A Skeptical Dude's Take: Real Estate
Market Insights for Real Estate Investors and Finance Nerds.
Welcome to A Skeptical Dude’s Take on Real Estate, a real estate investment newsletter, coming at you live from Nashville, TN. Every week I write a brief, hopefully insightful, dive into real estate and financial markets, for all you tubular dudes and dudettes out there.
What am I listening to? - The pounding inside my head. I’ve got quite the flu. 🤧
Where am I? - My living room floor, couldn’t make it to my office. See line above.
Today We’re Talkin:
The Weekly 3 - News and Data to Keep you Informed
Home Ownership Costs Double
Warning! - Don’t Get Screwed by a Shiesty Contractor
The Bottom Line
The Weekly 3: News and Data to Keep You Informed
The US population should outgrow most global economic peers. Future immigration policy may be a factor. (JBRE).
The anti-cancer and aging effects of vigorous exercise. A fantastic lecture from Dr. Rhonda Patrick. (RP)
Crypto currencies/tokens are on fire. Is hype or just getting started? (CNBC).
Today’s Interest Rate: 6.97%
(👇 .19% from this time last week, 30-yr mortgage)
Well, I’m sick as a dog, which is a dumb saying since my dog never gets sick. Probably because I spoil him with real food and I give him “AG1” for dogs, aka Scout’s Honor. (Side note, it’s amazing. All stomach issues disappeared overnight. Can’t recommend higher for your pup. Not a sponsored ad).
Where was I? Sorry I’m elbow deep in cough medicine… Oh yes. I was saying I’m feeling a lot sick, and a lot more punchy. 👹 Warning, I get a little passionate in this issue. So if you are faint of heart, well too bad. Keep reading, I promise to delight.
Could you Afford your Home Today?
Here is an exercise for you. Do you currently own your home? If so, could you afford to buy your home today at the current interest rate and price?
You can use the Realtor home value estimator to get a rough estimate of your home’s value and this mortgage calculator to calculate the mortgage. Let me know in the comments what you find out!
Unfortunately, the answer for many homeowners is…no. And therein lies the reason we have a low supply of homes for sale. Because the vast vast majority of potential sellers are homeowners (not investors or developers selling new), and will have to find another home in which to live. If they can’t afford the same standard of living they will be reluctant to sell, even if they have considerable equity in their home. Only those who can afford to buy in cash, want/have to move, want to downsize, and maybe a few other cases are unaffected by high rates.
But wait there more….
Home Ownership Costs have Doubled
Since 2020, the cost of owning/buying a home has doubled (Zillow). “In 2020, a household earning $59,000 annually could comfortably afford the monthly mortgage on a typical U.S. home, spending no more than 30% of its income with a 10% down payment. That was below the U.S. median income of about $66,000, meaning more than half of American households had the financial means to afford homeownership. Now, the roughly $106,500 needed to comfortably afford the mortgage payment on a typical home is well above what a typical U.S. household earns each year, estimated at about $81,000.” In this time, mortgage rates are up 103% and the average home ($417k) would require roughy 50% of a household’s total income. (It should be noted that the Fed’s Zero Interest Rate Policy of 2020-2021 absolutely skewed everybody’s idea of what a “normal” mortgage interest rate should be. This will likely never happen again, in my lifetime. I still estimate 5-5.5% as the future / long term mortgage rate).
My Take: I agree. And I’ll pile on. Construction material and labor costs makeup a large part of a home’s price appreciation as well. For example, during the pandemic some materials costs spiked wildly, as a result of supply chain issues and shortages, but have since come back to reality. However, we are well above pre-2020 price levels and we ain’t goin back. Inflationary powers have set a new floor for material prices. Lumber is a good example of this.
In fact, most construction inputs have found a new, higher price floor. Though they have remained relatively flat since the Fed raised interest rates, and for that reason.
Labor costs too, are likely going to be sticky, more so, in fact, than goods/materials. It’s hard to actually cut someone’s pay. For example, hourly labor for electrical work, what I’m seeing at least, is roughly 1.5x what it was pre-2020. And nationwide is staying up 30+%. (chart below is non-residential, I couldn’t find a good source for residential electrical labor, so I you have one, please share!).
So, while some labor costs may decrease slightly or flatline, we are likely NOT going to see the a reduction in real prices we saw for some materials. It also depends on the experience/skill level of tradesman. Simple stuff that an electrical company’s apprentice can knock out may be $40 / hour, while a master electrician may be 4x+ that, say for rewiring an electrical box or a 3 phase system for your Tesla. Regardless, my point is that higher prices are just today’s prices. We should plan for this.
Gumballs aren’t 1 cent anymore Boomer.
Don’t Get Screwed by your Contractor.
** Punchy Sick Guy Warning! **
It’s time to deliver a little pounding to a particular contractor out there in California that recently tried to pull a fast one… on my mom of all people, who just turned the big 8-0, although she is still spry as can be.
Let me say first off. My dad was a contractor, cousin’s contractors, I’m a real estate investor = I have many contractor friends. Plus I like to play one from time to time. BUT that is not to say there aren’t folks out there that are just down right price screwing over homeowners, given good folks in the business a bad name.
Frankly, screw those douchebags.
So here we go.
Late in the day, just this past February the 16th, I got a call from my mom who was in a titch of a panic. Her heat had gone out and she had called a seemingly reputable HVAC company to come take a look. I wish she has called me first but, hey she didn’t want to bother.
So I get one the phone and the tech starts telling me the unit is old, and to fix it will require several parts and even then they can’t warranty the work because of the age of the unit etc… I ask him how much and he says, more than $1500 for a new main circuit board and several other parts he needs to price out. First red flag, that part is extremely expensive (like new unit expensive), he may be steering me to buy a new unit which is easier and more straightforward than repairing. Could be true, or he could just be lazy. And in fairness, the unit is old (likely 15 years or so), and past its predicted usable life. But it’s a simple gas furnace, no frills, not much tech, no AC, and I’ve seen them go for a long long time. But if it’s kicked, so be it. Consider my skeptical ears perked.
I asked him if they tried any fixes and if they are sure the entire circuit board needs replacing. In my experience, often times a skilled tradesman can keep a piece of machinery going, so at least in this case mom has heat while we sort this out.
He responds oh no we tested it, it’s done. Not getting blah blah voltage. It may have been from a “power surge.” Hmmm, power surge….my spider senses are tingling now…
It’s here where the fun starts….I’m going to summarize because this was a long back and forth…
The sales guy hops on my mom’s phone. He tells me that another cause of the furnace failing is not just the age of the unit or an apparent electrical surge thingy, but also the duct work. One of the lines (of 8) is partially kinked and all the lines are old. “We have to replace it all,” he tells me. AND they also want to redo ALL the insulation, so the unit isn’t “working overtime to keep up.” I’m now pacing on my back deck, this guy is off his rocker.
Now I’d been in the attic recently to replace some pot lights over the kitchen, maybe I stepped on one of the lines? But I know they should be able to either pop that duct line back out so it isn’t kinked, or cut our and replace it for a few hundred bucks, it’s just wireflex insulated ducting. And if the ducts are old I can get them cleaned, no big deal.
Insulation? It looked fine to me when I was up there, standard fiberglass rolls in every nook and cranny, and I didn’t notice any spots that were lacking. Also, it’s the California Bay Area, not Alaska. Avg temps were 45-65 this February.
So I asked the price for the new unit, the cost to repair the ducting and clean it, and frankly didn’t even address his insulation rec.
He says…. wait for it….
For just the furnace - $14,000! $14 Grand! (Full disclosure I never received a full quote for the replacement in writing, despite calling their office later that day. This is what he said on the phone).
Attempt to repair the furnace (but not guaranteed) - $1940! Includes 3 parts. (I got this final number in an email later).
Ducting - $8447.40! They don’t recommend repairing and cleaning old ducting. Say it’s too far gone.
Insulation - $7192.92! They highly recommend replacing the insulation, to “keep my mother safe in winter.”
After hearing his spiel, I told him “you are off your rocker my friend. I don’t think we are even in the same galaxy. How did you come up with these prices?”
He tells me they are the most reputable companies in the area, blah blah, to trust him, and I won’t find a better price anywhere (true, their google reviews are top notch and they are a relatively larger company, which I normally don’t like frankly price-wise. Hot tip. I normally only call larger companies when it’s a timely emergency repair).
But wait there’s more…..
He continues on to say that this is this price?… This is the special price, just for us. They have 1 slot open Monday and that if I make a decision today he can replace the unit with a brand new model then (it was a Saturday). But only if we decide today. Otherwise mom is without heat till they can get us on the schedule.
Come on boys….You going to try to do the pinch on me? I’m in full red alert mode now.
Now at this time, unbeknownst to me, my mom is getting a little anxious because the other guy in the room is showing her “spoooooky” pictures of insolation and ducting in the attic. And if you’ve never looked at attic work, it looks ugly. ( I later got these picts)
Now you contractors out there yes, the wrapping of the ducts could be better (I’ve already had it done and there were a few others) but those are simple fixes. Read on….
Insulation is fine….
This is my favorite… “Ahhh, you don’t have enough insulation. Just look at this scary picture! It should be stacked 6 feet high! ”
Continuing on…
And while the other guy is showing her these picts apparently he has her sign up for some “Rewards Membership” monthly subscription for preventive maintenance. Awesome. Still trying to cancel this.
So I ask him the model number of the unit they recommended/offered for the space and while we were on the phone I looked it up. $1800 retail.
I ask him a few more granular scope of work questions like: the number of man hours and how many guys he is going to have on the job. He doesn’t know, but he assures me they can finish Monday. So assuming they pay retail for the unit (they won’t), plus lets say conservatively $1000 for parts to install it (they won’t cost nearly that much), and it will take 10 man hours to install (they should be able to do much faster), that’s an imputed hourly labor cost $1120. 🤯
I tell him thanks for his time but I need to get a second opinion. We are just way off on price here. He tries to assure me I won’t find a better price, blah.. blah.. they are the most experienced in the area etc.. etc.., but that they will send me the quotes and I can have by the end of business today to decide.
I tell my mom to give me some time and to stay at a friend’s for a couple days while we fix this. I need to do some due diligence. And, honestly, the guy was a good salesman, now he has me turnt a bit. And I’m pissed, need to chill a bit. I operate my business in Nashville, TN is it just that much more expensive in CA? Am I being overly dismissive of super old ductwork that perhaps was there since Father Time himself? Did everything really look good last time I was in the attic?
I call my cousin.
Folks, now my cousin is fantastic, he’s a contractor/developer an hour or so outside the city from my mom. He agrees with my concerns and recommends a HVAC company he uses on his places. Their tech shows up and guess what…..WE DON’T NEED ANY OF THIS SHIT.
Furnace can’t be repaired? BULLSHIT, he has it working in a couple hours, had to replace $300 igniter. Even pointed out several weaknesses (the pitch of the exhaust etc…) in the original installation that the other tech should have caught. Fixed em. Done.
Does the old unit need replacing? Fair question, and likely soon yes, I’ll admit. But the original $14k quote is more than 3x what is should cost. And guess who is getting the call to put in that new shinny unit? The guy who was able to take their time, do a little hard work and figure out how to keep the old one going. But for now, it’s been 3 weeks. Working like a charm.
How about the ducting? It’s so old and ugly looking? Do we need to replace the ducting to our entire home too? HELL NO. Cut out and replace one section of wireflex. $200. Done.
But what about the insulation? It can get pretty chilly in this Mediterranean climate of ours. Don’t we need to replace our entire attic’s insulation with 6 feet of R100 rated space blankets? BOLLOCKS! Wrap a few of those ducts with literal Duct Tape (yes that’s what it was actually made for folks), some insulation. $150. Done. (Ok, I am now channeling my inner Affleck in Boiler Room. Great flick.)
What? What is this price-gouging company out west do you ask?
Oh I wouldn’t think of holding that little tidbit back, especially after someone tries to fleece me for more than $24 grand and scares my mom into not thinking she isn’t safe in her home.
The company is ….
Moore Home Services
Website: https://moorehomeservices.com
Phone: (707) 243-8220
Google Reviews: Very good. But this review stuck out to me, posted just a day ago:
Jane Pritchard - “I’ve been a member with Moore for a while and I’ve gotten so I’m hesitant to have them come and do the free maintenance check because I’m left with not really knowing if there are really these monumental problems brewing with my furnace and/or AC or if they are just very well trained salesmen out to create more business. Either way I’m left more stressed than before the visit.”
I feel for all those poor souls that this company has taken for $1000s…
And IF any of you amazing skeptical dudes and dudettes out there want to prank call them, well don’t. Definitely don’t do that. I don’t want any of you prank calling this company. Again no prank calls please. That would be very uncouth of you.
Lastly, one kind word.
The technicians themselves were very kind, especially to my mom while in her house, despite overlooking the simple fixes that my cousin’s guy caught right away. I’ll just chalk that up to inexperience. Very fine folks just trying to make a living. It was their salespeople (who I mainly talked to), and the price-gouging managers who trained them, who are full on douchebags.
All I have left to say is, hey Moore Home Services…
….Go fuck yourself.
Is that clear? Let me make sure.
Go. Fuck. Yourself.
But I digress…..
Bottom Line
High prices for contractor services, materials, equipment, skilled labor etc… are major contributors to home prices. If the inputs to build a home are higher, so will be the final product. Of course, this will always be the case. Inflation and debt cycles are natural parts of a free market economy. But, for the last 10+ years before 2020, inflation had been below 2%. No longer. This is why the Fed had to raise interests rates so vigorously and keep them elevated. So in an inflationary time like this, seeing this kind of price gouging just really grinds my gears. It’s making the problem worse.
The Skeptics Take: Companies, like the one in my personal story above, that take advantage of folks who aren’t experienced, by charging wildly outlandish prices on top of beefy profit margins, are simply price gouging. And we shouldn’t stand for it. So, what can we do? Always make sure to get 3+ quotes for ANY major repair / renovation on your home. If the job is large, pay a small fee to another company for an assessment of another company’s estimate (they will always try to tear it apart). Ask for references, call them and ask your neighbors who they have used. If you are an investor, keep testing out new subcontractors/tradesmen constantly, even if you have someone you like. I’ve found my best folks that way. Plus, you always want to have several in your back pocket, the best folks are busy. And speaking of pockets, lean on the experts. A great resource for real estate investors is Bigger Pockets, a real estate investor site where you can find a realtor, property manager, contractor, CPA etc….Importantly, they also have a great forum board. Post your question there and get input back from fellow compatriots who have likely faced the problem you are up against.
There are a lot of great, hard working and honest contractors out there. And then there are those who seek to take advantage. Or just think “hey, it’s the price of doing business. If people are willing to pay it, I’ll keep charging it.”
Don’t get taken.
Don’t stand for it.
In other words, Stay Skeptical Y’all
Me playing contractor. Nothing more satisfying than knocking down a wall I say.
Most Interesting Tweet(s) of the Week
I’m totally drained, crawling back into bed now…So, instead of me sending you a weekly tweet, send me one! @ndreasmueller. What did you find interesting this week? Would love your thoughts.
That’s it for this week. If you are interested in digging deeper into any of these ideas or just want to talk real estate investing - which I always love doing - don’t hesitate to reach out. You can email me direct, I try to answer all the emails I get personally. Andreas.Mueller01@gmail.com
Again, stay skeptical, all you dudes and dudettes.
Herzliche Grüße
-Andreas
* The preceding has been my opinion only, the views are my own, and are intended for educational and entertainment purposes only and does not constitute financial advice.