Massive DEFLATION is Coming with Critical Housing Flip.

massive deflation massive changes to my

expectation for when the housing market

is going to bottom massive changes for

household formation we have so much to

talk about in this video it's crazy just

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this video food shift in rental

inflation could mean a massive change to

real estate projections and the real

estate collapse projections that might

not end up leading to a collapse in fact

the buying opportunity for Real Estate

could be shifting up not back let's talk

about all of that and more in this video

on real estate investing let's get

started first this morning we had the

CPI report the Bureau of Labor

Statistics Consumer Price Index

inflation report and what's very

important here is to pay attention to

something that has substantial lags

rental shelters specifically are right

here owner's equivalent rent of

residences this is basically where the

Consumer Price Index and the Bureau of

Labor of Statistics try to estimate hey

how much are properties worth on the

rental market and so what they'll do is

they call owners and Survey them hey how

much rent do you think you can get for

your property the problem with that is

when rents start going up owners don't

actually realize that and so you don't

realize those rents going up until much

later you have to shift that over when

you realize that probably by about six

months are the estimates at least

JPMorgan and Goldman Sachs agree on so

the problem with this is rent rental

inflation makes up about 3 32 percent of

CPI and about 25 percent of pce that's

basically the fed's version of CPI the

point is owner's equivalent rent and

Rental shelter makes up a huge component

of inflation and if the data they're

using is six months delayed then they

could be making some big mistakes if all

of a sudden rental inflation is

plummeting but it takes six months to

actually start seeing that rental

inflation plummet over here now the good

news is Jerome Powell has already made

it clear they're astutely aware of this

decline delay and as long as they

continue to see this decline trending

down they will assume that this decline

will come which is good because it means

you have a Fed that even though they're

kind of looking in the rear view mirror

they are looking at current data as well

and that's what we're going to look at

today because here's the thing when you

jump over to the owner's equivalent rent

you actually see it's up 0.7 percent

month over month that's a lot that's 8.4

percent on an annualized basis not great

but remember that keep that in mind I

want you to keep in mind eight point

four percent because we're going to

compare that to something in a moment

overall shelter inflation was 0.8 that's

9.6 annualized not great now we did have

some declines in hotel and lodging look

at that lodging away from home

specifically hotels and motels declining

on the month-over-month basis uh right

here which is actually incredible I

actually think it's going to contribute

to what we'll see as an Airbnb collapse

where more people are renting out

airbnbs because they need more money but

less people are actually demanding them

because they have less money and so you

end up seeing a large unfortunately in

both directions movement in prices

basically for airbnbs and rentals and

hotels going down that all helps take

shelter inflation down add to that a

decline in owner's equivalent rents as

we look at new lease signings oh boy

you're setting up for a massively

deflationary environment and potentially

quite large cuts at the Federal Reserve

so what do we have today we'll look at

this folks asking rents post the

smallest annual increase in 15 months in

November look at some of the data here

and I'll tell you there's one area that

is still booming in contrast to the

trend it's just one area based on these

surveys and I'm going to tell you

exactly what area that is it's a certain

State when you start thinking about what

state actually has their rental

increases going in a complete opposite

direction as anybody else in other words

we're rent still going up right all

right so what do we got here if you look

at the average of the United States

median U.S asking rents climbed

7.4 year over year to two thousand uh

about two thousand dollars two thousand

seven dollars in November this is the

smallest increase in 15 months and the

sixth month in a row where annual rent

growth slowed now I want you to think

about that for a moment because you

might look at that and say hey well rent

still went up seven percent how is that

a good thing well remember how how this

works when you have rental inflation

because of a pandemic that booms like

this

and then you have an inflection point

like this

the way this year-over-year comparison

works is really kind of funky because if

we're over let's say uh in December

right and we're comparing to December of

last year we might be right here right

now where the green is this might be

where we are right now and when we look

at December of last year Well December

of last year could actually be over here

and so now when you compare these you're

actually still up you're still up from

last year but the trend is plummeting

and this is why when you look at more a

recent comparisons and you go well wait

a minute you know when we compare uh

this area up here or I'll use orange

when we compare here to let's say here

the change is huge right because you're

only measuring on the upslope now you're

actually measuring the downslope

compared to the upslope and you're

having less of an increase and soon this

will turn negative cause this is the

trend we're going in

so uh that's that's why you still see

those year over year gains it's only

been about six months of these going

down so give it another six months and

then we'll see year over year declines

and all these numbers will be negative

that'll be pretty glorious because it's

also going to affect real estate

valuations and towards the end of this

video we're going to talk real estate

valuations a little bit especially since

lower rents could lower cap rates but

how is it possible that we have lower

rates if that means uh you know if there

are less homes talk about that as well

so uh very interesting uh slowing

inflation could lead to lower mortgage

rates we'll touch on that a little bit

later as well by comparison rents were

up twice as much in the summer as they

are now uh rents were up about 15 versus

the about 7.4 percent where we sit now

but what I want you to see is this this

is remarkable okay

these are the largest out of the top 50

cities these are the largest declines in

month over month uh actually these are

year over year asking prices let me

double check that though these are yeah

median asking rents year over year so

the largest declines over here were

Milwaukee Austin uh Houston Baltimore

Minneapolis Chicago Denver Atlanta

Dallas Jacksonville Boston Los Angeles

Vegas and New Orleans now what's

interesting here is I compared this

rental survey to May and I wrote it

right here and everything in green

highlighting means that today rental

inflation is slowing

compared to May so for example Milwaukee

was down 10 year over year in May now

it's down 13 so in other words we're

still trending down Houston was up 16

now it's down six percent Austin was up

48 now it's down 5.3 percent you can see

this crazy Arc happening in some of

those boom towns like Austin and Houston

crazy Arc Chicago for example was up 66

now it's down 3.8 Denver was up 16. now

it's down 2.9 Atlanta up 18 down Dallas

was up 21 now down right so you see this

there's only one place and these are

these are declines there are those still

areas where rents are still going up

year over year however I've highlighted

in green to show you how those are also

declining now this right here shows you

cities where rents are still going up

but what I do is I compare this to May

and if this number right here is smaller

than the main number what I'm about to

show you it suggests that rents are

starting to fall in these areas as well

so these are still positive year over

year but they're also starting to slow

down so for example Indianapolis

grew at 15.8 percent well in May it was

growing at over 20 percent now I'm going

to zoom out and in green you're going to

see where rent inflation is slowing in

pink you're going to see the one state

that has two cities where rent inflation

is actually getting worse it's the only

one out of this entire survey where

things are getting worse Ohio folks Ohio

Cleveland rents in May up 9.6 year over

year Cleveland Island now in November up

14.9 so you actually have rental growth

where everybody else is declining Ohio

at least Cleveland is going up Columbus

was uh it was almost stable almost

stable so even though this number is a

little smaller I marked it as pink

because it's almost stable they're at

8.4 percent Now versus nine percent

earlier that's not true for Cincinnati

though Cincinnati's down to 9.2 percent

versus the 31 percent they had

previously so a big deceleration there

but for some reason Cleveland and

Columbus uh are are holding up and

that's quite interesting how those are

the only ones holding up everyone else

is declining uh relative to to the

growth rates we've seen earlier in the

year and this is why when you look at

the average the average growth rate is

about 7.4 percent which remember the

numbers we wrote over here on the BLS

report you're a 9.6 annualized rates of

growth for the CPI the cpli report right

9.6 the the rent tracker is telling us

we're actually at 7.4 and declining fast

this number is likely to go negative

when this number goes negative six

months later this these numbers over

here go negative oh my gosh we are going

to have a 30 anchor on inflation massive

deflation could be coming because of

this kind of shelter deflation so let's

think about this for a moment because

real estate values are based on how much

cash flow you could get right how much

you can earn from investing in real

estate and when rents go down cash flow

goes down and cap rates uh or you know

go down cap rates are your expected

Capital return on a property right so

you take your gross rent you take off

your expenses how much is less divided

into the price you get a rate California

is like two or three percent often uh

Florida might be five or six percent

right and so different areas have

different cap rates problem is when

rents goes down those cap rates go down

and valuations come down so what's

really interesting here is even though

mortgage rates are trending down and

more people are renting

rents are trending down now that's

fascinating because how could more

people be moving to renting rather than

buying but rents be moving down

it has to do with household formation

the housing market right now is not in a

place where a lot of people feel

confident in the broader economy is not

a place where a lot of people feel

confident about their own finances to

form households so as older folks

potentially retire and move in with

family and sell properties you're

putting more inventory onto the market

or they're passing away more inventories

going on the market but less people are

buying those homes less landlords are

buying those homes but in addition to

that you potentially also have fewer

younger families like gen Z's or

Millennials like deciding to move out of

their family homes because you're in

tough Economic Times so you have less

actual rental demand and this is how you

could actually see both rental prices

move down and home prices move down it's

sort of the end part of the inertial

inflation part see initially earlier in

this year when you start raising rates

you actually tend to to push rates up

because the people are like okay we're

definitely forming a household we're

gonna buy now we're gonna rent right so

you push up rents that's part of why

we've seen some crazy rental inflation

earlier in the year because people are

like that's it I'm done I'm not gonna

buy

once that's over people like I'm just

not gonna form a household now you have

less household formation what happens

less demand for homes for sale less

demand for rentals less demand for

rentals means even as mortgage rates

come down you could actually see

valuations on homes potentially start

sliding down because they're much less

attractive to institutional investors or

even mom and pop landlords putting less

competition for on on these homes and

home buyers are now fearful about a

potential downtrend in real estate and

so even though lower rates from the

Federal Reserve or or even just the

market the mortgage market I'll talk

about that in just a moment uh could

suggest more affordability for homes

you're still walking into a really

uncertain time which doesn't necessarily

say the Bottom's in for real estate in

fact I don't think it is I'm going to

talk about that in just a moment but

let's quickly touch here what are bonds

doing you look at the 10-year treasury

the 10-year treasury is down 14.6 basis

points after the inflation report today

that should really Drive mortgage rates

down I believe mortgage rates right now

are around 6.3 percent let's just go

ahead and type in mortgage rates let's

pop this on to the 740 credit score

we're always going to use the same

credit score okay so they're sitting at

about 6.7 after today's treasury

movement I expect this to go down to 6.5

6.4 right around there so we'll see give

this a couple days for markets to adjust

we'll probably see mortgage rates around

six and a half and if we continue

trending in this direction we could be

around six percent mortgage rate soon

that though however is still three and a

half percent higher than where we were

in December which still removes 35

purchasing power from buyers rule of 10x

the real problem there though is less

household formation

three and a half percent higher mortgage

rates combined now with the fear is is

in my opinion you're going to keep home

buyers out of the market for longer

because one of the one of the factors

you look at when you go buy a home is

what can I rent this out for if I needed

to well now those rents are starting to

slide it's going to create fear and I

think a big buying opportunity for Real

Estate now

let me give you some time frames my

opinion my expectations obviously I run

a company called House hack it's real

estate startup uh where we expect to buy

rental properties

so the decline the rapid decline in

inflation and these deflationary signals

in my opinion move up the time to buy

real estate that time though is not now

even though we're seeing these sorts of

declines in mortgage rates the time is

not now I think that time is really

lining up for Q2 Q3 of 2023 especially

if we continue on this disinflationary

trend I'm going to explain why remember

how earlier I said year over year we're

going to start seeing negative rental

inflation and that's going to be really

disinflationary right or deflationary

it's also going to create panic in my

opinion because you're not only going to

see year-over-year home prices negative

but you're going to see year-over-year

rental prices negative so in other words

why would you buy something that's

plummeting in value why would you buy

something where your safety net is also

plummeting and value being able to rent

out the property most people won't

and that's when you get around Peak fear

for real estate and it potentially

becomes the best time to buy especially

if the Federal Reserve moves into the

territory of a Fed U-turn and we

actually see them start slashing rates

which I actually expect massive rate

Cuts within the next 12 months because I

think shelter inflation is going to

Anchor overall inflation down heavy so

my thoughts check out the programs on

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we'll see in the next one thanks so much

goodbye