BiggerPockets Real Estate Podcast - 541: BiggerNews December: Zillow Quits Flipping, Inflation News, & "Power Buyers"

Episode Date: December 7, 2021

Will inflation sink real estate? Is Zillow out of the iBuyer game? And why does my cash offer mean less than it did last year? Dave Meyer, VP of Data and Analytics at BiggerPockets, has heard your questions through BiggerPockets forum posts, YouTube videos, and on Instagram. This data-loving sandwich connoisseur is back to walk you through the biggest stories in real estate. As incredible as Zillow Offers was, it looks like it won’t be around any longer (at least for a while) since having a half a billion-dollar loss in Q3 of 2021. With Zillow’s exit from the iBuyer and flipping market, other big players like Opendoor and Offerpad have come in to fill the gap. But, what about the new “Power Buyers” in the market? Will they help or hurt real estate investors? We’ve also seen a run-up in inflation over this past year, causing home prices to artificially soar (especially when paired with low interest rates). So what is the best move for a real estate investor to make in today’s market? Take advantage of low-interest mortgages and all-time high rent prices, or wait for a supposed housing market crash or correction? In This Episode We Cover: Why Zillow cut their losses and exited the iBuying arena The new “Power Buyers” in the housing market and how they could help investors like you What a 30-year high inflation rate means for asset prices How to take advantage of record-low interest rates for long-term cash flow The cities in the US with the highest growing rent prices  What to look for in a rental depending on your estimated retirement age And So Much More! Links from the Show BiggerPockets Forums BiggerPockets Youtube Channel Zillow iBuyer Opendoor Offerpad Redfin BiggerPockets Podcast 480: Making $200k a Month After Being on the Verge of Bankruptcy Knock.com Orchard Homeward Band Protocol Check the full show notes here: http://biggerpockets.com/show541 Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast show 541. Despite all of these headlines and news about real estate you see out there, you're going to be able to leverage all the work I do every day. And we're going to look at just the top three trends and headlines that you need to pay attention to to be an informed investor and achieve your financial goals. What's going on, everyone? It's Dave Meyer, today's host of the Bigger Pockets podcast. And normally I'd have David Green here with me, but he is,

at a mastermind all week. And so today, it's just me. And I am really excited about this one. If you're new here, this is the show where it is our job. And yes, today, it's just my job, to teach you how to become financially free through the power of real estate investing. And today, we've got a truly excellent show lined up for you guys. I am really excited to go through this one with you. Here's what we got on tap. We are going to break down the most important trends and news impacting the very wide, broad world of real estate investing. And what we want to do is help you cut through all of the noise that's out there so you can focus on the information that is really important to you. And that means you can make informed decisions about your investing.

And the point here is that this information that we're going to talk about today applies to everyone, whether you're a seasoned vet with a giant portfolio and scaling a huge business, or even if you're just trying to get to your first deal or maybe just have a single deal, this information applies to everyone. Today, we are going to walk through the three most important stories and headlines impacting real estate investors. These stories are, of course, Zillow. We have to talk about this.

What happened with Zillow? What's the future of ibuying? And we're going to be discussing a whole lot more. A lot of things that people haven't been talking about yet in the news, which is a new entrant into the world of real estate tech known as power buyers. I actually think these new entrants might have a bigger impact on real estate than I buyers, so definitely want to listen to that one. We're also going to be talking about how interest rates and inflation are impacting the housing market. And yeah, those are two different stories, but I'm going to lump them together,

and that will make sense a little bit later. But this has huge implications for prices on the housing market, so really important to anyone who has a portfolio. And, lastly, we're going to talk about how rent is growing faster than at any time on record. And this obviously has huge implications for anyone who is already investing or anyone who wants to get into this market. So guys, you are going to want to stick around for this one. It is super important information. It's going to be fun. It is going to be informative. And most importantly, it is going to help you adjust your strategy and help you make informed decisions even in this crazy, competitive, and in many ways, unprecedented economy and housing market that we are seeing today.

So that's what we got for you today. I'm super excited. I think you're all going to get a lot out of this show. But before we jump in, let me quickly reintroduce myself for anyone who hasn't heard me as the host of this shore before or doesn't know me from YouTube or the Bigger Pockets blog or from Instagram where I am at the Data Deli. probably want to know who this dude who's talking to you is, so let me just quickly tell you. I'm Dave Meyer. I started investing in real estate just a year out of college back in 2010, and I've been building a portfolio ever since. I'm mostly into long-term rentals. I got a bunch of them in Colorado, specifically in Denver, but also have experience with short-term rentals. I've done some burs, and I also have recently been getting more into syndication deals.

But something about me that is not necessarily true about some of the other hosts here is that I am not actually a full-time investor. I have the great privilege of working full-time at Bigger Pockets, where I've worked for about six years and currently I serve as the vice president of data and analytics. And I know I'm probably one of the only people listening to this that actually likes their job, but I really love analytics. I have a master's degree in it. and I just really enjoy looking at complex situations, big data sets, and trying to make sense out of it and explain it to people. And because of that, honestly, I think I have one of the greatest jobs in the world. And that is why I am not actively trying to retire, but I am trying to build my portfolio while I keep working at bigger pockets. And the reason I'm here talking to you

today and am hosting this podcast is because part of my time at bigger pockets, one half I spend working internally on data and analytics for BP. That's boring. You guys don't care about that. But the other half, which I think you might care about, is I spend a lot of time analyzing the housing market, looking at real estate trends, and basically just crunching data to help investors like all of you cut through the noise that's out there and look at what's important. And I do that by taking all sorts of data, proprietary data, public data, but I also do my own original research and analysis. And that's what we're going to do today. Despite all of these headlines and news about real estate you see out there, you're going to be able to leverage all the work I do every day.

And we're going to look at just the top three trends and headlines that you need to pay attention to to be an informed investor and achieve your financial goals. Do you ever notice how every passive investment somehow turns into a very active lifestyle, active spreadsheets, active phone calls, active stress? Here's a better question. What if you could buy brand new construction homes, 10% below market value, and the best markets across the country, without making real estate your second job. That's exactly what rent to retirement does. They're a full service, turnkey investment company handling everything for you. In some cases, investors get 50 to 75% of our down payment back at closing, plus interest rates as low as 3.75%. They've

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in a long-term approach. This isn't about chasing hype or guessing market timing. It's about building durable, tax-aware, wealth over time. Learn more at biggerpockets.com slash bam. And with that, let's do this thing. First, guys, we have to talk about the Zillow situation and what this means for investors. And I know this has been all over the news recently, but that's because it's an important story for the general public. But as real estate investors, it's even more important. So we're going to talk about I buyers. We're also going to talk about something new called

power buyers, which I actually think might even be more impactful. to the housing market over the long run. So let's jump into it. If you haven't heard yet, Zillow, they recently shut down their eye buying platform known as Zillow offers. And they had lost something like half a billion dollars

in Q3, so it's not really a surprise that they shut it down, but it is a crazy story to hear one of these giant corporations like Zillow exit something they were so bullish on just recently. If you're not familiar with eye buying, it stands for instant buying. And basically what Zillow and some of its competitors like Offerpad and Open Door

Try and Do is reduce the amount of friction in selling your home. If you're trying to sell your home, typically you find an agent, you put it on the MLS, people come trompsing through your house and you get multiple bids and there's a bidding war and this can be kind of stressful for people. So what I buyers do is they're like, hey, just forget about any of that. We have an algorithm. We think we know what your house is worth. here is what we are going to offer you.

For a lot of sellers, that is a really good value proposition, and they actually wind up selling for that. And this business model for Zillow and these competitors, it's not just based on appreciation. And yes, they do want that because when they buy the houses, they do some modest reservation and try and force some appreciation. They also would love to time the market well and sell at a higher price just based off market appreciation. but they're also making money on fees.

Like they sell you their title and their escrow, and they also want to help you get a mortgage on your next purchase. So they are making money in a bunch of different ways. But the problem is Zillow faced a few challenges. And the first is their inability to predict housing prices. And I actually have a bit of training in machine learning and writing algorithms. and this doesn't really come as a huge surprise to me because the quality of an algorithm of prediction really depends on what data you put into it. And yes, Zillow has, they have tons of

data. Like they know how many beds and baths and square footage of every single house. But what they can't quantify, at least yet, is the layout of a house, for example. What is the curb appeal? Are the bedrooms arranged in a way that actually makes sense and is functional and comfortable for a tenant to live in? And they also can, can't forecast or quantify the change in buyer sentiment. You know, right now we're in this weird period of time when buyers are wanting different things. People used to want to live in big cities. Now people are moving increasingly to suburbs and they want more space and they want a bigger yard. And it's really, really hard for machine learning algorithm to keep up with those rapid shifts

in buyer sentiment and buyer preferences. And I think that's a big reason why they were having such a hard time predicting prices. And I'm not super surprised by this. And I don't think any real estate investors or real estate agents are really surprised by this because they have been complaining and frustrated with Zestimates for years. And, you know, I actually was curious to see if all of this talk about how wrongs estimates are is true. And Zillow actually publishes information about this. And their margin for error for houses that are on the market is 2%. And 2% margin error pretty good. But that's kind of cheating, right? Because once it's put on the market, you know kind of what it's going to sell for. Their margin rate, on the other hand, for things that are off

the market, is 7%, which is really big, right? If you have a house that you are selling for $500,000, the margin of error is plus or minus $35,000. So it could sell for $4.65, or it could sell for $5.35. That is a pretty big margin of error. and, you know, if you were trying to flip houses, that is way too big a margin of error. So that is a clear reason why they went wrong and why they're exiting the market. The other reason they cited for leaving is because of material and labor shortages. And I mean, come on, anyone who is a house flipper or running a renovation or just even trying to maintain your own rental properties right now knows that it is super hard to get materials. there are all sorts of supply chain issues, and there are labor issues, right? It's super hard to find a good

contractor. You can't even find appliances, right? A friend of mine was looking for a fridge for a rental and said it was going to take four and a half months to get a fridge. So these things, Zillow, sure, they probably have more purchasing power and can cut the lines in some examples, but it's a really hard situation to navigate for individual investors. And I imagine it's even harder at scale. So these are the problems. They are mostly operational, and it is why Zillow is exiting the I buying market. Now, I want to just take a really quick moment and saying they are not exiting the market because they think the market is going to crash. And sure, they might have some internal thinking about that, but I've got this question a lot. People are like, oh, Zillow is exiting because they think the market's going to crash.

But that is not going to happen. If you look at the housing market data, as I do literally every single day, The housing market is based on strong fundamentals right now, and it is likely to grow through 2022. We'll talk a little bit more later in the show. What's likely to happen after 2022, but Zillow, trust me, is not exiting the market because of prices going down in the future. They're exiting because they had operational challenges that a lot of their competitors, frankly, aren't seeing. So that's it. Zillow is out of the game, but there are still others in there. Open Door and Offerpad are two of the big ones.

Redfin also does this, but Open Door is now going to be the biggest player in the field. And Open Door and Offerpad have historically, even though they're smaller, they have performed better than Zillow. So they actually, I looked at some data and they actually had 50% better margins than Zillow in Q2. So that's significant. And they were also turning profits of 6 to 7 grand per house in Q2, while Zos, Zillow was still losing money, or I think on some houses Zillow is actually making a really modest amount of money. But it seems that these companies, Open Door and Offerpad, are actually

doing a lot better than Zillow has historically. And they've issued statements over the last couple of months that they are continuing to forge ahead. And if you look at data from them, they're getting better and better. Their margins are improving. Their scale is improving. And so there's really no reason to think that eye buying is going away anytime. soon. And this matters to investors. And I'll explain a couple T takeaways and why eye buying's continued presence in the housing market matters to investors. The first is motivated sellers. For a long time, this has been the bread and butter of wholesalers and house flippers and burs and all sorts of investors. There are people out there who just don't want to

put their house on the market, go through the bidding wars, clean it up, get the appraisal, do all of that. And so instead, these what they call quote unquote motivated sellers do is they sell the real estate investors who can basically come in and allow them to avoid putting it on the MLS because they don't want to do it. I was just listening to show 480 the other day. And Brandon and David had this guy, Dan Brault, great investor on there, Rochester, New York, which is my alma mater. He invested in Rochester and upstate Western New York. And what he was describing is that these motivated sellers, they have problems, right? Maybe they have a family issue and they don't have time to deal with it. Or maybe they're embarrassed or have some shame about their home or they're a hoarder.

Or maybe there's a roof that's caving in that they need to sell. They need to fix before they sell. They just don't want to deal with it. Dan and other investors like him who look for off-market deals, their goal is to solve these people's problems. And Dan estimates it's about 5% of the market comes out to be motivated sellers. It's not for everyone. But a lot of these people wind up working with real estate investors because it's a symbiotic relationship. These motivated sellers can't or won't put it on the MLS and the real estate investors get a better deal because of it. Now, this is all sort of at risk with I buying because rather than someone who doesn't want to put their house in the market going to an investor working with someone like Dan, they could just go on Zillow,

enter a few buttons and Bing, Bang, Boom, you got a instant cash offer and you have a huge company like Zillow, which has huge amounts of cash to offer you a reputable company coming in and saying they're going to buy their house from you. They're probably going to keep their word. And that's going to be really important to you as a motivated seller. So it does allow for more competition for these type of buyers. So I just want to stress that right now, I buyers, while Zillow is in the game maxed out at about 1% of home purchases per year. So it's really a small part of the housing market right now. And with Zillow exiting the market, it's likely to go down because they were buying. by far the biggest. But I do think this is going to grow, but slowly over time. And I don't want

people to be depressed or worried about this because there are still things that you can do as a real estate investor to out-compete these other Imires. And I really like this show with Dan because what he was talking about was solving a problem. And a big company that uses an algorithm to predict housing prices and just make these generic offers, yeah, they could solve some people's problems. But by building a personal relationship with a motivated seller and understanding what is important to them, what their timeframes are, and being flexible and being creative are still things that these iB buyers, they're never going to be able to do. And i buyers also, I know this, I write algorithms, I know how to do this. They are never going to be able to know your market as well

as you do. They just can't. They're looking at the whole country right now. You know your market with intimate detail. You also care much more about every individual deal you do because you do a couple of deals a year, right? And so you're going to do everything in your power to make these deals work and figure out a creative good solution for these things. Where iB buyers, they're basically just trying to snatch stuff up. If they're off by 10 or 20 percent in any market, if they buy in the wrong neighborhood, they'll lose money on a house and they don't really care because as long as overall they're doing better and they're averaging a positive return. Whereas for you, you can do better on any individual deal, you can be more creative, and you can out-compete these iBeyers. So don't worry about it. It is something

to keep an eye on. The last thing I want to say about iBeyers is also that they're not in all markets. They are mostly operating these big appreciation markets like Phoenix or Atlanta, Charlotte. And if you're not in one of those big markets, you don't really need to worry about iBeyers at all. If you are in one of those markets, I would tread cautiously and see how much they are buying. Because I said it's only 1% of the market nationally. But if you see in markets like Phoenix or Atlanta, they're actually purchasing more than 5% of all of the homes right now. And I'm really curious to see how this plays out, right? Because I'm wondering if are they going to keep buying at that rate?

Are they going to keep buying 5% of homes in Atlanta into the future? if so, the impact of iByers is probably not going to be that bad because you now have just raised demand and sustainable demand in that market. But if they are just going to come buy good stuff, sell it and move on to another market, like locusts, they're going to come in and they're going to consume everything. And once it's all gone, they're going to get out of there. That could cause a backside of prices in some of these markets because they'll be sucking demand out of the market, right? They're buying 5% of the homes. And if they move on to a different market and stop buying there, then that could reduce demand. So something to watch out for

iB buyers, but again, small right now, concentrated in a few markets, but something to pay attention to into the future. Another thing that I want to mention before we move on to our next story is about power buyers. So this is a new thing. And the difference between power buyers and iB buyers is that iByers focus on sellers, where power buyers focus on buyers. And what they do is they help these buyers compete in today's market. They do this through a variety of services. So the most simple one is that they help you make cash offers. They basically give you the cash to buy a home, and then they help you refinance into a mortgage

once you already own the property. And that's how they make money. Sure, they charge money to give you the cash, but they also get a mortgage origination fee when you go to refinance out of that cash offer. And they're pretty successful at this. They also offer really interesting programs like trade-in programs. This is kind of like, I guess it's like a used car where you come in and you sell them one house and give them another. Or you sell one house and you buy another from them, which is kind of interesting.

Or I actually think one of the most interesting ones is called the buy before you sell, which is basically an alternative to bridge loans. And it is super attractive, at least in my opinion, in this competitive market. So one thing that's going on in this market as you've seen is people are competing against cash offers, which sucks, honestly, if you don't have the cash, because you're going to lose out a lot of time. So power buyers can help you with that situation. The other thing that we keep hearing about is that inventory, the number of homes for sale is artificially low right now because people who would be selling their homes are afraid to do so because they don't know where they're going to live. You know, what happens if you sell your house and you go to buy one and you keep losing in these bidding wars, that's scary for some people.

So power buyers are offering a solution to this problem. Basically, they will help you buy a house, probably for cash, before you sell your old house. And so you buy something, maybe you move, you get into your new house, and then the power buyer will help you sell your own house. And the kicker is, if they cannot sell your house in 180 days, they'll buy it from you. So this is a really attractive offer. And honestly, could be beneficial to the housing market because we could get some more inventory onto the market. Now, there are a couple big players. Some of them will just name off for knock, orchard, and homeward. And these are obviously smaller players than Zillow and Redfin and

offer pad. But they're getting bigger. And I think it's because they are offering a really needed service in the housing market right now. So my takeaways for the introduction of power buyers are first and foremost, it could give homeowners and new investors power to buy in this market. If you are an investor and you're constantly getting outbid by cash offers, consider using a power buyer. They might be able to help you get into the market right now. And we'll talk about this later, but it could be a good time to invest because mortgage rates are so low. Inflation is looming. We'll get into all of that. But if you agree with me that investing right now is a good long-term investment, maybe consider using a power buyer. The other thing is that if you

are a cash buyer right now, you're about to get a lot more competition. So if you're someone on the flip side of that coin and you have cash and you're making cash offers and beating everyone out in today's market, you're about to get more competition from power buyers and for the rest of us who don't have all of that cash, but something obviously to consider if you're a big time real estate investor. The other thing that I think could be good is that this could help sustain demand in a competitive market. So again, with this inventory thing, I think Right now, demand is up and, you know, inventory is crawling back. But we're still in this weird time. And with competition so high, a lot of people might just opt out. Like, I don't want to deal. It's too emotional to deal with the pricing wars and these huge houses and losing things and waving inspection rights. Like, it's crazy right now. But eye buyers are taking a lot of that risk away right now. So people who might be deterred normally by a risk. really competitive market could find a way into the market. And that could make the housing market a little

bit more sustainable. So that's power buying. It's a new thing. Something to pay attention to. Again, if you're getting out bid in this market, I would look into it personally. But that's what we got for eye buying and power buying. And with that, people love to call real estate passive income, which is interesting because most of the investors I know are very busy. Busy finding deals, busy managing teams, busy worrying they pick the wrong. market. Rent to retirement flips that model. They help investors buy turnkey new construction homes, often 10% below market value in top rental markets across the country. Their local teams handle the build, the property management, and the details, so you don't have to. In some cases,

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included by the number one cost segregation company in the U.S., but you must complete it before the tax deadline. Go to costsegregation.com and use code tax deadline to get 10% off your first report. Don't overpay the IRS. Head to costsegregation.com before April 15th. We are going to move into our second story. And really, this is actually kind of two stories, and I'm going to lump them into one, interest rates and inflation. And I'm lumping them together because they really play off each other, particularly right now. But we're going to start with interest rates. So interest rates, they play a huge role in the economy, basically everything, from bonds to the stock market to crypto, everything. And that doesn't exclude housing. And rates right now are low. And when rates are low, other asset classes tend to increase.

So rates are low, which means a lot of money is flowing through the economy. It is an increased monetary. supply. And with increased monetary supply, asset prices tend to go up. So housing prices go up. The stock market is going up. Crypto prices are going up. It's not a coincidence that all these three things are at all times high when we have low interest rate and really high monetary supply. But the thing is, interest rates are going to go up. And there's two reasons for this. Interest rates, you know, are largely controlled by the Federal Reserve. And they've stated that they are going to raise interest rates towards the second half or towards the end of 2022. And they're going to do this because they only lowered rates for as economic stimulus.

And as the economy grows and expands, they tend to raise rates to keep the economy from overheating. And so we are seeing that. And they also raise rates to fight inflation, which we are also seeing. So we should expect the Fed to raise rates. The other thing that at least mortgage rates are based on are yield on 10-year treasuries, which is a type of bond issue by the U.S. government, and those are starting to go up. And as yields on bonds tend to go up, so do mortgage prices. That's a whole other topic for another day. You can Google it if you want, or you can just choose to trust me. But when the Fed rates go up and bond rates go up, mortgage rates follow. So mortgage rates are going to go up over the next two couple of years. And this is important for two reasons. The first is that

interest rates or mortgage rates specifically impact housing prices. So let me walk you through an example. When rates drop, it increases affordability. When rates are low, it is cheaper to get a mortgage, which means people have more money in their pocket to spend. And sometimes, very often, what they spend that on is on a more expensive house. So these low rates actually increase demand. People are like, oh, this is the cheapest I could ever get a mortgage. And so I am going to get into the housing market because it's cheaper. than it was before and all of a sudden I can afford the house I really want. So if you know anything about supply and demand, as that demand increased due to increased affordability, then houses start

to go up. Prices go up when demand goes up. So that is what's been going on. And to further explain this, let me walk you through an example of an analysis I did the other day. So basically, I looked at what it would cost to purchase a home, a $375,000 property at 5% interest rate. So that's what it was, like 10 years ago when I started, but you're not getting a 5% rate, but just bear with me. So at 5%, that $375,000 property would cost you about $1,10 per month. But if I drop the rate to 3% on the same purchase, my mortgage per month goes to 1264. So you're saving over $350, about $350 per month because rates drop from 5% to 3%. So if you think a drop in interest rates isn't significant, think about that.

Of course, 5% to 3% is a significant drop. But every time interest rates go lower, your mortgage or any new mortgage is going to get less expensive. So that's great for anyone who refinanced over the last couple of years. But it also, when prices drop, makes it more affordable for people to buy more expensive houses. So we're at 3% rates. Again, that 375K property would cost 1264.

But let's just say, hypothetically, I could afford that first purchase. I could afford 1610 for my mortgage, and I want to find a home that maxes out my budget. Now, at 3% interest rates, I can buy a $4,000 property, and my mortgage would be $1,604. So let me just explain that again. my mortgage monthly rate on a $475,000 purchase with a 3% interest rate would be less, less than if I bought a $375,000 home at a 5% interest rate. So hopefully you can see why this explains why prices have gone up so much in the last couple of years because people can pay the same amount monthly on a $475,000 home that they could for a $375,000 home a couple of years ago. And I know, yes, you do have to come up with more for your down payment,

but on a monthly run rate, you could actually pay less to buy a house that is $100,000 more. So I just really want people to understand that interest rates pay a huge role in housing prices. So that was the one reason that rising rates matter. Obviously, this is hugely important. The second thing is that anticipation of rates rising, which is what's going on right now, could create a temporary and unsustainable surge in demand. So normally, the housing market is extremely seasonal. That means that prices tend to peak over the summer, and then they come down in the winter in Q3, Q4, Q1, blah, blah.

That's not happening right now. Home sales, which typically taper off because of lower demand, are actually staying flat or as of last week, they actually went up in November, which basically never really happens. And I think what's going on here is that people, see the Fed signaling that they were going to raise rates. And bond yields were climbing a little bit. And they are like, man, I want to lock in a really cheap mortgage before rates start to go up.

I don't care if it's winter. I'm willing to move in the winter. I'm willing to purchase in the winter. And so I think this is a trend that we're going to see. I don't know if it's a trend. I think it's something that we're going to see in the winter of 2021 into 2022 that we've never really seen before. And so my takeaways for this are first and foremost, if you haven't locked in a refi yet. Go and do that right now. I mean, lock in these rates if you're holding onto a property. It's a no-brainer. As low as they've ever been, it's the cheapest debt you're ever going to get. This is also true. Second takeaway, this is also true for a new purchase. If you are investing for the long run, which you should be. If you're a real estate investor, the trick is to invest for the

long run. And if you are investing for the long run, you want to lock in cheap debt right now. get that mortgage at 3.1% if you can to lock it in for 30 years. And, you know, no matter what happens in the housing market, three, five years from now, maybe we'll see prices slide back at some point. Of course we will. Who knows when that will be. But if you're investing for 20 years, housing prices will be higher than they are today and probably buy a lot. And you're going to still be paying 3% interest 20 or 30 years from now, which is unbelievable. It is a lot. It is historically low interest rates. You want to take advantage of that. The big question here is, based on all this, is what happens when interest rates start

to rise, as they are probably going to do a little more aggressively in the second half of 2022. And to me, it really all comes down to how quickly rates rise. So ideally, the Fed will try to raise interest rates as slowly as it can. They want to keep the economy from overheating, but they also don't want to cause any shocks to the system. And we've seen the first. Fed's playbook and how they're going to do this after the Great Recession. Rates dropped really low after the Great Recession, or I think they bottomed out in about 2011. Correct me if I'm wrong. And then they started raising them very slowly. They raise them like a quarter of a point at a time. So it'll go from near zero to 0.25% interest rate to a half a percent. And those are super,

super low. And this is probably going to take years for it to get the Fed's target rate to get to one or even 2%. So that is what they want to do. But unlike after the Great Recession, we are actually seeing really high levels of inflation right now. And in order to fight inflation, the Fed's number one tool is to raise interest rates. Remember when I said monetary supply, increased monetary supply tends to stimulate an economy. Raising interest rates reduces monetary supply, which can in turn reduce, you know, slow economic growth, but also bring down inflation, which is what they want to do. So although they'd love to stretch out the time period for increasing interest rates, inflation might force them to do it faster than they want to. In my opinion,

we are not going to see rates rise too quickly. We'll probably see mortgage rates go to somewhere between three and a half to three and three quarters next year, which is probably not high enough to significantly impact demand. So I personally believe that appreciation in the housing market is going to go up in 2022. What happens in 2023 and beyond, I think it's too early to tell. Normally, I'd like to forecast that, but the economy is so crazy right now. I just don't want to speculate into 2023, but I do feel pretty good that appreciation is going to continue into 2020 because interest rates are just not going to rise as quickly as they would need to to to negatively impact. housing prices. So that's the issue with interest rates. And that sort of leads me and segues me into our

next thing, which is inflation. You know, we just talked about this, how it pertains to interest rates, but let's just dive into inflation because this is an important topic in its own right. All right. So inflation is up. You've probably heard the consumer price index, which is the most common way to measure inflation. Yes, I know there are a lot of ways to measure it, but I'm going to talk about the CPI right now is up 6.2%, which is the biggest jump year-over-year jump in the CPI in 30 years. The last time it was this high was December 1990. That was just three years old. And the reason this is happening is driven by stimulus and supply chain issues. So we've talked a little bit about monetary supply.

Over the past couple of years, there have been three stimulus packages, and they have printed some money, right? So they've increased the amount of money flowing through the American economy. That increases monetary supply. Inflation, by definition, is when too much money is chasing too few goods, right? There's a lot of money out there, not a lot of things to buy. And so that means that people will pour, the pricing power is with people who have the goods. They can raise prices to absorb more of that money. Right now, inflation is going really, really strong because not only are we seeing an increase in monetary supply due to more money from stimulus, but supply chain issues means we have even less goods than we normally would have.

So that means we have a lot of money, not a lot of goods. Again, this all comes down to supply and demand. That is why we are seeing prices come up. And the CPI, I should mention, does not include asset prices. So we're not talking about crypto or the stock market or even houses right now. Asset prices are not included in the CPI. CPI only measures the cost of goods and services like food or one of the main things that's pushing up the CPI right now is gas prices and use cars, for example. Everyone knows those

are going through the roof. Now, I'm not going to talk about asset prices just yet. We'll get to that in just a second. But I want to first mention that the target for the CPI is 2%. The Fed actually wants there to be a little bit of inflation, and we're actually at 6%. And now, this is probably confusing because no one likes inflation. It basically means that you are losing money. Your spending power is going down. For example, you had $100,000 in your bank account last October. Now, the value of that is about $94,000 because inflation has gone up 6%. So the value, the spending power of your money, has gone down about 6%. So that's bad. So why would the Fed target 2% inflation? Well, the reason is to stimulate the economy. If people believed that housing prices were going to stay flat, or maybe

they were even going to go down, you'd hold on to your money, right? If you're like, oh, this car is going to be cheaper in a year. I'm just going to wait a year to buy a car. People would not spend money and consumer spending drives the vast majority of the U.S. economy. And so the Fed wants that 2%. It's that little lights a fire under people. It's a little kick in the ass to get people to spend a little bit of money and keep the economy growing and humming. But obviously we're not at 2%. We're at 6%. So that is not where we want to be. And the big takeaway here, the big reason that I want to talk about inflation is because this has serious implications for investors. The first reason is like basically cash is losing money.

If you hold on to cash right now, if it's sitting in your bank account, it is just losing value. You have to invest right now just even to maintain wealth. And investing is looking kind of hard, not in real estate. I'll get to that in a second. But traditional ways you would try to hedge against inflation like bonds, those are giving returns at under 2%. And you need 6% just to keep pace with inflation. Cd is, I don't know, it's like a half a percent. So our savings account is a joke. You can't get any sort of return on those. So you have to invest in some of these other asset classes, honestly, traditionally more risky asset classes like the stock market and crypto. And I don't consider the housing market as risky as other people do, but the housing market. That is why

we are seeing all-time highs for all of these asset classes. is because inflation is forcing people out of bonds, out of CDs, out of savings accounts, these safer places to invest and into more volatile assets because you need to earn at least a 6% return to keep pace with inflation. Now, the main takeaway here is invest. You need to invest money to hedge inflation. And I'm going to pitch, listen, I invest in the stock market. I invest in crypto. I have money in bonds. But real estate investing is traditionally considered the best hedge against inflation. And I believe that as well. And let me explain to you why. There's three main reasons. There's actually a lot more, but I'll just give you the three.

The first is that when inflation hits and things like the CPI go up, asset prices, we talked about this a little bit earlier. Asset prices also tend to increase sometimes faster than other types of inflation. So we're seeing that in the housing market. We're seeing housing prices were up 15, 20 percent year over year. And CPI is up six percent. year over year. And there's a lot of other reasons for that. It is not just because of inflation. There are supply issues. There are demand reasons. But it is one of the reasons why housing prices are going up. It's also why the stock market and crypto is going up because, again, people want to avoid inflation. It causes asset prices to go up. So what does that mean for real estate investors?

It means that even though some of your expenses like maintenance and insurance are going up, Your value of your asset is going up tends to go up at least as much as those increases in your expenses, if not more. The second reason real estate helps hedge inflation is because rents go up, right? So even though things are going up and things are getting more expensive, you can adjust your rent based on the market. You know, this is the last story we're going to talk about. Rent growth is going crazy right now. Not a surprise because we're seeing inflation. That means that even though, again, your taxes,

those are probably going to go up a lot right now, actually, because property values are going up. Even though those are going up, you can adjust and you can adapt to these new situations by raising rent appropriately. And the last one, I think probably the most important one here is back to your mortgage and back to interest rates. This is why these things are so intricately tied together. If you buy a home right now today, sure, no one knows what's going to happen in the housing market in the next couple of years, but what I know for sure is that you are locking in a super inexpensive loan and inflation is coming. So your asset prices and rent are likely to increase, but your biggest expense, your mortgage, that is almost every investor's largest expense in any

given deal, it stays flat. Just because inflation is going up, it's not like the bank can call you and say, hey, we need to change your rate, unless you have an adjustable rate mortgage, don't get that right now. But they can't change it. Your rate is fixed right now. You can lock in a super low interest rate and a super low payment on a property for 30 years. So over time, your rent will go up, your property price will go up, but because of inflation and other factors, but your biggest expense, it is going to stay the same. So those are the three reasons why rental property investing is a great hedge against inflation and something that I would highly recommend to do in this environment where inflation is high and interest rates are super low. At least,

that's what I am trying to do. Okay, that was it for inflation and interest rates. Let's move on to our third and last story for today. Rent. Rent is growing very, very rapidly. It has actually gone up 13% as of October in year-over-year terms, and the average monthly rent, according to Redfin, is now $1,8. This is a record growth rate according to Redfin and Zillow. And honestly, it's good news for people who already own rental properties. Now, rent is not growing the same in every single market. We actually see Florida dominating in terms of fastest-growing rents. I'm going to read you the top 10 metro areas with the fastest-growing rents.

Top three are all in Florida and actually four of the top five are in Florida. So we have West Palm Beach, Fort Lauderdale and Miami in the top three spots, all with 36, percent year-over-year growth. That is right. 36% year-over-year growth. It's absolutely nuts. Then in fourth place, we have Seattle, Washington with 32%, Jacksonville and fifth at 32%. And then sixth through 10th place all have 31% year-over-year growth. Still absolutely enormous. Those markets are Portland, Oregon, Austin, Texas, Newark, New Jersey, and then Nassau County, New York, and New York, New York, the big city. All right. So those are seeing incredible growth, and not all markets have seen growth. In fact, one lowly market saw prices decline,

and that was St. Louis. So sorry to St. Louis. It saw a 4% decrease in rents last month, but overall, again, the average was 13% year-over-year growth, which is huge and way more than inflation, which is at 6.2%. So rents are growing faster than inflation, which means cash flow is generally increasing. And so the implications of this are, of course, people who own rental properties are going to do well right now. Because again, what we just talked about, hedging inflation, their biggest expense, their mortgage is fixed in place right now, and rents are starting to go up. And even though taxes and insurance are going up, rents are growing even faster than those types of things. So cash flow is actually increasing right now. The second implication

for rents increasing is less obvious, but I think it's super important still to talk about. And that is that cash flow is likely to go up. And so I know right now cash flow is super hard to find. I'm having the same problem. In big markets, you know, prices of homes have gone up so much that it is hard to even find a property that breaks even. But if rents keep growing at the pace they have, and they might, it's not for sure. I'm not really sure. But I think they will at least grow into next year. Cash flow is going to get better for the same reason that I just listed about hedging inflation. It's because your expenses grow slower than rent growth. So if you can find a market, even if your deal doesn't cash flow great right now,

but you think rent is going to go up into the future, that could be a great market for you if you don't need cash flow today. And let me just explain that. So like me, it might be like me. I don't need cash flow right now because I have a job that I love and I don't intend to retire for 10 years or whatever, right? And so I don't need cash for right now. I will need cash flow in 10 years. So right now, I would be willing to accept a deal that has,

let's say, two to three percent cash on cash return. Again, I'm not going to lose money. I want something at a minimum blakes even. But if I can generate that and I am in a market where I think demand is going to go up and rents are going to increase somewhere like Denver, where I primarily invest, I think that cash flow, even on something that's not cash flow great right now, when it comes time for me to retire and when I need that cash flow, I think it's going to be really great. If you are trying to retire now or you want to be financially independent right now, I would offer different advice. I would look for a market where cash flow is already good, even if it's not going to grow as fast into the future. But again, if you are in it for the

long run and you don't need cash flow right now, I would value cash flow growth, maybe even more than current cash flow. But that's just me, something to consider about given these recent trends. Okay, those are the major stories for December 2021. I hope you all enjoyed that. That was a lot of talking for me, but, man, I love talking about this stuff. So hopefully you got something out of it. Again, let's just go through these key takeaways. Number one, although Zillow is out of the eye-biring market, it is not because the market is going to crash. It's because it's really hard to flip houses right now. They were not able to accurately predict the home prices. They weren't able to pay the right amount for a home,

and they had labor and material shortages just like everyone else. But eye buying and real estate tech is not going anywhere. And you need to stay informed and adapt as eye buyers might enter your market. Keep an eye out for that. And if you are getting outbid by cash buyers or are worried about selling a house because you don't know where you'll live, check out a power buyer. They might be able to help you compete in this competitive market. The second takeaway is that rates are going up and inflation is eating away.

at your cash flow. You have to invest just to maintain your wealth right now. And locking in really low, super cheap interest rates on debt could be a great idea. So if you haven't refinanced yet, do that right now. And if you are investing for the long term, you might want to consider getting into the housing market right now. The last takeaway is that rents are going up and you need to factor this into your deal analysis. Don't just look at cash flow right now. Look at cash flow into the and figure out what it might be. In the same way you want to pick markets where the property price might appreciate, you want to look for housing markets where rent might appreciate it as well.

Think about when you need cash flow and what it might be in the future. All right, that's it for me. I hope you all enjoyed this episode as much as I did. If you have any questions or you have any ideas on topics you'd like for us to analyze in the future, you can always hit me up on Instagram at The Data Deli. and make sure to stay tuned. Actually, we have an awesome show coming up in January where David Green and I are going to make and break down predictions

for the housing market in 2022. And that's what you're really not going to want to miss. We've already been working about it and talking about it. I think this will be really helpful and insightful for anyone who's thinking about getting into the market or managing their portfolio in 2022. Okay, that's it for Bigger Pockets. I'm Dave Meyer. Thank you guys so much for joining me, and I'll see you again next time.

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