On the show today we talk… Definition of Inflation in Real Estate with J Scott!
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Show notes: Definition of Inflation in Real Estate with J Scott!
Today we are talking about the economy with our good friend J Scott!
J is an investor, author of 4 books, and co-host of the Bigger Pockets podcast. And there is a 5th book coming out in a few weeks.
Julie used to be a senior asset master in the area, and she doesn’t even look at her cash flow, but got a big dump into her bank account, and it was from her big 200 unit apt building.
Today we are getting an update from J on where we are going with the economy.
Julie also is into Meet Kevin with Yahoo News.
Inflation
Aug numbers just came out. Things are either getting a little better or a little worse. PCE – has the basket of goods gone up or down in price. Core PCE – You take out energy and commodities. And it’s a more accurate view.
The total inflation number is telling us that inflation is growing very slowly.
If you take out the energy and commodities we are looking at about 7% inflation.
Trailing 12 months
J doesn’t really like this number, but it’s a little over 8%.
He thinks the Fed thought inflation would be going down by now.
Releasing new rate high today
It’s a two day meeting, so we’ll know soon what it will be.
What we are talking about
When we are talking about interest rates we are usually talking about borrowed money. The federal funds rate is the shortest time money is loaned. This is 100% controlled by the Fed. Right now that is 2.25%, but it could go up.
Then we have over rates. Longer term rates. Two year treasury and five year and ten year bonds. The longer out you go the harder it is to control by the Fed.
Mortgage rates are influenced by the ten year treasury rates. So these releases may or may not impact the mortgage rates.
When the Fed raised rates in July the mortgage rates actually went down.
It’s the risk of the unknown
So, the Fed could raise interest rates and we’ll have some certainty for the next month or two.
Rate meetings
There will be three more this year for the federal funds rate.
The reason it’s going on
Inflation is trying to get the rates down to about 2%.
How things have worked in the past
Something they need to look at is public perception.
People think there will be inflation and they act as if there will be inflation, and it happens.
The Fed wants to public believe that we are solving the problem, so they start acting as if.
It takes about six months before you see in the impact of the rate hike.
J thinks what we’ve done already will have a good impact on inflation. And that the Fed is taking a more aggressive response than they need to.
Thinking back to the 70’s
When we had six to seven years of inflation.
What they realized is that if you don’t get inflation down to where you need to be… it can pop right back up. Like taking your penicillin.
The Fed wants to make sure that it’s absolutely in control.
How long is this going to go on
Are there mortgage strategies to buy time…
Is there any other option other than raising rates?
They do. They can control the money supply. Basically reducing liquidity in the market. The opposite of what they’ve been doing since COVID. Quantitative tighting. They are taking money out of the system.
To put money into the system they buy up assets. That’s how they put 9 trillion dollars into the market over the last several years.
So, they can start selling things back to get the money out of the system.
The Fed has said they are going to do this, but they haven’t yet.
J thinks that will have as big an impact on inflation as interest rates.
How does selling assets impact average person?
They wouldn’t feel it. But the banks will have less money to lend. So less money going into the market.
People and businesses will have less money.
Sofr Rate
Adjustable rate mortgages that have rate increases tied to the Sofer.
You may have heard of the Libor Rate. Sofr is just the new Libor rate.
When you get an adjustable rate mortgage it’s set at some amount above that Sofr rate. It’s typically 4.5% over that rate. So today your rate is probably 6.75%.
The Sofr rate is continually changing.
If it’s a fixed rate loan it’s somewhat tied to the 10 year.
The fixed rate is fixed.
The Sofr rate is likely to go up over the next several months. You could be paying 8.5% over the next year.
Adjustable progressive rate
There are so many products out there that are trying to get people into real estate that can’t afford the fixed rates.
The REAL ISSUE
Which is affordability.
We have inflation all the time. Over the next 10 years that value of properties is going to go up. Wages are going to keep going up but housing prices are going to stagnate. So people will make more money, and housing prices will stay the same.
Let’s look at Bothell WA
It’s just Bothell, and values are down 15%, or just down 10% off the peak.
Too many people are focused on one number when there are a lot of numbers we need to look at.
J tells a story about the market
Sellers are selling below what the peak was. But the amount of sales is actually very low. If people aren’t forced to sell… they won’t.
We might see a few sales of people that need to sell, but it’s not a true representation of value in these markets.
We are in a pickle
When rates settle down… if you quit buying we’ll be back to that… Why will rates…
Wages need to catch up to house values.
We will see today’s prices for the next 5 years. According to J. But our wages will inflate.
What about groups and hedge funds
Julie is with Exp and loves it.
We need a new data set for sales from groups and home owners.
The groups are buying a lot of houses right now. In 10 years 30% of single family homes could be owned by institutional buyers.
What’s really needed is that we need a whole lot more building and construction. Over the next 10 years… developers are going to make a whole lot of money.
Julie talks about Novation
This could be good in that the inventory goes back to general public.
It will be interesting over the next 10 years. Will we see deregulation. Will GNAR go away… It will be interesting to see. Nobody knows.
How can we let these corporations buy up everything
Can we get Chris Ricter to talk about data.
Is there anything that keeps J up at night?
Short of too much regulation… as long as J knows the rules of the game… he can adapt. Be flexible and know how to pivot if you need to.
Bigger things than you are going to impact you, and think about them, and be ready to adapt.
Leverage the rules as they are.
J used to flip a lot of houses, and if he were still doing that he wouldn’t be very happy. Think about where you want to be and need to be, and start making plans for that today.
What would you tell flippers right now
Make sure you have a plan B. If you can’t think of a plan B… don’t flip.
For multi family value add people
Have you lost your return now that the rates have changed. You’ve lost your cash flow.
The opportunity over the next few years is the people that have the bridge loans who are coming to the end of their loan term.
If you are getting into a bridge loan now… you are going to be paying for an insurance product.
Multi family investors are paying over a million dollars for the rate caps.
If you invest in syndications…
What’s the worst thing that’s happened to you and how did you respond to it.
Then you ask how much of your own money do you invest in your own deals…
What is J’s prediction for 2023
Checkout show to hear 😉
We will have a recession coming next year.
Julie’s cold call analogy
The pain is one step closer to having it over.
Best piece of advice
Get yourself a runway of a couple years.
If you look at the last time… between interest rate hikes… it’s 2-3 years. J says to give yourself 3 years of runway.
This could be a super blessing!
J’s new book is Real Estate By The Numbers at NumbersBook.com
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