Is the Housing Market Safe?

Dave:
The economy, as you all know, is sending a lot of mixed signals. Every day we hear things like stocks are rising and then they’re sinking mortgage rates, they’re volatile. We’re hearing the word recession a lot. What does this all mean for real estate investors? I am trying to make sense of it, but I could use some backup. So today I am bringing on my friend, fellow investor, and co-author J Scott to help cut through the noise. We’re going to talk about what’s actually worth paying attention to and everything you need to make sense of a market filled with uncertainty. Hey everyone, I’m Dave Meyer. Welcome to On The Market. Let’s get into it. J Scott, welcome back to the show. Thanks for being here. I appreciate it. Thanks for having me, Dave. I was joking with our producer, Chris, that I wanted this show to be called What the Hell Is Going on? And so that is what I want know from you. What is going on, J, at least from your perspective, what are the big themes you’re following, at least right now?

J:
I thought you were going to tell me. That’s why I came.

Dave:
I’ll give you my opinion, but I sure as hell don’t know.

J:
I think nobody knows right now. There’s so much going on politically, economically, geopolitically that I think there’s a lot of uncertainty. In fact, if I had to pick a word that kind of sums up what’s going on these days, it’s uncertainty. And when there’s uncertainty, what we typically see is that people don’t act, they wait. And we’re seeing that in the real estate world, people not doing transactions, transaction volume is slowing down considerably. We’re seeing that in other parts of the economy, businesses aren’t expanding, businesses aren’t hiring as much. I mean we’re still seeing relatively strong employment but not growth. And so uncertainty is really the word of the day. And I think for as long as we have this political and economic uncertainty, what we’re going to have is basically a holding pattern until either things get better or things get worse.

Dave:
That is a very good summary. I don’t think anyone can do much better and say that you have a good sense of what’s going to happen because everything is changing almost day to day. I guess the uncertainty in itself concerns me a little bit because this lack of activity leads to economic stagnation. You hear, I’ve heard anecdotally from friends who work at Fortune 500 companies that they’re pausing buying or they’re not making any investments. That stuff hasn’t really made it public yet because we’re getting Q1 earnings for the public markets yet. But a lot of this has happened since, and I sort of expect the same thing to happen in the housing market. And I’m turning slowly more bearish about housing prices because I don’t necessarily think inventory is going to stop rising, which I felt was a good thing for a while. But now if demand really starts to drop off, then we start to see price declines, which I guess some people might see as a good thing as well. But curious if you agree or disagree with that.

J:
So let’s go back and we talk about this every time we talk, and so anybody that’s listening to me for the second or more times has heard the spiel, but basically we don’t typically see real estate values go down. Over the last 120 or so years, we’ve basically seen an upward trajectory in prices with one or two exceptions, and they were big exceptions. So the depression was a big one back in the 1930s, and then obviously the 2008 recession, which is still fresh on a lot of people’s minds. And because we haven’t really had a recession since 2008, people who are on the younger side, let’s say 35 and below, didn’t grow up ever experiencing a recession other than 2008. And so in their mind, that’s what a recession is. The reality is that’s not what a typical recession is. If you go back to the other 35 recessions we’ve had in the last 160 years, what you find is that most of them are small. Most of them have an impact on employment, they have an impact on bankruptcies and foreclosures, but they don’t really impact housing values. And so unless we see a situation like 2008 or we saw in the 1930s, which I’m not ruling out, obviously that could happen, but unless we see something significant, I don’t think we’re going to see significant downward movement in housing values. Not to say it couldn’t drop one or two or 3%, but I don’t think we’re going to see a 2008 event unless we have a significant recession.

Dave:
Yeah, I should clarify, and I agree with you. I think we might see prices go down one or 2% in some markets, while some markets will probably keep growing, but on a national basis, I don’t think it’s out of the realm of possibility or even probability at this point that we see just a soft market. And to me, I don’t know how you feel about this, but whether it’s up 1% or down 1% doesn’t really matter to me. That’s a flat market in my mind. And I think we’re sort of somewhere around there and maybe you can just reassure people why you think that sort the 2008 event won’t happen this time around.

J:
Well, I can’t reassure people that the 2008 type recession event won’t happen, but a 2008 type housing event I think is a lot less likely now than it was in 2008. Remember, 2008 was a housing based recession. It was caused by the housing market and over leverage and some bad loans that were made and mortgage backed securities being bundled up and sold off without much thought. And so 2008 was a real estate recession. I don’t think what we’re likely to see if we see a recession or a big recession in the near future, it’s not going to be real estate based. And if you want to look at some data just to reassure yourself that real estate is in a reasonably secure position, and again, I don’t know what’s going to happen, but this is reassuring from my perspective. Number one, a third of the houses out there today are owned free and clear.
Two thirds of the houses out there today are owned either free and clear or with less than 50% loan to value, basically meaning more than 50% equity and then more than 70% of houses out there that have mortgages have mortgages of under 5%. Most of those mortgages were originated back in 20 19, 20 20, 20 21. So the point of this is that people aren’t going to sell unless they absolutely have to. And the likelihood of them absolutely having to sell is reduced because there’s so much equity out there. There’s so much equity that’s been built up and so many people that have free and clear houses. And so the question is, are we going to be in a situation where the economy gets so bad that people are forced to sell, they lose their jobs and can’t pay their mortgage or they get transferred somewhere else or their hours get cut?
That’s possible, but right now people aren’t going to sell unless they absolutely have to and they have a good bit of cushion. Most homeowners have a good bit of cushion so that even if they did see some distress in their personal financial lives, they’re not necessarily going to be in a situation where they have to sell. The other thing to keep in mind is while demand has dropped in the retail space, personal residence space, there’s still a lot of demand in the investor space and it’s hard to get exact numbers on what that demand looks like, but we’re hearing estimates of somewhere around 200 billion in money sitting on the sidelines waiting to be deployed in real estate from potential investors. $200 billion is a good amount of money. But again, to put that into perspective, the total multifamily mortgage industry is about $2.2 trillion. So 200 billion sitting on the sidelines is about 10% of the multifamily mortgage market.
And so if 10% of the multifamily market were to get foreclosed on or collapse and go away and those properties had to be sold off, we’d probably be able to absorb that 10%. That’s a huge number. By the way. We never see 10% of properties go under even in 2008. And so there is enough demand out there, I believe, to absorb a good bit of distress. Again, I’m not promising that it won’t be so bad that things do go south, but I think it would have to be pretty bad before that happened because again, let’s go back to supply for a second. We’ve seen undersupply and under building for the last 10 years, since 2008, there’s been an undersupply of housing Estimates are somewhere between four and 6 million houses under supplied or units under supplied in the market, meaning four to 6 million people who would like to have their own place or would like to move into a separate place.
And that capacity is just not there. And we’re starting to see housing starts, which is basically that first step in development of new units slowing down. So in 23, which is the last year, we have full data for, we saw about 1.4 million units built. If we have 5 million units under supplied, if we’re building 1.4 million units per year, that means that we have somewhere between three and four years of housing that we have to build just to catch up. And in that three and four years, we’re going to have more people that are looking for housing. So it’s unlikely that we’re going to catch up anytime soon on that undersupply as well.

Dave:
Well said. And I agree with you. I think for all of those reasons, I think housing seems to be a little bit insulated housing at least like you said historically, unless there’s that element of forced selling, it’s really hard for prices to go down more than a few percentage points because people aren’t forced to sell. They don’t want to sell. For a lot of people, this is their nest egg, it’s their biggest asset. And why would you just choose to voluntarily sell at a lower price unless you were forced to do that,

J:
Especially when you have to buy something that is still probably relatively unaffordable with mortgage rates. Super high.

Dave:
More insights from j Scott coming up, but first, a quick break. Stick with us. Welcome back to On the Market. I’m Dave Meyer here with J Scott. Let’s dive back into today’s big economic shifts. Now, J, you mentioned you don’t think we’ll go into the housing element of 2008, but you sort of left it open that there might be a recession environment. I don’t know if you want to say that’s like 2008, but it sounds like you’re open to the idea that there might be a recession coming. Can you tell us more about that?

J:
Yeah, I’ve kind of resigned myself over the last couple of weeks, last month or two that I think there’s a reasonably strong possibility that we do see a technical recession in 2025. And when I say a technical recession, I’m talking about GDP growth under 0% for two consecutive quarters. A lot of people like to use that definition of a recession. I would argue that it’s not the best definition, but it’s the most popular. And so I think there’s a high likelihood of that. So we’re going to see Q1 GDP data come out, but at this point we’re kind of teetering on right around 0% GDP growth. It could be 0.1% or 0.2% positive. It could be 0.1 or 2% negative, but there’s a very real possibility that for Q1 GDP growth could be negative 0.1, 0.2, 0.3%. That counts as negative GDP growth Q2, while we’re even less than a month into Q2, it’s looking like there’s almost no possibility that we are going to see positive GDP growth in Q2.
It’s crazy that 20 some days into the month we can make this call, but economists are looking at the data and basically saying it would take some crazy turnaround before we saw positive GDP growth in q2. And so if we end up in the situation where Q1 is slightly negative on GDP growth, and again, we’ll know that next week and Q2 is negative on GDP growth, we’re now technically in a recession. And the problem with technically in a recession is that once you’re technically in a recession, that’s all you hear about. Media starts talking about being in a recession and headlines everywhere are recession, social media, everybody’s talking about being in a recession. And when people get into their heads that we’re in a recession, they start acting like we’re in a recession. That means they spend less, they save more. They don’t necessarily look for new jobs, they don’t ask for raises, so wages don’t go up.
And all of these things kind of come together to push us further into that recession. So what might start as kind of a technical by definition recession can end up as a real recession where we have spiking unemployment where we have lower wages, lower hours, people not being able to pay their mortgage, people not being able to pay their car notes, defaults on credit card debt defaults on all of their credit, and that’s when things snowball out of control. And so I think there’s a very real possibility of that happening this year if for no other reason than Q1 and Q2 have already been set in motion and neither of those look very good. In terms of GDP,

Dave:
I agree with you about this technical definition. Honestly, the word recession is almost lost all meaning to me because people just use it in so many different ways because the way you’re describing it, like in Q1, yeah, there was a lot of economic turmoil, there was a lot of uncertainty. I wouldn’t call it a great quarter for the economy, but to me, for most Americans, the labor market is what matters, right? And the labor market is still holding up. And so yeah, we might technically be in a recession, but people still have jobs and that’s the good thing. And maybe they’re going to cut back on spending a little bit, but as with people are employed, usually things keep humming along. But I do worry about this sort of media reinforcement and you see this with inflation, you see it with recession too, people’s expectations of what’s going to happen with the economy, it’s like a self-fulfilling prophecy. We get what we sort of expect. And I do see that recession narrative starting to take over. I agree. I actually think we’re going to go into a technical recession too, and it’s hard not to talk about it as an economic commentator, but I think it’s also important to try and offer some nuanced understanding of this, that as of right now, there’s no evidence that the labor market is falling apart. It might, but as of right now, that to me, what’s the scariest potential of a recession hasn’t really started to unfold just yet.

J:
Well, that’s the interesting thing. If you look at the data today and keep in mind data is trailing data is rear view mirror. Most of the data that we get is at least one month behind. Some of its two, three months behind. Even the jobs data, it might be a little bit more real time, but it’s always at least a week or two behind. But if you look at the data right now, everything looks pretty strong. So inflation is coming down not too tremendously. We’d be more scared if it was coming down faster. So that’s a good sign. Unemployment is still strong. We’ve been getting consistently good unemployment numbers every week for the last few months. And so if all you were to look at was the data that’s come out already, there’s no reason to be concerned. Yeah, that’s true. The problem is that there’s some foreshadowing that’s been done and we can kind of get an idea of what GDP is going to look like in the future because we can see trends and we know how that’s calculated. And so let’s use Q1 as an example. Like you said, if you look back at Q1, most people would say Q1 wasn’t horrible.
I mean honestly, I mean it didn’t seem any different than Q4, Q3 or Q2 from last year. Obviously there was more crazy headlines around tariffs and economics, but from how we were acting and spending and all of those things, things weren’t actually that much different than they’ve been in the past several months or quarters. But when you get into how things are calculated, that’s where it gets interesting. And so let’s take GDP for example. Two of the inputs into GDP are imports and exports. Importing stuff makes GDP look worse. It makes GDP go down because we’re not manufacturing stuff, we’re exporting dollars to other countries. And so that makes it look like our output is dropping and exporting obviously is good for GDP. It means we’re producing more. We’re selling more to other countries In Q1 because of tariffs, what we saw is a very weird balance in imports and exports.
A lot of businesses were terrified that tariffs were about to take hold. And so what did they do? They imported a whole lot more inventory than they needed because they wanted to get that inventory in before tariffs took effect. At the same time, a lot of other countries had stopped buying from the US because they were concerned about tariffs and they were putting tariffs in place themselves in retaliation or in defensive mode. And so there was a lot less export from the United States to other countries. And so we saw our trade imbalance go out of whack, and that trade imbalance factors into GDP. And so we may see a really bad GDP number in Q1, not because the economy was bad, but because of how businesses and consumers reacted to what they thought was going to happen when tariffs were put in place. And so this is another example of how perception can often be even more important than reality when it comes to the economy because it drives how we act regardless of whether how we’re acting is rational or not.

Dave:
That’s super interesting. I hadn’t thought about that. And I mean, is that sort of a critique on the way that we measure GDP? Because is that really reflecting a deterioration in economic output or activity I guess you should say?

J:
Yeah. I mean the thought is that when you don’t have crazy stuff going on politically or economically, you don’t have new economic policy that’s driving large swings in the market and in purchasing and in selling that these things even out. And so yeah, I mean you can get anomalies like this where people are reacting in a weird way and it just so happens to correlate with that boundary of where GDP is cut off at the end of a quarter. Keep in mind that when we see a disparity in imports and exports in GDP, it does balance itself out because when we import more, that hurts the GDP number, but a couple weeks or months later, that gets reflected in the inventory numbers of businesses and higher inventory is good for GDP. And so anything we lose in Q1 for higher imports, we’ll probably gain back in Q2 from higher business inventories. It all does even out, but just sometimes you have weird timing things where something happens on a quarter boundary and so it makes one quarter look really bad and the next look good or vice versa.

Dave:
All right. Well we’ve talked a little bit about GDP and potential recession. The other sort of big economic theme that I think everyone needs to be paying attention to is the prospect of inflation. We hear this all the time that because of tariffs, prices are going to go up and that could sort of lead to this one two punch of stagflation. We put out an episode about this couple weeks ago, but just that’s basically the unusual occurrence when you have both a downturn in economic activity, a k, a recession and inflation at the same time. How are you thinking about and looking at the inflation picture right now?

J:
Yeah, I think it’s pretty clear that we are going to see inflation in at least certain industries and sectors. For example, anything that’s imported, anything that’s imported, I mean we’ve added ten twenty five, a hundred forty 5% tariffs on that stuff. And so everything from a lot of the food that we consume to a lot of the cars that we buy to a lot of the clothes that we buy and wear to luxury goods, electronics, all of this stuff is going to be more expensive due to tariffs and that’s going to be reflected in the inflation number and the CPI number. At the same time, we’re probably going to see deflation or a drop in prices in certain things as well. So energy is a good example.
We’ve seen that gas prices from the manufacturing side, from the pulling it out of the ground side have dropped considerably. In fact, it’s dropped to the point where it’s going to be really bad for US oil producers over the next couple months and they may have to start turning off oil wells because the price per barrel of crude oil has come down to near the $60 mark. And $60 is kind of this magic number where if oil producers can’t get at least $60 per barrel, it’s not worth it for them to drill oil out of the ground. And so this is going to be good for consumers. We’re going to see a drop in gas prices most likely over the next few months, but it’s going to be bad for the oil industry. At the same time, we’re likely to see some drop in some food prices because there’s a lot of supply out there that needs to be absorbed.
People are going to start buying domestically, which could drive up demand, which is going to increase prices of something. So we’re going to see things go up, we’re going to see things go down, but at the end of the day, we import enough into this country that I think the net flow of prices is going to be upwards. We’re going to see inflation. If you’ve listened to Jerome Powell, the head of the Fed Talk, he’s basically said as much he’s expecting this inflation and he’s basically saying he doesn’t want to touch rates, he doesn’t want to touch interest rates, either raise or lower them because we have these two competing factors. We have inflation, we have recession, we don’t know which one is going to be more impactful on the country. Keep in mind, if we have a recession, the best way to fight the recession is to lower interest rates.
If we have inflation, the best way to fight inflation is to raise interest rates. If we have both recession and inflation at the same time, which is again this term stagflation, then the Fed has a really tough decision to make. Do they tackle the recession or do they tackle inflation? And when they make that decision by lowering or raising rates, they’re probably going to make the other one even worse. And so at this point, if we start to see inflation and it’s at the same time we’re seeing a slowing in economic growth, it’ll be really up to the Fed to decide whether they want to tackle that inflation or they want to tackle the recession. And that’s what’s going to determine which way rates go and which way inflation goes.

Dave:
Yeah. Well there’s a couple of things I want to mention there. First of all, what J’s saying about that, putting the Fed in a tough spot that I worry about just because if you look historically at what happened in the seventies and eighties with stagflation in the us, it was a drawn out thing. And ultimately what the Fed did under Paul Volcker was raise rates super high, put the US into a very bad recession, and that’s what got them out of it, which was a good move I think, but a painful move. And so hopefully we avoid a situation like that. But I do want to say I do think inflation will probably go up when you look at the projections of what people think might happen because of tariffs. It’s less than I thought it might be. If you look at people are saying there baseline expectation going in this year is 2.2%, now it’s step to three, which is still a move in the wrong direction.
But I think it’s important to call out that no one’s saying we’re about to go back to these eight or 9% peaks that we saw. I mean, I’m sure it’s possible, but that does not seem like the consensus view, even though most economists are saying inflation will go up. My one thought though is prices will go up on imports, but it’s hard to quantify how prices of domestic goods might go up. And I think they’re going to go up. I was reading this thing just about cans, aluminum cans like the most benign thing in the world, but they’re made in America, but you probably all know this by now, but aluminum is now tariffed at 25%. So is steel, which cans are made out of steel sometimes as well. And so that’s an American made good, technically not getting tariff, but that American companies paying tariffs on their single highest expense probably. So that’s one thing. The other thing is that if American companies face less competition, they’ll have more latitude to raise prices themselves. And so I see these people saying, oh, if you just buy American, there won’t be inflation. I don’t buy that personally, do you?

J:
No. And this is where we get a little bit, we move a little bit from economics to politics, and I don’t like talking about politics, but I will give an opinion here because there is an economic component. But from a political standpoint, we’re trying to determine whether we should not just be bringing manufacturing back to the us, but should we be implementing punitive measures or should we penalize businesses for not bringing manufacturing back to the us? And that’s what tariffs are. They’re punitive measures to force businesses to bring manufacturing back to the US From an economic standpoint, this is going to cause inflation. There’s no two ways about it. There’s a reason why capitalism and free trade has decided that over the last 30 years we’re going to basically offshore production. There’s a reason why that was decided. And the reason was it’s less costly to do so. That hasn’t changed. Just because you put tariffs on something doesn’t make it less costly to build something offshore. But there is a political component here that we have to consider, which is there are a lot of goods and a lot of supply chains that are important to our national security that should be built here even if they are more expensive, in my opinion.

Dave:
I totally agree with you. Yeah, I agree.

J:
So anything like weapons, pharmaceuticals or food, basically anything that’s absolutely necessary to maintain national security and maintain the health and the liberty of our citizens should be built here. It’s going to force the cost of those things upwards.
But I think it’s important. The other thing to consider though is that this isn’t an easy or a quick process. Tim Cook, who’s the CEO of Apple said a few months ago, he had a really interesting quote, which is it used to be that it was cheaper to build stuff elsewhere because labor was cheaper. And everybody still assumes that’s the case. They assume the reason we go to China is because labor in China is cheaper than labor in the US and it might be a little bit cheaper, but it’s not so significantly cheaper that that’s the driving force for building in China right now. The driving force for building in China is that China is so much better at it. What Tim Cook said was, if Apple wants to build iPhones in the us, they have to build manufacturing facilities, they have to build production lines, and they need these things called tooling engineers, engineers who can build these machines that build these really complex components. And what Tim Cook said was in the US I could probably find maybe a small room full of people who are qualified to build that tooling. Those engineers that could do that tooling go to China and you could fill multiple stadiums with those people.
So the reality is we just don’t have the knowledge or the expertise here right now to do all of this manufacturing because we’ve exported it for so long doesn’t mean we couldn’t get it again, doesn’t mean we couldn’t figure it out. But it’s not something that Apple’s going to say, okay, beginning of 2026, we’re going to start manufacturing iPhones in the us.
Most likely that’s a five or a 10 year process. And so we need a plan to be able to get things like rare earth metals and minerals. We need to be able to get things like defense parts and electronic components and pharmaceuticals and certain foods. We need a plan to be able to get those things while we spend the next five or 10 years figuring out how to bring that back to the us. And you do that through, in my opinion, again, this goes back to politics, but in my opinion, you do that through cooperation and compromise with your trading partners not being punitive and trying to beat them down and beat them in a trade war.

Dave:
Yeah, that’s a really good example, right? Because this lack of tooling engineers can be used for both proponents and detractors of this idea, right? Proponents would say, look at this, we don’t have the engineers that we need to build stuff. That’s a huge problem. We got to do that. And other people say, we don’t have the engineers. We got to let the other countries do it because otherwise it’s going to be so expensive. And it seems like that’s why this is just such a divisive policy and issue right now. But I do think there are good policy objectives here. I worry about the short-term implications. It sounds like you do as well and just hope that we can figure out a way to transition towards a more balanced approach to manufacturing in a way that is not so harmful to Americans in the short run.

J:
And just to add one point, I know this conversation originally started on inflation and there’s another important factor to consider when it comes to inflation, and we talked a little bit about fed policy. What we didn’t talk about is the fact that fed policy may change significantly over the next year as Jerome Powell’s term ends and a new Fed chief is put into place to run the Fed. The president wants lower rates,
The president believes lower rates are better than higher rates for what he’s trying to accomplish with our economy. And so he’s been pushing the Fed share Jerome Powell to drop rates. Jerome Powell has basically said, Nope, we’re not going to do that yet. We’re still in wait and see mode to see where things head, but Donald Trump gets to choose the next Fed Chief about a year from now, and there’s a reasonable shot that he’s going to choose somebody that is going to be willing to carry out that plan of lowering interest rates, lower interest rates will drive inflation, they’ll also drive the economy. But it’s exactly what we saw in 2020 and 2021 when we saw interest rates at 0%. The economy went crazy, but it resulted in high inflation a year or two years later. And so that’s the other thing that we need to keep an eye on is who’s the new fed chair going to be? What’s their policy going to be with respect to rates and will they lower rates in attempt to spur the economy while at the same time driving inflation?

Dave:
I just keep thinking about this so much. I just feel like the next six months or so are going to be very uncertain. We’re probably going to have a lot of volatility in mortgage rates and bond yields in the stock market. And to me that’s this changing of the guard at the Fed, which Trump has said he’s almost certainly going to do is sort of a big inflection point in the future that we can point to and start thinking about. And I am just going to throw out a theory here. I just want you to know I have this maybe controversial take that if Trump replaces Powell with someone who’s willing to cut rates a lot that might send mortgage rates up, and I know that sounds crazy, but we saw what happened last September, right? They cut rates, bond yields went up, mortgage rates went up.
Bond investors, they’re a different breed than real estate investors. They’re not thinking the same way. They are very concerned about inflation because think about it, would you want to buy a commitment to the United States government that they can pay you 4% for your money in form of a bond when inflation goes up to 6%, then you’re getting a negative real return. And so these small changes in inflation really change the way bond investors think. And I wonder, even if Trump gets his way and lowers rates a lot, it might lower rates in some parts of the economy. But I wonder in the housing market and mortgage rates if it were really change the affordability picture much at all.

J:
And that’s not a conspiracy theory at all. I mean literally that is one of the ways that we think about US treasury bonds is that they are a reflection of investors’ expectations for future inflation.
And so again, we don’t buy a five-year treasury bond unless we think what that bond is going to pay us is going to cover whatever the real inflation rate’s going to be over the next five years. So if investors think real inflation over the next five years is going to be 6%, then they’re going to demand that those bonds are priced at at least 6% for it to make sense for them to buy those bonds. And so absolutely, if there is a belief that we’re going to see a spike in inflation either because of tariffs, because the fed takes a softening view on rates and lowers rates or whatever other reason, if the psyche of investors is that inflation is going to go up, that’s going to put upward pressure on bonds. The other thing to remember is that bonds are a reflection of investors’ belief that the US is literally the safest place in the world to invest money and US savings bonds or treasury bonds are literally the safest investment on the planet.
And that’s always been, or at least for the last a hundred years, been the belief that US treasury bonds are the safest investment in the world. And that’s the reason why we refer to whatever the return rate on US treasury bonds as the risk-free return. The problem is if investors, foreign governments, foreign companies start to lose faith in the US’ ability to back their debt to pay their debt, what they’re going to do is they’re going to buy fewer bonds. And what we saw last week, and we don’t know if this is definitely the case, but what we saw a week or two ago when the stock market started to really crash was that normally we expect people to take money out of the stock market, put it in the bond market, and bond yields go down as well. What we saw a week or two ago was that people took money out of the stock market, but the bond market didn’t move, which tells us that people were not taking money out of the stock market and putting it in bonds.
And one of the theories for why that was is that they were so concerned about what was going on in the US with our currency, with our debt, with our economic policy, that it could impact our ability to actually continue to pay our debt. And people were scared to put money into the bond market. And so if we have a new fed share that comes in that drops rates that could scare the rest of the world, that we’re going to see higher inflation in the US that’s going to hurt the US economy, that’s going to make it harder for the US to continue to pay on their debt, and they may choose not to buy our bonds for that reason, and that loss of confidence in the US could drive bond yields up as well, and that drives up mortgage rates and all other rates.

Dave:
Yeah, absolutely. It’s another thing to keep an eye on too, this sell America trade that has been going on or very unusual to see the stock market drop bond yields to go up and the dollar to weaken all at the same time, and that’s exactly what happened, but it hasn’t been this longstanding trend. We don’t know if this is going to continue, but it is worth noting this is something that is worth paying attention to over the next year. Still ahead, J’s advice for real estate investors navigating an uncertain future, so don’t go anywhere. Let’s get back into the conversation and hear what moves J is personally making in today’s market. Well, we’ve been having a great conversation, J, about the economy, and I could do this all day, but I want to turn the conversation to what do you do as an investor? How are you viewing this in your own resource allocation, your own investing? What are you thinking about?

J:
So you have to ask yourself long-term, where is money going to be the safest? I still believe real estate is one of the best risk adjusted or safest asset classes on the planet, so I’m still very bullish on real estate. Obviously not all real estate is made the same. We have commercial, we have residential. Even in residential we have single and multifamily and commercial. We have lots of different asset classes. So I’m not going to speak in broad generalities, but I will say that I think buy and hold real estate, residential real estate right now is still likely positioned pretty well, especially if we think we’re going to see inflation
Creep up over the next couple of years. Typically, inflation drives not just home value increases, but it drives rent increases. And so if you’re a landlord, if you’re a buy and hold investor, inflation is probably going to be good for you. Obviously it also increases expenses and labor costs and material costs, but overall inflation tends to be good for buy and hold investors. So what I would say is if you can find deals where you can weather a storm, meaning we may have a year or two or three of flat rents, we have already seen that since 2022, it may continue. We may see enough inflation that it drives expenses up for a couple years. We may see laws changing in some states that tend to make those states a little bit more tenant friendly than landlord friendly. So there could be some headwinds that make it a little bit tougher for buy and hold investors over the next couple years.
But if you can weather that short term storm and you’re not going to lose your property because you’re cashflow negative or because you’re too far underwater or because you have an adjustable rate mortgage or because you have a balloon payment on your debt, if you can avoid all of those things and you can hold a property for five or 10 years, what we’ve seen is over any five or 10 year period in this country, real estate values have gone up. So I’m a big fan of buy and hold real estate just to drag that out. In terms of multifamily real estate, I’m a fan of multifamily real estate right now. That’s the sector I’m in, so maybe I’m a little bit biased, but if you look at the supply and demand trends, what we talked about earlier, there’s a huge, huge undersupply of housing units in this country, and I believe that if you’re investing in a place where we’re still seeing population growth, where we’re still seeing business growth that are pro-business regulations, so it’s pulling more businesses into the area, I think what we’re going to see is a big opportunity for multifamily investors including new construction.
I think there’ll be an opportunity for those that can build at reasonable prices. Obviously that’s getting harder now with labor and material prices going up, but I think new construction will have an opportunity as well. On the commercial side, if we’re successful in reassuring a lot of the manufacturing that we’ve been trying to bring back to the us, there could be a great opportunity in things like warehousing and light industrial and even heavy industrial where business owners are going to be buying land or renting land to build warehouses or build factories or build tooling shops. And so I think there could be some really good opportunities in warehouse and light industrial and even heavy industrial. A lot of people ask me about self storage. Everybody thinks self storage is driven recession. The reality is self-storage is driven by high transaction volume.

Dave:
Transaction volume. In what? In real estate?

J:
In real estate, residential real estate. People get self-storage units when they move.

Dave:
Oh, that makes sense. Yeah.

J:
Okay. And so we can have a recession, but if nobody’s moving, we’re not going to see a lot of activity in self-storage. And so the most important thing for driving self-storage is how many houses are being bought and sold, not a lot right now. And so that’s why self-storage has been relatively flat over and even down over the last couple years. I could see that changing if we see transaction volume pickup, but that’s the reason self-storage has struggled over the last couple years. And so the question you have to ask yourself is, do we see a lot more houses being bought and sold? And if so, self-storage is likely to do well.

Dave:
Thank you for that. I have no notes on the real estate side. Do you invest in the stock market?

J:
I do some options investing for fun. What I would say is if anybody wants to make money out there, follow my stock market trades and do the opposite.

Dave:
The inverse J scot.

J:
Yeah, hundred percent.

Dave:
Yeah. I was just curious. I think I get a lot of questions. I think a lot about asset allocation. I am primarily two thirds in real estate, but I do invest in the stock market. I took some money out of the stock market earlier this year, luckily to reallocate into real estate, and I’m thinking about doing more. I wish I had sold more at the beginning, but can’t time it all.

J:
Right. Yes. Scott Trench has been saying for the last couple months that low leverage or no leverage real estate is the best investment right now. And I can’t disagree with them. I think you can. And again, low leverage for the purpose of if we have a bad couple years, it’ll help you weather the storm. And so I really like low leverage or no leverage real estate right now. And I see nothing wrong with keeping cash. I think there will be opportunities in the near future. And I know a lot of people don’t like to keep cash because they’re concerned about losing money to inflation. I’d rather lose 3% to inflation than lose 30% to a bad investment. Totally.

Dave:
And you could still get like 4% in a money market account right now or a high yield saving account, you’d be okay. So I totally agree. I sold a bunch of that stock, I put some of ’em into real estate and I’m just holding onto it for real estate. But just till I find the right opportunity, I think it’s okay and probably encouraged to be really patient right now because there’s going to be good deals in these types of transitionary markets, but there’s also trash out there. There’s a ton of trash. And so you just need to really be patient. And I don’t feel like there’s a rush. It’s not like there’s this window right now, like you said, I’d rather be patient and maybe miss a little bit of the upswing than rush into anything.

J:
Agreed.

Dave:
Alright, well J, thank you so much for joining us today. This was a lot of fun. We really appreciate you being here. I’m always happy to come back. I appreciate you having me and thank you all so much for listening to this episode of On The Market. We’ll see you next time.