409: REAL Data on Housing Market Crash Reality or Fiction, Kyle Kovats

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It is my pleasure to welcome one of our listeners to the show and that is Kyle Kovatz. He, he was kind enough to send me a video that he did. It related a lot to what I've been talking about on the show and I just thought he put a lot of work into this and did a great job with it. He's an apartment syndicator, he lives in the northeast and he syndicates apartment complexes in Texas and Arizona. And he's going to present some good insights for us today. A lot of this stuff you've heard from me before, but it's, it sometimes gives you a really different view of things when you hear it from somebody else in kind of their own language. Kyle, it's great to have you. Welcome.

Thanks for having me, Jason. I appreciate it. Very nice to finally be on the show after listening to the show for so long.

Yeah, good stuff, good stuff. Well, we appreciate you listening. Really enjoyed your presentation, as I say, and I'm so glad you're here to share it with our listeners and viewers. So let's go on in. You know, if you want to share your screen and, and for people listening on audio only, we'll be explaining things along the way. And if you do want to see the charts and graphs, of course go to my YouTube channel and you can find them there.

Sure, yeah. So thanks for having me. Jason, just to introduce myself real quick, as you said, you know, my name's Kyle Kovatz. Mainly what I do is I syndicate apartment complexes mostly in Texas and Arizona, in particular Dallas, Houston and Phoenix. I was named to the National association of Realtors 30 under 30 in 2016 and from there just kind of started investing in apartment complexes for the most part. So enough about me, let's get into the info now here. So one of the first things that, you know, I talked about with people is trying to recalibrate seller expectations on like the single family side. One of the things that we're seeing right now with interest rates going up as fast as they have and you know, as high as they have, which historically is really not that high. But with that being said, over the past year, monthly payments on mortgages, they're up 56%. So you hit a certain point where you know, that 20% year over year appreciation, that can't last forever, you know, that's going to, you know, start to, I guess come back to earth a little bit. And with the, with the, you know, 56% rise in monthly payments here, you know, this also coincides with, you know, purchase application data coming in at 2009 levels. Right now when we hear people say 2008, 2009, everybody thinks everything's going to crash down just like it did in 2008, 2009. I think you guys will see throughout the course of this podcast here that we go over, you're going to notice that the demographic story, if you compare the demographics of 2008 to 2022, they couldn't be any different. The whole fundamentals could not be any different either. And we're going to go over a bunch of that stuff here. But right now, just so you know, on top of inventory starting to tick up, but still near all time lows, we do have purchase application data actually starting to flatten out as well too, you know, in this case as well. And we're about at 2009 levels at this point right now.

Mortgage companies are definitely not liking this market.

Yeah, yeah, they're definitely not liking it, especially on the refi side of the business because the refi side of the business has just completely and totally died. But one of the things that some people aren't taking into consideration is that the arms, the arms are coming back. Right. Because you can get an arm. You can get, you know, let's say perhaps a 10:1 arm or a 7:1 arm and you might be able to get that at like 4.5. I know what you'll see displayed, you know, but that's put out there by like more Mortgage News Daily will be super high. I think it says like 5.38. I was speaking with a mortgage broker this morning. He told me he could do a 10:1 arm for four and a quarter, 7:1 arm for actually 7:1 arm is more expensive at like 4, you know, 454.5.

Is that on a single family, non owner occupied rental property that was on.

A single family, owner occupied, that one in particular. But yeah, like with this here in particular, you know, you're starting to see, you know, immediate sales slowing down. Now when immediate sales slow down in this Chart that I'm going over right now, for those that are just listening and not watching, I'm going over a chart from Altos research that shows, you know, the percentage of immediate sales right now. Now that Percentage is at 22.7%, meaning basically 22.7%. Near nearly a quarter of all homes going on the market. They're selling pretty much immediately. Most likely that's because they're going into a bidding war and they're getting sold, you know, real quick just like that. So with that, that's still higher than usual, still higher than all time norms, but it is coming down. We topped out around 33% or so back in December. So in other words, like one of every three homes that was going in the market was selling immediately, that number's come down to, you know, just around 23% right now. Still high. But again, it certainly is coming down, which means that some of the froth at least is being taken out of the market. But with that being said, anybody who thought 20% year over year appreciation was going to last forever, I mean, they needed a hole drilled in their heads right now, you know, I'm a broker as well, you know, I'm an agent who sells homes still. The reason I do that is to kind of, you know, keep my, my foot in the water and, you know, understand what's going on. You know, six months ago, five months ago, we might have had a house listed that got 40 offers. That same house today is getting three or four. That's not bad.

Kyle. Where, where is my violin? We've got to play the violin. For these sellers, they're only getting three or four offers quickly rather than 40 offers.

Right, right. So they're not getting 20% above ask. They're still getting above asking, though. And not only are they still getting above asking, they're still getting above asking at those elevated prices, at where the prices have took. Those homes that sold that had 50 offers, they set the baseline, these new listings, they're listing at that baseline and they're still getting higher than that. So, you know, anybody who thought the prices were overnight because the rates went up, going to drop, you know, 20, 25%. I'm smelling blood in the water. I'm taking advantage of it. I think those people, you know, they're buying what, what is being sold in the media right now, which is that everything's going down.

You gotta love how the media always reports this stuff. I mean, the foreclosure numbers and maybe you're gonna cover that. I can't remember because I, you know, I saw this presentation. We'll cover it, but, you know, oh, foreclosures are up by 130%. Well, compared to what? There were like, no foreclosures before. So it's just, it's so ridiculous. Yeah, well, so easy to deceive with these headlines, you know, but, but the unaware person who isn't listening to this show, you know, the. We'll call it the Low Information Investor. Right. They just don't get it. They're just fooled by this hyperbole.

Yeah, yeah. And if you start at, you start at one foreclosure, you get three, they would tell you foreclosures went up 300%.

So which is, which isn't a lie, but. Yeah, right, exactly.

And then you're starting to see, you know, price reductions going up, which means that people who are starting at that elevated price point, you know, where the run up, you know, went to, as far as, like the homes that got 50 offers and they sold for 700. And now you're listening at, you know, you're trying to push it, maybe go to 725, 750. You're starting to see a little bit pushback there, you know, because right now, as of last week, about 27% of all homes had price reductions in a normal market. Normally, historically, you're looking at about 33%, so we're still lower. But again, that, that, that number definitely is climbing as people try to push the market, keep pushing the market, and they're starting to feel a little bit of resistance as, as, you know, rates do go up and then total inventory, Altos research, I really love the data they put out there. And the reason is because their data is actually homes that are available, whereas national association of Realtors data is homes that are both active, under contract and pending, and, you know, have contingencies and things like that. So Altos tracks it really closely, and inventory is up from where it was last year. Right now there's roughly about 419 on the market last year. Same week was about 353,000. So it is up. But when you consider how low this is historically, I mean, last year was historic low at this time of the year. This year is basically like the second lowest of all time as far as years are concerned. So we're still super low. And you got to keep in mind that inventory begins to slow down once we get towards the latter part of the fall and get into the winter, and, you know, inventory sinks again at that point in Time. So how high can this inventory get to? It's assumed that we need to get probably to four to six months worth of inventory inventory to hit a balanced market. The problem is right now the Fed is trying to, you know, kind of fight a supply issue by dampening demand. So they're using a blunt tool in interest rates to try to solve an issue that interest rates can't necessarily solve. I guess could help a little bit. But you got to keep in mind that people don't just buy a house because they're, you know, thinking it's a good time to buy. You know, people buy houses because they hit the ages of 28, 34 Peak Home Buying agents, they date, they mate, they get married, they have kids, they buy a house. So we're hitting the largest demographic patch ever with millennials ages 28 to 34. We have more 28 to 34 year olds now between 2020 and 2024 than we have had at any four year stretch in United States history.

This is all while, by the way, I want to just tell y', all, wait till Those people are 42 to 46 and they reach their peak earning and spending years, okay? So that's one thing to note. And then wait 15 years. Ish. Give or take, because it all happens over different timeframes and there starts to be this giant transfer of wealth from inheritance. I mean, like, do you realize how this is going to impact the price of housing? It's going to be incredible.

Yeah, I totally agree, totally agree. And then here's the crazy thing. The thing that always frustrates me is you get the Wall street guys and the Wall street gals who are like, oh, interest rates are going up, everybody's going to sell, okay? They don't realize that real estate and stocks, it's not the same thing. People don't just wake up one day and say, let me move my kids out of this school. Let me, let me move my family. Let me come home and tell my spouse, hey, we want to make an extra couple bucks. So we're going to sell and uproot our whole family. It doesn't happen that way. Now, on top of that, here's the stats. Nine out of 10 mortgages, homes that actually have mortgages in this country have an interest rate below 5%. This is called the lock. In effect, if your rate is below the prevailing interest rate when you sell, why would you sell and then take out a rate at, let's say, 6, when your current rate is, let's say, 4% and on top of that, you're going to have to pay more money for the house. Your monthly payment is going to go up by four figures, most likely. And on top of all of this, 40% of all homes in this country don't even have a mortgage at all. And the average mortgage that is out there, you know, the average LTV nationwide, the average LTV LTV is 30%. 30%. Which means that if somebody owns a $500,000 house, the average mortgage on any house that's 500,000 is about $150,000.

That's what I'm saying. Show me. Show me the distressed homeowner. They're just not there.

They don't exist.

If you're calling for a market crash, a few things are necessary. You have to have a huge pool of. Of distressed homeowners that cannot afford their house, that have no equity, that have no skin in the game, that are willing to walk away, and they have to walk away for something better. That is a lower interest rate.

Right, right.

So what is going to cause masses of people to put their homes on the market, to go into foreclosure, to do short sales? Answer, nothing yet. Someday there will be changes and corrections in the market, but we are just so far from that. It's shocking that people are out there with this parade of market crash stuff. It's just complete falsehood so far. I want to always put the disclaimer so far.

Yeah, Jason, 2006 to 2011, we had forced credit selling. We had funny money out there. People who could breathe on a mirror and get a loan and everything like that. We don't have that this time. The average person taking out a loan today has a credit score of 776. I was reading a study yesterday. I think it was from Black Knight, I believe, and what they said is the average homeowner right now has around 175,000 of tappable equity, which means they have a lot more equity than that in the house. That's how much they could actually pull out if they wanted to.

Right, right. And that FICO score number that you talked about is. Is, I think the average buyer. Right.

Average buyer.

Average buyer.

Buyer.

And so that is extremely high. A fico score of 777, you said.

I think 776.

Okay. But let me also share with you the number. And I just shared this on a presentation Monday of existing borrowers. Their average FICO scores are 751.

Yeah.

Okay. These are like golden borrowers.

Right? Right.

Yeah. It's just yeah, yeah.

And again, all time low delinquency rate, all time low bankruptcies right now. So where is, there's no forced credit selling. So you got to tell me, because if you're going to make the case, if somebody out there wants to make the case that prices are going to drop, there's going to be a crash, where's the supply coming from? Because everything that leads to a crash is an oversupply with no demand. We have all time high demand because we have the largest patch of, of people, you know, who are hitting household formation age ever right now between 2020 and 2024, all while we have all time low supply. So I mean, you're making a case that like a nuclear war is breaking out and everything's going down and if that's the case and everything goes down. Right, but we don't bake into the cake nuclear wars and scenarios. Right.

So yeah, I mean, if there, if there's another more severe pandemic than the last one, that was basically a severe case of the flu and a massive overreaction. If Putin launches a nuclear missile, yeah, all bets are off. If the Fed raises rates to 10%, that's going to radically shift things. But you're still not gonna put everybody who currently owns a home in distress by raising the rates to 10%. You're just gonna stop the demand, Right. You're not going to move people out because those people that own the homes and have existing mortgages now, their mortgage just became that much more valuable. The higher rates go outside of the mortgage they have, the better off they are actually.

Yeah, definitely.

The value of their mortgage and their house, because it's attached to the mortgage, actually goes up.

Yeah, yeah, yeah, it's, you know, as we said for the past number of years, the debt was the asset and the asset might have been more of the liability because of how low debt was and how low interest rates were. And here's a crazy one, right? So there's 39 trillion, 39 trillion worth of US real estate housing stock. 27 trillion of that is equity. Only 12 trillion of that is debt. So for the 39 trillion of real estate in this country, 12 trillion is debt, 27 trillion is equity.

You know what I'd love, Kyle, is I'd love a comparison of that debt to equity ratio to the stock market. In other words, what is corporate debt versus equity? You know, if you look at the market cap of all the companies on the S and P and the amount of debt they hold, I'd be curious to know, you know.

Right, right. You know what's even crazy here, Jason too, is that look at this chart. Now again, if you guys are listening, you won't see this chart, but what the chart shows that from 2008 to about 2022, mortgage debt outstanding barely moved. Barely moved at all. At all. So I mean, we kind of hovered around that 10 to 11, 12 trillion in debt and equity went up. So let's make your case. Let's make somebody's case, somebody's case out there that says everything's going to crash. Okay, well if everything crashes, do you think values are going to go down by perhaps, let's say 20%. Okay, well, values go down by 20%. The 39 trillion worth of real estate is now worth, you know, 31 trillion. Right. And there's still only 12 trillion in debt.

Right.

Oh, like the loan to value ratios are still incredibly, incredibly healthy.

I mean, even if they go down more than that, say they go down by 30% or 40%, people are still in a very positive equity stance.

Right, right. And they're not forced to sell.

Yeah. And people, when they have positive equity and they have extremely low rate mortgages that are locked in for three decades, they're not leaving.

Yeah. Doesn't make any sense to.

Yeah, yeah.

And then, you know, right now, as I said earlier, we have to probably get to like four to six months worth of supply. We're at about 2.6 months supply right now. This is according to national association of Realtors data. They actually just put this out yesterday. So I just updated this as of Yesterday at about 2.6 months worth of inventory right now at the current sales pace, we got to get to 4 to even see typically what historically would be about 4 to 5% annual appreciation. They could get more towards like 6 months of supply to hit a point where historically you'd have like 2% or so annual appreciation. So we're still way behind the curve on that. There will be a supply of new homes hitting the market that, you know, were delayed, there was construction delays and things like that. But with that being said, keep in mind the new supply that does hit the market. Builders right now, they have permits to build a lot of houses. They've been approved on permits. They're not sticking shovels in the ground. Why? Because when interest rates go up, builders, they saw back in 2018 when interest rates went up, they said we're going to slow down in the building here. And the reason we wanted to slow down is we want to keep our margins High. So if interest rates go up and buyers can't afford as much at 6% versus what they could at 3, 4%, they'll just wait until rates go back down and they could build again and then they could, you know, get higher prices for these homes and keep their profit margins high. There's no reason they're not forced to build necessarily. And then, you know, if you look at national association of Realtors, you know, data on inventory going all the way back to 1982, we are still, I mean, we're near all time lows. The all time low was last year. We're just barely above that all time low right now. It is crazy, crazy, crazy how low we happen to be, you know, on inventory. And everybody knows this. We're already, we're coming into this at 5.5 million homes short on the supply side. Now it's estimated by, you know, all these different economists, in particular, Dr. Lawrence Yoon with the national association of Realtors.

A couple of times.

Yeah, I remember listening to him on your show. And you know, what he said is we have to build 1.5 million homes a year to just stay neutral at that 5.5 deficit. We can't even build 1.5 a year. So this gap is getting larger and larger. As that gets larger and larger, we have a huge supply issue. We have all time high demand coming into the market literally just because people are breathing. That's all it is. They're just breathing. They're hitting that age where it's time to buy a house. And again, this gap's now going to get even widened. I saw today Jay Powell was, he was before, I think, I think it was before Congress. I was reading some of the transcript from it, but somebody asked, they said, hey, if you raise interest rates, don't you have a supply issue? And won't that lead builders to kind of slow down building, which makes that supply issue even worse. And his response was, but it's going to take some out of demand. So there's two things you have supply and demand. It's not just demand. It's not just supply. You have supply and demand. So again, they might be trying to fight an issue that they're having a tough time with.

So let's just unpack that a little more. So the Fed is creating demand destruction by tightening the money supply, raising the rates. Okay, so that's demand destruction. But what you're saying, which is a good point, is that you also create supply destruction with the same blunt tool the Fed has.

Right, right, right.

And that's the problem. And folks, I remember seeing the interview on 60 Minutes with Ben Bernanke during the Great Recession. It almost felt. Felt like the way I was reading him is that he knew he was lying during the interview and he wasn't a very good liar. And he just sort of said, well, you know, we have tools to stop inflation when that becomes a problem. Right. And the reality is, yes, they have the tool and they're using it now. And you see how the tool is like a bull in a China shop. And this is why I'm so critical of the Fed right now, because they just waited way too long. They should have cooled the economy down a year ago more gradually. And this very blunt tool is, it's just reckless. And it actually, like so many things the Fed and the government do, is it. It hurts the people they say they're trying to help.

Right, right, exactly. And you see this here with this, this chart on the screen right now, you know, with completed housing data. So leading up to the 2008 financial crisis, we were overbuilding like crazy. There was three things that were happening. We were overbuilt, number one. Number two, there was funny money, loans. Anybody can get a loan whether they were qualified or not. And number three, we hit a lull in a demographic patch. None of that remains true right now. If you look at the lead up to 2008, we're building, building, building more and more and more until we got to the point where we were building like 2.3 million homes a year, completing 2.3 million homes a year. If you look now, post 2008, look at how little we've built. We are incredibly underbuilt. And while the next year we're going to have more house completions because supply chains are finally starting to get supplies. They've been trying to build houses forever. We're going to have more. That's going to stop right away because when these interest rates go up, if you look at builder sentiment data right now, it's tanking their sentiment data, which means, hey, if we're not confident about building and things like that, we're going to stop building. We'll just hold off a little bit. And when that happens, the supply goes down even further. So, I mean, we have a really, really big supply issue here. And then furthermore, this is a great chart. This chart here shows you.

I used the same chart before. Yeah, yeah.

This chart here shows you leading up to 2008, the amount of foreclosures and bankruptcies. We, you know, we've had and things like that. So leading up to 2008, starting around 2005, it started as far as the bankruptcies, the foreclosures and things, you know, of that sort of. We got to a point around like 2008ish, you know, 2009, 2010, where between bankruptcies and foreclosures, you know, you were having about 500,000 or so somewhere in that ballpark. It's just not happening right now. We have almost no foreclosures at all. In fact, right now, currently, the April data show that we had delinquency rate of 2.8%, which was an all time low. It is never in the history of tracking data ever been that low. Nobody is getting foreclosed on. Not only that, delinquencies is not talking about foreclosures, that's talking about, have you missed your monthly payments? Because here's the thing, those 2.8% that are delinquent, they have so much equity that they'll just sell. So it's not going to go into foreclosure, right? And again, for the first time since 1992, cash exceeds total debt. In other words, for the first time since 1992, we have net negative household debt. Net negative household debt, which means people have more cash than they have debt for the first time in 30 years. So people's balance sheets are incredibly, incredibly, incredibly healthy. Extremely healthy. And if you look at the credit scores that people who have been buying houses over the past decade or so, what they look like? I mean, this chart here, I mean.

Kyle, I used this chart last night in another presentation. You know, we're getting a lot of our data from the same places, clearly. And so this chart is amazing. I mean, folks, leading up to the Great Recession, I was in the mortgage business. I owned a mortgage business, okay, in Orange County, California. And I remember getting emails and even faxes too back then from our wholesale lenders that were the wholesalers, you know, and we were the retail mortgage branch, right? And they, they would send us things. I mean, they were ridiculous. I took screenshots, I put them in my PowerPoint presentations. Back then, Kyle, it was literally like this 560 FICO score. One day out of bankruptcy, one day out of foreclosure, no verification of income, they'll make a loan for 90%, 95% LTV.

Yeah.

This has not happened, folks, in 15 years. Now, this kind of underwriting, okay, these borrowers are solid. I mean, this chart he's showing shows you that a huge proportion of borrowers have credit scores exceeding 760 and another big proportion from 720 to 750. Anything above 720 is considered fantastic. Okay? And if you go over 760, you're like golden. I mean, that's phenomenal.

Yeah, Jason, if you look at these numbers, like about a year ago and even today, it's just, there's been, you know, less homes sold as opposed to a year ago. But if you look at a year ago, there was about, you know, if you look here, what percentage are we talking? We're talking like nine out of 12 mortgages. So 75% of mortgages had credit scores in excess of 7, 67 60. So, you know, where is this? Is there funny money? Some people are trying to tell me. Yeah, but people are getting these loans and these high priced houses, low down payments. Okay. You're also making the case the reason why the prices went up was because there was 50 bids. So now try to make the case to me that in a 50 bid bidding war, you won with a three and a half percent FHA loan where you did not show proof of funds that you had cash to meet any appraisal issues. So it. Save me, you know, spare me the bull, basically, right? So it's that people will just try to come up with any story they can for why, you know, they're not wrong when reality is they're wrong. So, and again, as we talked about, you know, all time low delinquency rate, you know, nationwide, 2.8% all time low. It's never been that low before. And that's just people again making their monthly payments. That's all it is. And you know, this here, I love this chart here. This chart here that we're about to talk about shows, you know, basically what is your monthly payment divided by your weekly earnings. And if we look at this chart here, this chart goes back to like the late 1980s, and we are near all time lows in regards to what your monthly payment is compared to. Which is the right question to ask, right? It's always the right question to ask compared to what you're making. So when you look at this chart here, you see that your monthly mortgage payment as a percentage of how much money you're actually making is near all, you know, near lows. And again, granted, this chart goes back about 35 years. It's near the lowest it's been in 35 years. The lowest was 2013. We're just close to that, you know, so people's balance sheets are so Healthy. And people can't wrap their heads around this because all they saw was prices going up, and they couldn't understand it. Again, the reality is wages have gone up as well, you know, so wages have gone up. You know, we have 11 million job openings in this country right now. When you have 11 million job openings, you know, typically a lot of job openings leads to higher wages, you know, so we're seeing all that before our eyes right now, right?

We are. Now, before you go on, I just want to go back to that chart, if you would. I just want to say a couple of things to play devil's advocate a bit. What, you know, always ask yourself. You know, what I say on the podcast all the time, Kyle, you can't hear the dogs that don't bark. Right. What isn't this chart showing us? And you're absolutely right. The mortgage burden on people is extremely low compared to history. But what it doesn't show us is what is the burden of expenses, including debt and just other expenses. Like, you know, they're not a debt, but a health insurance or, you know, anything else these households have in their life. Right. It doesn't show you that. So health insurance has gotten a lot more expensive. Right. That's more of a burden. Right. But comparatively, it would have to get. I mean, to be at the early 2000s or the 1980s levels, that burden would have to be so dramatically high. And it's not that high, but it is higher. So I just want to share that to one extent.

I do have a chart on that, too, Jason, so we'll go over that in a second here. And again, this is the demographics thing. This is the thing that I wanted to really stress to everybody, because a lot of people don't pay attention to just simple stuff like demographics. But if you look at this right here, look at the big waves. Look at the big waves. As far as, like, where the biggest patch of people is, you know, as far as people being alive right now in this country, they're between these ages of about 28 and 34. Now, think about this. In 2008, you had funny money. You know, you had anybody getting a loan. We were overbuilt, and we had this. This was the disaster. Big drop in population. These people here, these are the people 28 to 34 in 2008. It was the lowest population patch that we have had in decades and decades and decades. And then it went up. It was. They're surrounded by the boomers here and this little group in the middle, they are the Low. The low, you know, the low group as far as like population is concerned.

And so that group, that group now is about 42 to 50 or.

Yeah. In that vicinity.

Yeah. So. So they've gotten older since then and that is a demographic lull. But, but I don't think that's huge. Right. You know, but it is a factor. I agree.

Yeah. And this shows just the biggest five year cohort. So. And you know, this is the 2021 chart. But the biggest five year cohort for, you know, people in, in 2021 was ages 30 to 34, the second largest, 25 to 39, the third largest, 35 to 39. These are all people either entering or in peak household formation age. So you have the biggest demand drive ever of people who are going to be first time homebuyers buying houses. Because you got to remember, typically if you're like a 50 year old selling a house, you're also going to be buying a house. So it kind of evens out. But when you're that first time home buyer, you're not selling something to buy, you're buying, you're a new buyer entering the market. So this is where this huge demand has been coming from right here. And you look at this here, just, you know, more charts on this. But what's the most common age? What's the single most common age in 2021? The most common age is 31, the second 30, the third, 29, the fourth, 32, the fifth, 28, the sixth, 33, the seven, 35. You look at these, this and you see to yourself, okay, wow. Now I'm seeing where all this demand is coming from. Because I as a broker work around, you know, the New York City area. And when I'm in the North Jersey burbs, when Covid hit, I'm like, I guess everybody's just leaving, you know, New York. But I would see the people who submit the offers, they're not from New York. They're coming from like, you know, other suburban areas. Maybe they were living at home, maybe they were renting a place. They literally what was happening? I couldn't figure out the demand. I just thought it was people, you know, fleeing out of the city, which was definitely important, you know, as you'll see in a little bit, but also as people just literally breathing, you know, they just hit that age where it was time to buy a house is what happened in that case. And you know, as far as like the, you know, investment side of things, we built 5 million apartments over the last three decades, however, we've had more renters than that enter the renting market. So, you know, despite us actually building a decent amount of apartments, we've just had more people who are seeking to actually rent apartments. And there was apartments available. And we're seeing this, you know, kind of come out in the national vacancy data. So as vacancies have gone down, naturally what happens, you know, rents go up and we're seeing that almost as a perfect correlation here. So, you know, again, as the vacancy rates go down and as some people get spooked from buying because they're like, oh my God, interest rates are going up. I don't know when they're going to stop. I think there's some people out there who genuinely believe that we're going to see like double digit interest rates on, you know, loans. I don't see that happening. If that happens, you know, it would be a little bit unpredictable and they'd be trying to tank everything at that point. But with that being said, I think we definitely have a buying window right now. A buying window because there are people that are fearful, there are people that are saying, you know, let me rent. And you kind of can't blame them because right now nationwide it's $839 less per month to rent than it is to own. That's a huge delta. That's not a little bit of money over the course of a year that we're talking like $10,000, $10,000 cheaper per year right now nationwide on average to rent versus versus own. And we're seeing this because renters are realizing this. They're realizing if I move and I move to somewhere else, I'm going to have to pay significantly more money to rent because obviously retention rents are lower than what new leases are going to be. We have all time high retention rates throughout the country right now. And obviously you can't renew your lease unless you're paying on time anyway. And in May, the data out there by Jay Parsons, Jay's a great rental housing economist. Jay's data shows new leases that were signed 19 and a half percent more than the prior tenant. That's an all time high. And it's no secret because people a, it's much more expensive to own versus rent right now. So it's driving a lot of people towards rentals. And then number two, there's such an undersupply of it. We're having an all time high demand patch hitting quarter 1, 20, 22. Also according to Jay, we had the highest demand ever for Apartments. And you'll see this, I'll show you in a second here. But as far as how high the mortgage payments have gone and things of that sort, this chart here by John Burns shows it, shows it on the chart. It is $839 more than this this month, as of this month, to own a home versus rent a home.

You know what's always been interesting to me about this is that the apartment owners, and you're in the apartment industry, I'm in the single family home industry. The apartment owners have always been so much better at increasing rents and really just milking the yield out of their properties. Whereas single family homeowners, not very good at raising rents. And folks, single family rental property owners listening, you gotta get better at this. Don't let your property manager fool you. You have a lot of pricing power in this market. And the rents have yet to catch up with the prices. They're still lagging way behind the price increases. So don't be afraid to raise your rents.

Yeah, and single family home rents nationwide are up roughly about 15% year over year. So if you're only doing like a little light bump, your tenant's probably just saying, oh my God, you know, I guess they don't realize, you know, if I were to leave here, I couldn't get a place for anywhere close to what they're renewing me at. So you got to always think, you know, what's their alternative? If their alternative is going to be something higher, they're going to stay. So just, you know, people just got to do their research a little bit.

On that, you know. Look, folks, I've been talking to you a lot lately about Tina. T I n a, there is no alternative. That's the acronym. And your tenants live by the TINA acronym just like investors do.

Yep, exactly. And here's the thing, there is a lot of room to run on rent still. Because when you consider the alternative, again to your point, the alternative is to buy something, it's going to cost 839 more per month. And on top of that, they have to win a bidding war. And to likely win a bidding war, they have to put up a significant down payment, which they might not have. But when you compare renters incomes versus asking rent versus in place rents, there is a huge delta here. Huge delta. So because renters incomes and everybody's incomes for the most part has inflated along with inflation. You know, once people have that inflation psychology, they go to their boss and say, look, I can't afford my bills because everything's starting to go up in price. You need to raise my wage. When they raise the wage again, they can afford to pay more rent in that case. And that's exactly what we're seeing across the country right now. And if you look at apartment renters, incomes where they've gone since COVID Right. Look at this here. When Covid started for A class renters nationwide, their average income was around $72,000 for a class rentals, as an example. Right. They're getting close to $100,000. That's, you know, in that case, that's 45%, you know, income growth over two years. That's crazy when you look at that. And it's also happening in both the A, you know, the B class and C class space. Not to the same degree, but it certainly is happening as well. And you know, April rent growth as we talked about, you know, May, this is April's chart, but May's chart actually showed 19 and a half percent rent growth nationwide. So again, the rents are certainly going high. And as we said, quarter one, 2022, the highest demand ever recorded in US history for apartments. And again, it's just because that demographic patch that we happen to be hitting and where are they moving?

Let me ask you a question here though. You know, I have heard, and I haven't taken deep dives into this because it's not my area as much, but I have heard that the apartment market is at the risk of being overbuilt. Now, of course, this only means the expensive class A apartments because they don't build low cost class C apartments at all. Just like they don't build entry level housing anymore. But do you see a risk of that, Kyle, of apartments being overbuilt?

I guess it depends on the micro market. That's more of a micro versus macro thing. I mean, the areas that we happen to invest in, certainly something we keep an eye on. Like if there's, you know, a lot of new construction in the pipeline, we'll probably try to avoid that area just because you don't want to be competing against 2023 product when you have a 2010 build, you know, so 1970 build. Right, right. Especially that. Especially housing. Yeah, yeah, but that's the thing, you know, workforce housing. It's kind of like a catch 22, because the class A renters, their incomes are going up incredibly high and they're not as much affected by inflation. The class C renters with a $40,000 median household income, their incomes are not going up as high and they're much more affected by inflation in that case. So we, we've leaned more towards like the A class space. And then for this year in particular, the 10 year treasury is the one to keep an eye on as far as like where we see 30 year fixed rate mortgages going historically. You know, the chart that I'm showing on the screen right now shows that on average, typically, almost always, if you just add 175 basis points, the 10 year treasury, that's where your 30 year fixed rate loan happens to be right now. That's obviously not attached right now. You see sometimes them, you know, posting 30 year fixed rate loan rates at, you know, 6% when the 10 year treasury is only showing about, you know, 3.25 to 3.3 right now. So the market's kind of baking in. They think rates are going to go higher. But we could be at a point right now where we're really leveling off and maybe perhaps even coming down as, as of a couple of weeks ago, we went three straight weeks with mortgage rates coming down every single week. So we are starting to see a little bit of a level leveling off there.

A lot of people disagree with you on that one, just so you know.

Yeah, I know, I know.

They think rates are going up to 9% or higher in mortgage rates.

Yeah. And this is a big one I want to make mention of because there's a chart, this chart was put out there. So this blue line here shows the savings rate and the green line, you know, is the, you know, historical norm. So right now the savings rate nationwide, about 4.4% of their income, which is a little bit below historical norms. What they are failing to realize, these same people, when they're saying, ah, this means everything's, you know, crashing, they fail to realize this gap here. When Covid started until about two months ago, there was about 2.5 trillion in excess savings saved up over that time. So while the savings rate, the current savings rate is going down, these people are sitting on literally not just a trillion trillions of dollars in excess money that was saved up. And this chart shows it the best. It shows how much money was actually saved up during this point in time. Because again, people, they weren't going out, they weren't spending as much money for a period of time. They saved up close to $2.5 trillion in excess savings over just the past couple of years. So if that savings rate even goes negative, they got to start taking a hit out of this. It's going to take a lot to Take a chunk out of that there.

Right.

And this is the chart we were talking about. So your household financial obligations as a percentage of your whole disposable income. This would account for all of your expenses. We're still near all time lows. And this chart goes back to about 1980. So as far as a percentage is concerned, now it's up from where it was a year ago or so. Obviously. However, look at it historically. Again, compared to what? Right, compared back to the 1980s, we're still almost at all time lows.

This is a chart I do not have. This is a new one.

Yeah, yeah. So this is household financial obligations as a percentage of your whole disposable income. We're near all time lows on this. This was Last updated on April 4, 2022. I'll have to see if they've updated it recently. But this is the chart that I look at because I say to myself, you know, if they keep talking about so many people are in debt, well, it's not mortgage debt, it's not this debt. What are you talking about? Are you just making it up? Because show me the facts. And again, I'm totally open to seeing the facts. I'm totally open to see another point of view. And I've looked for it. I can't find it, though. I truly do look for it because I make my investment decisions based off that. If I thought things were going south, I'd start, you know, slamming the brakes, to be honest. I'm hitting the gas because I think right now is the buying opportunity.

I, I agree this is just to.

Get into inflation, but actually over the past week, week and a half, we've seen five year break, year break even inflation go down, which means that for the next five years they're actually starting to see data that's going to show them inflation going down. And core PCE has actually gone down for three months straight. Now we'll see what the next print shows. But core PC, which is the Fed, always says that's their preferred measure. It has gone down for three straight months. So if inflation goes down and we see retail sales go down a little bit, unemployment tick up a little bit, they might reverse course sooner than we think on the interest rates. That's speculation. I can't say for sure. I can't say for a fact. Nobody knows for a fact if we knew.

I'm just hoping Jerome Powell doesn't think he's Paul Volcker.

I agree. That's the only, that's the only issue we run but you know, we could be in more of a long term inflationary period as we're starting to see globalization, you know, not necessarily end, but we're starting to see it, I guess. Yeah, diminishing. Yeah, diminishing a little bit.

Yeah. So for the most part, that's again, one of the things that people always think about, like with inflation, how does that relate to real estate? I have a chart here that shows that, but it shows is that real estate likes inflation. Really does like inflation. Yeah, it's a great inflation hedge to have, obviously, as far as the debt side is concerned, as far as the appreciation side is concern. And we'll finish up with this. We'll wrap up with this. Right now, in my opinion, I think we're looking more so towards like what the 1970s were into 1980 as opposed to 2008. So I did a study on this, I did this myself, and I compared what the average CPI was in the years 1970 to 1979, what the Fed's funds rate was as it went up to all the way, as high as 11.2 and 1979, even higher in the early 80s as well. And how did that affect home prices? Well, from 70 to 79, which might be unfair because, you know, 71, we all know what happened in 71, and.

That whole decade is such an anomaly, but.

Yeah, go ahead, Exactly. But from 70 to 79, despite inflation being high, despite the Fed's funds rate, you know, going up, median single family homes went from 24,000 to about 55,000. That's 128% increase in value, which is about 13% appreciation year over year. So then my question was, well, what happened in 80 and 81 when Volcker went nuts? Right. So in 1881, in January 1980, the median home sale price was 55,000 in the U.S. two years later, in 82, it went up to about 62,000 for roughly a 12.3% increase, which is 6.15% annualized. And that's when Volcker went insane and raised the federal funds rate all the way up towards like 20, right in that ballpark. And that's despite rates going up. Now here's the crazy part that nobody necessarily always thinks about. We typically buy real estate. Do we buy with 100% all cash or refinance it? We finance it, we buy it with like 25% down. The thing is, for every one person, when you finance it with only 25% down, for every 1% real estate goes up in value. That's a 4% return to you every 10%, that's a 40% return. So if you really look at these numbers here, when we consider that over the course of this period of time, we saw about 7% annualized appreciation once we got out of that Volcker little issue between 82 and 88, that's really a 28% annualized return. And the thing is, here's the big thing. How do we compare this to the stock market? I always like to compare it to different things. 70 to 79, interest rates went up. Inflation was high. What was the total return on the stock market that decade? 12% from 70 to 79. Real estate, 13% annualized. And that's if you use no leverage to buy. That's if you use no leverage. If you put down 25%, that 13% is now 52%. So we're talking if you just put down 25% and your tenant pays your mortgage, 52% return in real estate versus 1.2% return annually in the stock market. So I'll finish up with that because I think we're more towards that period in time than we are towards 2008. And, you know, people can let us know what. What they think on that one.

I think that's a really good point, Kyle. But here's what you didn't say, which is also very important if you didn't buy the property. And, well, you did talk about the stock market. But say, say you're looking at today and you're saying, no way on the stock market, no way on crypto, and I'm too scared of real estate because now the interest rates are higher and the markets, you know, obviously appreciated quite a bit. So you keep your money in the bank. And that is a sure way to lose 15% annually, if not 17% annually, because inflation is eating you alive with your cash. You know, you've got to really look at that whole picture of what happens in the absence of doing something so very interesting, Kyle. I gotta wrap it up, but thank you for sharing this. I really enjoyed your presentation when I watched it on video. And I appreciate you coming on the show to share this stuff, give out your website and tell people where they can find you.

Sure. Yeah. Thanks for having me on, Jason. Best way to reach me is through my email. My email is kylekovacmail.com and you can follow me on social media. I post a lot of these charts on my Facebook page. And, you know, my name is just Kyle Kovatz and you can friend me on there. And then. And then, yeah, I'll consistently try to put out as many charts as I can.

All right, Kyle, thanks again for joining us.

Thanks, Jason. I appreciate it. Take care.

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