So today we're going to
talk about what I believe is the biggest issue in real estate today.
They tune
because I'm going to have three lessons that I always use to solve this problem.
And of course, at the end, I'm going to have solutions for you.
So I believe the number one issue facing everyone is affordability.
And without people that can afford our properties, there's nothing.
So some of you might be concerned about cap rates, interest rates, rising costs,
and you should be.
But if you really dig deeper, our customers are the ones in trouble.
And at the politicians are also taking a close look at this.
So I think those are the two big issues you got to be watching in 2023.
So if you're going
to race your own individual bias, you need to be looking at real estate
affordability from all these different angles,
from a tenant, from an employee, from a builder, from a landlord,
from an investor, and from a politician's viewpoint.
And all great entrepreneurs.
Take a look at all these viewpoints and then try to solve the problem.
Let's take a look from a tennis standpoint.
There's no question that red prices are going to keep going up in 2023
because we don't have enough rentals to satisfy demand.
Now, let's take a look at it from the employee standpoint.
There's no question that wage growth has not kept up
with rising home prices, rising costs, and certainly rising rents.
There's articles all over the Internet about this issue alone.
People are getting squeezed each and every day, whether it's housing,
gas or food.
Now, let's take a look at a builder, which I would arguably say
is the supply mechanism to help fix this demand.
As you can see right from the National Homebuilders website,
the cost just to build a brand new home is $446,000 today.
So the cost to add new supply is out of reach
and is going to continue to slow down building in the future.
This is not good if we're trying to help affordability.
Now, let's look at it from the landlord standpoint,
which of course many of you don't care about,
but you have to understand the pressures that the landlords are under.
So landlords are getting push on the expense side of the equation,
higher utilities, higher
property taxes, higher insurance, higher labor, higher supplies, higher
interest rates on their mortgages, all creating passive income issues.
And of course that is primarily the reason why landlords buy
rental housing is for passive income, which is going away
and will continue to go away as these costs go up.
Now, let's look at it from the investor
standpoint higher interest rates, inflation and recession.
They're all concerned. They're holding back on their cash.
They're trying to figure out what's going on, who the operator is
and how they're running their individual projects
and what they're even worth in 2023 or 2024.
This is slowing down the investment, which is also not good
if you're trying to add supply and help affordability.
So on the slide before, as the landlords costs go up,
investors cashflow or returns go down.
Now let's look at the politicians or the policy makers would drive me nuts.
But the biggest issue facing America today, I believe, is homelessness.
This is a big issue in many, many areas and maybe in some of your area.
This costs money and this is an affordability issue.
And politicians are policy makers are going to pass laws
and do things to try to solve this.
So as a real estate owner, investor, landlord, we need to be focusing
on these things to solve these policymakers problem.
So here's what's going to happen in 2023.
It's just a spillover from 2022.
Rents are rising faster than wages.
We all know this home buyer has lost around 20 to 30% of their purchasing power
just because interest rates went up and their mortgage payments got a lot higher.
The cost the bill. That's going to slow the supply.
That's going to create a problem for affordability.
The cost to build is higher, which will slow supply,
which is not good because more supply means the prices can come down
and the last one rates will continue to rise to combat inflation, as we know.
Right now we're at 6.5%.
Everyone's predicting the Federal Reserve is going to continue to raise rates,
which is going to create more problem in these areas.
So lesson number one, if a state, city or county
control your income and your expenses, move on.
Here is an example of some states and what they've chosen
to do around policies to control rents.
I completely understand why they might think that rent control will work.
Let me tell you the other side of it.
Lenders, investors will not invest in these markets,
which will, of course reduce the number of supply
and of course will reduce the flow of cash into these markets,
which is exactly what they need.
So when the states control
not only the income but the expense, because they'll forget
they control utility costs, they control property taxes,
they control utility cost increases, they control state and local taxes.
Everything that's going on in that state is controlled
by the policymakers and, of course, the politicians.
One thing that you could do as a real estate investor is stay away
from these areas that have strict rent control laws and stick with states
that are more open to free market solutions and are open to
how can we help add more supply in order to offset these affordability issues.
Lesson number two people drive all real estate values.
What do I mean here? Well, I'm talking about migration.
Where are people going and where are they leaving?
It's that simple.
And as they go, it puts significant pressure
negatively or positively on everything,
on houses, on condos, on restaurants, on car buying, on everything
that you might expect when a new family or a new person moves to an area.
Well, let's take a look at some migration patterns in 2021.
People moved primarily to Texas, Florida and South Carolina,
and they moved primarily out of California, New York and Illinois.
And why would that be?
People are starting to look at what are the most expensive states to live in.
They're also looking at safety and they're looking at weather.
And there's other things.
But this is a very important point when costs are going up
and inflation is running rampant.
Now, let's take a look at 2022, because this is the most recent data.
Florida, Texas, Arizona, North Carolina and South Carolina.
Now, if you go back and look at the rent control laws and you go back and look at
what's happening in those particular markets, you'll see that
most of those policy makers and politicians are more pro housing.
They understand that they have all these issues, all these people
coming in Florida alone, they had 116,000, Texas, 101,000.
When those people move there,
it puts a lot of pressure on the existing infrastructure.
On the other side of that and where you're seeing some of the biggest home losses,
some of the biggest rent declines, New York, California, Illinois,
New Jersey, and of course, Massachusetts, or the exact same reason.
It's important to understand that real estate values
and land hours are all looking at this.
A lender or an investor is looking at who's growing and why.
What's going on with the politicians and the policy makers?
Are they making it easy for me or not?
And that's what you need to pay attention to in 2023.
Lesson number three, solve the problem.
So as you see these trends happening, as you see these people
moving into different state, you need to simply do
your due diligence and see how long is this going to last.
If you're investing in those states, you're going to see pressure on rents.
Rates will go up with more people on the existing housing.
You're going to see housing prices continue to go up
as a result of more people looking for housing.
All of those things should be common sense to you.
Just solve the problem.
And as an investor, as you continue to build
that at affordable housing, what we're going to talk about next,
you help solve the problem for that particular state.
As you can see, there are housing groups already trying to tackle this.
The National Multi Housing Council and the National Association of Homebuilders
are already talking to lawmakers to try to help ease affordability issues.
What they're doing as part of their presentation is simply just showing
the lawmakers that the mortgages have gone from 1925 to 2923,
just from a 3.2% interest rate to just a little over seven.
And how, of course, it's shrinking the affordability
for somebody to be able to own that house.
This is keeping people in rentals.
And what we're striving for here is a balanced housing policy.
So one of the things you should be focused on as a real estate investor,
and there are lots of ways to do this.
Zoning impact, fees, density, public private partnership, land costs, low
cost money, subsidies for developers, owners and renters,
and incentives and policies for growth.
That's what we need to focus on for the politicians.
And there's lots of things inside of here that we can do.
And I'll just give you a couple example.
In L.A.
County, they used to have one home per lot.
Now they've relaxed the zoning to allow two houses per lot.
That's a way to increase density.
Impact fees are simply a cost that it takes a developer or builder
to be able to build on a lot.
So think about plugging in to electric and sewer and trash and all those things.
Those are called impact fees.
They are passed on to the consumer.
Some markets have height restrictions like 20 feet.
If they can go 30 feet or 40 feet.
But of course, most homeowners don't want this because they don't like rentals.
Density would be how many units can you actually get on a piece of land?
So maybe it's 15 per acre, maybe it's 30 per acre, or maybe it's 50 per acre.
Think in New York City and you go straight up.
That's a density issue.
All of these things affect affordability, both for the homeowner,
the builder and the renter.
So if these costs are high and the restrictions are high to build
a build on to these things, then of course there's not going to be any building.
So now let's look at the bigger picture.
You take a look at Fannie Mae or Freddie Mac's own website.
They talk about us housing shortage, everything everywhere, all at once.
And the actual article says it's like 3.8 million housing units need it.
At the same time, even though the U.S.
population growth has slowed a bit, the US Census
for 2023 shows that it's going to continue to rise.
The US population growth primarily due to immigration
and we all know what's happening around that issue.
But the main thing is real estate values will continue
to grow based on where people are actually moving.
Once again, Texas, Florida, North Carolina, Georgia and Arizona
have continued to get the most people over this period of time,
which is exactly why you're seeing the largest amount of rent growth,
the largest amount of home appreciation of most of the markets.