THE REAL ESTATE DOOM LOOPS SHOCKING OUTCOME

SPEAKER_1 (0:01)

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Michael Zuber (0:32)

Unfortunately, folks, we need to talk about what is called the real estate doom loop. Now, the story goes that higher interest rates are going to cause a housing crash. You obviously know that's not the case. But I do believe a doom loop is occurring and the outcome or the series of dominoes that is about to happen will shock you. And if you are not prepared, hurt you. So, what do I think will happen? So, first thing I'm going to ask you to zoom out, stop looking at the headlines, and we're just going to have a logical business discussion. So, let's get it started. Step one. Obviously, interest rates are rising. What does that mean? Well, in the residential space, it actually means a couple of things. In the commercial space, it means a couple of things. So, let's break those down. In residential, it obviously becomes even less affordable. We are already suffering from record low affordability. It is only getting worse from here. And again, this higher interest rates hurt buyers and sellers. So, you are going to see less transactions. You are going to have less turnover. You are going to have people cancel or take their housing off the market, have expired listing, cancellations, withdraws. All of this is occurring in the residential existing home market. But, there is another side to the single family housing market, and that is builders. Again, what are we seeing right now? Well, builders are blowing out inventory. Builders are taking it on the chin. They are giving big discounts. I have heard people in Texas getting 3.5% 30 year mortgage. Folks, those builders are taking it on the chin. They are eating margin. But, you know what they're doing? They're not building anymore. Builders have stopped. They have frozen in their tracks. They are letting land go. So, what is going to happen shortly is the builders will eventually run through their inventory and there will be nothing left. They will be building on contract versus building on spec. All right, let's switch to multifamily. We obviously know, and we've had conversations over the last couple of weeks, that banks are tightening the screws on dumb syndicators. They are having to raise millions of dollars or lose properties. They are hurting their current investors by giving preferential return to new investors. It's all kind of suck. But you know what else is also happening? New development has stopped. The higher that the interest rates go, especially on the short end where construction loans are anchored, they just won't build. So here is the real estate doom loop that leads to inflation. And of course, inflation leads to higher interest rates. Folks, we are at a dangerous time where higher interest rates could cause higher inflation, which could cause higher interest rates. Let me walk it through you. Step one, the cost of capital rises. That is happening right now. Step two, building new units, new construction, turnover, transactions, stops, grinds to a halt. Step three, supply falls. Again, demand, instant. Supply will fall off in 90 days, in six months. And then, here we go, rental demand will increase. Why will rental demand increase? Well, folks, you can't buy a home. It's unaffordable to buy a home. And you don't like to live with your parents forever. Death, divorce, transfer, all of these things. We have future buyers who would normally buy, who simply won't, and they will choose to rent. So again, supply is going to come down. Demand is going to increase. And what happens with economics 101, when supply is down and demand is up? You guessed it, prices, aka rents, will go up. Now, of course, this will not be immediate. We will probably see the ramifications or the first ramifications of higher rents in six months. It will be in full force in a year.

Lastly, before we move on to the next topic, remember that shelter is 34% of CPI. So if you take the largest single contributor to inflation, and you allow it, dare I say, incentivize it to increase by lowering supply and increasing demand, we could have higher inflation for years to come. Higher for longer could be much higher for much longer. Folks, before we go on to other topics, I want to thank you for being here. I'm actually recording this Sunday evening because I am on a 6 a.m. flight. Yes, folks, 6 a.m. Eastern, that is 3 a.m. Pacific. It is an ugly time, but it lets me get home early. So I'm recording this in the evening. You are watching this when I am at 30,000 feet. I hope you enjoy it. Like, subscribe, comment, you know all this stuff. All right, let's move on to some Fed speech. We got Fed comments from Logan, Jefferson, Cook, Bowman, and Kashkari. Let's start at the bottom today, instead of the top. We'll do Fed-Kashkari first.