Today we're going to talk about three reasons
why rent is going to go sky high over the next couple of years.
So if you're a renter.
Stick around because I've got strategies for you.
And if you're a landlord, I also have ideas for you as well.
So a lot of this information you guys already know, but single
family, home prices and interest rates are way up.
We're going to go into that in a minute in more detail.
Single family and multifamily costs
are also way up, which are different than prices of course.
And the existing supply is way down.
I'm going to show you all three of these things
and why they're going to get worse.
But before I do, let's do not forget about the law of supply and demand.
And I think a lot of times people just throw this out the window
when this is actually the most important piece
So over here on the Y axis is price.
And over here on the X axis is quantity.
And obviously, this is demand and supply The law of demand says at higher prices,
which you guys are seeing now, buyers will demand less of an economic good,
which is why we're starting
to see a little bit of a slowdown down in the housing market.
The Law of Supply says that at higher prices, sellers
will supply more of an economic good.
And these two laws, of course, enter act to determine the actual market prices
and the volume of goods that are traded on a market.
Now, this is a complex issue with respect to real estate.
We have prices we have costs, we have wage growth, we have interest rates.
We have all of those things.
And even more about where people are moving that can make this really complex.
So I'm going to try to break it down for you in these next few charts
so you can see where we're headed.
What I really want to leave you with is that each market has its own supply
and it has its own demand.
There are people moving in.
There are people moving out.
There are prices going up and there are prices going down.
And of course, we have the interest rates and the cost.
So the numbers that I'm going to review are national, but your individual market
might be different.
The first thing I'm going to start about is literally the cost of money.
So it doesn't matter if you're a consumer or you're a buyer or you're a borrower.
How expensive money is does affect what you're going to do next.
And what I did is I broke this down to January
just 20, 21 not very long ago till current, May 2022.
Now we're in June
and you can see the difference in the interest rates, as pointed out
by the St Louis Fed here.
You can go online and search for this stuff,
but this is a 30 year rate fixed mortgage in the United States
as of January of 20, 21 was 2.65
and as of May five of 20, 22 is 5.27.
So the next thing we're going to look at
is how these interest rate increases have impacted the average
mortgage payment as we take a look at the average home prices.
So stay tuned for that So going back again to the Federal Reserve's own website,
you can see that this is the median sales price of houses sold
in the United States by quarter so this was quarter 20, 21.
The average home price during that time was 369,800.
And in quarter two of 20, 22, which is the most recent data,
it was 428,700.
So now we're just going to take the information that we had
in the last two slides.
We're going to take the 369,800
and we're going to put the 2.65%
interest rate in there at a 15% down
and it kicks out a 1700 and $16 payment.
So as you can see from just 14 months later, the home prices went up
from 428,700 and the interest rate of course went up to 5.27,
which now gives you an average mortgage payment
with 15% down of 20 $521 the difference of course
is $805 per month
or 90, $660 a year.
Now I can assure you that wage growth has not kept up with this.
So what does this all mean?
What this means guys, is that buying a home has risen significantly
more than rent growth and this is going to push more people into rentals.
Unfortunately, even as a landlord, I like to see equilibrium in a market
and this does not bode well for the single family buyer.
So now let's take a look at that data from 20, 21 to 20, 22 that we just got
and measure it against rent growth during that same period of time.
And as you can see, the average American renter pays
about 1300 and $26 for a home.
It's closer to two grand roughly.
Here are the top ten states with the average highest rent
and here are the top ten states with the average lowest rent.
So you can kind of see that rents are as low as $826
in North Dakota and as high as about 20 $400 in Hawaii.
So rent can be significantly different across the United States,
no different than home prices can be different across the United States.
So whether you're a renter or a landlord, you need to take a look
at the combination of the home prices in an area
and the interest rates and what that does to the mortgage payment
as it relates to the actual average rent in that particular area.
So in some areas you're actually going to see
that it's cheaper to rent than to buy.
And in some areas it's obviously a lot better to own than to rent.
So as you guys are looking to rent or invest, just pay attention
to the average home prices.
And of course, now with these new higher interest rates
and what it's doing to the monthly payment as it relates to the average rent
in that particular market,
because even in these markets, we're seeing some rent growth go like this
and some rent growth go like that based on net
migration and people are either moving in or people are either moving out.
The same thing with home prices.
It's important that you're constantly looking at the total monthly payment
that a homeowner would have versus a renter in your investment decisions.
So now we're going to look at construction costs.
You guys could see year over year construction costs
have gone up by over 19% as reported by the National Association
of Home Builders and H-P dot org.
Just take a look.
So if there's 19% on a $400,000 home, what that means
is that that $400,000 home is now
cost 480,000 that means that if a home was $400,000
to build last year it's now 480,000 this year.
And that cost gets of course passed on to the consumer
in the form of a higher home price and of course a higher mortgage payment
and then of course drive for people out of home ownership
back into rentals again here I found some great data from
and it's a great company on the internet that looks at multifamily
construction costs.
The average increase is about 1.1 million for a four to six unit apartment building
and now they have different data in different areas.
And you can see Minneapolis, San Francisco, Dallas and Washington, D.C.
are going to be of course all a little bit different.
These costs must translate into higher rents.
Otherwise these communities might not even get built, which is
what's going to further exacerbate the supply issue that we have right now.
So the point of these two slides is that if a home is going to cost 480,000
and the interest rates are significantly higher,
there's going to be less and less people that can afford them.
And it's going to be pushing them more into rentals over here.
If these apartment communities cannot be built and we cannot add supply,
then you're going to see a shortage when there's more demand
and you're going to see more red growth because these apartment builders
cannot continue to build at these higher prices.
Both of these scenarios are bad for renters and bad for the economy
because renters need affordable price housing.
There's all kinds of really good information on the Internet.
And one of the really good impact studies that Goldman Sachs did late last year
was three reasons why the housing shortage will last four years.
What they point out here is literally just math.
These are the demographic trends of people that need
housing based on people that are coming of age.
The report goes into much more detail if you want to go take a look at it.
The point is we have a demand history and they have a demand projection.
Now you have to look at the demand projection based on the historical supply,
of course, demand and supply, which going back to that original chart,
we were talking about what we have here is we already have
almost 5 million housing units short
because of this period right here during this time
we hardly produced any housing because of the late crash.
We are now coming out of it, of course, but we're significantly behind
and we have this increased demand coming.
So what does this mean?
This means we have to build a lot more housing than we have been over here
in order to satisfy this demand and the future demand that we already have.
And if we don't, we're going
to continue to move in what people are now calling a renter nation.
This is an article that I did in Jetsetter Magazine in November of 20, 21.
You can get it online.
Here's another article that just came out in the magazine called Renter Nation.
So now let's take a look at the Fed's own information
on the homeownership rate in the United States.
And of course this goes back prior to 1970 where we had a pretty low
homeownership rate.
But all the administrations
have always tried to make people buy homes because that's the American dream.
And as you can see we peaked in about 25 almost at about 69%.
This decline is the reason why we've had
so much pressure on rent during this period of time.
It's because people are falling out of homeownership into rentals.
Then of course housing prices got pretty good,
interest rates got really low and people started to buy again.
And then of course we saw the homeownership rate increase once again.
So as a real estate investor, this is really
important information to follow because during this period of time
the administration was really pro homeownership.
So you want to be on that side of the equation.
Being on the multifamily side during this period of time was not necessarily
good because people were buying a lot of homes and moving out of rental
during this period of time.
If you own units as a landlord, you have done very, very very well.
What's important about this chart is
as you start to see the homeownership rate go up, of course,
people are generally moving out of rentals in the single family, homeownership.
On the other side of it,
they're actually moving out of single family, home ownership back into rentals.
So depending on what side of the coin you're on this could be either good
or it could be bad.
If you're a landlord
or a home builder or a renter, it just depends on your perspective.
So now let's take a look at this little dip where we are here,
which I blew up for you on this lower chart.
So this peak is here, which is quarter two of 20, 20.
And as you can see, the homeownership rate was almost at 68%
not very long ago, just two years.
And what's happened is it's declining over time.
The reason it's declining
is because the price of homes were going up during this period of time,
as we just showed you, and people were moving more into rentals.
So it's my belief that homeownership rates are going to continue to decline
because of, of course, the higher interest rates that we just
pointed out along with the higher price of homes.
So if you want more detail on this, just take a look at my other video
called Renter Nation that I did a while back that actually goes into
a little bit more detail point of this whole video is that if you're a landlord
or you're a renter, you're going to see your rents continue
to go up as a result of the higher price of a monthly mortgage.
And of course, the shortage that I just pointed out
and rents are under pressure because housing affordability is so bad,
because people have no other choice, prices are going up to build them.
And of course, there's a massive shortage in conclusion.
What do I think is going to happen here?
I believe that the cost of housing is not going to go down any time soon.
I believe that the Fed is going to continue to raise interest rates
to try to curb inflation.
So the monthly mortgages are going to continue to grow,
which is going to push more people into renters,
and it's going to further reduce the homeownership rate in the United States,
which is not necessarily good.
And this is why I believe we're heading toward a renter nation.
So as always, thanks for listening, guys.
I appreciate it.
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