Today, we take a deep dive into the intricacies of the latest Consumer Price Index report, its impact on the housing market, and the surge of information from the mainstream media. Join us as we unravel these interconnected topics and shed light on the complexities of the real estate landscape.
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WHAT TO LISTEN FOR
The basic concept of CPI and its impact on the economy
Significant obstacles faced by first-time homebuyers in today’s housing market
Adverse effects of the increasing rental property supply
How the mainstream media influences the real estate industry
RESOURCES/LINKS MENTIONED
Jay Parsons | LinkedIn and Twitter
Black Knight: https://www.blackknightinc.com/
CNBC: https://www.cnbc.com/
Sunbelt Construction Boom Threatens Top Apartment-Building Owners
Treasury Department: https://home.treasury.gov/
CoStar: https://www.costar.com/
Yardi: https://www.yardi.com/
RealPage: https://www.realpage.com/
CONNECT WITH US
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Full Transcript
Speaker 1:
More units means that you can’t raise rents as fast. So they’re taking a national approach to a hyper local issue which is housing and rents and affordability. And sometimes our investors see these headlines and go, oh my gosh, what are we going to do? Welcome to the Passive Income Brothers podcast.
Speaker 2:
Here we take the fear out of real estate investing using real life stories of everyday successful investors. Let’s go Welcome to another episode of the Passive Income Brothers podcast. My name is Tim Lines and today I’m joined by my brother, greg. How you doing today, buddy?
Speaker 1:
I’m barely joining you today, Tim. Our off microphone banter was amazing just now and it was definitely one for the outtakes, But I am happy to be here, Tim. We have a lot to talk about in this kind of crazy world that we live in right now of high interest rates, the mainstream media just trying to get clicks and sell newspapers with sensationalized headlines that are kind of like a blanket statement for the entire United States, when housing, especially housing is such a localized issue.
Speaker 2:
No doubt about it. So today is June 13, tuesday, june 13. And when you’ll hear this tomorrow and by tomorrow, you’ll know that the headline CPI number came out today, tuesday. Tomorrow, wednesday, it’ll be the Fed’s decision on whether or not to raise or keep them the same going forward. But there’s a lot of information out there. There’s almost too much information. We got chat, ept, we got AI, we got mainstream media, we got all sorts of apps, and it’s hard to distill sometimes what’s important, what’s not, what’s going to serve me, what’s real, what’s fake, and it’s hard and with full-time jobs and kids and just lives to live, it’s good to kind of hear somebody else break it down for you.
Speaker 1:
So that’s what Greg and I kind of want to do today And you know, tim, you’re right, there’s no shortage of information, and that is good and bad, because I feel like sometimes, especially with politics, there’s so much going on, there’s such a barrage of information that I don’t even take anything in, and it’s kind of like going into the store where there’s too many signs. You just end up not seeing anything. So there could be the greatest sale going on at one of the stores, but if there’s too many signs and there’s too many things to look at, you just shut everything down. And that’s what I think the mainstream media does a lot, especially when it comes to financial education and figuring out where to invest your money or if to invest your money. And that’s kind of where I feel like we’re finding ourselves right now and a lot of our investors.
Speaker 2:
Greg, it’s part of our daily routine when we talk to investors, right? Hey, what do you think is going to happen? And like I wish I had a dollar for every time I heard that, right, and I wish I had a crystal bowl that may work and say here’s what’s happening. But what we can do is we can distill some of the data. Right, and Greg and I were talking before we started today’s podcast saying let’s just go through some of the things that are going on today with some of the sources that Greg and I follow. So, to start off, greg, inflation right. Today, the headline CPI number came out at 4%. Right.
Speaker 1:
Yeah, that’s the main number, the main CPI number.
Speaker 2:
For May And to compare that a year ago, in June of 22, was the peak in headline CPI numbers And that was 9.1. I mean, so we’ve kind of fallen substantially since just a year ago. And who knows where it takes us. Right? There’s two thoughts. Right, There’s some people we listen to Greg say we’re in a disinflation, and we can see that right, Going from 9.1 to 4, we’re in a disinflation economic period And deflation, outright deflation, scares the Fed to death and they don’t want that. But so does a bounce back in inflation, right. And in the 70s inflation went really high. It came back down, It bounced back up. It came back down, It bounced even higher. So the Fed Reserve, they want to make sure they have a handle on this. They don’t want to start cutting too early and risk having the headline CPI numbers jump right back up again.
Speaker 1:
So right, tim, with this information that we have now, we’re at the lowest CPI rate in two years, which is great news. Right, the job market is still pretty strong. But the so-called CPI, the 4% number. It does strip out volatile energy and food prices, which real inflation may be a little bit higher, but this is just the way that they’re measuring things right now. So just a couple of notable things here. Categories such as shelter, motor vehicle insurance, recreation, household versions and operations, new vehicles are among the notable increases in CPI right now, but some categories, such as airline fares, fruits, vegetables, whole milk, used cars and trucks, they have deflated over the past year. Now, not everyone can feel that when they go to the grocery store, but that’s what the CPI numbers are showing us right now.
Speaker 2:
Yeah, and another great little tidbit is, if you don’t follow a guy named Jay Parsons from CoreLogic, you should follow him. I mean, i follow him on Twitter and on LinkedIn and he has great stuff and part of the CPI. Why it’s been so sticky and high is because of the rent of the primary residence, also called homeowner’s equivalent rent, and that’s like a 12 month. What they say is it’s a 12 month lag in the indication of where the CPI might go. So Jay says you know in his post today, as expected, the consumer price index rent of primary residence metric cooled for a second consecutive month. It’s still slight, slightly down for now, but trends and asking rents point to a predetermined sharper down ramp for CPI rent moving forward And he says this is true of both single family rents and multi-family rents as vacancy increases. Traffic is improving over last year, but operators are responding by pulling back on rents. And, greg, i want to talk about that because we’ve seen that in our own portfolios where, say, in Sarasota right, sarasota, that’s probably one of our better portfolios. I mean rent increases of 30, 40 percent. I mean it was insane, right, but now we’re maybe getting 12 percent or 8 percent, we’re maybe even 3 percent on some units, right. The term that we look for is that we’re moving forward. Right, we’re moving forward on rents. Are we getting 30 percent or 20 percent now? No, but if you look at the headline news in the mainstream media, it’ll say rents are falling, they’re dropping like a stone, which I guess is somewhat correct. But what does that mean to you, greg?
Speaker 1:
Well, you know, owners’ equivalent rent is kind of tough because it’s a huge part of the CPI number how much you’re paying for rent or how much people are paying for rent. But as we’re seeing, rent increases, rents kind of decrease a little bit in some places. Owners’ equivalent rent is really kind of measured over an entire year because a lot of people only sign leases once per year. So the owner’s equivalent rent is kind of taking those numbers of rent that was probably signed six, eight months ago, sometimes nine or 12 months ago, and that’s part of the CPI calculation, whereas in real time and rent is really a lagging indicator of CPI. But what’s happening now? if you had real time numbers, it’s more like yeah, rent’s actually ticking down. So really the CPI number it’s not as accurate as it could be for measuring what’s going on today. And I think you know when the Fed goes to say, okay, are we going to raise interest rates? Are we just going to lead in the same? I think they have to take that I think they do take that into consideration of yeah, rent is such a lagging indicator that rents aren’t going up as much anymore. So do we just hold tight with the current interest rate, or do we raise again?
Speaker 2:
That’s exactly right, and Jay even said that in his article, greg. he said that the peak CPI rent inflation hit between May of 22 and February of 23. And he has a great graph in there that shows the 12 month lag effect. So I would recommend you check out Jay Parsons Again. he’s a rental housing economist with WarLogic and just really on top of his game when it comes to data and analytics, greg. moving on, there’s a lot of people out there in the mainstream media.
Speaker 1:
But boy, I mean, we can lose listeners talking about CPI and interest rates really quick, huh.
Speaker 2:
Well, we could, right, but I mean, it’s certainly something that we look at a lot And listen. Everyone’s feeling it, right? I feel it every day when I go shopping and putting gas in the car. So there’s a bunch of people, termed the crash bros by one of the people that we listen to, and they’re on YouTube, they’re on podcasts talking about housing price crashes And, greg and I don’t see it Not only us people that we listen to data analytics firms that we subscribe to, and here’s part of it, right. So, according to Goldman Sachs, 99% of mortgages are 6% or below And, of those, 28% are locked in at 3% or below And 72% are locked in at 4% or below, and we’ve talked about this with other guests, greg and on other shows. That’s really called the lock-in effect, right? So people are not going to trade in their asset of this great mortgage, right? They’re not going to trade that in for a 6.5%, 7.7%, 7.5% mortgage. So that’s really leading to a marked decrease in inventory And it’s really bringing home sales to a grinding, to a severe slowdown, but it really points to we’re not seeing the distress that we saw in 2008 during the great financial crisis.
Speaker 1:
Yeah, and that’s exactly right, And in fact, we’re kind of seeing the opposite. We’re seeing prices rise in single-family homes due to that lack of inventory. Of course, my better half, lisa, is a wonderful real estate agent in Charlottesville, virginia, and she is still seeing multiple offers on single-family homes just due to that lack of inventory. So when you have multiple offers, the first thing that’s going up is the price. People are going to be competing on price. Yes, there are other terms that people will compete on. They’ll waive the home, the appraisal contingency, the home inspection contingency There’s a couple of different things, but the first thing that escalates is price. So we not only have a lack of inventory, we get to have an affordability crisis as well, because the way that single-family homes are ramping up in value our wages and real wage growth that the average American is getting or feeling right now is not keeping pace. So with the lack of inventory and the affordability crisis, i think it’s really going to be turning, especially younger buyers that should be buying their first homes here pretty soon. They’re going to stay renters for just a little bit longer. And, truth be told, 7% interest rates historically is not bad. I mean, i bought my first home coming back in 06 or 07, as ill-timed as that was, but we were in the 6s And we thought we had a wonderful rate. But I think people are so used to having rates in 3% and 4% territory that they take a look at their monthly payment right now and say no way, i’m just going to rent for another year.
Speaker 2:
Yeah, And look, I mean, according to Black Knight, the average purchase price rose for a sixth consecutive month to $454,000. Now, being a New Yorker, that doesn’t scare me $454,000, but in middle America or in the Sun Belt or Midwest, I mean that’s a big big number, right, Comparatively speaking.
Speaker 1:
Now you really can talk today. So if I’m carrying it verbally, i mean we are in bad shape. but overall that $454,000 is not a starter home. No, for a young family, a young couple or a single person, that is tough to afford, especially when you start getting that 7% interest rate. You’re layering on all these different barriers to entry into the first single family home and the first purchase, which is a lot of times the biggest purchase for most people.
Speaker 2:
Yeah, And let’s talk about some numbers now, right? So Black Knight also says that nationally, it now takes 34.2% of the median household income to make principal and interest payments, excluding taxes and insurance.
Speaker 1:
Yeah, and that’s the rule of thumb, tim, you should be spending a third of your take home on housing, and not just your principal and interest payments, but your power bill, your water bill. That should all be 33% of your take home or lower per month, and now we’re a 34.2%. That’s an affordability crisis in the single family homes.
Speaker 2:
So on top of that, greg, we have a credit crunch right. We don’t have time to go into fractional reserve banking on today’s show, but when you look at the business side of the newspaper or turn on CNBC or read the Wall Street Journal, once you’ve been living under a rock that we’ve had some major bank failures in the last three months. Signature Silicon Valley, probably leaving out somebody else Silvergate and First Republic on top of Credit Suisse. So five, right, i mean five big banks. And so what’s happening is there’s a liquidity crisis within the banking system And a lot of that has to. People are smarter today, more financially kind of astute. We all have iPhones or smartphones where we can move money within a few minutes with a few taps, and people are understanding that they can take their money say, they are $100,000 in savings, earning 0.15%, and they can now move that within a matter of minutes to a money market account which is outside the banking system right. Or they can move it into treasuries right. We can go to treasurygov and they can buy a six, a 12 month treasury. In the last few weeks or months, you can get maybe five or five and a half percent on some of those, and with a very little counterparty risk. But what happens is when you take money out of the banking system like that, they have less dollars to loan out and make money on a spread that way. Right, so they’re paying you, say, less than 1% on your capital that’s sitting in an account and they’ll go make a loan at 5% or 6% or 7% And then basically that’s part of their net interest margin. But when they don’t have enough dollars in their system to make those loans, what happens is the credit officers right, they have to make higher quality loans and a lot less of them.
Speaker 1:
So right now, people who are getting loans are those with higher credit scores and larger down payments, and that’s another barrier to folks getting into these higher priced homes with higher mortgage rates And, tim, that’s really been our thesis all along is that number one there’s not enough housing in the United States And this goes all the way back to 2008, when a lot of the builders went out of business and not all of them came back. So there’s not enough homes And right now, due to lack of inventory, high interest rates, people are in purchasing their first homes And that’s why we are investing in apartments. You know that has always been kind of our thesis not enough homes and the affordability crisis. That’s kind of going on. But then sometimes you run across a Wall Street Journal article that has people all sideways. Back on June 5th there was a headline in the Wall Street Journal that said Sunbelt construction boom threatens top apartment building owners And they were saying that rental profits are very vulnerable because of the increased supply in units. Over the next 18 months. They’re saying that 950,000 units, i believe, are going to be coming online. So what does that mean? more units means that you can’t raise rents as fast. So they’re taking a national approach to a hyper local issue, which is housing and rents and affordability. And I think a lot of times sometimes our investors see these headlines and go oh my gosh, what are we going to do? But when you really break down, what’s happening, especially with this article, is that all the new apartment buildings that are being built right now are what you call class A, meaning they have a beautiful swimming pool, a wonderful fitness facility, they have all the bells and whistles and they have to build it that way because they have to demand rents that are on the extremely high end to make the project work. Make the pro forma pencil. Where kind of Tim and I are in city side capital is. We are going to buy apartment buildings that are probably built in the 80s and 90s that probably need a once over. They need to have their interiors redone, the exteriors redone, but the replacement costs of those apartment buildings versus what you’re building the brand new apartment buildings for right now they’re not even close. The spread on that is huge And that’s why we’re able to invest and not really worry about the class A apartment buildings. Of course you worry about it, but you’re not really competing with those class A apartment buildings that are coming online in the next 18 months.
Speaker 2:
That’s exactly right, and a lot of that is a function of population growth, greg, right, because if you have a market that we like to invest in just pretend any market but it’s only 95% occupied and then we have like 2000 brand new units coming on, well, that could be a problem, right, but if we’re 95, 97% occupied in that market and then new units come on, there’s also a unit that become obsolete, right, built in the 20s, 30s, 40s, maybe even 50s. They’re becoming obsolete, so they might be getting knocked down or repurposed or something, right? So there’s also, like some of them that are coming offline at the same time. That’s just why you have to know your data, right. You have to know costar yardie real page. There’s so many black night, i mean, there’s so many places to get data and just to know kind of what’s going on in that market and are the deliveries going to impact where we invest. So something that Greg and I pay a lot of attention to, along with our partners. So, greg, because of all this, and the reason why we’re having a conversation like this today, is because this is what we’re talking about every day with investors, right, you’re supposed to be more of some of our brand new investors, who may be a little nervous. Right They did one investment, maybe two, and they’re looking at the news and they’re trying to figure things out and they’re looking at the monthly updates. It could be confusing, but it’s good to kind of talk about this stuff the good bed and the ugly so that you have more certainty, clarity and confidence going forward.
Speaker 1:
Yeah, and you know, i think some of the ugly out there is the high interest rates, right, and I think a lot of articles you see is commercial real estate. There’s a wave of commercial real estate loans coming due and it’s going to be doom and gloom because no one’s going to be able to refinance. I hate the term commercial real estate because commercial real estate is such an all encompassing term, because commercial real estate is industrial, multifamily, self-sorage, office, retail, basically anything that’s not a single family dwelling. Yeah, hotels, medical office, yeah, And then, like, every one of those niches has such specific items that make them work, that make them go. So any Tom, dick and Harry, like, namely, us, we invest in apartment buildings. We don’t invest in hotels, we don’t invest in whatever else out there, or motels, you know, like if we’re getting into a hotel deal, that’s not our specialty, that’s not our lane. So when you say commercial real estate loans coming due, a $1.5 trillion title wave, you really have to break down what they’re talking about. And a lot of times in a lot of these articles they’re talking about the office buildings that are kind of half empty right now. The work from home haven’t really recovered from the pandemic and a lot of these bigger cities That’s what gets the headlines because that office building may have a loan of $256 million. That’s headline grabbing and that gets the attention and that’s what gets clicks from the mainstream media.
Speaker 2:
Yeah, greg, i mean, listen, commercial real estate is all about net operating income, right, and it’s having that net operating income support the cash flow for the property. And When you buy it with debt, you have to have good debt terms that your NOI can support, right. So, for example, like last week, i believe it was, there was a huge Hilton in San Francisco That basically the owners handed the keys back to the bank and not to reign on San Francisco too bad. But I mean there’s a crime problem, there’s a political issue, i guess you can say there and seems like a lot of homeless and there’s not a great environment, i guess for investing, one could argue and That led to them basically not having the income to support the loan and they had to walk away from a trophy type property, which is insane, but that’s a casualty of war right there. I don’t know what their loan specific terms were. But the people who are getting in trouble today, greg, are those who have variable rate debt and either do not have a rate cap Those are gonna be the first dominoes to fall but or who do have a rate cap and they just haven’t performed Enough renovations, they haven’t performed enough net operating income increasing Projects on that property to keep up, to justify the refinance.
Speaker 1:
So yes, even if you do have to refinance. Say, you’re at three or four percent on your original loan But you have to refinance into a five or six percent loan as long as your net operating income Can support that new loan, the debt service ratio. As long as you meet that, you’re gonna be fine. And I think a lot of times when you’re looking at headlines and you’re getting a little crazy about things, you really got to dive into what asset class are they talking about? Yes, and we say in the multifamily worlds and that’s gonna be important to us because as Loans start coming due, there’s gonna be opportunities out there. But with higher interest rates There’s also going to be less building. So if you rewind ten minutes, i said there’s 950,000 units new multifamily units coming on over the next 18 months. But guess what, behind that There’s gonna be a slowdown to hardly any building because interest rates are so high right now. None of the new apartment complexes are really gonna pencil just because of those high rates. So it’s really this ebb and flow of units coming on. Then there’s gonna be a pause in building. But I think at the end of the day, multifamily is. We’re really comfortable with that, especially in the markets that we are investing in yeah, that’s into the day, greg.
Speaker 2:
In my view, people need food, clothing and a place to live. So, dude, that’s great. So, greg, i appreciate you making time for us today. Buddy, this is gonna be a big week in the markets, with the Fed coming out tomorrow with their. Are we pausing? are we increasing? What are we doing? But, yeah, stay tuned. I mean, we have a lot of guests lined up to talk to you in the next couple weeks about lending, about, you know, market dynamics. It’s gonna be a lot of fun.
Speaker 1:
So yeah, you know, and Tim, especially on a day like today, these opinions are our own and in no way are we saying you should invest in multifamily, you should invest in office, you can invest in anything. These are merely our opinions about what we’re seeing right now, about CPI and interest rates. So just saying that and realizing that it’s more conversation For you to kind of wade through what’s going on in the mainstream media, if you ever want to learn more, you can reach out. But today this real podcast was just like our own opinions about what’s going on.
Speaker 2:
Yeah, because, look, we’re living it Right. I mean, we’re doing a deal right now. It’s a in progress, but we’re getting it at a 20% reduction from the pricing of, say, 18 months ago, because that’s what’s happening. There’s price discovery for people who are getting in trouble and you may not see it on the mainstream media. You’re probably not gonna see it off market deals like these, but they’re out there and we’re looking to capitalize on that. So if you do want to find out more about Cityside Capital, what we’re up to, where we invest some of our past deals, reach out to me, tim at CitysideCapcom or Greg at Greg at CitysideCapcom. Check out our website. Find out some more information there. You could also schedule a call with one of us. Greg, do you want to say something?
Speaker 1:
You know I do, tim We talk often about the gentleman’s agreement that this podcast is not free And what we like to do is have our listeners give us a review, leave a review and a rating and I think, judging by the numbers, we’ve had a couple of people take us up on the gentleman’s agreement And I just want to shout those people out and say thank you very much, because it does make a difference In getting our show out to more people. The passive income brothers thrive When people hear our show and listen to it. So if you want to honor the gentleman’s agreement and you people know who you are that have not rated and reviewed We would really appreciate it if you could honor the gentleman’s agreement.
Speaker 2:
Yeah. And then lastly, after you leave that rating and review, if you want to shoot me an email and just does a topic that we have Not covered yet, we’re looking to get a guest on for a single family bill to rent. We’re gonna get a guest on for out of market turnkey investing, because we really want to highlight all the different ways that you could build out some passive income. Obviously, we have a real estate spin to our show and our thesis. But yeah, should be an email, tim at citysidecapcom, and let me know what you’re hoping to hear on future episodes And we’ll take it from there. And but until next week, thank you for joining us again for another episode of the passive income brothers podcast and we look forward to serving you again Next week. Thank you for listening to another episode of the passive income brothers podcast. We would be grateful for your support of our podcast by giving our show a five-star rating and review and Subscribing to our show on your favorite podcast platform. Don’t forget to take inspired action after listening to this show so that you can start building out your passive income streams. Finally, head on over to citysidecapcom To connect with us and find out more information about how to get started passively investing in real estate.