In today’s episode of the Actively Passive Investing Show, Travis Watts gives us an updated overview of the real estate market in Q3. He takes into account our recent federal spending, inflation rates, the price of real estate in 2021, shares price appreciation, and predicted rent increases. Tune in for more information on whether it’s a good time to enter the real estate market.
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TRANSCRIPTION
Travis Watts: Welcome everybody to The Actively Passive Show. I’m your host, Travis Watts, and today’s episode is really just a market update in Q3 of 2021. I’m asked all the time about the economy and my predictions and, “Is now a good time to enter into the real estate or the multifamily market?” things like that. And while I’m certainly not an economist, nor have I ever claimed to be, nor do I want to be, I’m happy to share some real data stats and facts with you all from real economists as to how real estate’s holding up and what’s going on here in Q3 of this year.
So I think the right place to start is to talk about the federal spending that’s occurred over the last year and a half, this crazy, unprecedented amount of money and stimulus rolling around the economy.
Just a quick recap, the CARES Act, which was the initial stimulus through 2020, when the pandemic hit, was $2.2 trillion. That’s “T”, trillion. And then we had the CARES extension of almost $1 trillion, I think it was point 0.9, $900 billion. And then we have the American Rescue Plan of $1.2 trillion. So you add all that up and we’re looking at about $5 trillion being injected into the economy over the last year and a half.
And then on top of that, we have proposed stimulus under the Biden administration; we have the American Jobs Act of $2.7 trillion, I believe, and then potential for a second infrastructure bill of $2.5 trillion. So an absolute insane amount of money that we’re talking about. But what’s the impact to the economy?
Well, first of all, that’s great for businesses who can take advantage, for example, the PPP program that came out, which is the Paycheck Protection Program – those loans were about $670 billion, plus another $325 billion was added to that program. Unemployment benefits of $250 billion plus $44 billion plus $120 billion plus $206 billion. And then we have student loan forbearance in effect at the end of September 2021, here in Q3. There’s mortgage forbearance on top of that, and a proposed $146 billion for expanded tax credits. That’s the proposed American Rescue bill.
Wow, that’s a lot to digest. Hopefully, you’ve kept up with some of that already in the news so that’s not such a shocker to you. The bottom line is, this is a massive influx of capital coming into the economy through various ways. This is a real estate show after all, so I’m sure you’re aware, whether you’re a homeowner or a renter, or you have rental properties in your market, prices are up. I’m sure that’s the case in your market. That’s pretty much a national thing that’s happening right now. Very high pent up demand, stimulus money, as I mentioned, rolling into the economy. I don’t know about where you live, but where I live, right now, if you want to bid on a home or a condo, basically, you have to be a cash offer, you have to be above asking price, and ideally, putting crazy amounts of escrow down, with no contingencies. That’s basically where we’re at.
So that brings up a good point – I want to talk a little bit about inflation. That’s on a lot of people’s minds. I’m sure you’ve seen a lot of headlines about inflation. Let’s talk about that.
The most recent study that I’ve read came from the Wall Street Journal, and they interviewed economists. And they asked these economists what they anticipate seeing over the next 3 years in terms of inflation? As you know, there’s different metrics and different data that you can look at for inflation. For example, the Fed – they always release the CPI, Consumer Price Index, and their ballpark or their range is around 2%; it’s pretty much been that for a number of years. They’re not predicting much more or much less than that right now in 2021. But I’m sure, if you’re like me and you’re out living in the real world, you’ve seen inflation over 2%. In fact, I would encourage you just to go Google “inflation stats” or “inflation 2021”, look at these different articles, look at these different data points. I’ve seen some that shows certain sectors, for example transportation and food, as high as 40% from one year ago. Now I recognize that we were in lockdown to pandemic one year ago but still, that doesn’t average out. We shouldn’t be seeing inflation of 40% year over year, not even 20, not even 10. And if the Fed is saying it’s two, well, they’re probably pretty far off then.
Travis Watts: Last summer, so the summer of 2020 – I think it was July, maybe it was August – my wife and I, we took a trip to the Northeast and we rented a rental car. We paid $150 for this rental car. So I just got back on – this is now the summer of 2021, exactly one year later; went to the same site, the same search, found the same vehicle type through multiple sources, at $400 to rent it. So there’s certainly some inflation hitting pockets of the economy stronger than others. Real estate’s a prime example of that.
Back to the Wall Street Journal and the economists interviews… So I thought that was pretty interesting – less than 3% of the economists interviewed thought inflation would be lower than 2%. 16% predicted that inflation would be what the Fed says it is. So whether they say 2% or 3%, they just would go with that metric. 81% of all the economists interviewed said they predict inflation being higher than 2%. I think that’s very important and worth noting. I’ve mentioned this before on previous episodes, I love these collective surveys and data points. I don’t ever want to just listen or tune into one person and take every word they say to heart. I like hearing from 50-100 to 1,000 people and getting the consensus here. So if the consensus is 81% feel that inflation is going to be higher than 2%, it’s probably higher, or going to be higher than 2%.
But reeling it back in, why is this important to real estate? How does this affect you and I? Well, first of all, inflation creates a situation where the value of the dollar goes down as asset prices go up in dollar terms. If you think about it, real estate is essentially a structure of commodities. You have carpet and light fixtures, and appliances and lumber, and right now, commodities are on the rise. Real Estate Investors benefit from debt. As you lock in fixed-rate debt, it becomes worth less every single year. It does not adjust for inflation.
Here’s an example I like to think about. If you took a million dollars as a loan or as a mortgage for a commercial or residential property, and you put low-interest rate fixed debt on that million dollars, and let’s say, for example purposes, because I’m not very good at math, that inflation is 5%. Well, that means after the course of 12 months or one year, that million dollars is worth 5% less because of the devaluation of the dollar. So in other words, you or I came out ahead about $50,000. This is why I’m so passionate about using the vehicle of real estate. It’s just simply an investment vehicle where you can lock in long-term low-interest rate fixed debt that becomes worth less every year as your asset or a.k.a. your commodity goes up in price, and at least holds its value.
Alright, shifting gears, because a lot of people ask about, what about the prices. Let’s just talk about the prices of real estate in 2021. So I gathered a bunch of data from sources like the National Association of Realtors, Fannie Mae, Zillow, Redfin, the list goes on and on. But I’ve compiled this for simplicity’s sake to share with you on the show, that all of these sources are predicting a range for 2021 between 6% and 15% price appreciation nationwide, on average; obviously every market’s different, but that is very strong.
In fact, when I used to invest in single-family homes, when I was doing fix-and-flips and things like that out in Colorado, this was 2010 through 2015, these were the types of data points that I was looking at and they came true. So that was a great economy for doing that. We’re a little bit different today, even though those are the stats and facts for 2021. We don’t necessarily have a forecast of that high appreciation year after year for, say, the next 5-10 years, but that’s how it’s looking this year.
Interest rate predictions through various sources all suggest sub 4% levels. So anything under 4% commercial and residential loans, long-term fixed-rate debt. So not a lot of change there. That’s largely due to the Fed and what they decided to do.
So the big question, are we in a bubble? I see this all the time. My gosh, that’s got to be the most popular headline that’s out right now. Are we in a bubble?
Well, first of all, real estate is local; every market, every sub-market is different, every state is different. There’s lots of data points to look at. So there’s basically no such thing as a US housing market. In fact, there’s over 400 metropolitan areas nationwide. For example, when I was prepping for the show, I looked up median home prices in different areas, and in Washington DC the average home price hasn’t changed since May 2020 through May 2021. But you look at a place like Austin, Texas, the median home price has increased 32% over the past 12 months.
And the other scary headline that I see quite a bit is about foreclosures. And what happens when mortgage forbearance rolls off? Are we going to see this massive wave of foreclosures hit the market, like we saw in the Great Recession? And again, looking at the data as of Q4, 2020, so not the most current data, but the most current I could find, only 2.8% of homes are at risk of foreclosure nationwide. That’s a very small percentage. And given the supply and demand that we have right now in the market, those, if they go through the full process of foreclosure, will likely hit the market and get scooped up so fast, probably over asking price, depending on the market, where it’s not going to be such a huge fluctuation.
So I hate to burst your bubble if that was your strategy, that you’re waiting on a massive wave of foreclosures to hit the market and that we’re going to see 2008 all over again; the data just isn’t there. The same lending practices aren’t there. The amount of foreclosures we were seeing pre-Great Recession were astronomical.
So a few quick takeaways or a quick recap from the research that I did. We’re seeing stable and consistent growth in the economy. All leading economic indicators are strong right now in 2021. Real Estate affordability has been slipping a bit since last year; a lot of markets have seen a drastic change in appreciation this year specifically, which could long-term balance out the whole supply and demand. But new construction real estate remains strong, existing real estate remains strong, inventory and supply is down. That’s one major reason that we’re seeing a rapid increase in pricing, in addition to demand for commodities; places to park capital, real estate being a long-term favorite choice among investors. Pent up demand and stimulus money making its way through the economy heavily in the real estate sector. The job market and wages have been increasing, which is great for affordability among homeowners and renters, and many economists predicting higher than 2% inflation. Multiple sources predicting home appreciation prices 6-15 percent this year in 2021. Prediction of mortgage interest rates sub 4% – very low, historically speaking.
And one thing I forgot to mention earlier is that the predictions on rent increases are closer to 6%, with a tapering off between 2022 and 2023, where they come down to more of a normal 3-4 percent.
Travis Watts: The bottom line, everybody, is if you’re a homeowner or a real estate investor, these are all great things. These are all great signals as to – should you enter the real estate market in 2021? That’s a personal choice. I’m not a financial advisor, please seek licensed advice, but I did write a blog on this about a year and a half ago. And to me, the answer to that question is it depends on you. It depends on how you interpret this data. It depends on how liquid you are, financially. It depends on your risk tolerance, it depends on the strategy, but always focus on your highest and best potential.
Lots of investors like myself prefer to be passive and hand the baton, so to speak, to somebody more experienced, with longer track record in doing this type of real estate investing. Others feel, “Hey, I could buy a rental property in my own neighborhood and I can self-manage it and that’s the right approach for me.” So we’re all different, you do you.
If you guys enjoyed this type of episode, more of a market update kind of episode, let me know, let us know. Reach out at https://joefairless.com/, connect with me on social media outlets or via email, travis@ashcroftcapital.com. I’m always happy to connect and answer your questions.
Thank you guys so much for tuning in this week. I appreciate you. This is Travis Watts with The Actively Passive Show. Until next time.
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