2411: Multi-Family 'Free Rent' Tactics and the Iran Conflict: Navigating Real Estate Uncertainty with Michael Zuber

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Alrighty folks, it is time to dig into the economy. We are going to talk about rents, we're going to talk about active inventory, and we're going to close with a very important topic. You've heard that the middle class is shrinking, but did you know that the upper middle class is expanding? Hint, folks, there is a key to that which we will get into, uh, at the end. But let's start with, uh, rents, and we'll welcome Jason Hartman to the show. How you doing, buddy?

Hey, Michael. Good. I hope you had a happy Easter. It's great to be here as always. And it's just interesting to look at what's going on. You know, rents increasing ever so slightly. Again, it's been a pretty boring market, but that's just the way it's been for a few years. This is the Zillow survey, rents up 1.9% year over year. As many of you know, if you follow my work and Michael, by the way, I don't know what you say about this. I'd like to know what you say, but I always have said Try to raise your rents on average 4% annually. 4% annually is my target rent increase, and it's been pretty soft the last couple of years, but still in positive territory for sure. And if you average that out with the COVID era, you're probably up well over 4% annually on average, but I have not done the actual math on that. But you know, during the COVID era, I mean, we saw rents go up like 15% in a year. So you're probably—

yeah, I'll give you my thoughts here and then I'll talk about this chart as well. So my, my thoughts is very much pragmatic, sort of on the street. This is a year, at least in my portfolio, we are not raising rents right now. We have, you know, in my market there are move-in specials, there are half-off deposits. We're going back to an era that which was no fun, which was '06-'07, where rentals were really soft. So this year we are not raising rents. We are looking to not give anybody a reason to look somewhere else. So we don't want those turnover costs. But yeah, if you go back to 2020 and average for the 5 or 6 year period, yeah, that's got to be up 4%, 5% a year. So that's very true. This is a very interesting Zillow report because I've seen others, probably Realtor.com being the other, that are actually showing national rents negative. I think negative 1.2 or 1.3 on the Realtor chart. It's very divergent, multifamily being the one that's soft, like 3 or 4% in single-family homes positive, like 1%, which I think is very telling, especially when you look at this.

And very accurate, by the way. The thing that is killing these numbers is the multifamily market, and they are cutting deals like there's no tomorrow because multifamily has been way overbuilt. They are also sucking renters out of our market that want to be single-family home renters that would normally pay more but their deals are so overwhelmingly good that we're finding it difficult to compete with those deals. And that's what's happening.

Yeah. It's funny. I saw a report about Phoenix. I don't know if it was Scottsdale. We'll just call it Phoenix proper where they're doing something I've never seen before. And that's offering 4 months free with a 1-year lease.

I've mentioned that on your show before. Downtown Phoenix. Yeah. Yeah. So basically your rent is, you know, 1/3 off. Right, right. You sign a 12-month lease, you get 4 months free rent. Now it's interesting, you know, for those of you who don't know or don't think about this much, why do they do that? Why not just reduce the rent? Because the institutional landlords want to keep what they call the coupon rate, right, high. And they basically do that to deceive the lenders and the next buyer of their property into thinking rents are higher than they really are. And they will try to renew those leases depending on how the market is at the time they do the renewals. You know, will the tenant insist on more free rent to do the renewal? Mostly not, mostly not because the tenants in those apartment complexes are typically not very sophisticated renters, although some are. And renters have become much more sophisticated, much more upper class over the years. You know, it used to be kind of considered like, oh, you're a renter. That's like the lower class, the lower echelon, but now we've got very wealthy renters. You know, people have, have decided they like the convenience of that. But you're absolutely right, a lot of free rent, a lot of incentives being offered, and that has caused the single-family market to soften up because, you know, we don't play in a vacuum, right? We're subject to the market in general. But I will say the multi-family market in many areas now is finally showing positive rent growth, and it is healing. You know, it takes a while to absorb all of that oversupply, but, but that's happening. And I think it'll probably bottom out in about 6 months or so. And I think we'll start to see things really move into positive territory in terms of rent growth overall.

No, I think that's exactly right. I think that, you know, back to your question at hand is I see the next year is really managing to occupancy numbers, not maximum rents. But that said, 2027, 2028 for sure could be a completely different story because what happened with multifamily, the overbuilding, That stuff's not there anymore. And pretty soon we're going to be in a vacuum with no new construction. And then you will see dramatic— you'll basically catch up in rent growth is what I think is coming down the pipeline.

Absolutely. Absolutely. And, you know, let's just make sure we point out on this chart for a moment here. The blue line is the Apartment List National Index. And look at how that one is so soft. Yet the owner's equivalent rent of residences, the Zillow observed rent index, more focused on the single-family side, those are up. Okay, no question. The problem is you gotta average them together, right? So single-family rents are now up 2.6% from last year. Multifamily rents up 1.4% last year. That's the overall, you know, nationwide thing according to Zillow.

Like it, like it. Well, let's switch to inventory. What are you seeing going on with inventory?

Yeah, I got some more charts for you, buddy. So inventory is still historically low, much lower than it was in 2000. 17, 18, and 19, but higher than it was last year by a small margin. I think that number is actually about 8%. Not a big deal, but, you know, a little higher. Overall inventory is about half what it should be, but at the same time, demand is much lower because of the high interest rates. So those two go in lockstep. And I think the best metaphor that I really want to share with everybody is to visualize your kitchen sink. Okay, now your kitchen sink has 3 major components. It has, of course, the basin of the sink, it has a drain, and it has a faucet. And for the last 3+ years, this is the way it's been. Okay, the drain representing the absorption rate or the demand for housing— the buyers, the buyers are the drain, they're draining the supply out of the market. Okay, the drain has been plugged up. And so it's been plugged up by about 30%, you know, roughly. Okay. So only 70% of the drain is working. Okay. So that's, that's the demand side. And we've seen demand destruction basically because of the housing affordability being so, so low. And then you have the basin. That's the existing inventory. That's what's for sale. And it's only half full, or if you're a doomer, if you're Nick Gurley or Peter Schiff, it's half empty. Look at it however you want. Right. And then the faucet. The faucet is the new listings coming up for sale, and the faucet's trickling. It's not on very much because there's not much inventory coming on the market. So that's where we are. Faucet is a trickle of new inventory. You know, someone opened up the faucet a little bit more over the last year, and since COVID certainly a little bit more. And so inventory has increased. The basin of the sink has been filling a little bit, but it's still only half full, and the drain is plugged up because Affordability is so, so low. So let's add a fourth component to this. What do people do when this happens? Okay, that's the picture of the market, the sink, but the population hasn't declined. Okay, so what are they going to do? Well, they have to rent. They have to go to the, the next sink over. Like, say you have a two-part sink, okay, and, and it's partitioned like many sinks are, right? Mine, mine isn't. Mine's one big sink in my kitchen, but Some are partitioned. And so they have to go into the rental market. And the rental market has dynamics like that, too. And we just talked about those, really. I think we've kind of covered that when we talked about the multifamily and so forth.

Yeah, it's really interesting when I look at a chart like this. Again, I go back to, you know, the reality of watching this on YouTube for the last 8 years. What we've learned over the last 4 years is sub-6% mortgages increases that demand. I mean, it can't be argued. We were at 5.99, I don't know, 6 weeks ago, 7 weeks ago before the Iran conflict, and we were already seeing dramatic increases in mortgage applications, refis, and the market was really destined to have a pretty good spring selling season.

Obviously it was. Yeah, yeah.

Fast forward 6 weeks, that is no longer the case. Uh, this conflict, this war has caused interest rates to go up almost 60 basis points, 70 basis points. But also importantly enough is it creates fear. And you are just, you know, families are not going to go out and sign up for the largest payment of their life when they're afraid. And then you add on top of that AI and job loss, you know, mantra coming from everywhere, left, right, and center. There's a reason why this spring selling season is going to be a dud, just like last year.

Sadly, you know, we were— it was like a certainty, 99.9% certainty that we were going to see rate cuts. And then It just took a complete U-turn when the war started. But here's the thing, folks, nobody knows what's going to happen. War is very uncertain.

Okay, very messy.

I mean, it just doesn't seem like it's going to be very long that the Strait of Hormuz will be closed. And as soon as it's open, the—

so what is, what is not very long mean? Well, are you thinking, do you think in week, do you think in days, weeks, or months?

I think in weeks. I think it's going to be a couple of weeks, 3 weeks before.

So by May 1st?

Listen, I don't know. No, of course.

I'm just trying to get a feel for how— Yeah, but I might be wrong.

We're going to be back in business in 3 weeks. Yeah.

Yeah, I'll take the other side. And again, I hope I'm wrong.

Yeah.

It just feels like we have not appreciated how hardened Iran is, right? I do believe that Trump, you know, he moved the date from today, tomorrow to blow up bridges and whatever refineries or whatever it was. I think they're going to call his bluff and see what he wants to do. And then if he does, they're going to throw their own at infrastructure around the Middle East, and that's going to cause oil to go to $200. That's my big fear.

Oh man. Whoa. Nelly, $200 a barrel. That's going to be insane if that happens. Wow. But here's one thing that a lot of people don't appreciate about that. Yes, certainly that's significant inflationary pressure right there. And by the way, Michael, and we can talk about this more on another show, but one of my listeners sent me these currency units from other countries. Here is Zimbabwe. I think this one's Zimbabwe. This is, uh, $5 billion.

That's in one bill. $5 billion.

Yeah. How much, how much is the hamburger? Oh, it's $15 billion. Here's 5 of the, or 3 of these, you know, and this is just showing inflation all around the world. You know, look folks, this is something you can profit from— inflation-induced debt destruction. Okay, it's a big, big opportunity. And you know, let's talk about these in another show sometime. But here's the thing people don't really think about with oil prices. You know, a lot of people are making a ton of money off of this. Sure. Okay, and remember, these oil company stocks are owned by the American public. All right, you know, it's not like this happens in a vacuum and it's only negative. Sure, right? There, there are many, many new millionaires that are minted out of every war. Okay, I mean, that's many profiteers, and some of them are you. You're, you're listening to this, right?

No, there's no question that war is horrible, war is terrible, all of those things. But you know, it does create unique opportunities for the people that are willing to go out there and strike while the iron's hot.

And I know, but war in this case, as it was— and we didn't have a war, but we had a Cold War with the Soviet Union for decades, right? War, as terrible as it is, remember something: it is sometimes an investment. Okay, now before people, you know, lose their brain here, okay, think about what Reagan did. You know, he just spent the Soviet Union out of existence. He spent them into bankruptcy, and that was an investment, okay? Because we no longer had to fight a Cold War with them once they essentially went— became insolvent through the arms race, okay? Now what are we doing with Iran? Trump finally has, and I'll say it, the balls to do what every president over the last 47 years should have done. They should have just solved this problem. These people have been chanting death to America for 47 years and have the power to do it. So this is a prevention investment. And I know the comments are coming, folks. Oh, Jason, you're a warmonger, you love Trump, whatever. You know, let's grow up, people. I mean, seriously, just think it through. Okay, so things are multi-layered, they're complex, there are many crosscurrents, and That's one of the crosscurrents that few people appreciate.

Yeah, I like it. Well, you had, uh, you have one more thing you want to talk about, and that's the K-shape or the upper middle class. You have a chart on that?

I do, I do. But before we do that, let's just finish the inventory topic. Okay. And I know we got to wrap it up, so this is inventory by state. So it's a map that you're seeing now. These are from our buddy at Resi Club. We both know Lance, and we've interviewed him and so forth on our shows. And one-year shift in active housing inventory for sale shift between March 2025, March 2026. And it's interesting here to see what's going on. California, 5% increase in inventory, the most populous state. Washington State, 31% increase as people are fleeing.

Get out of Dodge.

Millionaires tax and everything else. It's going to be really interesting to watch New York. As Mommy, you know, ruins New York City, right?

Yeah.

Now granted, this is by state, so he's not going to ruin New York State. Okay, he'll, he'll ruin the city. But Florida, Florida kind of got out over its skis, as most of us know.

For sure.

It's still— Florida is a fantastic investment overall, but you got to think long term. It has— I mean, just everybody seemed like they moved to Florida during the pandemic migration, post-pandemic migration, and it got out over its skis a bit. I own many properties in Florida and so does my mother and it's been softy, right? But Florida is down in terms of inventory 8%.

Yeah, I think that would surprise people. I think everybody would be surprised by that.

Yeah.

Okay.

Yeah. So that's good news for Florida investors. Things are healing there and Texas is up in inventory by 9%, which is also quite interesting. So it's just kind of interesting to look state by state, see what's going on. Where I live in Arizona, we're up 8% year over year. So some interesting things for you. If you in Nevada, you're up 14% year over year.

Yep.

All right, the middle class. Yeah, great book, Michael, written circa 2004. I always recommend it. I quote it during my live conferences and speaking engagements. A book by the late Lou Dobbs called War on the Middle Class. Really highly recommend this, especially chapter 2, read chapter 2 because it really shows you, although he doesn't say it, why income property is the most historically proven asset class in the entire world. Because what he does in chapter 2 of War on the Middle Class is he talks about the Wall Street crooks, and many of them are not legally crooks, but I would say they're ethically and morally crooks, right? Because they can get away with what they do legally. Just because something's legal doesn't mean it's right. And just because something's illegal doesn't mean it's wrong, okay? The laws are historically wrong many times, okay? So don't go by just the law, right? Think it through, right? It's more complex than that. And he just talks about how the middle class has just been hollowed out for decades. And my whole mission in getting into this business of helping people buy turnkey properties nationwide 21 years ago, 22 years ago now, in 2004 was to basically save the middle class. Because if you want to have a stable country, you've got to have a big middle class. And the middle class has been under serious attack for quite a while. But what is interesting is that people are either moving up or down, right, as they hollow out the middle class. Some people sadly are moving down. Those are the people that could buy 1 or 2 properties a year and save themselves by becoming investors, setting up their retirement. But many people are moving into the upper middle class, and that is swelling. And that's the article I read yesterday. So you can see on this chart now, what's interesting too is what they define as upper income. It really depends where you live because it's not really that much in some places. You know, they're comparing upper income, they're calling it $256,000, $257,000 a year. We'll round it off. Yeah, that's increased by 78%. Now, I don't know if this is adjusted for inflation. That's one of the things you always have to ask yourself. I'm not sure, it doesn't say that, but it's just interesting to see the differences here in the different income categories.

Yeah, one of the things that, uh, you know, that, you know, that I think about when I think of middle class is people are always moving up or down. And the other kind of point to this is if you want to go up, you got to own assets. You got to own assets for a decade. It is that freaking simple, right? There's no other way to do it, right? You can't out-earn, you can't out-save. The best way to do it is owning assets. Now, obviously you and I are very much into income-producing real estate, but frankly, I don't give a rat's ass what you buy. As long as you hold it for a decade and it's truly an asset, the chances of you becoming richer are really good if you do it.

Well, well, yeah, I would caution you, if you own gold for a decade, until lately, you would have done nothing for 45 years. I mean, it was a 45-year span peak to peak on gold. I mean, people made no money, they lost money. And the problem is, you know, the hardest part of being an investor is to control your own emotions and— amen— hold the asset. Now, granted, you shouldn't always hold an asset, okay? There are times when you should sell, but Most of the time it's the investment offers one return, but the investor gets lower return because they can't hold through the tough times. That's, that's the hard part.

Well, Jason, you are putting on two events in the next couple of weeks or months. Tell us about those as we wrap this up.

Yeah, the first one is Empowered Investor Live, our annual conference, and we have none other than Michael Zuber speaking at that event. That's in Irvine, California. Go register, grab your tickets at empoweredinvestorlive.com. We'd love to see you there. We've got very good hotel rates at a beautiful property. No need to rent a car. Fly into John Wayne Airport is 5 minutes, free shuttle, just really easy event to attend. That's Empowered Investor Live in the middle of May. Starts Friday evening, ends at the end of the day on Sunday. We'd love to see you there. You can meet our property managers, our affiliates, our local market specialists, get lots of great housing and economic data from Michael Zuber and myself and other speakers. EmpoweredInvestorLive.com for your tickets there. I also host a superyacht mastermind group. Go check out MastermindYachtAdventures.com as well, and we'd love to see you at either or both of those.

Thank you, Jason.

Take care.

We'll talk.

Happy investing.

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