Today we're going to talk about my two year real estate prediction.
So first, we're going to start with somebody
that I admire that's now passed away since 1983.
Buckminster Fuller.
And he used to talk about generalized principles or universal
laws, things that you cannot refute.
Like there is dark, there is light, there is on,
there is off, there is hot, there is cold, universal loss.
And two of those are precession and lag.
And we're going to talk about precession and lag as it relates to real estate.
So the first universal law is around precession.
And while I'm going to simplify it here,
basically if you drop a pebble in a pond, it has rings.
So in other words, this could be a choice to make something that happens
like an event and it has ripple effects as it moves through a pond
or in this case, the economy.
Lag, of course, is the difference between
here and here and here and here and here and here
and that is the time frame between one event and another event.
In other words, when something has dropped in upon, when is that first circle?
The second circle, as you guys know, as it gets further and further out,
they get longer and longer.
So with regarding lag, what's happened, as we all know, the Federal Reserve
raise rates five times so far and they're now going to be meeting again
two more times this year for a potential rate increases of seven times.
Now, let's tie all this together and I'll show you some of my prediction
as it results to perception and lag
with regards to the interest rate increases that we've recently had.
So let's first take a look at precession and lag.
So we know perception are the rings.
So in this case, the dark rings are the federal funds
rate hikes since March, May, June, July and September,
and of course, November, December, based on my two predictions
and the dotted lines are, of course, what I think is going to happen
for the Federal Funds Rate increases between now and the end of the year.
The green here represents the actual inflation rate,
which of course is the reason for this federal funds rate increases.
What the Federal Reserve is trying to do, of course, and one of their charters
is to keep inflation low.
And as you can see, it hasn't really worked yet,
even though we've had five increases and we have potentially two more.
What that means is the Federal Reserve could wait to see if there's
a better lag effect.
It might take a little bit longer or they might raise rates again in 2023.
It's anyone's guess as to what's going to happen.
But I'm going to guess that they're going to raise rates
two more times before the end of the year because as you can see, with five rate
increases, inflation really hasn't changed.
And lastly, let's not forget that the target inflation rate
for the Federal Reserve is 2% as admitted on their own website.
So the real question is, on October 12, where will the inflation rate be
and will the Federal Reserve increase more rates at the end of this year
and into next year?
And what will that do to the economy as a whole?
So in this chart, I summarize all five of those increases
and potentially the other two right here in this purple dot in the center.
And that's now my new perceptual fact for 2022 federal funds increases.
The real question is, as we start in Q1 2023,
what is that now going to do from a lag standpoint
in the economy and what is happening today for many of you?
They're paying attention.
You realize that these signs are already here today.
So I believe we're going to have two more federal funds increases
and we're going to have interest rates around 7%, possibly even
eight, and Q1 of 2023.
That's going to continue to send consumption down.
And people are going to buy less because the cost of money is up.
That means less automobiles, less TVs, less homes,
all of the things that people finance, which is right now the majority of things
people do in a video earlier this year, I said we're moving to a renter nation.
I really believe that these numbers are interesting for you to watch.
And right now, the renter percentage is trending somewhere between 35 and 36%.
And of course, on the other side of that is the homeownership rate, which is what
everybody's watching, which is right now somewhere between 65 and 66%.
I do believe that there's a lag in having the inflation come down.
And I do believe that the next two increases,
because the consumption is going to come down, that we will start
to see inflation potentially trend down below 7%.
However, let's don't forget that
it's still five percentage points off or what the Fed want.
Real estate listings are going to continue to go up.
Real estate prices will continue to go down as there's more and more supply.
And unemployment as of right now is around 3.7.
And I believe that's going to stay pretty steady through these midterm elections.
I do believe in the first quarter of 2023, you might see this tick up a little bit.
But now, of course, we're going to go to Q1 of 2024.
The one thing I want to point out here, while you think that might be so far away,
it's only 14 to 15 months from today.
This is not that far away.
So the first thing that I believe is I believe that
we're going to be in a recession sometime in 2023
and we're going to still be in one and Q1 of 2024.
So the one thing I do believe is consumption
is going to continue to go down because of the lag effect.
Remember, this is only 14, 15 months later.
And of course, because of lag and inflation, rates are already at 8.3,
I just don't believe that they're going to be anywhere near their target of 2%.
And so therefore, I think that actually interest rates
are going to continue to go up through the remaining 2023 and possibly into 2024.
There could be even higher than we saw one year ago in 2023.
What that's going to do, of course, is reduce consumption,
reduce homeownership, increase renters,
and it's also going to temper inflation.
I hope.
Remember, inflation started at 8.3, just 14 or 15 months ago.
And I'm hoping that inflation will be down in the five or 6% range.
I'll tell you why.
I don't think it's going to be more in the very next slide.
But one thing is for sure, real estate prices
are going to continue to go down because they're going to be more listings.
And I believe that the Fed is prepared
to drive up unemployment, which is also not going to be good for a lot.
So now let's look
at the individual components over here as I think it's going to be
as a lot of people think it's going to be in just 14 or 15 months from now.
So let's first start with recession.
There are a lot of people that believe we're in one today
and there's a lot of people that believe
the Federal Reserve is going to push us into one tomorrow.
The bigger issue, in my opinion, is that there's a lot of people believe
that there's a 98% chance of a global recession
if you just take a look at what's going on in other countries as well.
So I believe that
what's happening domestically and what's happening internationally,
it's all going to point to a recession that's going to hit the United States.
So that's why I said that there is going to be a recession in 2023 and in 2024.
The second one is consumption.
And as you all know, we've all changed our consumption behaviors
as a result of this high inflation.
People are cutting back on gas, food, rent,
cars, consumption of all kinds of things right now.
And as you guys know, I'm still projecting a pretty high inflation rate into 2024.
And so I still believe, as do many people, that a lot of shoppers
are going to continue to cut back and change their purchasing priorities
going on into what is just 14 or 15 months from now.
The next one is interest rates.
Now, I do believe that interest rates are going to go up even higher in 2023
and potentially into 2024 as they continue to tamper down inflation
and bring it down to that 2% level, which there's no possible
way that they're going to be able to do it in just a 14 or 15 month period.
And let me show you why.
And so for all you naysayers that believe that inflation is going to come down
rapidly, I went back to the early 1900s to see
how fast has the government actually done this in 100 years?
Well, it's very unfortunate, as you can see,
there's really only one time and that was from 2008 to 2010
that we actually saw a big reduction in inflation in a 24 month period.
That's the only time in this entire chart the Federal Reserve
has certainly adjusted the number from month to month and from year to year.
But the biggest decrease has to be from 2008 to 2009.
We had a massive economic contraction during that time
and I'm hoping we don't have that again to get this kind of adjustment.
So as you can see from just 14 or 15 months later that we're at 8.3 now,
getting to five or 6%, inflation is pretty reasonable
and possibly even aggressive based on all of this history.
So obviously, higher interest rates are going to create more renters, lower
homeowners, hopefully inflation, it gets tempered a little bit.
But the and the real estate prices are definitely going to go down.
But the biggest concern I have is by far the unemployment rate.
This is what I actually believe is going to be
the biggest shock to this economy in the next 14 to 15 months.
Take a look at some headlines that are recent.
This is just a week old. The Fed's tightening.
I guess inflation could cost the US 1.2 million jobs.
That's why I picked 4.4 from 3.7 in the slide prior.
What's even more alarming is actually the fine print here
and potentially, if unemployment goes as high as 5.5%
at the high end of the Fed's range, that 5%, that would be
2.2 million more people unemployed.
This would be disastrous for everything in this category right here.
It would most certainly push more people out of homeownership into rentals,
and it would put even more pressure on rental housing.
This is not a good scenario, and the Fed themselves have said
that they're going to keep the interest rate above 4% beyond 2023.
That means this is from the Financial Times.
That means that the cost of money for everything is going to continue to go up.
So now, of course, let's go out to Q1 of 2025
and the math of course, gets a little bit more fuzzy.
But like you guys, I'm trying to make some good assumptions for my own
purchasing and for my real estate portfolio that I own.
So once again, we have another lag effect.
And of course, the first 14 or 15 months might correct a lot of these thing,
but if they don't, then of course, we're still
in a middle of a recession potentially a global recession.
I believe that real estate prices are going to continue to go down.
And this is actually when you're going to start to see bank owned properties
and people losing their real estate investments, those kinds of things.
Hopefully the Federal Reserve has raised interest rates high enough
to where they're actually coming back down potentially in the 7 to 8%.
At least that's my wish.
Of course I want inflation low, but I just don't think that
they're going to get there in a 27 month period as evidenced by history.
I think that we could still be in the four or 5% inflation
time frame, and I still don't think that the Federal Reserve
will be done by that point.
And the unfortunate thing around all of this, there's high unemployment,
there's high inflation, and these higher interest rates are
that more and more people get pushed out of homeownership and into rentals.
And as you can see, we're trending even more toward higher renters at 38%.
And homeownership at 62%, which is what
we saw right before the last financial crisis.
As you all know, I did a prediction video and there's many economists
that believe for the first time in the US housing history
that we actually might see homeownership below
60% for the very first time
as a result of all of this collateral damage.
So hopefully you guys understand the difference between perception
and the lag.
And of course, if this is a scenario here, then I do believe that
in 2025, in 2026, you're going to have massive buying opportunities.
Again, as bad as I believe that this is actually going to be,
this is part of a real estate cycle.