Today we're going to talk about
why renting is still better than owning and the facts will back it up with charts.
There's five reasons.
And most importantly, when we're heading into a recession, I'm
going to give you the exact month in 2020.
The first reason why I believe we're going to go into recession is because
we still have supply issues when it comes to housing in every single market.
The second, of course, is
you all know we have our mortgage rates the highest in 13 years.
The third, of course, affordability is a massive problem,
all for renters, but more importantly for first time
homebuyers, which of course put people back into rentals.
The fourth personal savings are way down and the fifth
and final continued inflation is definitely on the way.
And I will show you why.
So some of you might know that I just got back from Rebel
Capital was George Gammons event where I listed the six economists
that I flew to Nashville, which is where I am now to go to the CBRE
National Convention for Multifamily Commercial Real Estate.
And of course, tonight we start our collective, which is our mastermind.
So I've had a series of personal development on this industry
and these charts
are all from things that I watched or read or listened to during those events.
The first issue is supply, though currently there's
a 600,000 units shortfall of apartments in the United States
almost entirely as a result of the 2008 and after crisis.
Now, of course, when things imploded, I started lending branded a shortage.
What didn't stop is people started getting older.
And of course
when they get older they form households, which puts more demand on the system.
This same study by the National Motor Housing Council,
and they also predict that there's also about 4.3 million units
or 370,000 units a year needed by 2025 just to meet the current shortfall.
And if you want to take it out even further, it sure
looks like we've got about a ten year supply issue.
And if and only if if we built over 400,000
units a year will we actually take care of those shortfalls.
All in all, you have a very basic problem.
You have low supply and high demand
rating price increases and creating rent increases.
Now, with regard to new construction, there's three buckets.
There's under construction.
So already started to plan, which are units that are in process.
Maybe the land's been bought or maybe it's an escrow and they're about ready to go.
And then three, our prospective, as you can see, it's a big number.
So the gray represents under construction, which is where we're going to start.
Those are the units are going to get added and already will hit the supply,
which is good.
But these particular markets, as you can see, as a percentage
of the existing housing stock, are going to get hit the hardest.
So what new units are added sometimes actually
create concessions at higher vacancy and things like that.
But as you all know, we actually need these units and more
all across the country.
As you can see, these are the top
ten markets under construction right now from all their family.
Now, the other two categories, the planned and prospective,
I don't have as much certainty around because of the cost of labor,
the cost of supplies
and the cost of interest rates, which we're going to talk about next.
So the only thing that you could really rely on
would be the first chart, the great chart, what your units are in construction,
which is about 19.2%, which is just over a million units.
This chart here will tell you why I think we're going to continue to have a problem
and we're going to be pushed more into a renter nation.
Some of the issues affecting supply are, of course, the 40% regulatory cost.
The high cost jurisdictions, the cities, the counties in the states
have made it really hard for new construction to be added.
This further exacerbates the supply issue and of course does not handle the demand
and largely most of the cities athletically have not really dealt
with this housing shortage that is about ready to hit all of us
and is going to continue to make rents go up and single family prices go up.
What I really want you to pay attention to here is that
this chart goes out to 2030 and of course the light blue or multiphase
family completions and the dark blue are single family,
but the dotted line are household formations.
And this is very, very important.
This is a leading indicator.
As you can see, it's flat.
So housing formations are actually very simple.
Think of groups forming together and creating more housing.
That would be, of course, more jobs, need more apartments,
get married, have kids, and things that push household formation
are lower and interest rates which create more households.
So when household formation is flat, that's not necessarily good.
Household formation could stall as Ridgers move in with family
or roommates or cut costs.
I want to reiterate household formations are a leading indicator
for multifamily and single family growth.
So the next slide is why
renting is still a better deal as compared to cost of owning,
though as everybody knows, the cost of houses have gone up.
The cost of interest rate to buy,
those houses have gone up, therefore the mortgage payments have gone up.
Well, this is also comparing it with the rising cost of red.
As you can see right now, there's a $470
difference between renting and owning,
which is why I made the statement, why renting is still better than owning.
But what's interesting is that this just crossed in late
2021, early 2022, as you can see, where those lines intersected.
And there has never been a gap this wide.
So when I did my video last year called Renter Nation,
this is why it all has to do
with the supply and demand, which doesn't look like it's going to get any better.
Obviously, there are a few things that could change this right away.
One, interest rates could go lower, which would certainly help.
That mortgage payment to additional supply could be added when supplies added.
Then, of course, it helps with the demand, not lowering prices.
Then, of course, as interest rates
go down more and multifamily and single family can be added.
Right now, this is what's creating the affordability issue
that we're all experiencing right now, both on the renter side
and on the Single-family side.
And this chart right here should tell you that more people
that are more to buy homes and allies in that first time homebuyer
actually pushing them and keeping them over the rental market,
which is not necessarily good for the overall.
Some of you might know that a commercial real estate industry is in trouble.
It's in trouble because the net operating income,
which is just simply income minus expenses, is one thing.
And now we have the higher cost of debt.
Imagine when your mortgage payment doubles, let's say from 3 to 6.
Now, don't have the cash flow that you once had a year ago.
And of course, this is when there's variable rate loans or short
term loans or a bridge loan.
So the second line of this chart here should be cause for alarm,
because as you can see, there were over 2500 units that were acquired from 2020,
and they have 2 to 3 year durations on the interest rate or or said
another way, their loans are maturing and keep going down the list here.
You're going to start to see there's an additional 400 properties
that actually have construction loans maturing in the next two years.
So all of this means out the bottom that many of these properties
have low debt service coverages, which is the indicator that the bank uses
in order to do a cash out refi or a valuation.
As you can see, we've got over 2500 properties right now at risk
and this is all going to hit the fan here in the next 18 months to two years.
So this is all going to create a fair amount of distress.
And so our ideas, I broke it up into these different cities
and it's going to show you from Austin, Charlotte, Jacksonville, Miami, Nashville,
Phenix, Raleigh, Durham and Salt Lake City work properties
of maturing construction loans, bridge loans are floating rate
loans, and it's clear that Phenix, Salt Lake, Austin and Nashville
are going to be in trouble when all of these loans come due.
And so what we're going to see is a lot of
banks are going to take back this commercial paper.
It's going to create some distress in the multifamily arena,
which is going to continue to make harder and harder, harder
to get loans to fill the supply issues that talk about earlier.
So now let's get into the actual people that drive this demand, both
on the Single-family acquisition side and the multifamily renter side.
Well, this is an alarming chart.
When I take a look at it.
As you can see on the right side, you've got personal savings
as a percentage of personal income and it's spiked, of course,
during the pandemic when the government was giving out all the stimulus checks.
But it's continually gone down and it hit bottom about 2022.
So what does this actually mean as you compare it to the charts, The lot
where you can see that checkable deposits and currency has gone down as well.
What this should tell you is that trillions of dollars were spent during
this period of time and people reduced their savings accounts during that time.
This created massive inflation, which is what we're seeing now.
Unfortunately, what also has spiked is credit card debt,
which of course is over $1,000,000,000,000 with the tea guys.
And most of that debt is sitting around 20%.
The people that own that debt, an average of 50 $800 per person
in the entire United States of a 20% interest cost on that debt,
keeping them further and further and further
out of the single family market and into the rental market.
It's interesting to note
that this is the highest it's ever been in the history of the United States.
Now, this chart is what the Fed and many other people look at.
This is inflation,
nation impacted by higher prices for food and shelter and lower prices
for gasoline and used vehicles just a couple months ago.
As we all know, CPI or the Consumer Price Index has gone down
since June of 2022 through its current state.
However, the dotted line is the one I want you to focus on.
That is the year over year change in or CPI.
The Federal Reserve is very concerned about housing.
The core CPI excludes food, food and fuel.
And you can see here it's actually trending up.
And that's where I'm concerned because energy,
food, housing, all those things are getting less
and less and less, as the chart here clearly shows.
But it's still well above the Federal Reserve's target of 2%.
The core CPI is what we should be watching because this is a long run trend
and it looks to me like it's continuing to go up slightly.
And if that's the case, we might see the Federal Reserve continuing to increase
the federal funds rate slightly just to continue to taper inflation.
So what does all this mean?
As I told you, I was going to predict a recession, but here
you can clearly see that in a Q3 forecast we're going to have zero GDP growth
and we're going to go negative in the final quarter of 2023,
spilling over of course into Q1 and Q2 of 2024.
This is a direct result of the lag
from raising their federal funds rates ten times.
So what happens during a recession and how does it affect everyone?
Number one, businesses cut back, banks cut back on their underwriting,
unemployment goes up, layoffs go up, wage growth goes down.
And of course, consumerism also goes down, driving prices down,
which is exactly what they were trying to do in the first place.
But of course, this is going to tilt this into recession.
But not to worry. There's lots of things that we all can do.
Just take a look at my other videos and you'll have a road map to try
to get you through what I would consider to be some economic hardship
for the next 12 months.