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hey this is gonna be a pretty deep dive into real estate investing and if you really like a deep and thoughtful thought-provoking information about Finance use that coupon code expiring tonight that price is going to go up we're changing it this weekend prices are going to move up and we are a totally removing lifetime access for some folks who don't go in with that coupon code linked down below so make sure if you get in using that coupon code link down below if it still works when you try it you're going to lock in so use that code linked down below we are changing all that information this weekend so take advantage of that link down below do it right now just open it up while you listen to this this is going to be a really good dive into real estate buckle up I hope you enjoy it because you're going to learn a lot hey so I think it's useful to have a real talk discussion about the real estate market and some expectations here because there are a lot of uh folks who are claiming that real estate is basically going to collapse the entire world and I actually don't think that is true I don't think we're going to see a 2008 style collapse now I do want to be very clear that real estate prices I expect are going to continue to come down and we're going to go through a version of the real estate cycle which we're going to talk about here in the moment but these beliefs that rents are going to collapse and therefore prices are going to collapse and then wealth is going to collapse and then the economy is going to collapse I think there are a lot of these that are substantially overblown and so without overwhelming you with like too much in the way of granule data I just wanted to have a simple discussion with you about at least my thoughts on the real estate market and what's to come and and maybe how to plan uh for this real estate market transition I think we ought to call it so first it's worth noting that I have been studying what I call the real estate cycle which is actually on screen right here now I've been studying this real estate cycle which I created this graphic back in Photoshop back uh in like 2010 uh I was inspired by other people's real estate cycle Graphics but these particular arrows and colors are mine uh and the reason for that uh is I made this because I printed this out in a very large uh frame that I would bring to open houses because it was a conversation starter uh remember I was a real sleeper I still am a real estate broker but I don't actively help people buy and sell homes anymore so I would hold open houses and I would set this up in the kitchen and people would walk in and go yeah we're in the cycle now and and I have always been a student of the fed and Market cycles and Booms and bus and I think it's so incredibly fascinating and so I think it's useful to understand when do rents go up when do rents go down when do prices go up when do prices come down right and all of this really fits in the real estate cycle and it's really incredible because the cycle just means you're going to hit a low and you start going up again right and generally the way America works and thanks to inflationary Dynamics generally when we go through the real estate cycle think of it kind of like a snowball in Reverse so it's kind of like going uphill which is kind of interesting because every time you go through the cycle your previous low tends to be lower than the next low which is nice because that means you sort of have this longer term appreciation for Real Estate so do I actually think we're going to revisit prices of 2008 no not not even remotely close do I even think we're going to revisit prices of 2000 uh you know the real certainly not the bottom in 2011 but even like 2014 or 15 probably not you know if if we have a real estate price correction to valuations maybe slightly over corrected to 2017 18 levels that's probably the extent of which we might see a real estate correction here now there's some factors that go into this and we'll talk about these so let's look at this cycle in in detail here so I'll take a little screenshot out of this and we're going to blow it up and we'll go through the cycle in detail here because there's there's a lot of drama around this and I think it's worth you having some clarity because then I think we're going to be able to see okay like when do we make profit uh and how do we make that profit and when do we have to be really fearful right so the first thing about when we have to be fearful let's start there because that's really going to help us time this out is we know that uh somewhere between February and June most markets hit a peak this is approximately when the real estate market hit a peak is somewhere between February and June in most markets so most markets have already seen an inflection point in the pricing of real estate and we measure that by looking at the month-over-month sales activity if one month homes are selling for one hundred thousand dollars in the next month they're selling for ninety five thousand dollars and we know prices went down five percent that month generally we don't see large declines like that the average decline that we saw during the Great Recession was somewhere around 1.9 percent per month and right now we're actually starting to see some two percent month over month declines in areas like Seattle San Francisco San Diego Idaho Austin Texas so on Boise Idaho specifically but the year-over-year numbers are still higher and so when we look at that that's simply logical because when we look at a year ago so let's say this is for example uh let's let's make this a little more clear let's say these two dots right here are September so right here is September 22 and this over here is sep 21.
well visually it's it's worth considering that maybe prices are at 95k here down from that 100K we had before but that might still be higher than the say 90 000 we had here so it'd be somewhere around what five and a half percent higher so you still have that year-over-year growth okay worth noting so when do we actually have a fear moment and a fear Catalyst that comes into this Market well in my opinion it's when we actually get to where prices have come down and year over year so let's say in this case march to March and the reason I'm picking March is because let's say price is peaked in March over here uh then actually we'd probably be better off drawing it like this watch this so if price is peaked over here in March in an area and now we get to march of the next year here well now this is where you're really going to see that year-over-year decline in pricing and you might see something scary like -10 or minus 15 and I think this is really when you get that Tucker Carlson and CNN and Anderson Cooper kind of Click bait where it's like oh my gosh home prices finally fall year over year for the first time in 15 years or whatever blah blah I'm gonna get that sort of drama and that drama can feed upon itself unfortunately because that could lead some folks to sell homes who otherwise might not want to sell homes because they've locked in a low interest rate and they're better off staying and so a lot of folks ask me like why would somebody sell if they have a low interest rate that doesn't make sense like why wouldn't they just stay and just wait and hoddle right well it's important to remember that 80 year olds own twice as much real estate as like a 35 year old even 70 year old statistically on twice as much real estate as a 35 year old so you your odds of home ownership are a lot higher the older you get and there are a lot of individuals who are in retirement or are retiring who say you know what I don't want to go through another real estate cycle I don't have the time to go through another cycle I'm going to sell and downsize now maybe into something smaller or I'm going to sell all my rental properties that have been hodling I'm going to dump those now maybe at more of a a closer to Peak pricing then maybe what I'll be able to get in the future especially as interest rates continue to rise remember the cycle correction that we're going through right now is driven like this this inflection point is driven by nothing other than the Federal Reserve like we have a lack of homes there are not enough homes we expect that excess demand for homes before the Federal Reserve started tightening was somewhere around 25 even Lowe's studied this and their earnings call they thought that excess demand was somewhere around 25 but the problem is when interest rates are two and a half percent for a thirty year fixed rate mortgage and now let's say they're seven percent for a 30-year fixed rate mortgage that's a difference a Delta here of four percent and a difference of four percent I'm sorry four and a half percent a Delta of four and a half percent represents a forty five percent decline in purchasing power so now if you offset that excess demand and lack of Supply we had with that negative 45 drop in purchasing power you could see a negative twenty percent decline in prices and that would take us to roughly uh you know maybe a year before pre-covered levels or maybe slightly before pre-covered uh so you're talking end of 2019 kind of pricing right so this this is what it has inspired this short sort of inflection point here and so even though we have a shortage of listings uh it's very important to consider buyer purchasing power is something that is slowing this and so now if we couple this together with the fear of potentially oh no we are seeing year-over-year declines and prices we could exacerbate the real estate fall uh thanks to fear of loss and fear of having to go through another cycle and potentially over correct real estate prices to the downside my guess would be somewhere up to potentially 30 percent some markets we might see a little bit more now do I think we're going to see something like a 2008 style recession because of uh you know no income no job no asset ninja loans or dead people getting loans or people with terrible credit scores getting loans no I I don't think we're gonna see it as a 2008 style recession for the real estate market especially since credit scores today are about 100 points on average higher than they were back then you're talking about 780 instead of 680 and you're talking about people who really have the ability to repay their loans so you're gonna have a lot more of this sort of discretionary selling where people say well I'm going to get rid of my investment property so I'm going to downsize earlier right but there's another potential push towards discretionary selling and that is going to come from Pension funds Pension funds and asset managers who say look you know we don't know how to buy wedge deals we don't even know how to renovate properties we just buy and huddle real estate and we just milk the cash and cash return excuse me and the cash on cash return on some real estate in the country is like three to five percent well some Pension funds are going to look at that and they're going to say well why do we deal with tenants and toilets for three to five percent let's just dump those and try to either feed our margin calls that were suffering in the stock market or in the bond market or just go buy the dip in the stock or the bond market and uh we'll sell we'll liquidate some of the real estate we'll be on we'll go we'll go buy uh the dip in stocks or bonds or whatever or just buy treasury bonds add four to five percent yields like why bother dealing with tenants and toilets when you can get a four percent Treasury risk-free and and that combined with liquidity pressures and margin calls you're probably going to see some Pension funds and institutions start liquidating properties so what's fascinating about this is you are going to the more the FED tightens you are going to drive people to sell now in the short term you have this really weird phenomenon where rent prices can actually go up as home prices fall but that does not last forever I want to make that very clear like at some point that Transitions and rents do end up falling but rents end up falling later and you'll actually see that in my real estate cycle as well and that's because of a concept known as inertial inflation and so even though it's easy right now to go into like an Austin Texas or Miami or Boise or or Phoenix Arizona and and you know pull up charts about how rents are falling in those areas well that's a duh because you have a reversal of some of the kova trends that you used to have right so you're going to have a kind of like an earnings recession so to speak you're going to have a hard comparison to last year because boom and zoom towns are now no more but Nationwide we're still seeing rents rise in fact Morgan Stanley expects rents to rise three and a half percent in 2023 you've got Bloomberg intelligence that did analysis on about 10 different rates and they expect the average rental increase in rental growth to be between two to four percent over the next year between all of those different real estate investment trusts so you're really not seeing less mass panic yet in terms of rents falling and again that's usually because you have a lag of rental declines and that's pretty typical the reason you see that is because housing purchasing is very interest rate sensitive as soon as uh interest rates for for homeschool purchasing power goes down almost simultaneously it's almost instant that can in the short term Drive some more people to actually rent properties and drive up rent in high demand areas and this is where things get a little bit convoluted and complicated but I'm going to keep it as simple as possible think about the rent curve like this as home prices go down you could actually see real estate rents uh go up and so you kind of get this like double double top here the Orange Line being prices and then rents rents do end up tending to follow down because now the costs of mortgages goes down uh the cost of buying let's say a rental property is is way lower over here and that means you could bring more Supply to Market so more people buy homes cheaper more Rental Supply comes to the market for example my company house act comes in and buys 200 homes or whatever in a couple different markets or three different markets whatever and now we put this up for rent well now we we are providing more supply of housing for people people that's renovated and healthy and safe to move into right and so so rents could come down a little bit so you want to price in these sorts of buffers this is very typical and this is where you get this sort of double top shape but but the rent inertial like the inertial inflation first pushes up rents for a while maybe in a six to 12 months of rent still moving up and then rents will come down so you have to prepare for that in the real estate market you have to prepare for this sort of transition that's going to come to the downside it runs uh because of what I've just just described but what's really remarkable uh and and that I really love is that people forget and and the part that I love is not that this happens but that people forget this people forget that real estate is about desirability right people want to live in areas that are desirable that will generally help prop up prices and rents to a certain level however the opposite is true of areas that are not necessarily uniquely desirable for example if you're in a particular town where the weather consistently year round is between 90 and 110 degrees you really have few natural resources or amenities near you you know maybe you're in a desert or whatever or the amenities and resources that are around you are are not ones that are desirable to you uh certainly not desirable for human habitability then then you might leave maybe you move to that area because state income taxes were lower uh or or it was uh you know uh the housing was initially cheaper but then it became expensive right but what happens in areas like this is people move to them during these sorts of pandemics or or life-changing events like tax events that change or whatever and they realized wait a minute I don't actually want to live here and they potentially leave so you sometimes have this transition away from areas and you can actually see declining rents sooner in potentially less desirable areas so I would say that this curve looks a lot more like this I'll give it a little bit more of a gap looks a lot more like this in low desirability areas so if orange is prices green is desirability areas and you see those rents fall sooner and red is going to be that Decline and runs in higher desirability areas you're probably still going to see those declines but the magnitude of the declines or the length of those declines could occur longer you might get an earlier bottom and some of the more desirable areas and this actually is where we get into a New Concept which is quite remarkable and it's known as the concentration of poverty and see the concentration of poverty concept is incredible and it's very important to understand so I'm going to give an example here let's say you live on the coast of California and you can't afford living in the coast of California anymore and now you're going to move Inland and I'm not going to pick an example of a town Inland but let's say you're going to move Inland to California because you just can't afford living on the coast anymore well you and many others make that same move Inland and now you go to a small town of say 30 000 people and you move from a larger City on the coast that was very expensive to a low cost of living area where there are 30 000 people but now all of a sudden you get this rapid growth in population from thirty thousand to say thirty six thousand so now all of a sudden population grew 20 in this area and initially you get rents that boom up maybe that's what happened during the pandemic right you get rents that boom up and they boom up so much and so quickly that it's actually an unsustainable rise and then you actually start seeing something incredible happening and that's known as a service service decline because of the concentration of poverty so you take people who can't afford living in expensive areas anymore you move them to poorer areas and now you overwhelm poor infrastructure schools police fire uh street cleaning roads everything everything stores everything is now overwhelmed and overfilled and you actually reduce the value of living in that now 36 000 Town 36 population town because everything's actually worse than before those folks move there now you have this really interesting curve that you want to think about because really what you've done here is you had some form of a shock or either a tax change or a pandemic or whatever that led rents to artificially run up above uh the the trajectory of sort of the nation right like if the orange line is sort of national rents for some reason this one particular area just exploded but then all of a sudden because of the concentration of poverty becomes a will actually overpopulate and less desirable to live here or raise children here and you actually end up seeing a quicker decline here and even though everywhere rents might slow those areas have become concentrated for poverty can quickly actually become towns that could eventually go bankrupt and you could see a substantial correction to the downside in rents so this is where balancing desirability in real estate is is so important and this is where I want to give you sort of a road map for when you're thinking about real estate is you have to think about real estate as what it is first people have to want to live there if you're simply looking at a spreadsheet and cash on cash returns you could end up investing in a bankrupt town that has one source of jobs and if that one source of jobs goes away you're done all those rental properties go to zero or they're worthless or people just leave and you can't rent them out anymore and then you lose liquidity right liquidity is something that's already not synonymous with real estate real estate is not known as being a liquid investment but your investment will be more liquid if you invest in a desirable area for example I sold 85 percent of my real estate portfolio in an extremely desirable City actually multiple extremely desirable cities and I was able to do so very quickly because there are plenty of people willing to buy because there are more than 700 000 people in the county that I was selling these properties in well if you're selling an accounting that has 20 000 people and all of a sudden you've got to dump 20 or 50 properties what are you gonna do the liquidity won't be there so smaller towns have liquidity risk they have this this potential uh key employment risk they have desirability risks and so there are a lot of these Zoom towns that are actually going to see these massive declining rents very very quickly and potentially pension fund liquidations of properties to where yeah you could in isolated regions actually see prices fall substantially more than you might Nationwide and so this is where when people say all real estate is local they're right like every Market's going to behave differently you can't like paint the whole Market with a with a you know one big brush and say that's it everything's going down 30 no do I think everything is going to Trend down yes absolutely I think all real estate markets across the entire United States and probably the world are going to Trend down under these higher interest rate regimes that we're facing and we probably won't see a trough in uh real estate prices like a bottom until a year to a year and a half after the Federal Reserve finishes their tightening that's kind of scary but it all goes back to the real estate cycle and what's fascinating is the real estate cycle actually teaches us about that delay in rent but I I wanted to before we talked about the real estate cycle just teach that real estate is local not only is real estate local but you have this concentration of poverty risk and this Zoom down issue that occurred that could lead you to see some dramatic changes to the downside in rents in some areas that that are just not going to be true in others so do keep that in mind inertial inflation first then rents go down how can we see that depicted here well let's start here which is what is the bottom of the market look like well the bottom of the market actually is very interesting I remember this very very clearly because I remember marking the bottom of the market uh in November of 2021 and the reason I was able to do that was because I I saw housing inventory rise rise rise rise rise rise rise rise up to the point where the one city that I worked in had 450 properties on the market when somebody came to me and said Kevin I want to buy a three bedroom two bath house I said sure uh which neighborhood because there are 10 in each it was incredible and I remember at the time we had about 450 properties on the market and that was about November of 2011.
and I began noticing that the number of properties on the market began falling we went from 450 to 420 to 400 to 380 to 350. and before you knew it by November of 2012. by November of 2012 you won't believe this we were down to 80 properties on the market that's it it got so bad that real estate agents were wondering how am I going to be able to survive there are not enough homes to sell I remember this clearly I'll never forget that and sure enough that next year in March of 2023 uh sorry 2023 2013.
we actually saw home prices jump about 20 percent in not the span of a year but in the span of two months it was April and it was March so we saw this explosion in home prices very very quickly because there were just so few homes somebody put a place up for 350 itself for 400 so somebody else put a place up for 400 and that's sell for 450.
until it found that equilibrium right so Supply is such a such a clear indicator of a bottom in a market the tracking Supply is probably the best thing that you can do but notice that you get an absorption of real estate for sale Supply before you actually get low tenant vacancies and then when you get low tenant vacancies you see increased rent in prices obviously prices go up kind of through the whole curve here then you get sort of this glut of new construction kind of what we got going on right now we've got the most homes under construction right now that we've seen over the last decade we have the most homes under construction now yeah and some of that has to do with supply chain bottlenecks and hold ups and such but there's a lot of new construction right now and this is where then you start actually having the opposite effect where you potentially go from a shortage of homes to an oversupply and this is roughly where we sit right now right if if we just hit you know if March was 2022 was over here we're we're just the beginning of potentially even touching oversupply in some markets but a lot of areas are still very very low in Supply we're just in the trajectory of adding more homes on the market so it's going to be a while before we're actually at saturation on the market where there's so many for sale signs around that you're just like oh my gosh what's going on to this town there's so many for sale signs around only after you get this is over Supply and you start seeing prices actually come down do you then start getting higher vacancies and that's because people are moving out of potentially certain areas that they move to for again Zoom purposes and are now leaving and now these places become harder to rent out and because there are more there's now an oversupply you have potentially more sellers who are saying oh it's time for me to rent out my property instead of trying to sell it and that leads to vacancies because they can't sell it and now they can't rent it either but only later do we actually get uh the the full realization of declining prices on a year-over-year basis month over month begins a lot earlier and declining rent in general tends to occur later in in that bottoming process I think it's kind of fascinating I think it's it's not like a perfect cycle here I think I could tell you that declining prices uh really start here but you don't see those year-over-year moves over here same thing with increased prices probably begin over here so probably be worth updating that to say declining prices here increased prices over here sort of the oranges right but those rents lag you generally don't see those rents until vacancies change and that's why the order of this cycle is so important so the the point of all of this is is to first of all encourage you to be prepared right get educated I mean you all know I sell courses on this kind of stuff but get educated you know watch YouTube videos uh you know go to my real estate playlist you can go to metcaven.com links and the real estate playlist uh is on there uh I will double check after I post this video but uh you can click the real estate playlist and watch the real estate videos metcaven.com links uh you know if you just want to watch Fed videos or stock videos and click those links you can do whatever you want you want to invest in house hack or learn about the courses click those links just everything's at my kevin.com links but pay down debt get a better job you know somebody suggested the other day that they were going to get a second job like they make six figures at one job and they're like I have so much free time I'm just gonna get a second job and it's like hey well if you can have two six figure jobs for example I mean even if you had a six figure job and a 50k job it's like well now you're able to qualify for that much more real estate right I know you're probably going to need to do that for two years and prove that or at least one year plus like some kind of year-to-date income statements uh which some lenders will do not all lenders will do but get your income up now is the time and I hate to say it but it's true it's Now's the Time to like Double Down uh you know tighten those boot straps save money and see what you can really do to prepare yourself to buy real estate getting educated paying down debt having a lower debt to income and having more cash available for a down payment and to qualify for a loan is is what's going to get you into real estate and so if I had to paint uh sort of a projection for the real estate market right now in terms of where I think top and bottom is we'll do that together and then we'll end the video okay I think this is actually quite useful so we basically had this near straight up certainly an acceleration I'd say in 2013 uh in 2018 we had a minor little dip here you know and then in the coveted pandemic we had a minor little dip and then we went a little parabolic and I'd say now we're turning okay so I'm gonna make that turn a little bit more abrupt since I'm running out of space so we're gonna go with a turn here so let's go ahead and label this you know let's call this 2011 2013 2018 2020 here's your pandemic boom time right now here you sit at 2022 you're not you're not going to go back to these sorts of levels all the way down on the left side but but I do think there's a chance you'll probably go somewhere over here and so I would say we're going to compress this a little bit just so I can like graphically kind of show it to you um I I would guess the real estate market will probably do something like this uh where we do go back maybe to those 2019-ish levels right yeah I believe that this uh we'll probably see a Fed u-turn uh probably if if this is I think you're gonna see a more dramatic drop here in March of 23 you probably have a Fed u-turn here and I'm gonna go with q 4 2023 oops 2023 there we go something like this and then probably like a q to 2024 maybe trough bottom somewhere on here maybe maybe even a little bit earlier so like q1 2024 to Q2 like that winter quarter could be very interesting as well so maybe even like Q4 23 something like that so fed U-turn called that Q3 to Q4 Q3 to Q4 2023 bottom somewhere between Q4 2023 and Q2 2024 but then it's going to take a little while to really get out of this because I don't think rates are going to plummet very very quickly although they could and they could drive the market up quickly but I would say you'd certainly be back to some form of appreciation by 2025 q1 almost certainly but you can't make any guarantees you know these are just guesses and and all of these facts could change dramatically so uh these are just my thoughts uh personally with househack I probably want to be buying here you know as as the market kind of is here so I don't want to be buying now this right here this is wait wait wait wait wait wait wait wait wait wait wait wait patience I think will be rewarded that's and so that's going to be a little bit of the goal for us anyway hopefully that provides you some insight if you found it helpful consider sharing the video appreciate you as always and I will see the next one thanks goodbye
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