Are you worried about a real estate market crash? John Burns is a real estate market expert, and he talks about why investors are well-positioned in the Jacksonville, FL, real estate market.
John Burns Real Estate Consulting is the go-to resource for businesses trying to solve today's real estate riddles. This firm analyzes the data and makes informed housing industry investment decisions for tomorrow.
JWB is one of the many businesses that trust John Burn's insight. Some investors expressed concern over home price increases, changes in economic growth, and a housing bubble. So, we invited John to come to the show to share a little bit of his wisdom.
In today's episode of the Not Your Average Investor Show, we asked John Burn about:
- Where are we in the real estate market cycle, and does he expect to see a real estate market crash?
- The supply and demand indicators he most pays attention to when making decisions
- What are the risks of foreclosures affecting the Jacksonville, FL real estate market post-COVID
John has over 700,000 followers on LinkedIn, but he's giving our NYAI community a private audience about a real estate market crash coming and what he expects to see in the Jacksonville, FL real estate market.
John's predictions are not guaranteed, of course. Still, there is no purpose other than to identify prospective properties consumers may be interested in purchasing if they seek positive cash flow rental properties. His real estate consulting firm analyzes data from Freddie Mac, homes for sale, real estate agent reports, the house price index, and economic growth. John is a highly credible expert, and we are thrilled to have him share his knowledge with our JWB Not Your Average Investor community.
What does John Burns see in the Jacksonville, FL real estate market right now?
In February, we called this the high risk, high reward part of the cycle, which means we see the typical constructs of a housing bubble. But the money continues to flow into real estate and makes housing more expensive. Looking at the Jacksonville stats shows that it's different from the national statistics. Texas has all-time highs while other areas of the country are significantly down.
Pricing is going up, and there has been an undersupply of land and new homes. The land supply issue is part of the equation and the amount of construction going on.
Is there an undersupply of homes?
Investors should pay zero attention to undersupply because some data analysts have made errors in their calculations. Big Shifts Ahead is the book John Burns wrote, and he shares the numbers he sees in the coming real estate market.
When we look at the demand, population growth, and it comes to a little less than 1.4 million houses needed annually on average. This year, we'll be doing 1.7 million homes, which means we're building more than we need for the long-term average. But there is a surge in demand, and that 1.7 million is already sold. But at some point, we will get into an overbuilding situation when the next recession hits.
John Burns doesn't believe we have underbuilt the market. From 2000 – 2010, we ended with over 3 million more vacant homes than when we started. Since then, we have built less in the last ten years, and with the population decreasing, we are reaching an equilibrium. That being said, we got back to equilibrium nationally in 2019.
Jacksonville got back to equilibrium before that because there has been such strong demand. The months of supply in Jacksonville are looking good. As long as the Jacksonville, FL real estate market inventory stays below four months, the real estate prices will go up, and the market will remain stable. However, that could shift overnight.
JWB is building more homes in Jacksonville because of the high demand. The whole shift of people working from home has helped people who want to live in areas adjacent to the city centers. Many people are happy to rent houses further away from their work, like 10 miles away. Employees are moving all over the place, and John sees it in his own business.
On the supply side, the overall thought that we are incredibly undersupplied across the United States is overblown. The numbers are much less. We are also building at a rate where we're at the highest construction levels where we have been, like in Texas. At some point, there will be overbuilding.
The months of inventory of houses in Jacksonville is what JWB watches very closely. The prices are low right now, but that number can shift at any point. Why do those inventory numbers move so quickly? It is primarily due to technology and the ability to work remotely. The macro trends on the demand side are ease of transaction, working from home, and living in a more affordable place.
Is there a land shortage?
There is no actual land shortage. However, not much capital has been going into land development. The titled land that's ready to build on isn't entirely prepared with the basic infrastructure to support communities. Land developers have to develop their land because no one else is doing it. There's a fair amount of construction going on in Jacksonville.
On the labor side, it's predictable that we'll have more retirees than workers. The COVID pandemic, government stimulus of unemployment benefits, closing of the borders during COVID, and the labor shortage show that companies will not be forecasting much growth in 2022 because it's so hard to find people to work.
What does this mean for construction?
More people are going away from hard, dirty jobs and heading toward online careers. There is a lot of retirement going on. The typical construction foreman age is in his fifties – seventies, and they are retiring. Construction is hard work, and the labor pool isn't as happy about doing back-breaking work, especially as they age.
It will take longer to build the houses. There is an insane demand for land right now. Many large corporations are buying up land as well. There is a backlog of construction projects because of the labor shortage, which is the main issue. The labor shortage could delay the completion of a lot of building projects.
It all comes down to a labor problem. For example, it's not the shipping containers delaying the supply chain, but the lack of truckers moving those materials. Hurricanes and other disasters don't help either. John says, “There is a material shortage and labor shortage worldwide.”
How does this affect real estate investors in Jacksonville?
John feels either the Fed completely disagrees with him, “or they're feeding everyone a line of BS.” Wages are going to go up because it's inevitable during inflation. You can charge more rent when wages go up and when the tenant gets a good raise. That is why real estate is an important inflation hedge.
John does not see an overflow of labor anytime soon, quite frankly, so he does not see unemployment spiking anytime soon, even during a major recession. Rental properties are an excellent upside due to the cash flow and inflation hedge. Real estate is the best asset class right now, and it will continue to happen because of the labor shortage.
John thinks prices are higher than they should be, but that's okay if you're purchasing for the long-term. If you're in it for the short term, you are at risk. It's a different story for long-term investors.
Should investors wait for the market to come down?
Many investors think they should wait for the market to come down. But right now, the prices keep going up, and investors are still waiting to get in the game. If you think things are going to crash, don't invest. Investing is about risk-reward, diversifying, and not putting all of your eggs into one asset.
But, John Burns says that he thinks real estate is a safe investment for the long term. Newly built rental homes are booming. There is a strong tenant demand for new communities and new homes. In these more contemporary communities, renters are no longer seen as “deadbeats.” The renters in the new communities are not looked down upon by homeowners as they tend to be in the older neighborhoods.
JWB has bought land, developed those lots, and is building new rental property construction. They have a solid business model that makes sense for the tenant, the long-term investor, and everyone wins. JWB started buying land, developing those lots, and selling those lots to other builders who were building new build-to-rent communities.
What does John see in the future for build-to-rent communities?
Forty years ago, there were no garden apartment rental communities built with lots of amenities. Many people would rather be in these types of communities, and the demand is high.
The high demand is happening because to the tenants, it's a predictable landlord, it has a 24/7 call center, and the entire neighborhood is full of renters. Every decent-sized community in America needs at least one of these build-to-rent communities because they serve an ideal demographic of renters.
Can John speak to the improvement of credit scores for homebuyers?
Drew Barnhill asked, “Is the higher demand for credit also driving more renters toward build-to-rent communities?”
All mortgage companies want higher credit scores. The 580 FICO score programs are still out there, but most lenders seek higher credit scores in the 700s and up. More lenders shy away from lower credit scores due to the risk.
John Burns blew us away with the following claim: “It is far harder to get qualified to rent a home than it is to buy a home.” The reason why is because the Federal Housing Authority will give a mortgage to a person with a 580 score, but a landlord wants a higher FICO score from their tenants. Gregg agreed that is the truth with JWB tenants.
When cities are fighting against the build-to-rent projects, throw that fact at them. Gregg agreed. There is a massive demand for renting a house, so property management companies, including JWB, can attract and select the ideal residents.
JWB manages over 4000 homes, and yes, the leasing department wants the tenants to have high credit scores. There is a huge demand for the ability to rent a house, and that's why we see rents go up. Beyond rents going up, we are attracting a higher standard of residents in the rentals we manage.
One of the things JWB does is only sign long-term 2- to 3-year leases. That's tougher to do and raises the bar high, but that gives us the best tenants at JWB. It decreases the turnover costs, and that benefits JWB's investors.
Because rent hikes are so significant, more renters are asking for 2-year or 3-year leases, so their rent won't go up 10% each year. The turnover of renters has fallen across the nation, and one of John's clients is trying to force the end of leases so they can raise the rent.
Your rental rate in single-family homes does not affect your comparable sales as much as if you were to invest in multifamily apartment complexes or commercial properties. Plus, there is less incentive to do long-term leases if you are not in the single-family space. In Jacksonville, FL, real estate investors are good because the most desirable rentals are single-family homes.
How will foreclosures be different in the next cycle?
John does not feel there will be too many foreclosures when prices are going up. We learned our lesson during the last recession about restructuring loans, per John Burns, and he feels we will not see a foreclosure surge soon. He doesn't foresee a bunch of foreclosures unless the prices start tanking.
If foreclosures were coming, there would be a lot of money rushing into the space. There are big companies that are formed and organized, ready to purchase these foreclosures. There will be many institutional investors gobbling up these foreclosures if they can continue to purchase at low rates and have high yields.
Many publicly traded companies are permanently in this investment game. Because they are sitting on a lot of revenue, they are at no risk of losing money on these foreclosures. With that said, the prices of houses will still go up and down. It's just that these major companies would prefer to buy existing properties via foreclosures and make money on them rather than build properties themselves.
If housing supply does start to outpace demand, does John predict a soft landing or a hard real estate market crash?
It all depends on what's happening with the economy and how strong the recession is. If we go into a massive recession, people may stop buying homes, and it could get ugly. If it's only a mini-recession with rising mortgage rates, the real estate market will gradually slow down.
What does John think about markets that have a very low supply of houses?
Housing prices will go up when inventory is low. John looks at the data on genuine buyers across the country, and he sees that they are not out of control. Most home buyers are not appearing to be financially stretched since they are moving into more affordable areas. On the investors' side, if single-family rentals are no longer the best risk-adjusted return, they can invest in other areas.
What does John predict for the real estate market over the next two years?
If we continue doing great in the economy, Jacksonville will be in good shape. If there is a recession in Jacksonville, the builders will be sitting on empty homes, and it could get ugly.
Looking at the total supply shows what risk you have. But the biggest thing that can benefit real estate investors is to buy and hold. It doesn't matter if you see prices going up and down because investors will see the gains over the full market cycle.
John asked Gregg a couple of questions to dig deeper into this conversation:
- What's going on with property tax increases in Jacksonville?
- Is there anything in the tax laws regarding depreciation?
Property taxes are going up, but so are rents. If the government makes significant changes to property taxes and depreciation benefits, that could negatively affect the real estate market. However, JWB currently is not aware of anything changing soon, but we will keep an ear out for updates.
If you were buying your first rental home, would you wait, or would you buy now?
If John had $100K, what would he put it in? He would look at all of his investments and diversify. John stated he would buy a property and hold it for the long term. He said, “Long-term investors know they don't need to time it right. You buy a good investment, and you let it ride.”
The market is cyclical, and long-term investment into Jacksonville, FL, real estate tends to pay for itself. If you're a buy-and-hold investor, if the return on investment makes sense to you today, and if the market is performing better than the national average, it doesn't matter if the pricing goes up or down. You know your investment will perform over the long haul.
What are the downside risks? Yes, you could get a better deal in three years. However, you may lose out on the low interest rates and high demand for rentals that you have today.
You have a risk within the overall economy, too. If you wait for the market to tank for lower prices, but you don't have a resident paying rent, that will hurt your investment, especially if the workplace opportunities disappear. Currently, JWB continues to build more single-family rentals because the market indicates this is a wise investment.
How do we contact John Burns?
If you want to connect with John Burns, you can find him on LinkedIn. John Burns Real Estate Consulting is hiring analysts, so contact him if you know anyone who wants a career in the real estate consulting field. John also invited people to contact him if they see any data points that he's missing today or in the future. He's involved with several real estate forums that share information warranting attention in the space of real estate trends.
How Do I Find Out More About Investing With JWB?
Contact the JWB team to begin the discussion. If you want to invest in Jacksonville real estate, now is a great time to jump in. Go to www.ChatWithJWB.com and find out how we can help you reach your financial goals through turnkey single-family rental homes.
If you want to become part of the JWB online community, join us in the JWB Facebook Group at https://www.facebook.com/CashFlowProperties.
You can also go to www.JWBInventory.com to see what properties are currently available. We encourage you to contact the JWB team for a consultation to determine how our turnkey rental properties can deliver positive passive cash flow.
We hope you enjoyed hearing the wisdom that John Burns had to say about real estate market crashes and the Jacksonville, FL real estate market. If you are a real estate investor who wants to purchase from JWB, contact us today at www.ChatWithJWB.com. Jacksonville is on track for continued growth, and JWB is excited to help many investors grow their wealth through turnkey single-family rental homes.
To Your Success,