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Real Estate in Uncertain Times: Finding Opportunity in the Chaos · The Academy Presents podcast

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Did you know that 90 % of the world's millionaires
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invest in real estate? Well, I'm Angel with the
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Academy Presents Real Estate Investing Rocks,
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and I'm here to help you if you want to go for
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your piece of that pie. Are you new? Are you
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new to this and you just don't know where to
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start? It's okay. Are you someone that has invested,
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but you feel stuck, you feel like you've lost
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momentum, you don't know where to really head
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from here? Are you a seasoned real estate investor
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who is doing great but maybe you just want to
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hone a few skills here and there? This is the
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place for you. The Academy Presents Real Estate
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Investing Rocks podcast will connect you with
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industry experts so that you can save time, avoid
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costly mistakes, and begin living the life you've
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dreamed of all through real estate investing.
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You're already taking the first step. just by
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joining us here today. Hey guys it's Angel you
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know just thank you for being here this is my
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favorite six days of the year because we do this
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twice a year two three day conferences and it's
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amazing um first off if you want to stay on this
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side there is probably about 35 hours of content
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over here that is totally free totally for you
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that there is a super sneaky way to get over
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to the live side if you go ahead and do that
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VIP subscription If you don't see the QR code,
1:26
if you don't see the link, let me know. I will
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personally take care of that for you and make
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sure you have that option. So the benefit of
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being on the VIP subscription is that you get
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all of the content from all the summits we've
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ever done. So that's over 400 hours of content.
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And guys, I've said this every single time, I
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think, but I didn't get to where I am from reading
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a bunch of books and listen to a bunch of podcasts.
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I did all that, but it was these. these one -on
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-one interactions, these recordings, all of this
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information, this is what really helped me get
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to where I am. And I would love to share that
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with each and every one of you. And so that VIP
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subscription is an amazing, amazing opportunity
2:02
to do that. So now that that is out of the way,
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I'm going to introduce my friend, George. George
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is amazing. He has presented on some of the economic
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uncertainty, what he has kind of done some predictions
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on. And so we get to hear a little bit about
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that. And then we're going to hear some more
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about investing here in certain times, because
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in the current economic landscape, I think the
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only thing is certain is the uncertainty. So
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the volatility, the tumultuousness of it. And
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I'm just excited to hear what you have to say,
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George. So if you want to take it over, we can
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get going. Well, thank you, Angel. And you might
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be wondering after an introduction like that
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whether you should be investing at all. But no
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worries. I brought my friend here, Sun Tzu, to
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remind us that In the midst of chaos, there is
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opportunity. We're gonna focus on single family
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in this presentation, even though many of us
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may be more interested in multifamily or other
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facets of commercial real estate, just because
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there's so much data out there. And of course,
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economics being the study of scarce resources
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with alternative uses. What we're learning over
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here is going to be of direct relevance to the
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multifamily space, if that happens to be where
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you're at. So last time, and actually before
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we get to our predictions from last time, I've
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actually invited somebody else to come and he's
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late sometimes, but it's a little embarrassing.
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Oh, here he is. Oh, why here? It's the data scientist
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of real estate. And he's here to make sure that
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we don't go any further than the numbers would
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warrant. Awesome. So we made some predictions
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last time. We talked about how You know, the
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US is not likely to suffer a housing crash. However,
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there are many places around the globe that are
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likely to see a housing crash before the United
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States. And lo and behold, let's take a look
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at how that turned out. Australian home prices
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down 8 .9 % from peak. Canadian home prices,
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record price drop down 13 % from peak in February.
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Toronto home prices down 22%. China's home prices
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slumping for 16 months and Hong Kong down 15
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.6%. Now, how is the US faring through all this?
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It turns out We've only dropped about two and
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a half percent. You may wonder why our housing
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market is so resilient. And let's go through
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some of those factors. The chief is number one
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on the list. It's housing under supply. Now,
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before we get any further and talk about the
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how great things are, let's understand that clearly
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we. do have an affordability crisis. Our home
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price to median income ratio is above seven.
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This is a region that we can't expect to stay
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in forever. However, we do know that we've been
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under building for a long time. We have very,
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very little supply on the market. So even though
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these prices under ordinary circumstances would
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be unsupportable, these are not ordinary times.
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Take a look at what's happened so far. We've
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seen a two and a half percent decline per the
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case shiller. Meanwhile, interest rates have
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risen insanely from seeing a two handle just
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over a year ago to topping out at 7 .08%. So
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why have home prices been so resilient? And remember,
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most of the time when we're having economic troubles
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or home price declines, et cetera, I mean, the
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Fed is doing just the exact opposite. So how
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have we managed to swim upstream? Well, the first
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factor is that construction is far behind historical
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norms. And this is tending to support home prices.
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And also you have sellers that are locked into
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these incredibly low rates. I mean, who wants
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to leave your current mortgage only to go into
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a much higher payment, maybe a smaller home?
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So we have very little housing supply on the
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market, not only because it isn't being produced,
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but because that which exists is being held back.
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Now, during the pandemic, we saw that our leading
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indicators of construction permits and starts
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got really high. close to 2 million almost at
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one point. Well, what happened? Those homes were
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never built and we've kind of crashed down to
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our leading indicators being around 1 .5 million,
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which is, by the way, our historical long run
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average of homes constructed in the United States
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on an annual basis. This is just what it takes
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to replace what becomes obsolescent and also
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to account for a growing country. Here's showing
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that the inventory is low and declining. You'll
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see some people saying like, oh, well, you know,
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hey, it's kind of recovering, but recovering
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from what? You know, we still have historically
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low inventory. So when you see all these headlines
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like, oh, yeah, you know, we're seeing a recovery
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in the inventory. Well, from what? What should
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we expect? These are the things that the headlines
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just don't tell you. I mentioned, how bad is
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this housing shortage? Well, depending on how
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you calculate it, if you look in terms of household
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formation, people will say, oh, yeah, maybe we're
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$5 million behind. Well, if you consider that
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we really do need about 1 .5 million units to
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keep up, we're about $8 million behind. And a
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lot of this is pent up demand. we had a major
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recession. And so a lot of those households were
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just simply never formed. You have more people
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living together. That's what happens when you
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have a major housing crisis. So although this
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is sad, we have to remember there is also opportunity
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here. And for people like us who happen to be
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interested in providing housing, this is an opportunity
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for us to use those incentives in our economic
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system to provide the housing that people need,
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whether it's building new housing or it's simply
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maintaining the housing stock that we currently
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have. Now, when you look at interest rates, and
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actually I do think that I did want to talk about
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interest rates first. it doesn't really tell
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the whole story. I mean, when you say, gosh,
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you know, we went from rates in the twos to rates,
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at least briefly, 7 .08%. And we hit that peak
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twice. Gosh, it's actually much worse than that
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because think about what happens to your payment.
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And this is really where it gets frightening.
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When you see payments for your ordinary home
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of around 900, 1 ,000, 1 ,100 over the last 20
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years, and all of a sudden, well, my goodness,
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we've almost doubled. And although we are taking
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back a little bit, as you do see, rates have
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slid back our way a good bit. These are extraordinarily
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high home payments. forcing a lot of people to
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become renters and all that goes with that. So
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what's happened in the meantime? Well, inflation
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fears have eased. We may have topped out. not
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making any predictions on that yet, but we have
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slid down from our highs, but also the fears
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of bondholders. I mean, you have these relatively
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long duration bonds, and who really wants to
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go into that without a little bit of a cushion?
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Well, if you see that inflation is coming back
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down and the likelihood of these continued rate
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hikes, especially at the rates we've been seeing,
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like 75 basis points each time, we had 25 in
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our most recent meeting of the Afghanistan city,
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but again, you know, it's not like it was. All
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right. So what are some other things that might
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lead us to believe that things could possibly
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continue to go our way in the housing market?
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Maybe we'll see lower rates. We'll take a look
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at that 30 year mortgage versus the 10 year treasury
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spread. So what are these bondholders essentially
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demanding? And of course I'm comparing primary
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to the 10 year, but you get the idea. I mean,
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we're looking at the impact, the impact of those
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rates. So normally we have a spread of about
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172 basis points. Well, we're actually just over
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1 % higher than that right now as we record this
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in the middle of February. So if we just saw
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spreads return to historical levels, we could
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see mortgage rates slide another 1%. Of course,
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we probably have the countervailing impact of
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that there could be some further Fed rate hikes,
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etc. We don't know what's going to happen yet.
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But again, just given current information, we
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are probably way above where we probably need
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to be. All right. So that doesn't mean that everything
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is all good and fine. I mean, what if the Fed
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decided, oh, we're all done hiking? Doesn't mean
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that rates are going to fall the next day. And
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if you look at this historical rate chart, the
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Fed, when they stop hiking, usually we have to
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wait an average of about 8 .7 months before we
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see the beginning of the declining lag of the
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cycle. So again, we don't expect that we're done
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with hikes. And certainly, even if we were done,
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it's going to take a while to see some easing
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up. But a lot of strategy that goes into this,
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right? Now it's time to consider how long do
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you want that prepay penalty, for example. I
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mean, I could even see in some cases, I saw,
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I think actually more than one bank that was
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offering me no prepay penalty. And that, and
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these were non -recourse loans to be clear, but
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that's kind of, I'm sorry, they were recourse
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loans, not the non -recourse loan that I wanted,
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but that's sort of tempting. I mean, to imagine
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that, Gosh, six months from now, one year from
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now, not even a step down. So things to think
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about. All right, we also might be up for a recession.
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And it's really difficult to say exactly what
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will happen next. Nobody knows. I think we've
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been expecting a recession for quite some time.
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We saw two consecutive quarters of negative growth,
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normally almost 100 % correlation between that
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and recession. But what's going on is that, well,
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the labor market is still firm. And why might
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that be? Well, I don't know. We just printed
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a whole lot of dollars. So you may not expect
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to see the ordinary relationships we do see in
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macroeconomics. But again, hey, we have to figure
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at some point we will see a recession. So what
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happened the last four times we had a recession?
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Well, it turns out that prices just continue
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to march up. Now notice we're using core logic
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here, not case Schiller, which started in 87
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wouldn't allow us to see those first two recessions.
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But I mean, it's a pretty strong correlation
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between rates, I'm sorry, with home prices continue
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to march almost unabated through these recessions.
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And I can show you the graphs. They tend to level
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a bit. Prices don't go up nearly as fast as they
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do during stronger economic times. But again,
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we're only seeing two recessions where we lost
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ground. And one of them was very, very mild.
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Now to be clear, that 1991 recession referred
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to here, we're already at two and a half percent
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price decline. So things are clearly worse than
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the 1990 recession. However, it's not likely
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to be anything like the 2008 recession. And again,
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you'll notice we're looking at core logic figures.
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These are slightly different than, uh, case Schiller.
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Actually, I think we can, I could just superpose
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that over the core logic. It looks like we got
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some time here and you can see, I mean, yeah,
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we, you can hardly tell if I didn't have those
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gray bars there, it would be a little bit difficult
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to tell gosh. When even did we have a recession
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just by looking at the home prices? Why, you
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would hardly know. All right, so we still do
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have inflation and the numbers came out, I want
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to say was it just this morning. And I think
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we were looking at about five and a half for
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core and maybe just a little bit above six for
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headline. But I mean, we're coming down, right?
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So it's hard to say. We don't know. Are we going
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to have another run up in inflation? Will it
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run sideways for a little while? But I would
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say either way, you're pretty good with real
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estate. Notice that during the decades of the
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70s, 80s, 90s, 2000, 2010s, that home prices
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tended to keep up with, or even in some cases,
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significantly exceed the inflation rate. So again,
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regardless of whether you actually believe the
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inflation rate is real or whether the statistics
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are a little cooked, I can hear Angel laughing
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a little in the background. I think we all believe
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that those official statistics are a little bit
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behind the mark. However, take a look at this.
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I mean, you're not doing bad. And this, of course,
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is not taking into account cash flow, amortization
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of your loan, or the tax benefits of real estate.
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So Hey, these may be uncertain times, but it
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could be the very best time to invest.