2455: Repricing Risk: Why Higher Rates are Triggering the Commercial Domino Effect with Michael Zuber

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I'm in St. Augustine now. You know, if I had never worked for you and had that wonderful experience and gotten to know you, buying this investment property was life-changing. It has not only been very profitable, but it's a wonderful place for our family. And I just— I mean, I'm here right now and just thinking about and wanted to thank you for that.

Welcome to the Welcome to the Creating Wealth Show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self-made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer, and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate deals. Real estate transactions. This program will help you follow in Jason's footsteps on the road to your financial independence day. You really can do it. And now here's your host, Jason Hartman, with the complete solution for real estate investors.

Alrighty folks, I have some bad news for anybody involved in the real estate industry. And what I want to do here is spring that bad news on Mr. Jason Hartman. Let him react in real time, let him know where I'm right, where I'm wrong, but more importantly, assume that I am right, what happens next? Because then this bad news I think is coming and it is coming quickly. But let's welcome Jason Hartman to the show. How you doing, buddy?

Well, Michael, I hope you are wrong, and I think you hope you are wrong too, right?

Yeah, so let's put it on the table what I think is going on. So I think we are fundamentally seeing a change in the risk profile. I think risk in the bond market is being repriced because the Fed is not giving any forward guidance. We've seen the 10-year jump. We've seen the 30-year bond jump. I think that is just the beginning. I think it has been rather orderly. I think the next thing that we're going to see in the mortgage industry is the mortgage spread, the one between the 10-year and the 30-year mortgage, which is now at historical norms after being blown out for years.

The spread is going to reverse. The spread is much better than it's been recently.

Yeah, correct.

And that's good news.

Well, yes, it is good news. I think it is going to blow out. So I think we're going to get a higher 10-year and we are going to get higher mortgage spreads, which means just to put a pin in it, I think we could see 7.5% mortgage rates before the summer is over. So I wanted to, A, spring that on you, get your initial reaction, but more importantly, After that, just assume I'm right for a minute. What happens to housing? What happens to real estate? And then maybe we'll jump into commercial because I think we might see two different things. What do you got?

Yeah, I think, uh, I think that would be very bad news for affordability. Housing is already very unaffordable, although it has been improving slightly, you know, recently because wages have been catching up. Wage increases have been catching up with prices and higher interest rates. But that will simply mean that the rental market gets a boost. Because remember, there's always an equalizing factor, Michael. So many people don't get it about that, and that's why you want to be invested in multi-dimensional asset classes, because of that equalizing factor. You don't have that in every other asset class. So for example, if you own rental property, or if you're buying rental property and you say you hear, you know, higher interest rates, you think, oh, that's terrible, now the deals will make even less sense and they've been constrained, you know, over the past 3 years, right? It's been tough to make a deal work because those numbers with high debt service costs and high prices at the same time just don't look that great. And so it will become even more constrained, which means fewer people will buy rental properties. Bad for my business. Okay, so I will be singing the blues about that, as I kind of have been over the last 3 years. I've not been too, too happy with business over the last 3 years. It's been kind of slow. But also, that means fewer rental properties will be on the market, which means tighter supply. And all of the buyers who have been waiting over 3 years to get on with their life buy their first home, start building a life, building a family. They've been putting that off, putting it off, putting it off. As we know, sales activity— you report on it all the time, Michael— is way, way down, about 2 million per year deficit in number of transactions. So if you multiply that by over 3 years that we have now, that means there's pent-up demand of about maybe 6.5 million buyers that did not make a normal buying decision that would have in, in normal times. So they're the shadow demand, which is good for housing prices but more positive for rents with higher interest rates. So it's a multi-dimensional asset class. When affordability is constrained, people don't buy— both owner occupants and investors. Okay. And that means less supply and more people fighting over the supply of rentals. Okay. So that pushes rents up, upward pressure on rents.

No, I agree with all that. And again, I really do think 7.5% mortgage rates are coming because the 10-year risk is being repriced.

You're killing me.

I really do. I really do. And again, I don't think we'll be there forever, but, you know, we're going to be there for a minute. And, you know, things will get better in '27. But risk is being repriced and there's really going to be only one winner. And those are going to be the people like me who, you know, are shopping for one deal a year. We're buy-and-hold investors. Let's be very clear. If you're a flipper, anybody— you're a whole—

that's bad news for flippers for sure.

Yeah, you're a flipper. Anybody that needs to get out of something, you're going to have a terrible second half. The rest of the year is going to be terrible. But if you're like me, the opportunity of finding a motivated seller will never be higher in the next 6 months because you're going to have more inventory, less competition. And you and I both know sometimes you just have to sell.

I would actually argue that a little bit differently than you.

Awesome.

I agree that the motivation will be higher than it has been if that happens. I mean, this is an if. We don't know that it's going to happen. But of course, but if affordability is further constrained, there will be some sellers that just have to sell. Most, you know, you look at delistings are at record highs, so most just are indifferent, you know, if they don't get their price they're not going to sell type thing because there's really very little urgency. But there are those few people that don't have a COVID-era mortgage at a super low rate, okay, or they just have to sell because of life circumstances.

Yeah, death, divorce, sickness, blah blah blah.

Yep, absolutely. And this is why, you know, this is why divorce is one of the biggest destroyers of wealth Okay, you know, most people say it's, oh, because she got half or he got half. In rare cases, it's mostly the other way. But, you know, the other spouse took my money, right? That's the complaint. That's a big destroyer of wealth. But what's worse than that is not that they got a whole bunch of money from you. What's worse is that it forces people to liquidate assets at inopportune times.

Exactly.

So what's the lesson, folks? Time your divorces. Okay, how about don't get divorced? If the market is down, go to counseling, work it out, just put it off until the market comes back and then get the divorce and sell at the peak, right?

Yeah. So again, so again, if we're talking 7.5% mortgage rates, you're absolutely right, we don't know this is coming, but I think they are. I think residential transactions slow down even more. Flippers, wholesalers are screwed because they have to get out and they can't. Yeah, buy and hold investors, I think, you know, the small set of you that are out there are going to do just fine because you'll find the motivated sellers if you're disciplined.

Yeah, that was the part of the argument I didn't make yet. I'm sorry, I didn't say that. Okay, so for the investors who own a lot of properties already and aren't thinking of expanding their portfolio, they're just in sort of, you know, operational mode. They own a bunch of properties, they, they've created a lot of wealth for themselves They win big time. You know, people that own a lot of real estate— a lot of people don't understand this— people who own a lot of real estate, a lot of rental property, they love high interest rates, okay? Because that just makes their rents go up. It makes it difficult for their renters to get out of that rental pool, and so they stay longer. Their vacancies are lower, the tenant turns are reduced, and people just stick around. I mean, I've noticed that with my own tenants during this high rate environment. They're just sticking around, you know, and normally I think I'd see more turnover from those tenants, but they just stay longer because they just don't have a lot of options, right?

Yeah. So again, I think residential, it's just you're stuck in the mud. It's horrible. I mean, if you earn— if you're paid on transactions or you're paid on moving inventory, The last 3 years have been terrible. Unfortunately, I think the next 6 months are going to be the worst of the cycle. I don't say that with a smile on my face. I think it's just going to be true, the worst of the, the what will be a 4-year cycle. Uh, but now let's go to where I think the fireworks really, really start.

Before you go off of that, can you just put into your thinking though, I'm curious what you'd say given the midterm elections coming up. I even predicted this. And listen, I've made the disclaimer a million times, I'm terrible at predicting interest rates. Interest rates are not— I mean, they're partially a market phenomenon, and that's sort of easier to predict. What's hard to predict is central planners, right? And that, you know, central bankers, central planners run the interest rate environment to a large extent. But as an election draws near, they want to give out the goodies, right? The folks in power want to stay in power. They want to loosen the money supply and pass the punch bowl around at the proverbial party. Yeah, it's just— they're just not going to be able to do it. Is that your point?

Yeah, they're less than 100 days out, right?

Yeah, I know.

And, and you can already see the future pretty clearly the next 30 or 45 days if you're paying attention. And by then you're less than 40 days from the election. They just don't have enough time. It's over. Yeah, the midterms are decided. So now let's go to where I think the fireworks are. So again, I think residentials just sucks. It's depression level for the fourth year. Not fun.

But depression level of sales volume transactions, clear on that. Don't say prices because I've never said that. I know, but most people listening, they confuse the two.

Okay, not on my channel. My channel, I think I've beaten them up. But yes. Okay, so again, I think the fireworks are going to go on commercial because again, we have had extended pretend going on. I know with certainty there are phone calls being made around, because I get some of them about potentially buying deals off market directly from banks. I think the risk pile blows out and banks are no longer going to kind of teetotaler this thing. They're going to just start foreclosing en masse because we got $1 trillion of resets coming. I think there's another trillion behind it, kind of extended for 10.

In, in, in terms of interest rate resets on commercial real estate, this is all commercial.

Yeah, we're done with residential. So I think, I think the pain that I've been waiting to see is coming in the next 6 to 9 months. What we really need is we need massive foreclosures and so much inventory that it stops popping on the MLS or LoopNet or CREXi or wherever. Right now it's just like friends of friends getting deals because I get some of those phone calls and I think it's just going to be so much that banks just, they can't extend, they can't pretend anymore. They're going to, they have to clean up their balance sheet. A lot of these fund of funds need to return money to their original investors. The clock is running out, and whether you like it or not, commercial hasn't popped yet because there was hope of lower interest rates. That is over if I'm right, and we're going to 7.5%.

Yeah, so, you know, like Michael said, in the commercial real estate world, whether it be multifamily, office, retail, industrial— and those asset classes are all very different, so I kind of hate when people paint the broad brush and say commercial real estate, you know, what does that exactly mean, right? But certainly office space is very, very difficult. Multi-family, very, very difficult. You know, there are some like flex space industrial that's actually decent opportunity. Retail, we sort of had most of the retail apocalypse work its way through, and that's the Amazon effect largely. I've been actually pretty impressed with a lot of shopping centers and the way they've sort of rebuilt their environment, and they've got new kind of strange types of tenants in some of these office. You know, you go into a strip mall and it's just a— well, that's kind of a weird type of tenant here, but you know, they're paying their rent.

That's all.

Yeah, they're getting— they're paying— they're being able to pay the bills with that. But you are right that the commercial real estate world is in tough shape, especially multifamily and office, and The rule has been really for 3 years, every year they make up a new phrase: survive to '25, extend and pretend, right? And '25 has passed, obviously. We're now in '26, going on '27, right? I'm talking about the year, of course. And so I think it's going to be tough, and a lot of investors want their money out. You know what's been going on, and we've talked about it, some of the sort of blue chip or very well-known sort of influencer style multifamily investors. We all know who they are. They've lost tons of money.

You know, here's the problem.

Complexes going into foreclosure.

It's already tons of money. And what people don't realize is most people realize— they think it's a one-and-done. Most of these guys, it was their first loss of several coming.

They are dominoes. Yes, they are dominoes.

And that's what most people miss.

Yeah.

Yeah. So again, I think as you opened, I certainly hope I'm wrong, but I really don't think I am. Yeah, I think mortgage rates are going to 7.5% very quickly. There's going to be pain felt in residential. I think the pain will be dwarfed by what's going on in multifamily and office to clean that language up. But at the end of the day, I'm an open market guy, free market guy. And frankly, these deals need to transact and they're going to transact at 40%, 50%, maybe even 60% below last sale. And they should.

Michael, I hope you're wrong on these high rates, but yes, that will happen in the commercial real estate market. Thankfully, the protection layer we have in housing is multifaceted. One, everybody needs a place to live. Number two, there's a major housing shortage that is still in effect that has not been canceled yet. Okay, it's the housing crash that never comes. Grant Stephan, your buddy, wrote wrote a newsletter about it. You probably saw that last week. I think we're pretty darn well protected. But again, making new deals work in a 7.5% interest rate environment is not gonna be easy. Okay, that's not gonna be easy. Now, the thing we did not say, you know, I always say you can't hear the dogs that don't bark. And whenever you're listening to someone have a discussion like this one, or you're looking at an article or a chart or a graph or whatever, you always ask, what are they not saying? What haven't they said? What are they not telling you? Well, what we're not telling you is compared to what. So we talked about what it does to residential. It increases upward pressure on rents. We talked about what it does to commercial, which is a bloodbath. Okay, but we didn't talk about what it does to the stock market. We didn't talk about what it does to precious metals. We didn't talk about what it does to cryptocurrencies. Other investments out there, or even businesses, right, that, you know, private equity companies buy and so forth, and small businesses. So there's a thing called TINA, okay, and it's an acronym. It stands for There Is No Alternative. And this is an investment acronym, and investors always look for the least worse thing they can do, right? And so I would argue that single-family investments are the least worst thing Okay, because obviously the stock market is just crazy overvalued, whether you look at the Buffett indicator, you look at any of the Case-Shiller metrics, the CAPE ratio, you know, just PE ratios in general, the AI apocalypse that is upon us. I mean, it is like so overvalued, and even if it wasn't, it's not multi-dimensional like income property. So there is no alternative, what else are you going to do? So Michael, I'd like to pose that question to you for investors out there. Like, okay, say you're right and we have these higher rates. I hope you're wrong. I think you hope you're wrong too. But if you're right, well, and you've got to invest your money, you've got to make it work for you somewhere. What do you do? What's the TINA? What's the— there is no alternative. What's the least worst option?

Well, again, I will say that this will not last forever. So it's a 6 to 9 month window. So in the grand scheme of things, it's not a decade. Uh, so again, if you're out there and you're like me stacking cash, and, you know, my audience knows I raised them over a million dollars here in the last 90 days because I want to go shopping, I have no problem if, if the market is so unpredictable that just keeping it in a money market making 4 to 5% for, for 6 to 9 months, I have no problem doing that. I'm not in a rush to deploy this capital. So that's the first thing I would say. The second thing I will say is I really do believe there's only one winner in the environment I'm talking about. So I will be writing offers, I will be following up once every 10 days on properties that I think works, and they will either sell it to me, sell it to someone else, or take it off the market. And I've been doing this for decades. I have no problem writing offers 17 times on the same property over a 6-month period. I only need to do one deal. I'm not in the business of buying 20. I'm not in the business of flipping. I'm not in the business of this. I just want to buy what I call a deal of a lifetime once a year.

And what kind of deal are you looking for? You're looking for small plexes, right? Or small multi-unit?

Well, again, so I'll answer it two ways. Once Zuber a decade ago, and once Zuber today. So a decade ago, yeah, it was, you know, kind of 10 units and below. You know, wherever I could get the best yield. I put them all in the same spreadsheet. I would want double digits— 12, 13, 14, 15% yield, right? Deal a deal like that. Today I've been very clear, I'm looking to take somewhere between a 20 and 80 unit building down by myself. No partners, no investors. I know I'm going to have 2 years of just heavy lift because it's going to be disgusting and destroyed and no maintenance. I've done that before. I've done you know, several of those. So, you know, I'm looking— dude, I am— I'm a lot closer to being done than most people, and I only need to put one or two more scalps on the wall. So, you know, before—

before you're set for life, in other words, right?

No, I'm set for life already. This is all ego-driven at this point, right? I told Olivia—

I love how you admit that. That's great.

Yeah, I told Olivia that we are no longer buying when I'm 65, uh, and that's a decade away.

Yeah.

So this is my last distressed cycle.

Yeah.

So I only got one more shot at this. So, you know, the next 18 to 24 months, I hope to, you know, put one or two scalps on the wall and, you know, be done with my—

the hunting trophies in your lodge, right?

Exactly.

Exactly.

So yeah, that's, that's what, that's what I'm doing now.

Yeah. Cool. Good stuff. Good stuff. I should mention, Michael, we have two great resources. They're both free. Free software, propertytracker.com. It's the best deal analysis software in the business, bar none. Propertytracker.com, and it's totally free, no catch. And we have monthly master classes. This one coming up is on asset protection, very important topic. And you just go to jasonhartman.com/wednesday because they're the second Wednesday of every month to register for those. So, uh, we'd love to see it, either of those things.

Very cool. Thanks, Alan.

Happy investing.

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