So today we're going to talk
about the impact of interest rate changes by the Federal Reserve
as it relates to home builders, homeowners and landlords and renters.
It's important that you look at interest rates from all perspectives
because it does affect everything a little bit differently.
So let's look at home builders.
So the first thing that we're experiencing of course, as you guys know,
are the material and the labor costs are way up
or from higher interest rates,
higher gas prices than all of these things get poured into the construction
project itself and make the construction projects higher.
In fact, if you go to the National Homebuilders
Association, you'll see that just last year, home building prices
went up by over 26% in one year.
So why is that important?
Because if this home here as pictured, let's say, is around three or $400,000,
this could be 70 to $100,000
more just to build it than it was one year ago.
And I can assure you that the home builder doesn't eat that cost.
It passes it on to the consumer in the form
of price appreciation or inflation or whatever you want to call it.
Then, of course, that home buyer has to get a loan,
which is now more money and the loan payments more
because of these interest rates going up to the supply chain is a mess.
And I'm speaking from personal experience
because we have six construction projects going right now.
So it's very, very difficult right now to get things like lumber
and concrete and appliances.
All the things that we took for granted before are really difficult to get.
And of course, when we get them, they're more expensive.
And of course, the homeowner is paying for it eventually.
The third thing, which isn't talked about a lot are these land costs.
Land costs are going up dramatically everywhere.
And why is this important to you?
Because of this land right here costs the developer a hundred or $200,000 more.
It now goes to the consumer who pays eventually
for the price of that land anyway.
So when you are building, it's literally just land
plus construction, and that is the cost.
And then, of course, there's a markup above
that So land is a big issue when it comes to building homes.
Borrowing costs are up as a result of these interest rates.
Of course, builders that have lines of credit
or borrowers that are trying to buy properties like this,
their mortgage payments are going up, keeping them further
and further out of this new construction market
and pushing them into existing homes or even rentals.
So as a result of these things,
we're definitely going to have a future supply of housing.
And that's on the heels of already over 5 million housing
units shortage, as we've talked about in prior videos.
So these home builders, they're experiencing these high costs,
which is eventually going to be passed on to the consumer
and therefore we are going to see less new home buyers, especially now
that it's going to cost more to buy this house than it was before.
And don't forget, the Fed has also said
they're going to continue to raise rates throughout this year.
So now let's take a look at the homeowner.
What are they thinking Well, the first issue that they have
is that most of these folks, if they've been in their home for a while,
they're probably sitting on a much lower rate, a much lower payment,
and they have probably some equity, in some cases lots of equity.
So their decision is if they sold their house,
they have a capital gain and they make a lateral move.
They're actually getting the same house for a higher payment.
So therefore, we're going to see a lot of these homeowners stay put.
My prediction is that we're going to have listings go down
even more over the next couple of years as a result of this.
I don't see affordability going away.
Any time soon.
Remodels are going to continue to spike, but they're going to be tempered
by all these supply chain issues with regard to the labor costs
and the material costs and all of those kinds of things.
One thing to watch for here is the government
is already coming after us for the property taxes
because they've taken massive tax hits in lots of these spots.
And the landlords, the homeowners are low hanging fruit
for increases in property taxes which we're seeing across the nation right now.
The last but not least category are the landlords and the renters.
And so what's going to happen here and what we're already experienced
is you're going to see less acquisitions because of higher interest rates.
So think about this.
You have your income, you have your expense.
And then you have your debt.
If your debt costs are more than your cash flow is less.
Less and less of these deals are now penciling when just several months ago,
the rates were significantly lower and now they're close to 5%.
So the cost to borrow, whether you're building something
new or you're buying something existing, is going up
dramatically, which is pushing more and more deals to the side.
And we're seeing a shift from the sellers now to the buyers
as a result of these rising interest rate costs, as cash flows continue to go down,
as a result of rising interest rates and mortgage payments,
as well as property taxes, utility and energy and all those things.
The cash flow on these deals where in just a few years ago
were much higher, are now going down dramatically.
Those of you that are looking to build or even do a value add,
this cash flow is now a serious issue for you
because not only do you have the higher interest rate on the loans
that you're using to borrow these properties or to buy these properties
or to build these properties.
But we're starting to see higher renovation costs, higher construction
costs, higher labor costs, higher energy
costs, higher property taxes, higher
insurance rates, those kinds of things all shrink down the cash flow.
Then, of course, the investors are now looking at cash file
as it relates to cash on cash, which is do I want to invest the money
because I'm not getting the cash flow that I once was before
because of all these prices going up.
So unfortunately, that's going to lead to a lower supply again,
which is the worst time for this to happen,
because what we need are more units and more housing
to offset some of these high rent prices and some of these high housing prices.
But as a result of these things, the higher borrowing costs,
the higher construction costs, we're going to see a decrease in the supply
of housing over the next couple of years as a result of this lower supply.
You're going to see higher rents Unfortunately,
the one thing that combats higher rents is supply.
And so as rents go up and they will because supply will go down now
the renter is going to feel a much bigger affect on their affordability.
And they're probably going to downscale or not move as much
and they're not going to be as mobile as they once were before.
Of course, depending on what happens with their individual rent
and the wages that they make.
One of the greatest things is buying your first home.
And unfortunately, because of the low supply
and the higher rent, one of the things we're going to see is less renters
buying homes as a result of the higher interest rates
and of course, their wage growth staying the way it is.
It's going to keep people in rentals As you guys know,
I did a whole video on this called Renters Nation.
As we start to see the homeownership rate in the United States tick down.
Unfortunately, it's going to grow from the renter base
and the rents themselves are going to grow as well.
So this will be a very good time for landlords.
If you own something, it will not be a very good time for renters, unfortunately.
And this system is very out of balance.
Lastly, I want to touch on inflation because it does affect landlords
and renters.
So as renters experience higher prices for gas,
higher prices for food and landlords that have floating rate debt, as an example,
and their interest rate goes up because the Fed is raising the rates.
Then of course, their costs go up.
Now they're kind of forced to grow their rents as well.
So all these things affect everyone a little bit differently.
So as the Federal Reserve continues to increase rates, as they say
they're going to, I just want you to keep your eye on all of these things,
because whether you're a renter, whether you're a landlord,
whether you're a homebuilder or whether you're a home owner,
all of these interest rate changes have significant impact to you individually,
and they all have ripple effects of the things
that are going to happen in your own respective area.
As always, thanks for watching Don't forget to hit the like button
or the subscribe button. And I'll see you in the next video.