2048: Investing During America's Decades Long Housing Shortage

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Welcome, empowered investors. This is episode 2048. Thank you so much for joining me. And thanks to all of you who joined us last night for for our Empowered Investor Pro meeting. That was a great meeting where we talked with two landlord tenant attorneys in two different states. They talked about the eviction process. You know, we're all going to get a couple of bad tenants if we do this long enough. You know, people that don't understand success don't understand the very simple equation, which is this. You've probably heard it before, so forgive me for being cliche, but the simple way to successful is to simply increase your failure rate. The more you fail, the more you will succeed. The law of large numbers is in your favor. And so you know you're going to have a bad apple here and there. You're going to have some bad tenants here and there. And so we learned a lot about the eviction process last night at our monthly Empowered Investor Pro meeting. So thanks to all of you who joined us and thanks to the two attorneys that joined us to talk about landlord tenant law. We really appreciate having you on. So the housing shortage continues. And some are still denying this absolute reality. Some are thinking, oh my gosh, you know, the Airbnb bust is going to solve the housing shortage. It's really not a housing shortage, folks. That's like me Taking a bucket of water out of the ocean. It is a bucket of water, but it's hardly anything in the overall scheme of things. So that is not going to solve the problem. This problem is much, much larger than that. So here's an example. This is from the Wal Street Journal. If you're watching on video, this number is, you know how they have those little blurbs where they just put a number then they explain what the number means and this number says 800,000. Now keep in mind, if you're not watching this on video, you don't know what I'm going to say here. Because this is about a state that people are leaving and they're talking about the housing shortage within the state. And that is the state, the Socialist Republic of New York. So in the Socialist Republic of New York, they are short 800,000 homes. The wall Street Journal says how many new housing units New York state would need to meet its housing shortage by 2032, according to the Regional Plan Association, a nonprofit studies group in the New York metropolitan area. So in a state where you are literally seeing people leave, where people are fed up, they are sick of the overreaching government, the high taxes, all, all of the problems, not to mention the weather ain't so great, right? And that's just not where the startups are. It's not where the, the new business is. It's not a, you know, it's not where you have all this attractive right to work environment, right? So this is a place people are leaving and they're talking about their housing shortage. Think of how much more acute that is in a place like Florida or Alabama or Tennessee or Texas, the desirable states that people actually want to live in, right? So this is a huge, huge problem and it is not likely to be solved easily at all, folks. And that's why you have this. You look at the map of the country as the doom and gloomers, the people who are jealous who have been predicting the collapse of the real estate market. They've been predicting the real estate crash for 11 years now, easily, if not longer. And they just are the ones who didn't have the self confidence. They didn't have the guts to invest. And because of their low self confidence, they want to rain on everybody else's parade. And just remember the market will have a correction at some point. And God knows the Federal Reserve is trying to cause a correction, right? There's no question that shelter inflation, a huge part of the CPI is one of the things they are trying to attack. But remember the Only way you can effectively attack this because income property is a multidimensional asset class and if the prices soften, then we make our money on rental yields. If the prices appreciate and we're a capital appreciation market, so much the better. That's just the icing on the cake. You know, if you've been following me for the past 18, 19 years, you know that I have never been an appreciation oriented investor. I'm always a yield oriented investor. But since so many people myopically focus on this one component of the market where they only think it's good if prices are going up and they only think it's bad if prices are going down, that's why I'm just forced to talk about it to address the doomers, to address the crash bros. Because they are talking about it all the time. So here in a market where we've had extremely high interest rates, we've had the cost of money literally triple, right? The tripling of the cost of money and we've seen dramatically historically higher interest rates. You look at the appreciation rates in all these different regions of the country as everybody thought the market was going to crash, right? The complete opposite happened. Now granted it wasn't as stellar as it was before in the past couple of years by not even close, but still 7.24% appreciation in the region. I'm broadcasting from 7.21% in the next region over 4.99. But then you see in the left wing areas on the west coast, right, you see decline in prices because these are the cyclical markets of 2.35%. But even with a decline in prices, if you had a property with good rent to value ratio, you'd still be making money. If you know how to do the math, you can have prices go down and still make money because income property is this beautiful multidimensional asset class where it's not just about the price. Learn how to analyze a deal. Learn how to read a pro forma. Go to jason hartman.com There is a great free video that is about, I don't know, 29 minutes long. If there's one video you must watch, it is this one. It's right on the front page of my website. Just go to jasonartman.com it's totally free. Like if there's one crash course in real estate investing, that's it. Just watch that video and learn how to analyze a deal, how to do the math and understand the numbers if you haven't done so already. I know most of you have but give it to your friend who is the constant glimmer, who wants to see you fail. The person who didn't have the self confidence to invest, who listened to all the wrong people for the last decade and missed out. And now they're mad. Right? You know, misery loves company, folks. So give them that video just so they will understand how to do the math. Okay, before we get to our main part of the show today, let's take one quick look at inventory. Because our friends at Altos were on vacation last week and so they didn't release any numbers. So we are two weeks behind on inventory numbers. Now. What happened in those two weeks? Well, inventory jumped and it continues to inch up. Right. We do see a decent amount of demand destruction due to these higher interest rates. Nobody could deny that. Remember the metaphor. Think of your kitchen sink and think of the sink being full. If that basin were full of water, that would be just a normal market. That would be normal. Right now that Sink is only 40% full, give or take being approximate here. Right? So it's about 40% full. And the inventory coming into the market is the faucet. The faucet represents that. That faucet's still at a trickle. And now the home builders with a higher cost of money, they're talking about decreasing their production of new homes. Well, folks, we've already got a bad inventory shortage and they're going to decrease the supply of new homes. So it's only going to get worse. Upward pressure on prices, upward pressure on rents. That's the macro trend. Yes, of course there will be little ups and downs on the way to that macro trend. But the macro trend is so clear that it just can't do anything else over time. Right? It just can't do anything else. And I don't want to convince you of anything. I want you to figure it out for yourself. Look at the household formation numbers, look at the demographics, look at the housing supply, and understand that people only have three choices. Buy rent or be homeless. That's it. And that will dictate what happens with rents and prices in the long term. And then you look at the bad fiscal and monetary policy and you just think it's so inflationary. It's just so inflationary. Okay, so what happened in the last couple of weeks? Well, inventory inched up because I believe the last time we reported we had 497,000 homes for sale in the country. So that bumped up by about 11,000 homes. Now, keep in mind, this is a country of 339 million people and, and about 140 million housing units. So again, this is a drop in the bucket. It's nothing. Inventory is historically low. When you look at the macro trend, yes, it got lower during the COVID era for sure, but it's still very, very low. 508,813 homes for sale in the country. Inventory still urgently low. We need inventory above this level that we had in 2019 and 2017 and those where we had higher inventory, we are still about 700,000 units short. That represents our shortage of housing inventory. That's what needs to be constructed today. Right, but remember something. Remember that some of the housing units become obsolete. They just need to be torn down. So you have inventory that needs to cycle out of the market that is no longer suitable inventory. You have massive household formation, demographics all in your favor in so many ways, especially in the primaries. I mean, even in the non prime areas they're talking about their housing shortage. New York, 800,000 homes short. Right. Who's going to build 800,000 homes in New York? Right. It's very unlikely to happen. So still in a place where we have critically low inventory levels overall in the macro trend. Okay, so hope that's helpful. Let's get to the main part of our show and continue my interview with my friend Mike Slotnick. Here we go.

So on the labor side, yes, we have historically low unemployment and massive shortage of labor. And it's unclear where all these folks we are getting. Large amount of undocumented. Immigration used to be called illegal, now they're called undocumented.

Well, actually Hillary Clinton calls them workers without papers.

Okay, whatever you want to call them in theory, used to be, you know, and I, you know, I'm not trying to be stereotypical, but a lot of folks in the construction industry were coming from the south, south country.

Sure.

So you here go to a construction site and Spanish is spoken as the primary language on these.

Yeah, of course.

So is this still happening? So is there, is there.

It's not enough to solve the problem, you know, I mean it's, it'll help the illegal aliens coming across the border once they're trained and skilled and you know, assimilated into society for the ones who get to stay, yes, that will help. But look, that's been going on for decades. This is not a new phenomenon by any means. And what we've seen is that a lot of those people are maturing in their prosperity and their success path and live nice middle class lives. So, you know, it's not like they're going to go swinging a hammer either. Okay. They stay in that low level socioeconomic spots for a certain amount of time and then, you know, they move up the ladder too. That's what's great about America and that's.

Why everyone is coming to America for the reason that it is, like you said, it's still the greatest power in the world, still the best political system in the world, and so on.

Oh, yeah, of course. The US Is the best deal going by far. It's far from perfect. It's definitely declining, but it's still better than everybody else. But remember, all those people coming across the border also create more housing demand. They all need a place to live.

Affordable housing is in major, I mean, lack of supply and massive demand. Agreed. So where are we going from here? So the demand for these houses has been somewhat reduced, but the supply has been reduced more.

Even more. Yeah. So we're going from here is that unless a couple of things happen, which I'll be happy to talk about, we are likely to face a housing shortage for decades to come. Decades. We are going to be in a savagely short housing market for a long, long time. Now, there will be ups and downs in that cycle. There will be times when the market gets softer and times when the market is even more difficult. Right. Things obviously fluctuate, but for all the housing bears and all the people who are frankly just jealous losers because they missed out, because they couldn't get themselves to make a decision and take a risk, or they didn't have the willpower to delay gratification and buy some properties by giving up something, you know, in 2015 or 2019 or whenever, by delaying gratification and putting their money into investments, they missed out. And these people are jealous people that like to do their armchair quarterbacking, yet they have no experience, you know, they read some stuff and they think they know everything. They're wrong. Okay? The, the numbers just are what they are. You aren't going to magically create a bunch of new housing supply. There's simply no way to do that. Okay? Now granted, if there's another pandemic and a whole bunch of people die, or if some technological breakthrough happens, allowing and change huge shift in government policy at the federal, state and local levels, allowing them to create a whole bunch more housing, then, yeah, that'll cure the problem. But those things notwithstanding, I don't know how we fix this.

So a couple of quick comments on this. So the, the question is, what are the economics today for a buyer that goes through your network as Far as the prices are high, the rents have gone up, but also taxes have gone up, insurance to the roof. I'm just curious what the investment looks like today. But before we do that, what do you think about this idea? So this has been circulating. I know it's a very hard lift and it's an idea that's been around and it's even more kind of relevant now. I don't know if it's viable, but it's relevant. Ton of office buildings are semi empty. Yeah, ton of them.

And they are being. Some of them are being converted to.

Yes, that's the point. Conversion to housing.

Right.

But it needs massive government subsidies because it's difficult to convert office.

It's very expensive to do that. But some are doing it. And I've looked at some of those projects. They're pretty interesting.

Yeah, we've done quite a bit of hotel to multifamily conversions. Those are a whole lot easier and they work really well. Yeah, that creates affordable housing. But the office is the next thing in line because hotels are back to doing normal. They're not being sold at a discount the same way they were, you know.

When the COVID Same with retail centers. You know, you could convert retail centers to housing too. They've talked about doing it with shopping malls, of course. Look, all of that is possible, but it's just very expensive to do those retrofits. Yeah, they're. They're very expensive to do. Some cities have actually eased regulations. San Francisco, believe it or not, is one of them. And I believe Chicago and New York have too, to make it easier and less expensive for developers to convert office buildings to condos and apartments. But again, remember, that doesn't solve the problem for the single family market. Right. Most people, at least when they form families, and we've got this huge demographic cohort in their prime family formation years of 25 to 34 years old. Right. Most of them want a single family house. Yeah. You know, there's some in cities and they. They'll live in a high rise. Sure. But these high rises are quite expensive. They're not cheap by any means. They're condos. They have very high association fees. It's incredibly expensive to retrofit them. So all of that is passed through. But to your other point about the rising cost of property taxes and insurance. Look, we're very active in Alabama and Florida, Tennessee, Indiana. Some of those are our most active markets right now. And we've been in many other markets. You know, we used to be super active in Texas Arizona, Nevada, you know, we've done business all over the country. Okay? Those costs certainly are rising in some areas especially. But just like any corporation, any business, a rental property is a business. And like any other business, it is ultimately a pass through entity. Everything gets passed through to the consumer, in this case the renter. Now, it doesn't get passed through right away. There's a little bit of a time lag and that's what kind of kills people. Okay? But ultimately, if someone wants to rent a house, there needs to be a house available for rent. And for there to be a house available for rent, some investor has to do the analysis and decide that's the highest and best use of their money. And if it's not, they're not going to make the decision to buy the property. And if they don't make the decision to buy the property, there won't be a rental. Okay? This is the problem with rent control and why it's a stupid, socialist, communist disaster, Right? Because not enough people will make the decision, make the calculus to buy properties, to rent them out. And that's why there's huge housing shortages in places like San Francisco, Santa Monica, California in general, New York, et cetera. All these places with failed rent control policies.

Yeah, rent control policies actually raises the prices for everyone else because you take.

Them out of them.

But let's go back to the turnkey properties in the markets where you operate, Alabama, Florida and so on. So taxes are up, insurance is up. Absolutely. Staggering increases in insurance and whatever you want to call it.

But the staggering. Let's talk about the staggering increase in insurance. First of all, that applies to older homes. And our clients aren't buying older homes, okay? These older homes in say, Florida or the Gulf coast of Alabama that are, you know, near the beach, that are very hurricane susceptible, that are properties that, I hate to sound callous, but just economically speaking, they need to be destroyed because they're just obsolete houses. They need to be rebuilt. Okay? And every time Mother Nature comes along, they usually do that for us and force the decision. Right. Which should have been made anyway. Okay? So these are not the types of houses that our people are buying with massively high insurance. Okay? But insurance is socialized to some extent, so it does go up for everybody, even if you don't have one of those houses. Right? So, you know, if Insurance goes from $1,000 a year to $1,600 a year, that's 50 bucks a month. That doesn't change the deal. You can get a tenant to absorb 50 bucks a month in rent increases, okay? So that equation is not as startling as it now. If you have some crappy old beach house built in the 50s on a beach somewhere in Florida, you know, that insurance might be six grand a year, okay? I mean, it's enormously expensive because they just know the next hurricane is going to just wipe that house out.

Okay, so what is the typical product today? Just curious. Just today what price and what kind of rent? Just curious.

The vast majority of the properties we have today are brand new construction. Now, Mike, as you well know, because we've known each other for many, many years, sometimes our market is renovated houses, okay, that fix and flippers buy, renovate for a profit and sell to our investors that are the long term holders. But right now there's no inventory in that because nobody wants to sell any resale houses, right? So all of the inventory virtually is new homes. I mean, there's a tiny little bit of renovated older houses, but very, very few. We hardly have any of that. So they might buy a property that, you know, starting brand new, starting at maybe $280,000. You know, that property will rent for $1800 a month, maybe, maybe 2000 if you're lucky. Okay? Those numbers work fairly well. They're definitely not as good as they used to be, but, you know, they work fairly well. And what we have to understand is that rents always lag prices. So we've seen tremendous run ups in prices over the past couple of years and the rents are catching up. Now, let's talk about rents for a second, okay? Because most of the rental data that you might see or read is based on multifamily housing. And the multifamily market is very different from the single family market. It's very hard to get good, reliable data on single family homes for rent. There's just not good data on it. Zillow has a decent index called the Zori, the Zillow Observed Rent Index, okay? There are some others, but none of them are great. And I want you to just think about this. Look, I've owned zillions of single family homes over the years and I've had apartments and I've got a mobile home park and I've, you know, dabbled in some other stuff, okay? But I have never, in all of my decades of doing this, I have never received a survey from any company or government or anybody asking me about my single family home rentals. No one has ever called me and said, hey, you know, we want to get a pulse on the market for a Survey we're publishing on your single family properties. Are you able to ask higher rents or are the rents really soft? Do you have to give more incentives for people moving in, or can you charge a really high security deposit? Are you having to underwrite the leases at low credit scores or can you demand the best a tier credit tenant? No one has ever done that because it's a very hodgepodge, fragmented market. Okay? Now on multifamily apartment complexes, it's super easy. And there's lots of companies that do this to survey. To call up the Irvine company, Irvine Apartment Communities in Southern California, that owns thousands of rental units, or Sam Zell's company, Equity Residential, and call them up and say, hey, you know, with your thousands of apartment units, what's going on with your rents? Give us the vibe on the market, right? That's super easy for them to do that. Okay? So just understand that single family home rental data is not great, okay? It's, it's getting better, but it's fragmented.

Because you have one very fragmented ownership versus apartment complexes are much more corporate owned, institutional.

Hey, Mike, before we go though, I want to share one more thing. I didn't share this yet. Okay, so on the screen, I have got a graph of housing inventory, okay? And this is really, really telling. Okay? So for those of you listening on audio only, what it's showing is right now, as we speak, inventory has fallen in the United States. I mean, nobody would believe it that with, with mortgage rates this high, that we would have inventory of only around 420,000 homes for sale in the entire country. I mean, think about it. We have a country of 332 million people. I think only 420,000 houses for sale. And let's compare this to prior years. 2019 is a good year to compare to because it's right before COVID And at this same time of year in 2019, the inventory was more than double what it is now. More than double in 2018. Basically the same story in 2020, it got a little lower because people were taking their houses off the market. They didn't want someone coming over and coughing on them and giving them Covid. Okay, so 2020, everything was starting to get locked down right about this time. And, you know, we saw inventory falling, falling, falling. Okay, let's look at 2017, inventory was way more than double what it is now. And then, of course, we see during the COVID era, when we look at 2021, 2022, inventory was just savagely low. I think the lowest point, Mike, Just for comparison, was 243,000 homes for sale in the country. And everybody remembers that. Multiple offers on everything, no choices whatsoever. An absolute feeding frenzy. Houses that would go on the market and within hours would have many, many offers, some having dozens and dozens of offers. It was just a savage market. So now we're at about 420,000 what we need to be normal. If you took this chart back to 2015, which it doesn't go back that far, you would see about 1.2 million homes for sale. And Mike, we knew each other in 2015 and you know, business was great for us and the market was good and properties were selling and you know, that was a normal inventory market with about 1.2 million homes for sale. Now we only have 420,000.

Yeah, this is great data. Appreciate Jason, you sharing this. So I guess on a forward outlook, the chances are the inventory are what going to slightly increase over time. Again, we're still coming out of COVID so hopefully over time inventories will gradually improve. But I guess a lot depends on the interest rates. So before we wrap up, just a couple of quick comments. What do you think is going to happen with the interest rate and Fed kind of action for the rest of the year into next year? A lot of folks have talked about this. There's a lot of speculation when the Fed will start easing. They still might still do one more quarter increase. They haven't said that down. They're getting close to being done. But don't you think that more and more problems are going to hit the economy and they're going to have no choice but to ease And a lot of banks, we talked about this, a lot of zombie banks.

Look, it's very hard to predict interest rates and I have done a terrible job at predicting interest rates over the years. So that's the first disclaimer I'm going to make. I've been very good at predicting other stuff, but interest rates are a tough one because they're centrally planned. Okay, but if you ask me, I'll throw out my prediction. I think the Fed is going to be forced to pivot. You know, they may raise one more time or they may just let it go at the next meeting and keep it even. But then they're going to start cutting because things are breaking, banks are failing. Banks have these hold the maturity assets which the Fed is making less valuable with their high interest rates and they're going to push us into an official recession. Okay, we're definitely not in a recession yet, but I mean There are kind of signs that we should be, but the labor market is so strong. I mean, look, we hear about some layoffs at tech companies that were overstaffed anyway, okay? Overfunded, overstaffed, woke people working there. You know, just stupidity. All right? I mean, look, Elon Musk, when he took over Twitter, he cut that company by 80% and it still runs, okay? So these tech companies are massively overfunded, massively over supplied in terms of labor. So now they're getting to be real businesses. That's all that's happening. It's an adjustment. One thing that does concern me, and I don't know which way to think about it, is the massive impact of artificial intelligence. And on one hand, obviously it's going to put a lot of people out of work, but on the other hand, it's also going to create a lot of prosperity and progress. So it's hard to evaluate how that's going to play out. My sense of it is that we're going to see times of pain as there are job losses, and then we're going to see a follow on time of increased prosperity and increased choices and increased opportunities. But again, there's always lag times, folks. If there's one message I want you to understand from what I say, it's the lag time that kills people. There are always those adjustment periods. And it's going on right now in real estate. The rents have yet to catch up with the prices. Right? We know that there's a shortage of housing. No one can deny that. Well, one Guy does on YouTube, but he's wrong for many reasons. But rents will increase more and more and more, okay? Because the single family market, unlike the multifamily market, is not oversupplied. It's massively undersupplied, supplied. And the rent stats are for the multifamily market, the ones that mostly everybody's seeing and reading. So I think the Fed is going to be forced to pivot and cut rates. And as I see it, rates probably settled around mortgage rates. When I say rates, I'm talking about mortgage rates, not Fed funds rate or Treasuries. Mortgage rates probably settle somewhere in the 5% range. And when that happens, coming into a market with only one third of the housing inventory we need, it's going to light the housing market on fire, okay? It won't be as good as it was before at 3%. Of course it won't be that good. But people need a place to live. And you know, I don't know how they're going to create it out of thin air. It's just not going to happen. It's not going to be 3D printed homes. I've researched that in depth. I've done many shows on it on my podcast. 3D printed homes are dramatically more expensive than anybody says. If it made sense you'd see it everywhere. You don't. There's a reason. I think that's what we're going to come into. We're going to. We're going to see rates settle somewhere in the 5% range for mortgages and we're going to see the housing market just get treacherous again. Not as bad as before, but it's going to be savage. Lack of inventory. It will cause a few more people to put their house on the market because the delta between the rate they have and a new mortgage at 5% ish will not be as large. So that'll be an easier calculus for people to make. But as soon as those houses come on the market, they're going to be snapped up because they're going to be cheap for the buyers too.

Yeah, I mean you basically, as rates will cycle back down, which I strongly believe too as more things will break later in the year. But you can't almost call recession without some level of meaningful unemployment increase in the past cycles. Unemployment would have to go to 6% or higher, some real recession to take place. We are at a point of historically low unemployment. It's not even clear when do we get over 4%. We can't get to that number. But, but I agree with you as far as the interest rate cycling down, you're going to have a lot more demand. Right. You're going to have more supply going into the market and then some more new construction. Right. At least developers will find it economically more interesting to build as interest rates cycle back down. So.

Right. The one, the one thing we didn't cover in that analysis though, Mike, is just general inflation. And I think we're going to see in the coming years just a lot more inflation. And remember that inflation makes the building materials go up, it makes the labor costs go up, it makes the energy costs go up. And so that's going to make new build houses more expensive or remodeling houses more expensive too.

So stop for a second more inflation. So you don't think we're coming back to what the fed has called 2 to 3% annual inflation? You think it's going to be staying at an elevated level or what level given comparison to what the Data is reported today.

I mean, look, during the COVID era, they created so much increase in the money supply, okay? And that's still out there sloshing around. I mean, they're tightening it up, but there is just so much evidence, even pre Covid, that the future is going to be very much inflationary. Now look, there will be times of disinflation, maybe even deflation. And again, this is by no means an even thing. You got to peel that onion too, right? There's a difference between consumer inflation, asset inflation, inflation, wage inflation. Right. There's pull inflation, push inflation. Like anything, it's complicated. Okay? But generally speaking, the overall big macro trend is inflation. You know, if, if there's one year of disinflation or even deflation. Okay, fine. But the big long game is inflationary, in my opinion.

Yeah, I agree with you. It's. It's the, the. We can't stop printing. I mean, the growth of M2 money supply has slowed down and it's been shrinking slightly. But on a relative basis, the shrinkage relative to the increase that we saw during the COVID it's a drop in the bucket. And in the upcoming years, that growth will continue, probably pace faster than it's almost. Fiscal responsibility of the government is gone. It's a lot easier to print money, print debt to feed the bees.

Yeah.

So from that perspective, the plan of.

Governments is always inflation, Mike. Because for them to be able to give out goodies to the populace, to the voters, to keep them in power or to vote them into power, they got to make promises they can't keep any other way than to. Than to print.

Yeah. Austerity is not the word anyone wants to hear. The tolerance for pain. The tolerance for pain is so, so small and so short. That's the reason the Fed probably will take action when real pain starts showing up.

So. You're absolutely right, my friend.

Thank you, Jason. Thank you for sharing. Thank you for your wisdom.

My pleasure. Happy investing.

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