Because we've had six rate increases since March.
You're really tied to the residential market.
You you coach, mentor and teach a lot of people.
What are you seeing right now to these increases?
Well, you know, everybody is talking about and worried about
and many are predicting a big real estate crash.
I don't see it.
And I might be eating my act.
Okay.
I think there will be some continued softening.
I think people have got to dissect
that discussion between linear, cyclical and hybrid markets.
When you segment by price, by geography
and all of that stuff, you really
I think the necessity level housing is going to fare pretty well through this.
And remember, at the end of the day, it's always the question of compared to what?
It's not just the question about what is real estate going to do.
But the question is, if you're an investor,
what other option do you have for your money?
Right.
You know, there's an acronym in the investing world, Tina.
Tina.
And it stands for There is No Alternative.
And so when you look at investing, you always have an opportunity cost.
If you close one door, you open another.
If you open one, you close another.
And that's the decision investors always have to make.
What is the highest and best use for my money?
Where can I get the return?
And if you look at properties that are pretty conservatively performed
right now with vacancy rates, repair costs, maintenance, cost management fees
overall because income property is a multidimensional asset
and you're not just earning your return one or two ways
they'll perform with leverage, of course, over 20% annually.
So I would say even if it only goes half as well as expected, 10%.
And what are you going to lose money in the stock market in cryptocurrency?
I don't know. You know, what is the alternative?
That's always thought.
Let's unpack a little bit of that, because I know we've had you on before
and you talk about the cyclical, the hybrid and the linear markets.
And you were saying that which is going to be cool
to talk to you about, because a lot of people are saying that
everything's in a crash.
I also believe that real estate is going to take a severe adjustment.
But you're saying as you invest in these linear market. Yes.
So can you explain that real quick?
You know, country is large and diverse with the United States.
There's no such thing as a national housing market.
Okay. There are really just local markets.
And the old saying in real estate
that we've all heard is all real estate is local.
Right. And that is true.
And so we have almost 400 what's called
MSAs, metropolitan statistical areas.
We have over 3100 counties in the U.S.
We have over 9000 cities in the U.S..
You know, all of these markets act somewhat differently.
Of course, they they're related for sure.
And I divide them into three basic types, the linear markets.
These are these boring markets that are inexpensive.
They're characterized by always low land value and high improvement value.
People have to remember when they buy a property,
they're really buying two things.
They're buying the land and they're buying the improvement.
Sitting on the land, the house or the apartment complex.
Right, or whatever. Office building doesn't matter.
And so when you have low land value,
that's where the the froth is.
And so when things are going up and the market is going crazy, land values
skyrocket, usually buoyed by high affordability and low interest rates.
Right. And in good incomes in comparison.
But when they're going down, land values do soften.
They do soften a lot.
The improvement value doesn't soften that much.
Of course, in a down market and during the Great Recession
or the global financial crisis, whatever you want to call it, we did see
a lot of deals that were below the cost of construction.
But the construction materials and you both know this all too well
with your business, they are commodities traded globally,
not attached to any one currency and needed by every human on earth
because everybody needs food, clothing and shelter.
And so these materials
set something of a floor
on values in and how much they can drop.
So what I say is buy in these linear markets where land is cheap
and improvement cost as a ratio is high.
It's a bigger part of the equation and that helps offset risk.
Okay. And I guess I got that.
So a cyclical market.
On the other hand, there's complete opposite, right?
That's like where I grew up in Los Angeles, California.
Okay.
In a cyclical market, you have really high land values
and as a ratio, low improvement cost to land.
And when things are going up, it goes up like crazy.
And when things are going down, it plummets fast.
So one of the things that I'm finding and you know, we do investment communities
every week
and our acquisition guys are out there, are analysts are looking at deals.
And, you know, if you look at an A.I., let's say a year ago
or six months ago or one month ago, it is what it is. Yep.
The big difference is the cost of debt.
Yeah.
And so when debt goes up, cash flow goes down.
Therefore, the cash on cash or the yield goes down.
And so, you know, that's all across the entire nation.
So cyclical, those are more linear. Right.
So the cost of debt for that same house is going up, let's say.
So is it the cash flow going down at the same time?
Oh, yeah, it's yeah.
I mean, you know, cap rate, compression, it's constricted, no question about it.
That that debt.
I mean, look at real estate is a credit based asset.
Yeah.
So when the cost of debt goes up, the deal looks different.
No question about it.
It it's more susceptible in those cyclical markets.
And hybrid is the third kind just in between the two. Sure.
If you look around the world,
most of the world is a linear market like the middle of the country.
And the to the coast are the cyclical markets.
Those are the markets that get all the attention in the news
media are the cyclical markets because they're newsworthy.
There's something going on. They're going up.
They're going down.
The boring, linear markets don't get that much attention.
But yes, the debt is a national or even global thing.
Right.
And I got to ask you, Jason, you know,
if it's a linear market is different than a cyclical market.
You still have to, though, factor in what people can afford month to month
with the interest rate. Right.
I mean, the interest rate has to affect even a linear market.
Of course, it affects every market, no question.
And that's why I starting out with your brother.
Yeah, because his he's looking he's solving to his monthly payment.
Yeah. We have a very good friend.
I'm from Seattle that, you know, was, let's say his home.
And things in Seattle have gotten really pricey.
But he he bought a home in the I don't know, in the five hundreds.
And now it's like right around a million.
Yeah. Okay.
Well he's in a let's call a mid 3% loan and he wants to move
but he's not moving because if he buys the exact same $1
million home and it's six or 7%, his payment jumped so high.
So one of the things we were talking about in this chart is the number of mortgages
by interest rate, you know, so
there's a lot of people that are, you know, equity rich, right.
And, you know, it's trapped because in that particular case,
he's like, you know, I'm not going to move
because I get the exact same house and my payment goes way up.
Why would I move?
I'm so glad you mentioned that this chart I have long said on my podcast
and YouTube I've been talking about how about 25% of the mortgages
in the country, the existing mortgages out there. Right.
There's about 100.
And I don't know, it depends who you ask,
but there's around 140 million housing units that are owned.
Right.
And about 25% of those have mortgages below 3%.
I mean, think about that.
Why would you ever want to give that up? Right.
People will beg, borrow and steal to protect that mortgage asset.
And here's the funny thing.
You can have something that is worth more to you than it is to someone else.
This is a really important concept
that it's hard for people to get their head around. Sometimes.
And so that a house with that cheap mortgage
may be more valuable to the person
already owning it than it is to the market that sets a new price on it.
It's probably because they have to pay 7%.
That's cheaper than rent.
In a lot of cases, that mortgage might be cheaper than rent.
So that's why I'm saying
those people are going to be stuck there for a while.
That's the poison pill, the Fed, the dysfunctional central planners
that run our economy who have put into the market.
And guess what?
That poison pill has a 28 year timeline left on it,
and that will constrict housing inventory for decades to come
because I don't know that will ever see these kind of low rates.
People have 28 years left on those mortgages at 3%.
Jason's got a big event coming up in Scottsdale in January.
Late January last week in the January.
Chat about that real quick.
Yeah, it's going to be cool. I got you got Tom Wainwright, right?
Speaking at George.
Speaking and speaking. You've got a bunch of people got. Yeah.
Ken McIlroy's speaking.
To me fun.
Yeah. No, it's going to be great event. It'll be a lot of fun.
Two and a half days last weekend of January.
Empowered Investor Live.