How is the 2008 Real Estate Crisis like 2023?

Mike DeHaan: [0:00] What is going on, guys? I am back from my trip to Japan, which if you follow me on Instagram at all at Mike underscore Invest, probably saw me posting some travel pics and things like that. Sure at this point, there's probably a lot of people that are sick of hearing about it, and they're like, we get it. You went on a trip. Good for you. Well, too bad. It is something that I'm very passionate about. And I saw this great post from Alex Ramos the other day that was talking about how, you know, your personal brand doesn't need be about work. He talks about how he's into business, he's into philosophy, and he's into fitness, so he'll just have a bunch of other people. Well, my brand is not only real estate, it is also travel. And if that's something that you're not really into, then, don't know, go follow Dan instead, and you can watch him hang out with his kids and do all those adorable family things that I do not do because I'm too busy doing random things around. Either way, I'm super happy to be back in here today with a Friday focus for you today. And today, I'm going to be talking about an Instagram post that I made a couple of days ago. Again, it's michael underscore invest if you wanna give me a follow. And in that post, I talked about how I had just rewatched The Big Short on a plane on one of the flights I had back from Japan.

Mike DeHaan: [1:13] And if you're unfamiliar with that movie, it's about the 2008 real estate crash and it's a really solid watch. But I've watched the movie, you know, three or four times, but this is the first time that I've watched it since the real estate market really started to turn over. And me making that post, it led to a bunch of, you know, comments and and I got a handful of DMs from people who wanted me to do something a bit more long form on the topic. Because really what I was doing was I was comparing it 2008 to kinda what's going on in the real estate market right now. And people wanted me to talk about it a little bit more, so I figured I would make a quick Friday folks episode to do a little bit a deep dive into it. So, you know, with only a limited time, I'm gonna touch on a few things. I could go on and on about a lot of different things here, but you know, it's just kind of like my 2¢ focusing primarily on the residential real estate side and what exactly has gone on over the past couple years. So if you you have seen the movie, it's a really really solid movie. Alright. Come and check it out. They do an excellent job explaining exactly why the two thousand eight crash happened. You know, the story fundamentally is about these like lucky few guys who profited immensely off the situation by shorting the real estate market, which basically means you bet against the real estate market, which everyone thought was insane at the time because the market was just on fire. And so they go about like how they were able to do that and like what, you know, how much money they made and and all the ways they did research and different things. It's it's really fascinating. But as they go through it, you know, it sounds like a really boring topic, but they make it interesting because they explain a lot of the complex financial sort of situations, these fun little like side clips that make it very easy to understand and very easy to sort of like, I don't know, identify the key issues about why what they're doing is actually wrong.

Mike DeHaan: [2:55] So they, you know, counter out the legal and financial jargon with, know, fun clips with like random celebrities, a sort of game of fine situation. So as I was watching this movie, you know, couldn't help but just think of how similar so many of those circumstances are, you know, that occurred that at Rise that sort of went up 2008, that are really similar to a lot of the lending practices that I personally saw, you know, being active in the real estate market as it rose up through 2020 through early twenty twenty two before things kind of halted. You know, and one of the main differences kind of off the bat is that, you know, the 2008 rise was caused by an increase in purchases by like unqualified buyers. That was the whole thing with like the subprime mortgages, was you have these people that, you know, shouldn't have really been able to buy all these houses that are able to do so because of faulty lending practices, you know, which obviously led to more houses being bought, caused a rise in prices, all those different things. Whereas the 2021 rise was caused by an increase affordability due to the rock bottom interest rates. Right? So it's not necessarily just because a bunch of unqualified buyers, you know, buying multiple properties, but it is more that you have a bunch more buyers now being able to buy because interest rates are so low. You know, and while that's a little bit different, the increase in affordability with the interest rates also paved the way for a lot of people who could, you know, barely afford properties to kinda like sneak into home ownership, right? Particularly with some of these super low down payment programs, the lenders were starting to push like these FHA and VA loans. So you know, 2008, we had people that were buying tons of properties.

Mike DeHaan: [4:32] In 2021, we started to have a bunch of people who could only buy one property, but they could barely barely do it. Okay? Now the thing that ultimately caused the issue in 2008, the unqualified buyers are mostly using these adjustable rate mortgages that would skyrocket with the rates if they were not paid off. And ultimately, that's exactly what happened is you had a bunch of properties come due, tons of people just abandon their properties, default on their loans, the ones they shouldn't have owned to begin with, and they walked away causing this huge, you know, collapse of debt. And now in 2021, they may say it couldn't really happen because you were getting these thirty year fixed loans. But the kind of weird parallel that we are seeing now is you have these FHA buyers or these like low down payment buyers who were majorly overpaying for properties very regularly. So for example, we had a flip that we sold to an FHA buyer, and they bid $35,000 over asking for one of our flips. We had no other offers on, there's no need for them to do that, they just did. They now just, you know, pumped up the valuations and also made their payment higher. I guarantee you what they did is they said, we can afford this much per month, that means this is what we can pay for the house, let's pay that amount, let's offer that amount so that we can be competitive.

Mike DeHaan: [5:43] Ridiculous thing to do, it was happening all over the place. And then as a result as well, you were having people that were absolutely maximizing their monthly payment to the point that, you know, any sort of change in that is going to cause them problems. So as an example, we had another property that was sold to an FHA buyer, and we need to credit them $27, that's $2.07, on the HUD, so they could pay off their credit card, because they could not pay it off themselves, because if they did, their liquidity that was required by their lender was going to be too low, and they're not gonna be able to close on the property. Right? So that's a $27 difference between being able to qualify to buy this house and not. If $27 is a make or break thing on something like a, you know, dollars $203,100,000 house, probably shouldn't be buying the house. One little thing goes wrong in there and you're gonna be in big trouble. Okay? Now, what we are starting to see two years after the fact is we have this huge increase in values of properties. And so now all the cities are gonna lick in their chops, and they are starting to do a reassessment of property values. We're starting to see massive property tax insurance increases all across the country. Right? Some markets do things like I think California still does this, where they will just grandfather you in forever with your taxes. Most states don't do that. For example, in my house here in Washington, which I bought in 2021, I had a property tax increase this year of $700 a month.

Mike DeHaan: [7:09] Okay? That is insane. I am fortunate that I am able to do that, but most people are not. Right? That's a whole other mortgage payment that they were not expecting to have when they were doing their financial forecasting of the beginning of the year. As soon as that happened, half a dozen properties in my neighborhood, many of which had been bought in 02/2020 or 2021 at rock bottom rates, were suddenly on the market. And me, because I'm a real estate guy, I go in and look at what they bought the houses for, what they sold them for, and people are taking some pretty massive losses on these properties, guys. Now I live in a nice neighborhood, you know, so a lot of these people can probably deal with that. But what happens when it's the 0% down people, the people that are in the much lower income areas, they're not gonna be able to take large losses because that could cause them catastrophic issues forever. You know, if all of sudden their life savings that went into the property that they have no earning power, sort of re earn that money is gone. Like that's gonna be a really big issue. And then it gets even worse when you have these zero equity in these 3.5% or 0% down properties, and not only are they now having to sell to escape that mortgage payment that they can no longer afford because of the increased property taxes or insurance or whatever it is, but they are now having to bring cash to the table to escape from that monthly payment. Okay? Like that is a very real situation that is happening all over the place. That's why you're seeing such an increase in this push for subject to real estate investments, which has its own issues, but I'll save that for another call.

Mike DeHaan: [8:40] But you have all these people that literally cannot get out of their properties because they cannot afford to cover the gap to pay off the debt, but they also cannot afford their monthly payments anymore. You see a lot of different financial news outlets play down this fear. As an example, I saw an article in Business Insider that said from October 2023 now it's always kinda hard to get information. Right? Like you see financial news outlets downplay this. I saw this article when I was preparing for this episode from Business Insider. Articles from October 2023. And it was saying that there's really no threat because only 2% of properties owe more than their property's worth. Okay? Sounds like a low number, but the problem is, right, that's looking at blank value properties, it's looking at the mortgage amounts versus the property values. The problem is, we as real estate investors, real estate people know, it costs me to sell your freaking house. Right? It's not like you can just go and be like, oh, well, I have a little bit more equity than debt, so I can just walk away. No. In most markets, it costs you like six or 7% of the sales price to sell your house. Okay? If you're in somewhere like Washington, we have this thing called excise tax, which is a, you know, 1.8 to 2.1% tax on every single real estate transaction. Though here, it costs 9% to sell your house. That's all of a sudden, in order to sell that $300,000 house that you paid, you know, $290,000 for, that is now only worth 270,000. So you are underwater.

Mike DeHaan: [10:03] Okay? They put 0% down. You also have to bring an additional 10% or 9% of that sales price in order to cover all the expenses associated. So if you consider that instead of saying, oh, well, there's only 2% of properties that have a mortgage larger than it's worth. What happens when you consider the amount of properties that are now underwater if you consider the sales cost of doing this transaction. All of a sudden, I bet that number is a heck of a lot more than 2%. Okay? There's probably a ton out there that aren't even being tracked and we really have no way of tracking them. I was reading more about this on Wikipedia, you know, which in high school, they said I wasn't allowed to use as a source, but you know, fuck them. It's it's a valid source. There's a lot of great stuff on Wikipedia. It is regularly reviewed. They said that in August 2008, there were 9.8% of mortgages delinquent and by September 2009, they had grown to about 14%. Okay? So if you think of that number of properties underwater that I mentioned before, with it being about 2%, if you consider those sales costs and it is actually closer to seven, eight, or 9%, which it definitely could be, all of a sudden, we could be a lot hairier than the general news out there trying to make you look.

Mike DeHaan: [11:15] Okay? So anyways, what exactly is gonna happen? I don't know. Time will tell. I don't know if things will crash because for all the people who are in trouble, there are also tons of people who are doing perfectly fine, and now they are going to be lifelong prisoners in their homes because you'll have to pry their 2% interest rates from their cold dead fingers because, boy, people are not gonna let go of their low fixed monthly payments. Right? People want that security of knowing what it is. But I really just think that this will be another major item that contributes to the massive wealth gap that is already growing every single day in The United States and a lot of other developed countries. So really what you should be doing is just doing everything that you can every single day to be on the right side of that wealth gap because it is inevitable, and it is only going to keep getting worse as more and more things like this. Anyways, that's one of the ways that it is very similar to 2008. There's a lot of other stuff you can go into about commercial mortgage and things like that, but that would be a really long episode and that's what these are for. Anyways, thanks for listening to my ramble. I'd love to hear your comments. Hit me up on Instagram at Mike underscore Invest. And let me know what you think.

Mike DeHaan: [12:22] I would love to know your opinions on how it differs from 2008, what you're kinda seeing in the market, all these different things, how you think it's similar. Think my big dummy, go ahead and tell me that too. I love to have a good little online confrontation. And if you want to be an investor who can learn to take advantage of all these underwater mortgages, then you should learn subject to real estate. You can do that by going to collectingkeys.com/subtwo, that's subto. You can get our new free course where we will teach you exactly how to structure those kind of deals legally, ethically, incorrectly, so that both you and your seller can be in a better place as opposed to how some of the other miscreants out there teach subject to where they just basically teach you to screw everyone over. It doesn't need to be that way. They just don't want to know how to do the real thing because I don't know. They're criminals, whatever they do, not my business. Anyways, guys, appreciate you all. Thanks so much, and I'll talk to you next time.