November 2022 Monthly Market Update

 Here we go. It’s the November 2022 monthly market update. The year is almost over. Interest rates are being jacked up even more to curb inflation. But what are the other stories coming up? Welcome everybody. This is the monthly market update. Here we go. All right. If you are new to these monthly updates.

You guys can check them out at simplepassivecashflow.com/investor letter. You’ll find this in all the other monthly reports. We do this every month. If you guys are new to the group, also check out the I think we’ve got like a hundred reviews on this thing thus far. My first book, The Journey to Simple Passive Cashflow teaches all about taxes, investing in deals, and infinite banking.

A lot of the stuff that I didn’t realize was. Very counterintuitive ways of building wealth that we use for a lot of our clients in the family office group and our investor group. But let’s get started here for you folks. And for some of you guys joining live on some of the social media channels of the Facebook groups and LinkedIn.

And those of you guys who are also checking this out on the podcast form can also check these great graphs and visuals we have on each of these articles. on the YouTube channel. But the first thing coming from John Burns real estate consultant is that apartment rent doesn’t grow to the sky. And I think we all knew that’s why, we never really underwrote more than a 3% rent escalator.

Whenever I see that in a deal, I know that they’re reaching or maybe that they need to inflate the performance a little. And that’s what we teach in this syndication e-course. As a past investor, what are the kinds of things to be on the lookout for? So in this article saying the rents are set to fall in many areas around the country, which is exactly what the Fed needs to help get inflation under control.

So like a lot of places, like we are investing in Phoenix, some of those rent girls were like 20% or greater year. And you know that definitely that’s not sustainable. I would say more on a five to 10 year time horizon. I think Phoenix is more like a two to 3% annual rent growth, or at least that’s what you should underwrite so that you under promise, over deliver.

The combination of recession concerns, requests to return, the office rents that are just too high and a multifamily high of new rental supply are all combining to cause rents to soften. Potentially decline and of course, take all these articles with a grain of salt. And I try and interject my commentary on top of this because, this is national data here, we always try and look at the emerging markets and within emerging markets such as like a, Dallas or Phoenix, you’ve got your submarkets there may be a couple dozen submarkets within one of those major Ms.

But what led to this great growth? Strong job growth, income growth, household formation, bolster demand in nearly every market, even with those with elevated levels of supply move outs to purchase a home or at all times, lows. And are likely to stay low given the relative affordability of apartments at 6% plus market rates.

So what they’re saying is, a lot of the people who were on the fence to buy houses up until maybe a quarter or two ago, they got the wind knocked out of ’em with the interest rates exploding on them. Now they cannot afford that much in terms of monthly payments. Which is why a lot of those people are moving back to apartment dwellings, nicer ones of.

but they’re taking a step back from home Ownership rent to income ratios of 20 to 23% are completely normal within ranges and a testament to the strong growth in incomes among new renters that REITs have observed over the last several quarters. So they get, I think what they’re saying is, people’s pay, their salaries are there too.

The higher rents. Of course we always ask like, how much more can it be going up? Really it’s not getting to that, that one third, rent to income ratio quite yet. We’re still in like that 20% range of business online. Here they’re talking about what were the things put in that, that latest inflation reduction act.

It always seems like they come up with one of these things once or twice a. This one got signed in on August 16th, 2022. And the way it normally works with these is, they sign it in and then, they’re investors and, a lot of the sophisticated investors start picking through it and start to see any carrots or sticks in there.

So some of the tax credits and incentives promoting clean energy in. One of the sole purposes is to incentivize and revitalized domestic manufacturing and many of its tax credits and incentives are focused on clean energy manufacturing. Now, I don’t know how that really impacts any of you listeners out there seems obvious that would be, that where money would go.

Obviously, this is the whole joke about this, right? What the heck does that have to do with inflation reduction act, if anything, that just is more spending, which increases inflation, but any. . We don’t like to get political on this show because it is a waste of time, right?

We need to figure out as investors what is happening here and how can we react for our own good. So one of the things of this inflation reduction Act is the advanced. Project tax credit provision credits up to 30% of the investment in PR in property used in a qualifying advanced energy project.

That one’s a kind of a head scratcher on how to really use that one. I’ll be honest one of the significant drawbacks in the Investment reduction Act is enactment of a corporate minimum book tax. The minimum book tax would be 15% of book. and lastly, as a condition for being subject to the corporate minimum book tax for a year, that the, a coal corporation must have an average book income of excess of 1 billion over three years prior to the tax year.

So it really probably doesn’t impact many of our listeners. I don’t know if any of you guys make a billion dollars. If not shoot me an email. Let’s get you into some deals or especially some of these benefit deals we have coming up. As it’s harder to find deals out there and we’ve taken a break from the normal value ad apartments because it’s not the time to be going into those deals, but these high interest rates.

So I’ve personally been looking at ways to save taxes, right? It’s getting time to be efficient, so to find, seek deals that provide those tax minutes for our investors. So we’ve got some things coming down the pipe for you guys, if you guys are interested in those. If you’re not part of our investor group, go to simple passive cash flow.com/club and get educated and see what’s coming down the pipeline there.

For multi-housing news the article headline is the fed’s painful ounce of prevention worth a pound of cure. And obviously what they’re talking about is curbing inflation, which, they pegged at 8%. The Fed’s funds rate Feds have increased the cost of doing business across every sector of the economy.

This also impacts the US and abroad. The economy this time around is more on secure footing than 2008 excess. Access is where we saw in residential real estate and construction that drove the economy in places like Phoenix, Vegas, Florida, and California in 2008 are not the norm today. And said, we’re still seeing everything from manufacturing and entertainment and technology and healthcare drive our economy today.

And I will also personally add that, we don’t have these no doc, these ninjas that they gave anybody with a pulse. To invest. And I mind you, investors like the, I think the reason that sets us apart from the average investor out there is that we try to invest in things that cash flow and are backed by equity even in hard times.

And I think at the end of the day, you, if you go into things that cash flow, you should be a lot better than most or be able to weather a lot longer recession or maybe even depression, if that will. To be able to come out the other end and hold onto your asset. Hold on to your debt service, whether you do that with cash flow or cash reserves, one or the two or the combination of both.

I know I’m going through this very quickly, but these are very simple yet, these concepts are, have taken me a long time to realize and really think of and how do I strategize my own the whole balance between trying to grow your money. How much cash reserves do you have on ti on, on.

But if you need to invest, like how we are now with, inflation at very high levels where you’re just losing your money, not doing anything, where can you make it and get a nice little yield, maybe low double digits and yet be very secure in investment and not have it be a high risk type of move.

That is the question. That’s what we’re all asking. I’ve obviously got my opinions and I will be sharing those, especially with you guys coming on the January retreat on January 13th to the 16th here in Hawaii. Beyond the lookout for that. Again, club members you guys get invites to that. Freddie Mac reports multi-family investment market index down in the second quarter.

Decrease nationally in all 25 markets on both accorded annual bases. It is similar to the last article, right? Things couldn’t grow at a 8%, 20% rent increased level for very long. And at what point that rents are still going up, but not at that feverish pace as it once was, but it’s not really going down yet.

That’s a. And I don’t really anticipate it going down. And I said this before, if there’s if I was a gambling man, the one thing I would bet on is rent’s not really going down for a long period of time.

And again, different source. Here, there’s seen primary driver between the quarterly decline was higher mortgage rates.

And Aln. Also was saying the same thing. Quarter three brought an end to coasting on 2021. What they found made demand rent growth. Finally, losing steam was a major development in third quarter, but net absorption deserves all the attention has been getting. As mentioned, apartment men has been poor.

All year at mid-year 2022, net absorption was 75% lower than it was in 2021. So what that means, what absorption is new units getting filled in a timely matter, like a days on market. It’s, I would say overall, occupancy is pretty high and, there is a housing shortage and especially with people not being able to afford houses, that’s where the apartment demand is still pretty. For both average asking rents and average effective rent. Third quarter growth was a loss by any quarter since 2021, quarter one. For a price class perspective, average effective growth, rent growth was stronger in the quarter for price classes, A and B, with the other two price classes also seeing larger declines in rent growth.

So what they’re saying, again we’ve talked about this in. Your higher end tenants with, they call ’em class A and B here are less impacted and going through less declines than the Class C or below cohorts. And that makes a lot of sense because this last pandemic really hurt the low end as opposed to the high end.

But I think a lot of it is and don’t get it, don’t get it mixed up with these. Fear mongering headlines. The industry came into a year with a very high average occupancy, very low lease concession availability and double digit 2021 rent growth, thanks to the demand explosion, the from the previous year, and the fact that we had a freaking pandemic in 2020, right?

The high average occupancy provided upward pressure for rents, even as lack, lesser demand was slowly eating away at surplus occupancy. Very low apartment demand degraded further even falling into very slight negative territory nationally in the period. But ultimately lack of household creation and affordability is the cause of this.

The fourth quarter is usually the softest for multifamily demand, and the largest macro economic situations does not prove much reason to expect this year to be an exception. And I would say maybe on 10% of our assets, we are taking a very conservative approach because we’re starting to see some of the signs of normally like we start to see a slowdown in leasing activity.

We’re about Thanksgiving, but we’ve really started to see that here in October. So we might be reading it. Into a lot, but that’s your guys’ antidote from what we’re seeing across the portfolio. But top five markets from multifamily deliveries, and this is where the pros, the big money, is putting money into building new assets due to long term the fundamental growth.

And I, again, as a real estate investor, I think you need to be looking not on a 1, 2, 3 year time horizon, but like a 5, 10, 20. Or more time horizon. Those markets are Dallas, Houston, Washington dc Miami and Phoenix.

Multi-Housing News came up with this great article that I wanted to pull out, why Affordable Housing Production Lakes Demand. We’ve always, everything that’s built is always class a brand new, right? Some of the reason here, housing aimed at people with low to moderate income is not being replaced at a fast enough pace to meet our demand.

Of the nation’s 43 million multifamily units, roughly 10% are considered affordable for those whose incomes are less. 80% of the area median. So this is what we’ve called the missing middle, or I would just call it the lower middle class and workforce.

They’re talking here about the l i htc I call the LTA Lurk program, with, low income requirements for, as part of the building. We try to stay away from this in our investments. It’s just a different little bit different type of a business plan. If you’re that kind of investor, you don’t knock yourself out, right?

You guys that your money. But we found that, whenever we have more than 10% section eight, it gets to be a little bit seedier of a property, although like the LTA and the lurk and depending what municipality you’re. , it’s more, it’s nicer pro assets typically of what I’ll see and they’ll pay get if the average rents are like one 1500, they may require like 20% of the units to rent at 1300.

We’ve got a couple of the buildings like that, and they’re nicer pro properties, so you don’t really attract the CD tenants. But, I really would stay away from that on Class Bs or worse. They’re saying that, Missing middle housing is much more problematic. Very low New construction is coming online.

One reason is rising construction costs, but all require new projects to be more expensive Class A properties. Another factor is regulate regulatory barriers, especially in small markets where there are no clear rules when it comes to zoning issues. I will also. Cause we were always looking for land and we actually just dropped the project in Alabama that we were looking at.

The, some of the costs were just too high. So there you go. Some of the, that’s a real life example of what they’re just talking about with rising construction costs.

Adams reports. US foreclosure activity continu to increase quarterly nearing pre pandemic levels. Definitely nothing near what it was in 2008. I’ll probably call it one or less than a 10th of where it was, but it is picking up from the low of 2020. 1% from the previous quarter and up 167% from a year ago.

But that number is, yeah, this is a great example of fear mongering right here. They’re saying it’s up hundred 67% from a year ago, from a year ago it was pretty much nothing. And it is nothing compared to what it, I would say average it is foreclosure activity is reflecting other aspects of the economy as unemployment rates continue to be historic.

the mortgage delinquency rates are lower than it was before the Covid 19 rate outbreak. And this is what’s the Fed is looking at. Or this is a byproduct of unemployment, which is something that the Fed is looking at. The Fed needs to induce a little bit of unemployment right now. Again, unemployment rates continue to be historically low, so they need to induce more unemployment so that they can get this inflation under.

It’s under control, to get it down to, I think what we’re used to under 6%, I think I made a bet last month with Dean from when we do the Real Estate Brothers for the Hawaii investors, I think I said it was gonna go up to 10% for a 30 year mortgage and then come back down maybe a year from now, or 18 months from now.

Which is why, we’re switching the acquisition strategy. A little bit states that pulls the greatest number of foreclosures, including California, Florida, Texas, Illinois, New York. And some of that’s misleading, some of those, like California, duh. Because they’re like a huge state with a big population.

So its Florida. I’d like to know more percentage per capita, maybe or per person. I think that’s a little bit more. Then just going after the Biggers bigger states.

Last fact here, in fact, nearly three times more homes were repossessed by lenders in the second quarter of 2019 than in the second quarter of 2020. We believe that this may be an indication that borrowers are leveraging their equity and selling their homes rather than risking the loss of their equity in a foreclosure auction.

I would disagree with that. Common. I think right now the foreclosures is really low. I think really all that is that, that’s basically just shit happens. I don’t know if it’s really indicative what’s happening in the economy, but it’s just, sometimes people go, Troubling times personally, or this, they, they get into a car accident, somebody gets hurt or somebody just loses their job.

I think that’s just the, exceptions coming from, people who just go through tough times in life. And that’s always going to be there. They call it the death, despair, destruction, divorce disaster. That’s what, like those wholesalers prey on right? People, other people’s misfortune, which I don’t really think is very ethical.

I don’t know. I’m not gonna say it’s ethical or not, but it’s jacked up if you if you think my opinion. And that’s always been tick me off that, these guys will go around they’re here to help people solve their problems and buy people’s houses for 50 grand where they really could just sell it to a realtor for 90 and.

They say they’re doing a good thing. I see it as screwing somebody who isn’t the most financially minded or in a stressful distress situation. That said, we don’t have any problem doing it when it’s a rich apartment investor who is just a little clumsy with their money or worse, second generation, third gen generation wealth person who doesn’t know too much about money and is just looking to get paid quick and selected at a good price.

but maybe, I’d say maybe next year, if this all continues and interest rates go up and some of these adjusted adjustable rate mortgages continue to increase the debt service amounts, maybe some of these apartment investor owners might be more distressed sellers ready to sell, at which case might be, we might get involved in some of those acquisitions musicians.

A lot of those people, maybe they just don’t have adequate cash reserves to, whether that’s storm or, some of our cases, like general partners will put in some of our money and that’s why we are here. Because I think I, I will agree with Sam Zel here. He says the US economy is softening, not in a recess.

I says we’re not in our recession yet. We’re in a market softening in inflation reduction. Act pass in August resulted in a lot of spending and is irresponsible, and the title of the act is misleading and it’s going to add on the inflation pressure and not decrease it. Yeah. He’s probably right.

He’s probably right there. Real page. Apartments remain hot, but peak rent growth could be in rear view. I would probably agree that they’re, these guys are spot on with this.

Some of the highest comparison to the 2022 peak in this order. West Palm Beach, Florida, Phoenix, Arizona, Jacksonville, Florida, New York. New York. Fort Lauderdale, Las Vegas, Memphis, Riverside, California, San Francisco, California, Miami, Florida. They’re all. And you were from six to 2% off of their previous high.

Still, if you definitely jump, they jumped, but it’s still up overall.

So these are the top cities where housing markets are cooling the fastest. You don’t wanna be in these markets, I guess is what they’re saying. Or maybe it’s just they, these markets really got really hot and there was just a big delta, what we were saying on the last slide. But number one, Seattle, then two Las Vegas, three San Jose, California, San Diego, Sacramento.

Denver. Then Phoenix, Oakland, Northport, Florida. I’m by a little biased cuz I invest in. I think Phoenix is on here just because Phoenix was like the hottest market in the whole country. So I think that’s what’s contributing to their big Delta. I still think it’s a great place to be, but yeah, like Seattle, Las Vegas, San Jose, those things really spiked and cooling down now.

And this is more for home cells, has nothing, not talking about.

Affordable housing trends Report affordability has emerged as a primary concern for low income earners living in naturally occurring affordable housing apartment asking rent peaked at 16.9% between mid 2021 and compared to an increase at 2.3% in the average already wages over the same period, so people’s pay is not going up.

Their rent is financing gaps widen as construction costs soar. We talked about this earlier with construction costs going up. We just finished our Chase Creek construction 230 units where I would say we probably got hit the hardest with this, with the lumber, I think a year and a half ago.

Our lumber budget exploded, three x outside of our control, but it is what it is. We recovered, moved on and got over it. Substantial progress remains elusive, modest increases, and we’re talking about the Affordable Housing Trends report. So this is where a lot of the federally subsidized rental units by program.

From the most to least is the housing choice vouchers. Then a project or section eight, then public housing and then another.

Si joint Center for Housing studies of Harvard University reporting, leading indicator of remodeling activity. Okay, so as we know in 2020 the remodeling took a big peak there. And then, maybe cuz people were stuck at home and their homes were important because that was the only place they could go.

But they’re saying annual gains in improvement and maintenance. Expanders to owner occupied homes are expected to climb sharply by the middle of next year. So maybe this will help lower some of the raw material costs like lumber.

How rising mortgage rates are pushing people back into the rental market. We talked about that earlier. Here it is in a different format. The tightness you said was created by a decorative underbuilding followed by the global financial crisis in 2008, which occurred when millennials were coming of age forming households and creating a surge in housing.

It’ll take a while before you see a substantial improvement in rent affordability. But a supply increase should eventually boost rental vacancy and decrease pressure on rents. But that’s not coming anytime soon. And this is why I still believe residential multifamily is still the place to be with this fundamental shortage or more demand than supply.

Here, Rob Page reports higher income, renters pay the biggest rent hikes and are least likely to miss a rent payment. That’s because the high income earners, or we call ’em here, market rate, class A people have more liquidity, more savings as opposed to the Class C staff where, you know, I would probably assume that a lot of those guys have either no savings or maybe a thousand or a couple thousand bucks.

When there are uncertain times or a pandemic, those are the people that kind of need that government assistance first, where it’s the wealthier people who have liquidity and savings. And I think that’s what’s hard right now is there is a lot of liquidity still in the system, which is why with the interest rates being cranked up, you’re not seeing the inflation.

go down the next month or the next quarter, right? That’s what’s the problem right now. There’s a lot of quitting in the system, which creates a lot of SL and slack from the Fed, increasing interest rates and that the unemployment doesn’t pop up and doesn’t lower inflation right away. There’s that leg.

Here they’re saying the average renter in class A and B units have seen rent increases 14 to 15% since. Of 2020, which is maybe it was called that three years ago. So about 5% a year, which is pretty high. Again, that’s where we get that two to 3% is what I would normally underwrite. Or, somebody could probably truthfully say it’s 5% but I just probably wouldn’t use that just to be safe, unless you’re somebody who likes to just promise the moon and not.

Wanna make excuses when you don’t hit your targets later. If you’re using the right numbers, then it is what it is, right? Things happen, but, I think something can be said for fudging those numbers and then, when you don’t hit ’em well, it’s yeah, obviously it wasn’t, The rents weren’t gonna go up 5% every single year.

Different story with Class C renters, of course. These are more workforce housing. Folks of average WA range lower than $62,000 a year. Their rents probably went up about 10%, so maybe 3% across the board or 3% per year over the last few years.

But that’s it. That’s the end of this month’s report. We will see you guys in December. If you guys haven’t joined our club, go to simple passive cash flow.com/club. We’ve got the annual retreat from January 13th to the 16th in Honolulu, Hawaii. You guys have to complete the form there and book an onboarding call so we can get to know you because everybody who comes to our retreat, we’ve met, we’ve vetted, we know that they are going to make a great community member there.

Not gonna be a weirdo in Hawaii. We don’t want any weirdos in Hawaii and it is what it is. It’s like we have a private life. Group. We don’t just let anybody in and we especially don’t let anybody come to the physical in-person events because it reflects badly on me, right? , It’s like people think that I know these people super well and a lot of people I would say maybe it was a little bit different than the pandemic, now that we’re out of the pandemic, I would say people who come, I typically met at least half of the folks out there, but it’s always great to.

Associate the face to the name and it gives you guys the opportunity to ask the real questions that you want, right? I’ll put, I’ll remind you guys, whoever’s coming what do you guys need? What can I do to help you? Let’s talk about your situation, right? Let’s not talk about the weather here in Hawaii.

That’s boring, right? That’s not a good use of our time. Anything I can do to help. And that’s what you guys get when you guys come out to Hawaii here in January. Again, join the club, simplepassivecashflow.com/club, and I enjoy the Thanksgiving holidays and we will see you guys in December.