Transcription
Welcome, everybody. Today, we are reporting on the inflation report. It came in double the Fed's target. So, we're at 4.1% inflation right now, with a goal of 2%.
>> Yeah. And as you guys know, the reason why we're going live today is how important this is, because, uh, this is actually the real thing that investors watch: this PCE report. And it came out a little bit higher, as you guys know.
And the reason why this is important is because the the is the chain of events typically, even though the tenure went down a little bit today. So, it'll be interesting to see what happens with the 10-year, you know, over this week. But generally, when when inflation goes up, then the Fed is not going to be cutting rates anytime soon. And of course, as real estate investors, that's what we all want.
>> Yeah, yeah. And it's really moving in the wrong direction, you know, because everyone wants these rate cuts. But in order to get these rate cuts, you really need inflation to start cooling. And it really wasn't just oil, because if you look at the core inflation, that still was at 3.4%, which is way above the Fed's target. So, basically, this oil issue is now creeping into the rest of the economy, which wor specifically said that he was trying to prevent.
>> Yeah. So, don't forget, the Fed's target is 2%, right? So, when we talk about core inflation, what we're really talking about is it's really 4.1, but core inflation strips out energy and it strips out food. Isn't that convenient? It strips out energy. Um, and of course, everybody knows what's going on with energy. Denal and I just got up to Utah, and, um, you know, we saw it all the way as we were hitting the pumps all the way up. You know, it's going to be really interesting to see how summer travel, uh, goes up this this particular year.
But anyway, so, uh, 3.4 is still quite high. And so what this really means is that if you're a real estate investor, if you're planning on refinancing, or you're planning on rates going down, which I think is kind of generally what everybody's hanging on, um, and also maybe it's just time for you to stop focusing on the federal funds rate, which is what a lot of people do, and really focus on this PCE, because the PCE is the rate that, um, really most real estate investors watch, um, because it just has a chain of events.
>> Yeah. What's interesting too is consumer spending actually rose. So, with all this inflation, consumer spending rose 7%. Um, so I think that that's really interesting because that means people are still spending through the inflation, which is not necessarily a good sign for the housing market or for, you know, the apartment market. Because it basically means people aren't saving any money. You know, if they were saving money, they're now just continuing to spend how they spent before, which is dipping into their savings account.
>> Yeah. And the one thing, as you guys who are real estate investors, and maybe some of you who are not, um, you can work the other side of inflation. So, inflation is simply rising prices, as probably most of you understand what that is. So, if you're holding on to something that is a hard asset—whatever that hard asset is, it doesn't necessarily have to be real estate—then you can pretty much, uh, calculate what your rate of inflation is.
So, uh, another way to look at it is if you're saving money, if you're saving money and you're making 1 or 2%, let's say, maybe you're in some kind of a money market where it's a little bit higher, um, you know, the inflation rate should be lower than the saving money rate. So, in other words, if it's not, then your money is actually losing purchasing power.
So, that's why watching these indicators are extremely important, because there are money moves that are being made. There are positions being made based on refinances, if possible, um, and also, uh, acquisitions. And there are all these things that happen as a result of the PCE, which turns into, you know, interest rates, uh, which turns into the 10-year Treasury, which turns into cap rates. For those of you who know, cap rates are right now higher, way higher than they were just a couple years ago, which is why values for specifically commercial are down.
>> So, you're saying basically if somebody's not making 4.1% on their money, they're actually losing money based on today's inflation report, right?
Well, right. That would make sense, right? Because now it's not it's not direct, but it's a gauge, right? So, if the indicator is 4.1, and it is, um, and you're making one or two, then you're for sure moving beh.
So, the goal, obviously, is to have your money invested in whatever some kind of—that's why there are all these marketing-branded inflation-adjusted, you know, indexes and, you know, all these kinds of things. Um, you're just going to want to make sure wherever you're headed that you're going to want to be in those things. And, by the way, you should be anyway.
Um, you know, that's part of the reason why we're so bullish on real estate, because, you know, if you're buying a, let's say, a $500,000 house, um, you personally only need, let's say, a hundred grand of your own money, and the rest is actually borrowed. Um, and so that's a really important piece, because you're getting inflation adjusted on the entire 500, uh, even though you're borrowing, uh, 400. So, this is just purely leverage and using the system to you, because the inflation is obviously going to be on the 500, not, uh, including the money that actually wasn't even yours in the beginning. It was somebody else. And if it's covered by a tenant, um, then that's the golden ticket. The golden ticket is to get debt, have it paid off by somebody else, and then let inflation do its thing.
>> So, let's talk about mortgage rates. So, they really don't need a Fed hike to stay high. So, all of you guys that are watching that you're like, "Okay, the Fed did not change rates when they met last week." The issue with that is now that these inflation rates came back high, borrowing costs certainly could go up because of the bond market.
And in fact, uh, my mortgage lender, uh, messaged me a few days ago saying if this report comes back high that, you know, you should lock in rates by Thursday, because on Friday, you know, you were going to see an increase in rates. So, most likely, we'll see an increase in rates tomorrow just based on this report, because the bond market doesn't like the inflation, and the bond market actually sets mortgage rates more than the Federal Reserve does.
>> What's interesting, and of course confusing, is that the tenure actually went down at the news already, and that's just in this last hour or two, right? So, it's going to be interesting to watch to see what happens. Uh, but I think this is, um, this is probably the better indicator than the Fed funds rate. There's a whole lot of focus on the federal funds rate.
Um, the other interesting thing that I read this morning, uh, preparing for this, was that as you guys know, when Wars came out and talked recently, um, and the Fed was neutral on the federal funds rate, um, he kind of had a split, uh, you know, board, I guess. Um, and so, so apparently some of that some of that language has been revised because there was some stuff in there about federal about rate cuts. And apparently that was revised. I got to dig into that today a little bit more, uh, because I wasn't able to see the before and after reports. I just saw that reported by somebody else.
Um, but that, I think, is very, very interesting and very, very telling, because as you guys know, he didn't really take a position talking about Wars. He just said that everything was going to be, uh, moved to his task forces, which, um, however, Trump did come out and talk about. Uh, his position is that he wants lower rates. Uh, so it's going to be really interesting to see how lower rates, um, happen when we've got the PECE and, and of course, the, uh, the CPI kind of rising.
>> Yeah. Well, double what they wanted. It's not just rising, it's double. So, yeah, and you know, worse is under a lot of pressure because you have Trump on one side like, "Lower rates, lower rates," and obviously a lot of investors want that too. But then on the other end of it, you know, you have really high inflation. And so he's trying to balance, you know, both of those things with what he said was a very stable job market.
Um, so, you know, with the consumer still spending, because the consumer spending is actually up, um, that is going to be bad news for our actual housing market, just because if less people are having saved money, there's going to be less buyers. Now, it's still not going to crash the housing market because we don't have that many sellers either. But it is going to continue to be a slow real estate market until inflation gets under control, the job market gets under control, and, you know, rates get under control, which could be a very long time from now. So, we are still expecting that really slow housing market, but no kind of crash or anything like that.
Um, but however, that's in single family, which we have set rates for 30 years. But for multifamily, where a lot of people were in floating debt, uh, since 2021, this is brutal news because they are really banking on those rate cuts.
Well, as you, we talk a little bit about the debt wall. And if you guys don't know what the debt wall is, um, it, you know, over several years, it's it's trillions of dollars. And the debt wall simply means that you have the debt maturing. That's it. So, it could be an office building, could be a multif family building. It doesn't really matter what it is. But if you have, let's say, locked-in debt like Ross and I have on so many projects, you know, we're we're in the low threes. We even have some of the high twos where we're actually fixed. That's obviously a great scenario because we're beating inflation. We're borrowing money at less than inflation, you know.
But what happens is, as you guys know, is those loans mature. Um, and so we have two loans maturing in in spring of next year that we're already working on, and obviously they're at lower rates. So, today, here we are in summer of 2026, and we're looking at rates that are going to mature in spring of 2027. So, what's on our mind? We know that if we refinance, it's going to be a significant jump in the interest rate. Now, u luckily, on one property, we're 50% loan to value, but even if we we renew at 50% loan to value, our payment's going to go up significantly because our rate goes up.
So, this is kind of what's going on in the commercial arena is that a lot of people's rates are expiring, and they're going to continue to expire. And so, um, and we're of course living in the past based on these interest rates that we have locked. Um, and so we're looking at these at these future, um, adjustments. And so, uh, and of course, this is just our little company.
So, people, as you driving by and you see these office buildings and retail buildings and medical centers and multif family and all that stuff, there's this debt wall, literally. And so what happens in the debt wall is that your mortgage payment goes up significantly. So, if you don't have the ability to to take on that extra pain—and by the way, depending on the size of the loan, this could be hundreds of thousands of dollars, um, a year or a month, even even, uh, 50 to 100,000 a month depending on the size of the loans. And so if you don't have the income, which most of these properties don't, you're going to be in a situation where these are probably going to have to be put on the market and/or, um, maybe even write a check depending on the sizing of the loan.
And as you guys know, the the way it works is they look at the debt payment and then calculate back to the net operating income, which is income minus expenses. Um, and then that's how they back into the loan amount. And there are these things called debt service coverages and all that. And all all is calculated based on lowering the risk of the lender. So, the lender is going to want a little bit of room in that mortgage payment, obviously, as it compares to the net operating income.
So, as the commercial side of the equation starts to become a little more bit more stressed for occupancy, let's like in office buildings or multif family, which rents are pretty much flat, um, this all plays into this debt wall and these rate increases. And so that's why, especially on the commercial side, everybody's kind of hanging on this, you know, hoping that the that that inflation is going to head down the other way. Um, and it's a fairly big, uh, issue, uh, for people that are that are trying to renew, uh, as these loans mature.
>> Yeah, yeah. And so what do you think about, you know, we're at 4.1%? You know, what do you think? How do you think this implicates like the greater economy as far as just...
>> Well, I think there's a couple things. One, it's convenient that they strip out energy and food, right?
>> Well, they did it on the 4.1, right?
>> No. Yeah. On the 34, right?
>> On the 34, that's that's the core. I think that's incredibly convenient.
The interesting thing is that a big piece of this is what we call OEER, or owner's equivalent of rent. And OEER is basically, even though I don't agree with the way it's being calculated, um, but, you know, you got to kind of go with whatever they're doing. But OEER right now is flat. And so what that means is that there's really no, which is potentially inflationary, and there was a time where it was.
And so what we what we're what we are experiencing right now is supply that hit the market as a result of these low rates. Um, so we're in an over supply time frame. And so an overupp time frame simply just gives the consumer more choices. That's it. And so...
>> You're talking about rentals.
>> Yeah. I'm talking about rentals. I'm talking about OEER, um, and owner's equivalent of rent. So, when rents are actually, um, kind of muted down right now, which they are as a result of all this supply, then, um, you know, that piece of the inflation is going to be pretty stable or potentially even negative, because, uh, we certainly have had negative rent growth in plenty of markets, which means that when you start to see concessions and, you know, no rent growth. So, it's a great time to be a renter right now because the landlords are just getting whacked.
Okay. So, why is that important? It's important because that essentially runs out in about a year. In other words, uh, because of the affordability side on the single family, uh, more people are pouring into the apartments because they're getting great deals. Because, um, you know, in many, many, many markets, you're seeing one month free, two months free, three months free. And on the extreme, we've even seen four months free on a 12-month lease. That basically is a negative rent growth, essentially. It's just baked into something called concession.
So, when that happens, that means that that piece that the Fed doesn't have to worry about that right now, but there will be a time where they're going to have to worry about that, where you're going to start to see this this rent growth again, because, uh, because of this affordability issue. So,
>> Which will affect the inflation.
>> Correct. Right, right. So, it's going to be interesting to see how oil, you know, that that whole thing gets all kind of, uh, figured out. Uh,
>> But it's also, we talked to somebody that's in that industry, and the oil issue is far from over because they're not producing as much right now. But even if they started today, it's it's could go higher before it goes lower, just based on demand.
>> It's true. So, we have a speaker coming to Limitless this year. He's going to be doing a mainstage talk about energy. His name is Chris Martinsson, and, uh, he's got a great YouTube channel called Peak Prosperity. He's flying out from the Northeast, and I've had multiple conversations with him, and we just did a podcast with him about this, you know, where are we with oil, etc., etc., because it's such a big piece of real estate, believe it or not. Um, you know, because how it affects the, you know, gas prices and, you know, obviously transportation of food and all the stuff that that goes on with oil. I mean, oil touches everything, um, is one piece. So, he's going to be talking about that. We think it's a huge issue. Um, and he's going to be on the main stage at Limitless, certainly, to to talk about this this this this very issue.
Um, he thinks that we're going to see, you know, five, six, even $7 gas, uh, through this summer. And certainly, uh, as I just said to you guys, uh, you know, we're on our way from Arizona right now. We're in Utah, Park City area, and then we're heading up to to Idaho, uh, next week. Uh, we'll be there for most of July. And we're seeing it as as, you know, as we're moving along as well. So, it's an issue.
But right now, it'll be what my my bet, my big issue is when if we get oil figured out and it starts to come down, the the price, um, will at that point will we start to see, you know, the OEER, the rent, the rents, rents will go up, guys, trust me, in 2728. Um, that's not very long, that's like a year from now. So, it's going to be interesting, and that's why I think that PCE, CPI, whatever you're kind of hanging your hat on, is probably going to be, um, the nemesis of this administration for a while. Because, um, the only thing, as you guys know, that brings down rent prices is supply, right? Um, and, um, you know, when there's a lot of supply, there's a lot of choices. Consumers have lots of choices for rents. Um, and the landlords are scrambling to try to get them full. Uh, there's going to be deals, and so, you know, that's baked in as well.
>> But you also have to think too, with the housing market right now, a lot of investors are out of the housing market because it's hard to find cash flow deals.
>> Oh, that's a good point.
>> But, you know, if our if the rents start to go up and then the deals start to pencil better, that could increase housing prices because investors come back into the market.
>> Really, really good point. So, Dale has a lot of investors that call her all the time. Um, and she just told me actually yesterday or the day before that, you know, you're you're trying to find deals for them, and it's simple. It's rent...
>> ...minus mortgage, minus expenses. Is there cash flow or not? Period.
>> And what's the return? Yep.
>> Yeah. Is there cash flow or not? Right. So, if you take 100 grand and you're going to and you're going to invest in something and you want a, let's say, a 5% return, then, you know, you can calculate or 10% you're going to calculate back back into that.
So, uh, unfortunately, because of where rates are and the operating expenses, a lot of people aren't looking at that, uh, higher expense, higher insurance, higher utilities, you know, higher labor costs, all those kinds of things, higher property taxes—those are all hitting the real estate investor right now. So, as we as we start to look at people that are trying to invest, um, you know, that's going to be a big deal.
And then, of course, this bill that just u passed this week is actually a good thing, uh, you know, kind of slapping the hand of some of these big institutions. Uh, and we're going to talk about that more later, uh, uh, at a different time, but that that that was a win, I think.
>> Yeah, yeah. Congress passed a bill, Trump has to sign it with, uh, you know, going after, you know...
>> ...some of these, you know...
>> ...the big ones. Yeah. Like you're talking about, you got this, there's a lot of discussion around u you know Wall Street basically buying up Main Street. So, uh, if you guys don't know, there's there's a bill that, uh, is moving through right now that, uh, I think is going to be, um, certainly, uh, very good. And Trump's talked about this, you know, because essentially, like if you're trying to if you're a smalltime investor or even just a somebody trying to own a home, the last thing you want is Black Rockck owning the home next door across the street from you. And so that's essentially, uh, what this is for.
>> Absolutely. But, well, we will keep you guys posted. Um, inflation came back double of their goal. So, just keep that in mind. Always good to be in hard assets when we are having high inflation. And we are definitely having high inflation right now. So,
>> Thanks for listening, guys.