Sellers Are Capitulating

🎙️ The Investing in Real Estate Show Sellers Are Capitulating Hosted by Lex Levinrad Hey everyone, and welcome to the Investing in Real Estate Show. I'm your host, Lex Levinrad, and on today's episode, I want to talk about what's happening right now in the real estate market — because things are changing very rapidly. For the first time in a while, we're beginning to see signs of capitulation. Now, capitulation is a term that comes from the stock market. It describes the point when investors give up — when stocks have been falling and people finally throw in the towel and start selling. We're starting to see that same kind of behavior in certain areas of the real estate market today, and I expect we'll see even more of it in the months ahead. Year-over-year, foreclosures are up 17%, bank-owned properties are up 34%, and there's a noticeable increase in short sales, pre-foreclosures, and REO listings on the MLS. Many of my students are now finding deals on auction sites like Auction.com and Hubzu.com, and I believe that trend will continue throughout the next year or two. So, the big question is: Where are we in the cycle, and where might the market bottom out? Historically, the real estate cycle runs about 18 years — roughly 13 to 14 years up, followed by 4 to 5 years down. If we peaked around July 2022, then that would suggest a bottom sometime between mid-2026 and mid-2027. Now, real estate is hyper-local. Condos behave differently from single-family homes, and markets like South Florida don't move the same as the Midwest. Condos in South Florida, for example, have been hit hard — partly due to the unresolved Surfside law, with only about half of buildings having completed inspections. That's why, in our training programs, we focus primarily on single-family homes. It's also important to understand that not all single-family markets are the same. The $350,000–$400,000 "median" home that a typical family buys is a completely different product from a $150,000 starter home — and both are worlds apart from the $5 million waterfront properties here in Deerfield Beach. The luxury market remains relatively resilient because those homes are scarce, and many are purchased with cash by wealthy buyers. But that's not the market I teach or invest in. My focus is middle America — the average family earning $70,000–$80,000 a year, buying a modest 3-bedroom, 2-bath home. For that family, affordability is the key issue. At today's prices and rates, that household can typically afford around $2,000 to $2,100 per month, including taxes and insurance. The challenge is that, with 11 rate hikes since 2022, those numbers often don't make sense for buyers — it's often cheaper to rent than to buy. For affordability to return, home prices and interest rates both need to drop by about 20%. Now, the economy itself is in a strange place — a mix of stagnation and inflation. We've got gold, silver, and stocks rising while more Americans are falling behind on car payments, credit cards, and mortgages. It's a divided economy — the haves and the have-nots. The wealthier segment owns assets like real estate, stocks, and Bitcoin. But 75–80% of Americans fall into the lower or middle-income bracket, and they're feeling the squeeze: higher rents, higher food prices, higher everything — without matching wage growth. We're also seeing record levels of credit card and auto loan defaults, and foreclosures are climbing. Many people are struggling to keep up with mortgage payments, and businesses — including trucking companies — are shutting down at record rates. Given that, I believe the Federal Reserve will have little choice but to cut rates soon, even if inflation remains a concern. Now, let's talk about what this means for real estate investors. Some markets — particularly in the Midwest — remain relatively steady. They don't see huge gains, but they also don't experience massive losses. In contrast, "boom and bust" states like Florida and Texas swing more dramatically in both directions. For example, in markets like Austin, Texas or Phoenix, Arizona, we've seen homes that sold for $420,000 just three years ago now selling for around $240,000 — nearly half the price. In parts of Florida, such as Cape Coral, prices and rents have both fallen, while insurance and property taxes have risen — squeezing investor returns. So, what works right now? The answer is simple: focus on affordability. Forget the luxury market, forget high-priced areas, and concentrate on properties with an ARV (After Repair Value) of $300,000 or less. If you can buy at 60 cents on the dollar, that means targeting homes you can purchase for around $180,000 that are worth about $300,000 fixed up. That's where my students are finding success. For example, one of my students recently bought a home for $105,000 in a market where comps were $220,000, and another paid $107,000 in that same market. We're not seeing deals like that ...