Dangerous Shift in Inflation Data | New Market Details

hey everyone kevin here we've got to

talk about a new coming form of

inflation that we haven't talked too

much about

but now it's front page of the new york

times and quite frankly even though

we've

briefly mentioned it and talked about it

a bit it is time to fully address

this potential risk to our markets now

there is also

one more big risk that happens tonight

and that is the expiration of the

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for getting 40 off on the program's link

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prices will go up tomorrow okay folks

let's get into

the topic rising rents folks

let's address what the new york times

says first then draw conclusions

and come up with a strategy for dealing

with this so again we're going to start

with the article

first the new york times says rising

rents threaten to prop

up inflation let's talk about this the

rental market

they say which slumped during the

pandemic has snapped

back more quickly than economists had

predicted oh my gosh economists are

wrong what and now

renters across the country are facing

sticker shock

rents last month rose seven percent

nationally from a year earlier

now it's worth noting that housing

prices

rose about 20 year-over-year so rents

are substantially behind

home price appreciation now home price

appreciation could be propped up

by uh by essentially lower interest

rates and now

initially when we think okay well home

prices are up 20 rent should go up 20

it's actually not a hundred percent true

we'll talk more about that in a moment

but one of the things for you to

consider when you think about the

difference between renting and owning

is that owning is a form of an

investment and when

other alternative investments become

less desirable to invest in

maybe stocks are too volatile or they're

trading sideways too much or bonds are

not providing

enough of a yield investing in real

estate becomes more desirable and the

more people invest in real estate

willing to accept lower rates of return

the more you could actually see home

prices go up and rent prices not

actually catching up to home prices

so this is a very very important concept

to consider is

a and it's basically defined as a

compression of

yields in real estate that could lead

home prices to go up substantially more

than rising rents

but bottom line is rents still went up

seven percent year over year

now we are measuring a year ago we're

measuring into about june

a lot of folks got rent abatements last

year as well

that is they got offered lower rent they

got rent uh

forgiveness or they got negotiated deals

we personally have negotiated

lower rent deals with tenants last year

and now it's like oh my gosh these are

like below market

so there's there's a little bit of

measuring into the hole going on here as

well

but seven percent from a year ago

that's a good chunk that's a good move

for rents they also mention

that we have a 1.8 gain just from

may we're going to talk more about this

the new york times goes on to say that

this could be bad news for both those

seeking housing and the national

inflation outlook

and that's because rental costs play an

outside

role in the consumer price index so in

other words what they're saying here

is we might actually see things that are

very high right now

like used cars or airline tickets right

we might actually see these potentially

start inflecting down

drawing our inflation readings back down

but if at the same time

as these go down rents go up we might

end up seeing

higher inflation for longer than

originally anticipated let's keep going

and then again we're going to come up

with conclusions and of course make sure

to get your 40 off coupon code link down

below expires today okay then i'm gonna

stop talking about it

uh prices are going to go up a big chunk

but anyway both tend to move slowly

but are just defying expectations okay

that's because okay let's break this

down so

technically the way cpi defines rents

going up is through this bizarro thing

called

owner's equivalent rent and it's

basically a survey of homeowners going

what could you rent out your property

for right now

and that's because there's really a not

a very good database

showing rent rental comp data we have

frustrations of that as real estate as

agents as well because a lot of like

leased properties just don't get

submitted

as comps so it's very difficult to get

accurate housing data

so the most accurate means that cpi

gatherers bureau of labor statistics has

found has been this thing called owner's

equivalent rent

it's odd it's behind it's not that great

but it is what it is it's what we have

and what we're looking for again are

inflection points

this is something that's very important

to know about data as well a lot of

folks get

really like jazzed up over this idea of

oh well

the data's wrong it's it's rigged or

whatever that's fine

then just look at the uh

the rigged data so to speak and look for

inflection points or

changes in the rig data see what i mean

and then just track the changes right

unless of course it's rigged to where

you don't even see the uh inflection

points and if you believe that well

you're honestly probably not watching

this video

uh because you've got to have a little

bit of faith just a little bit of faith

so you could track at least some data

right and so that's what we're trying to

do is we're looking for those changes in

the market

and this is an inflection point we're

seeing owner's equivalent rent move up

fairly

sharply says an economist i expect it's

going to get worse

later this year and into early next i do

think

we'll see upside from rents and that'll

offset some declines in good categories

exactly

like used cars airlines durables

whatever services whatever

in other words inflation might stay

higher longer

so but the only way that rents rise

enough to keep inflation uncomfortably

high she says

is if wages are persistently higher now

wages

in the service industry like retail

hospitality those are going up

substantially

but if you take out the reopening wages

wages actually aren't going up that much

they went up like 0.2

last month which is very very low anyway

uh all right and then we have here data

do suggest that a substantial supply of

new apartments should be on their way

this year but it's unclear when those

will match up with demand

in other words builders are trying to

build more which makes sense

that's one of the reasons we saw lumber

prices skyrocket so much

uh here's a real estate agent who was

interviewed saying there's going to be

another wave we're basically at full

rental capacity

and we're going to have another wave of

people coming back to the office

he says we're just past peak zoom

which i think is kind of interesting you

know zoom video conferencing we're just

past that peak

so in other words we're still working

our way down that bell curve and we get

a long way to go

so far in 2021 rental prices nationally

have grown 9.2 percent compared to the

two to three percent that is typical

from january to june it's a big big big

move here folks

occupancy rates are high rents are a

trailing spouse to home price

appreciation in other words home prices

tend to go up first and then rents go up

but remember the warning i gave you

about they might not necessarily have to

go as

much as home price appreciation uh the

administration officials over at the

biden administration still suggest that

inflation will be temporary

obviously at least 50 of us do not

believe that to be true

and uh and even if congress passes any

kind of rental relief packages or new

sort of human infrastructure or stimulus

packages it'll take years for some of

these things to actually get out

some of these new things but let's now

so now we've got the new york times

article here and we've got some of the

concerns laid out let's try to put this

together here okay

uh all right so here's how we're gonna

start first

uh yeah look a quick note on these

rental relief packages and things like

this and this sets up just another issue

california has 5.2 billion dollars of

rental relief money 92 percent of that

is from the federal government

they've only sent 6.3 percent as of the

last reading about

a few days ago they've only distributed

6.3

attendance that means you've got a

substantial number of tenants who are

still behind in red

and so we have this really really weird

environment where what you have

and i'm going to write this here sort of

on on the bad side of things right

you have essentially a lot of people who

are behind on rent

uh and then you have this potential for

an eviction

crisis and this is happening by the way

at the same time as you have this

potential that

real estate prices might start coming

down now we've talked about this before

and the easiest way that i like looking

up that

okay why do i think real estate prices

might start coming down easiest thing to

do is just quickly hop on over to the

redfin data center

and what i like to track is i like to

track new listings

we see new listings slightly ticking

down here but

then you look at prices listing home

prices

and we see that home prices are still up

so home prices are still up that is new

listing prices what sellers are asking

for the asking prices are up

but at the same time pending sales are

really starting to fall sharply

earlier than they usually fall and

that's that's a potential problem

because it's a potential sign of buyer

fatigue and a potential stagnating of

inventory

so this is another thing right

stagnating

of inventory and then of course you have

buyer fatigue

fatigue yeah so you got behind on rent

eviction crisis stagnation of inventory

bio fatigue

all of these things are kind of coming

together

at a relatively similar

point and this is concerning because

when you look at this

as being a bad you wonder okay well when

could this potentially bubble over

well realistically this inflection point

in pending sales and

and an increase of inventory is going to

start affecting prices almost

immediately

the real estate market can move very

very quickly and so personally

i wouldn't be surprised if we start

seeing prices actually come down

in the second half of this year as we

start seeing inventory build up

and we start getting this alignment

again between buyers and not like 15

multiple offers anymore or whatever

we start getting in alignment again

where supply all of a sudden

meets demand right we're getting back to

an equilibrium as we go back to

equilibrium

we could easily see real estate prices

come down a chunk

i would say maybe somewhere between five

to ten percent off these crazy highs

would be realistic and in that case we

might potentially

end up in a situation where let's say

home prices end up

i don't know 12 to 14 percent higher

than they were before the pandemic

it wouldn't surprise me to see rents

somewhere between 12

10 to 12 percent as high as they were

prior to the pandemic so i do think

we're going to get that rental uh

you know appreciation and prices i do

think we're going to see home prices

come down from that crazy 20

gain just level out a little bit i'm not

sure if we're going to get a culmination

of a massive crash

but you never know because in order for

us to get like a massive crash

we'd really have to see home prices give

up not just their 20

gains but then probably fall another 20

to 30

i don't really see a catalyst for home

prices falling

50 percent unless interest rates like

skyrocket two to three to four percent

and i don't believe that's what's going

to happen now there is this belief that

well wait a minute kevin

if this is what inflation looks like

right now and inflation is so high

and then all of a sudden used car prices

and airlines come down but pushing it

right back

up are rent prices then you could be in

a situation where you have higher

inflation longer and maybe the fed is

forced to raise rates

i do believe that could be true and it

is possible that we will see

higher inflation longer but i do believe

that

eventually rents will also start

inflecting down

we might just end up getting a delay as

to when we see inflation inflecting to

the downside

that could be short-term painful for

markets

and so i want to be prepared for the

potential of having

inflation in the market as well as the

potential for having less inflation than

we expect in the market

so i'm really taking this sort of

sideways trading maybe a little bit of

deflation you know falling prices in the

housing market

a little bit of a sideways uh a trading

or investing mindset

but before i get into that mindset i

think it's worth quickly noting this

here

the cpi estimate of home prices doesn't

come close to reflecting the market i

thought this was really interesting

this is uh the cpi's owner's equivalent

rent right here

is this blue line right here and home

price appreciation is the black line

and it's just worth noting that over the

last 21 years you've had a much

slower movement in rent prices than you

have in housing prices

so usually you can get these extreme 20

ups and downs or whatever

in in housing prices but

i believe that we'll probably have a

more muted uh

rental appreciation where maybe we get

five percent over two years right

compounded that'd be like 11

ish somewhere around there and i do

believe house prices

could be doing something like like that

you know where essentially we get this

a parabolic move up and then almost like

a momentum stock come down and sort of

level off

maybe it would be a little bit softer

something of that effect okay so now how

do we make conclusions and how do we

want to invest

in this well so here's sort of a very

clear bottom line on my belief

my belief is that we will see

probably higher inflation longer so

inflation longer and that's potentially

due to

rents going up so more inflation longer

in that event we're probably going to

have sideways trading in the stock

market

longer and that means i really don't

want to be a buyer of

option contracts i want to be a seller

of option contracts

so i want to be a seller of options

but i also want to be prepared for large

dips

so i want to have cash saved up and then

i also want to be prepared

to shop in the housing market so that's

going to be a big deal in my opinion is

going shopping in the housing market

very very excited about potentially

shopping in the housing market and and

finally getting some

wedge deals again below market value

transactions why would i want to get

into real estate

because real estate ultimately is an

inflation hedge

when there's inflation real estate is a

great tool for hedging yourself against

inflation

and i want to take advantage of being

properly exposed to growth in tech

stocks and stocks

but also i have my inflation hedge in

real estate so those are those are some

of my

uh beliefs and thoughts about this

market and how we're going to

potentially deal with this

rental inflation danger so these are my

thoughts hopefully you find these

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you