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 remember, we have extended the coupon code for the Real Estate Investing course do-it-yourself Property Management course and the other courses like the Real Estate Agent course or stocks courses until December 14th at 11 59 PM You get lifetime access to those programs on building your wealth. New lectures coming out this month Lifetime access to when I conduct the live streams. You have access to those anytime.

I Go live the private course member live streams where we do deal analysis as well, so make sure to check those out link down below. It's the sponsor for 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 building your wealth. Get prepared for this real estate transition.

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