RE Market Update: Strong Rent Growth and Resilient Buyer Demand, Conditional Value at Risk (CVaR)
In this episode Jason Hartman provides a market overview, highlighting CoreLogic’s latest single‑family rent report that shows annual rent growth of 4.3%, slightly above his long‑standing 4% target. He then delves into the mortgage landscape, noting that roughly 65% of first‑lien mortgages are at or below 4%, 25% at or below 3%, and that 42% of homes are owned outright. Loan‑to‑value ratios remain modest, indicating low leverage across the market, and the credit‑score profile is dominated by borrowers with scores above 760, suggesting very low default risk. Hartman explains the shift toward new‑home sales, which now represent about 27% of all transactions, driven by a severe shortage of resale inventory as owners cling to ultra‑low‑rate mortgages. He describes how inflation has effectively “destroyed” debt for property owners, providing an implicit cash‑flow boost of roughly $90 k per $1 M of mortgage balance. The conversation then turns to Manny Kim of Giza Capital, who introduces Conditional Value at Risk (CVaR) as an extension of Value at Risk (VaR) that measures the average loss in the left‑tail (black‑swan) region of a return distribution. Using CVaR, Kim shows that income‑property investments have markedly lower tail risk than equities (e.g., a 5% CVaR of ~5.8% for property vs ~13.5% for stocks). They discuss how CVaR can be used to size leverage—allowing investors to target a specific black‑swan risk level—and to optimize multi‑asset portfolios across stocks, commodities, gold, Bitcoin, and treasuries. The episode concludes with a brief debate on whether leverage inherently increases or decreases risk, with Hartman arguing that appropriate leverage can actually reduce overall risk when guided by CVaR metrics.
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Welcome to episode 20172017 and greetings from Ibiza, Spain. Yes, the party capital of Spain and maybe Europe in general. I don't know. The trip continues and heading back to Barcelona after this. It's been an interesting trip. Follow me on Instagram Jason Hartman1 if you would like to see some pictures from my crazy travels and a little more personal touch on that. And also some good real estate information. Not in the stories as much but in the reels. Lots of good real estate clips, short form clips there. If you are pressed for time, the YouTube shorts and the Instagram shorts are a great option to just get some quick real estate investing tips and so forth. All right, so let's dive in. We've got a few things to cover today. First of all, CoreLogic released its monthly Single Family Rent Report highlighting that annual rent growth stood at 4.3%. Now, if you've been following my work for the last 18 or 19 years, you know that I have always said the target to raise Your rents is 4% annually. 4% annually is our target rent increase. Of course, over the past couple of years we've had much, much more dramatic rent increases than that. But if you are getting 4% annual increases, you're doing pretty darn great with all this news about how rents are collapsing and rents slowing down and the rental market is crashing. Well, 4.3% better than my target for the last 18 or 19 years. So again, you've really got to peel back the layers on this news. It's always very misleading. It's always clickbait, it's always sensationalism. But the truth is the truth. And the growth in rent is slowing. There is a deceleration, of course, but it is still very, very strong. And as you know from what I have said, I we are going to see a lot more rent increases in the future. And that is because affordability is so darn low. If you're watching this on video, you of course see this chart. If you are listening to audio only, check out the YouTube channel. We get these up in about one day after they're on the podcast so you can see the videos and the charts and the visual aids. Now this one is really telling. I've talked many times about how we will have a ongoing shortage of inventory for as much as the next 28 years because so many people have these super low mortgages and those super low mortgages are something they don't want to give up. The world has finally realized that the mortgage is an asset. It is a huge Asset for you. I've Talked about how 65% of the mortgages are at or below 4%, 42% of the homes are paid off, 25% of the mortgages are at or Below 3%. Truly an amazing amount, amazing thing. However, this is newer. So this chart, if you are seeing this visually, is really, really telling because what it shows you is a graphical interpretation of all of those different mortgage rates. And you can see the percentage of outstanding first lien mortgages in certain rate ranges. And it is just truly, truly amazing to understand it and comprehend it in a visual way. And you can just see how the biggest distribution is the folks that have mortgages below 4%. I mean that is a giant, giant share of the marketplace. And it'll be interesting in years to come because we are seeing the money move off the sidelines and we're seeing buyers buy properties and they are paying much, much higher interest rates. So as we go forward, it's going to chip away at these low rate mortgages a little bit. But the vast majority of what people are buying is brand new construction. So it's really going to change the percentage distribution a little bit. But remember, the vast majority of that is not mortgages that are paid off, not low rate mortgages that are paid off when someone sells a resale property, but brand new homes that have a brand new mortgage for the first time ever because the property was just constructed. All right? Percent of closed end first lien mortgages by current loan to value. Now this shows you remember about 42% of the homes in the country have no mortgage at all. Right? So here you can really, really understand the idea that the loan to value ratios aren't high, people aren't underwater in any real significant way. Again, not playing into the narrative that this is another 2008, not even close, because it is a very small number of people who are highly leveraged. The vast majority of properties have a very leverage ratio. And again, no distress to speak of, not a lot of properties that are highly leveraged, very low rates and surprisingly resilient buyer demand even in the face of much, much higher interest rates. All right, then we look at credit scores and again, we have looked at this over the last few years. But what are the quality of those mortgages? How good are those borrowers that have these mortgages? The 58% of the people who do have a mortgage, not the 42% who have no mortgage at all. Well, credit scores above 760, 760 FICO score, that is a gold plated Borrower with incredible credit. I mean that is a giant percentage of the market in terms of billions of doll. That is the biggest share of the mortgage market by a long shot. Very few people have credit scores below 719 even. I mean, you know, 720 used to be considered the gold standard of fantastic credit. That has changed a little bit over the years as lenders have demanded better and better credit. But you can just see that a giant percentage of the mortgages are are these just gold plated borrowers with awesome, awesome credit and a very good history of repaying loans. So the chances of them going into default extremely, extremely low. So that's one thing to look at. All right, let's look at the share of sales. Now what we're talking about here is the new home market versus the resale market. Existing and new home inventory as a share of total inventory percentage. And, and over time, since the year 2000, over 23 years, right, we see that new home inventory has gone up and down right where it has made up a higher share or a lower share of the market, depending on how much new home inventory is available. And again, overall new home inventory is not super high, but as a percentage of inventory it is very high because there is very little inventory overall. So again, this is very telling. It shows you that the buyers are buying new homes because very few resale owners are willing to sell their homes and part with their ultra, ultra cheap mortgages. So that same story just continues and continues. And that's why this market just continues to surprise some, disappoint some and delight some. So what do I mean? Who's delighted? Well, people who own properties are delighted because they're seeing great rent growth, they're seeing a solid market, they've got very low rate mortgages, they're getting awesome inflation induced debt destruction. That is the great strategy that pays off your mortgages for you. I mean think of it. If you had $1 million in mortgages over the last year, you basically got inflation to repay about $90,000 of those mortgages for you. Basically free money where you're getting inflation induced debt destruction of about $90,000, which is like having a whole other income, a high income in the household, right? Another 90 grand in addition to all the other benefits in terms of your return on investment on your properties. So it delights those people, it disappoints the crash Bros. The people who want to see the market crash. The people who have been waiting, who have been predicting the market crash. These people who have been thinking that oh, you know, maybe 2011 or 2012 or 2013, 10 whole years ago, maybe that's the time to buy. But they were too chicken. These are the people that lack confidence, that don't have confidence in their own research and their own decision making skills. And they love to see other people fail. They love to rain on everybody's parade because they thought, oh, the market has come back and it's over its skis and it's out, you know, it's, it's, it's too high and it's going to crash again. And it never crashed. And it kept going and kept going and kept going because we have that shortage of housing, especially that shortage of entry level housing, not housing overall, but especially entry level housing, those good rental properties, those bread and butterfly starter home properties or even second home properties, big shortage in both of those segments of the market. And so those people are totally disappointed because they keep waiting and waiting for their chance and they keep missing the boat, you know, the train keeps leaving the station on them and they keep waiting and waiting, thinking there's going to be a crash and it just doesn't happen. But even if it does happen, look, there will always be cycles. There will be adjustments in the market over time. Of course it'll be as a result of high interest rates and we have high interest rates. And yet there hasn't been any significant adjustment at all. I mean, it's just minimal adjustment. Mostly in the very high flying cyclical markets those have seen some adjustment. But again, the linear markets, they're just chugging along very nicely. So it surprises some, it delights some and it disappoints other people as well. This is interesting. Basically, from 2000 until the pandemic, new homes on average made up 11% of total inventory, give or take in in the January 2023 report, this is a tweet that I'm reading that share of new homes reached 27%. A whopping 27% of all sales were new home sales. And you've all seen what the home builder stocks have done. I mean, they're doing fantastic. Home builders are loving this market because nobody's competing with them in any significant way in terms of resale inventory. When existing homes for sale are nearly non existent, a new home at the right price is an attractive option. And that is exactly, exactly what is happening. It is my pleasure to welcome hedge fund manager Manny Kim back to the show. He's with Giza Capital. He talked last time about VAR or Value at Risk and how it applies, how A commonly used stock market technique is applied to income property investing. But now we're going to take that a step further and talk about black swans. Hopefully you've all read Nassim Nicholas Taleb. I've recommended his books before on the show. He's a really great author. Highly recommend him. And we're going to talk about that black swan. It's called Conditional Value at risk, or cvar. So here we go. Manny, tell us about it.
Yeah, thank you, Jason, for having me again. So CVAR is a concept that's related to var. Var value at risk. And it's actually pretty. So the. It's actually pretty simple when you condense it in words. So you can see on the slide, the formula looks very complicated, but basically what you're doing is you're using the VAR that you calculated. So what is the cutoff point that you wanted to do? Okay, so I have a certain investment, right? It has a certain distribution of returns, right. On a bell curve, you know, most of it is around the average, but there are some parts of the return distribution where you're going to lose a lot of money, right? That's what's called the left tail of the distribution, right? Or in common parlance, it's called the black swan. Right. We want to avoid those right, as investors. And this concept of CVAR came about because investors were using VAR to calculate just a risk level at a certain point in the distribution, right? But they weren't calculating all of the different left tail risks that were involved. So some very smart mathematicians came up with this formula and basically it measures the average of all the black swans. Does that make sense? Yeah, but, yeah, basically, like if you have black swans and let's say there's a 50 loss risk somewhere, somewhere there's 20 after a certain point, right? Of, let's say, you want to make sure. Okay, I want to know what the black swan average loss would be below 5% of an investment, right? I can tolerate up to negative 5%, okay. In every given quarter year or whatever. But I want to know if I encounter one of these black swans on average, like, how much am I going to lose? Right? That's what CVAR calculates. So again, VAR or value at risk is looking at risk at a certain cutoff level. Okay? So if you look at the chart on your screen, basically that dotted line that's vertical, is the cutoff point, right? So any return above that, right. I think in the chart it's a negative 4%, right? That's where the cutoff Point is, you're saying that, okay, I want to calculate. When you calculate var, you're calculating, what am I expected to lose at that level of risk? What are my odds of getting that return? Right, which is negative 4%. Okay. C bar is basically saying, okay, any negative return below 4%, like on average, like, how much is that? So you're looking at the average of the tail after a certain cutoff point. In this case, it's 4%. Right? Negative 4%. Does that make sense to you guys? So you're basically saying there are all these bad things that can happen with this particular investment. In this example would be the nasdaq. Then, okay, what is the average of all the bad things that can happen? That's basically what C bar is. So given what we calculated before in the 10 cutoff and the 5% cutoff for both stock market income property, we can calculate the average black swan risk. Right? And that's for the stock market, it's 10%. So you have a 10% chance in any given quarter that you're going to lose 10% actually, on average. Right. That's the most common black swan that you're going to encounter. Does that make sense? Now, for 5%, it's a little bit higher. It's like 13.5 ish. Right. But again, but for income property, in any given quarter, right, you're only going to have a 10% chance of losing less than 5%, like 4% or something. And for 5% risk, it's like 5.8%. So again, like, what this is basically showing income property owners is that you can quantify what your black swan risk is going to be. So this number that I just gave to you guys is the black swan risk, which probably is like, not really a risk at all. Right.
If you really. It's interesting because when you talk about black swan so much, I can't help but think of the COVID era. And it was interesting because everybody said, well, Covid was a black swan, right? Nobody expected that. Taleb was actually on some news station and I saw him being interviewed. He was saying that wasn't a black swan event. Now, I don't know why he said that, but I just never made sense of his argument about that. But regardless, what you think is a black swan being, you know, maybe bad news, right? Real estate was phenomenal during COVID Yeah.
These numbers that I'm showing on your screen, it includes Covid. So let's say Covid was really a terrible black swan event. The 10% and the 5% cutoffs. Even with those, it should be above, I don't know, like seven and a half, like 8%. But it's not, you know, it's below those numbers. So I mean, that shows you quantitatively that income property is in terms of black swan risks, much lower than that of the stock market as well. But I think what the key takeaway for your listeners, especially for income property owners, is that you can quantify it. Right? So let's say you're trying to lever up your property, or let's say you're trying to refinance something or figure out if you want to make additional investments. This gives you numbers, right? So that's really the key is that going back to the Sharpe ratio discussion, given a certain Sharpe ratio you can lever up, you can really engineer the, the amount of leverage you put on for a particular return that you want.
Right.
And it's the same here. Right. Let's say that for a certain CVAR. Right.
All right.
I only want 4% risk, black swan risk. Right. That's what we're measuring. Right. Well then you shouldn't level up your property. Right. Because this is nominal prices with no leverage. But let's say, hey, you know what, I'm comfortable with an average black swan risk of let's say 10. I can take that then. Well, you can lever up the property by 2.5.
See that, you know, Manny, and we've talked about this before. See, that's where I disagree with the sort of traditional concept of leverage. I think leverage actually makes the deal far less risky.
Sure, yeah.
I mean, people, I don't know, you.
Know, people in terms of income, property and all the characteristics. But, and this is a separate topic, but let's say you're trying to engineer a portfolio not just of income property, but you want to include stocks, you want to include commodities, gold, Bitcoin, you want to include treasuries. Then this metric cvar can be used to optimize the portfolio overall. So yeah, this metric can be used to do that. And you can optimize it for an inflationary environment, deflationary environment. You can back test those things and show with statistical procedures like, yeah, this is going to be probably reliable at a certain level going into the future at a certain odds. So you can calculate those things. And that's why I see var, even for a single asset context is useful, but it's especially useful if you're optimizing a portfolio of assets. That's where it really shines as a metric.
Okay, good stuff. Well, thank you for bringing this to us. These are always really interesting, and it makes a lot of people, including myself, scratch their head. But it's really interesting to see the level of depth and analysis that goes into, like you do quantitative analysis, people. It's really fascinating. So, Manny, thanks for joining us. You can find them at Giza Capital, everybody, and we appreciate it.
Thank you so much, Jason.
