Today we're going to talk about the top five issues facing real estate
and make sure you stay till the end, because I'm going to talk about three
strategies that you could do right now to get out of this mess.
Number one, inflation versus interest rates.
So most of you know that we've had six rate increases
from March of 2022 and we have another potential interest
rate increase in December and then potentially even more in 2023.
There's lots and lots of articles about this,
but the Fed does only care about the inflation rate,
and they're obviously using
the interest rate as a mechanism to lower that right now.
What this means is that the cost of money is going to continue to go up,
and the pain that people are experiencing for all kinds of reasons
is also going to continue to go up.
So as you can see from this chart here, these are the past
six interest rate increases that we've had.
And when we started in March of 2022,
we were at 8.5% inflation.
So as you can see from these six rate
increases, we've hardly had any debt and inflation.
And of course, the Fed is trying to get to 2%.
So hopefully this starts to work
and lower inflation and we start to hit the Federal Reserve's target numbers.
But what I really wanted to discuss here is there's a lot of very smart
people like Goldman Sachs that's also projecting
that we're going to have significant rate increases in 2023
because of the lag effect with inflation hitting the 2% number.
What that's going to do, it's going to create an affordability issue.
Now, this is for the homeowner, for the renter
and for the real estate investor.
So high inflation and high interest rates create affordability issues.
And as you can see, there's lots and lots of information about this,
about how people are getting priced out of homes,
priced out of buying homes, priced out of rentals.
And you're going to see a lot of policy start to be implemented
in 2023 as we try to solve some of these issues.
But make no mistake about it, these affordability issues
are a direct result of high inflation and high interest rates.
So number two is the price of money.
And a lot of people don't consider this, but there is a cost of money
in the form of equity or the form of debt.
And as you know, many builders are facing
the construction costs are now hitting the highest spike in 50 years.
So that is just the cost to build a home.
But in addition to that, most of these construction projects are finance.
So just like you are trying to buy something, the builders are also trying
to finance a big subdivision or even one house.
And so the cost to finance a home and the cost of the home itself
is just going to continue to drive these prices even higher.
The next two, of course, are the cost to own and the cost to buy.
And we're seeing this on inflation of people
have variable rate that their cost to own is even going up
because the rate on their home is going up each and every month.
And if you're trying to buy, of course, the cost of finance, whatever
it is, it could be a car, it can be a flat screen TV.
The cost to buy is also going up.
The price of money is significant, and it's going to have ripple effects
to the economy as the people, as people's cost of living continues
to go up and their wage growth doesn't go up at the same rate.
Number three, which I know a lot of you don't care about our company
profits and losses.
Let me clarify.
When inflation goes up, prices go up.
So in theory, you would think that corporate profits
are going to go up and you're going to read a lot about this.
But what you really need to do is dig down a little bit deeper
and also take a look at their expenses and their overhead
and all the things that are associated with inflation, even for corporation.
This is very, very important because we're next.
We're going to talk about unemployment.
What I'm particularly concerned about are the margins inside of a company,
not just how quickly the revenue is growing.
The margins are what you have to pay attention to.
And as you can see from this chart with the AP that this is inflation
at a consumer level, but it's also at a corporate level.
So you can see the corporations also are significantly impacted by inflation.
And this is showing up in the cost of goods.
This is showing up with those supply chain issues.
And certainly it's showing up on the labor costs right now, all inflationary.
So just think of any business like a trucking company that has to put fuel
in their vehicle to Gulf Point A to point B, those costs are up.
So then they have to pass those on to the next customer and then, of course,
ultimately the consumer.
So all of this is happening right now.
And these corporate profits are actually being squeezed
as you're going to start to see in the future.
So number four is unemployment.
And right now, unemployment looks pretty good.
But the Fed has said that they're trying to increase unemployment.
They've said it over and over and over.
And if you really dig deep, you can see that the Fed forecasts
the unemployment rate to rise to 4.4
next year from 3.7 today.
That implies an additional 1.2 million people losing their jobs.
That is significant.
If you just Google corporate layoffs, you'll see there's all kinds of businesses
laying off right now as they try to adjust for the slide.
Before, when I showed you about how their corporate profits
and their margins are going down each and every month.
So be on the lookout for higher unemployment numbers next year
because I think this is going to significantly impact on the way
real estate is traded and consumed and used in 2023.
So as the cost of money goes up, therefore unemployment will go
up, as the Fed has said, as corporations are now doing.
So what I wanted to talk about,
what effect does higher unemployment due to an economy?
And as you can see, people spend less money
which ultimately contributes to less contributing
to the economy in relation to services or goods sold and produced.
Very, very important.
In this chart here, you can see some of the causes and the effects.
Some of the things that are going to start to show up.
Unfortunately, if the Fed hits those numbers
and we really have more than 1 million more people heading toward unemployment
next year, we're going to start to see mental health issues, physical issues,
lower life expectancy, homelessness, what we already are seeing.
Drug abuse, poverty.
Social isolation, all of those things.
All as a result of high inflation and high interest rates.
So these are the personal effects, unfortunately,
as a result of the high cost of money and higher unemployment.
Number five, one of the things that break me out
was that we have a big drop off in people's personal savings rates.
So over here you can see actual savings rate.
What's really, really interesting is right here, of course, this is the pandemic.
This is all the stimulus money that people got.
And as you can see, their savings rate went way, way up.
Now because of inflation and higher interest rates.
The savings rates are now at extremely low level.
Guys, take a look at this.
This should be a cause for concern because this is what kept the economy
going for a while and this is what people need in order to survive into 2023.
So this chart, as you can see from January 2020,
when we first got into the recession
and you can see how people have spent their money all the way down here.
But as you can see, that are very, very, very low point.
This was as of the end of September.
So what does all this mean?
It means that everyday prices are surging in the form of inflation, of course,
but also in the cost of money when people
are actually using their credit cards or whatever it might be.
It's killing people.
It's driving their savings rates down even further.
So this, folks, is where we're heading into 2023.
And this is why I'm most concerned, because these folks
do not have the cushion like they had during the pandemic.
So here are three strategies
that we could do in 2023 that you can do before the end of this year
to try to get yourself into a better situation.
The first one, we talked a lot about this, but your income must rise
higher than your debt.
This is very, very important
because right now the cost of debt is going up a lot.
But your income must rise higher than debt.
For you to stay ahead of this number, to evaluate your debt cost.
So if you have credit card payments that are 18 or 20%,
you need to take a hard look at that and figure out how you can lower that
so you're not falling behind.
As I talked to you about in number one, same thing with real estate.
If you have variable rate debt that has gone up a lot,
you need to be looking at fixing your debt cost today.
You need to hedge your payments today and grow your income for 2023.
And then the third thing, which I talk a lot about,
cash, is king do not worry about inflation.
Grow your cash savings account as much as you can.
You're going to need cash for all kinds of reasons.
First, you should always just prudently have a reserve.
You should have at least six months of operating expenses
to you cannot control all unless you own the company.
What's going to happen
from a corporate profit standpoint and who's going to get laid off next?
So you need to have enough cash to buffer you in case you have a job loss.
And you can go find another one.
Three, you need to have enough cash to be able to pay your rent
or your housing or whatever else you need to be able to
hold on to or sustain through 2023.