BiggerPockets Real Estate Podcast - 885: BiggerNews: America's Path to "Renter Nation" as Prices Rise, Rates Stay Put w/J Scott

Starting point is 00:00:00 Hey, everyone. Welcome to the Bigger Pockets podcast. I'm your host today, Dave Meyer, joined by one of the OG original Bigger Pockets members, podcast hosts, all sorts of things. Mr. Jay Scott himself. Jay, thank you for joining us today. Thanks for having me back. I feel like it's been a minute since I've talked to you guys. I know. It's been way too long. How far back do you go with Bigger Pockets? 2008, six months before I flipped my first house. I found Bigger Pockets because I did a Google search for how to flip houses. And so yeah, I think it was something like March or April of 2008. That's incredible. I bet half of our listeners right now didn't even know that Bigger Pockets was around in 2008. Not to date you, Jay, but just to explain that we have a lot of experience at Bigger Pockets. We've actually been around for about 20 years, which is incredible. And Jay has been one of the most influential investors and participants in our community. So we do have a great show that I'm very excited to have Jay on for because we're going to be answering questions, some of our audience and some of the Internet's biggest questions about the economy, about the real estate market.

Starting point is 00:01:16 Hold on. Hold us. I thought we were talking about Taylor Swift and the football games coming up. I'm not prepared for an economic decision. We can sneak one of those questions in there. Do you have strong opinions on what's going to? to happen there? I don't. I don't. It just seems like that's all anybody's talking about these days. It doesn't feel like anybody's talking about economics or real estate anymore. All I hear about is football and Taylor Swift. Well, I think there's some sort of like escapism going on where everyone's just like tired of talking about the economy or what's going on. But it is so important. Like, we have to be talking about what's going on with the news and the housing market if we're going to make good investing decisions. And so unfortunately, Jay, I'm going to actually, I'm going to stick to

Starting point is 00:01:56 the script and make you answer some real questions that are going to be useful to our audience. So let's just jump right into our first question here. Housing crash. This is the number one thing being searched right now on Google about housing, about the economy. And we want to know what you think, Jay. Are you on the housing crash side of things? And when I say housing crash, let's talk specifically about residential because I know you invest both in residential and commercial real estate. So here's the thing. First of all, when we talk about housing crash, too many people, I think, can flate this idea of the economy and the housing market. And there are two very different things. And so when I hear the question, are we going to have a housing crash? Sometimes people actually are asking, are we going to see an economic market crash? Because they assume it's the same thing. But historically, they're two very different things. Let me ask you a question, Dave. Going back to, let's say, 1900, How many housing crashes have we seen in this country? Crashes?

Starting point is 00:02:57 I want to say just one, but maybe two. Because most of the date I look at is from like the 40s on. So I don't know if there was one during the Depression, but I'm pretty confident since then there's only been one. Yeah, there wasn't one during the Depression. And the only housing crash we've seen in this country was in 2008. We saw a little blip in the late 80s with this thing called the Savings and Loan Crisis, which was another recession that was kind of tied to real estate.

Starting point is 00:03:23 but for the most part, every recession we've had in this country, and we've had 35 recessions over the last 160 years, every recession we've had has been non-real estate caused. And typically speaking, when you have a recession that's not caused by some foundational issue with real estate, real estate's not affected. Now, 2008 was obviously a big exception. 2008 was a real estate crisis, and it was a real estate caused recession, and we saw a housing crash. but the problem there is that I think there's something called recency bias that a lot of us are falling prey to. It's the last big recession we remember, and so we assume that the next recession and the one after that and the one after that are going to be similar to the one we remember the best, which was the last last one. But the reality is 2008 was very out of the ordinary. It was the only time we've seen housing crash in the last 120 years.

Starting point is 00:04:15 So I think the likelihood of a housing crash anytime soon, and it's not just because of historical reasons. about other reasons. I think it's very unlikely that regardless of what the economy does over the next couple years, I think it's very unlikely we see a housing crash or even a major housing softening. Well, see, Jay, this is why we bring you on here. You have so many good stats and an excellent opinion on this. And I completely agree with you about this. I was kind of calling it a year or two ago this like housing market trauma that I think my generation, I'm a millennial, had. And a lot of people around my age, you know, grew up during this era when the housing market was a disaster for most people. And they feel like that that might happen again. And of course, there's always a

Starting point is 00:05:03 chance. But as Jay has provided us with some really helpful context, that is not the normal situation in a broader economic downturn. And I'm curious what you think about this, because part of me thinks there's this recency bias, but there's also this desire for the housing market to crash by a lot of people. For people who might not be investors or own properly currently, I think a lot of people look at prices now and the relative unaffordability and are hoping or rooting for a housing market crash, even though it sounds like you think that might not be likely. Yeah, there are a lot of people in this country that are really unhappy with the direction of the economy and their personal finances.

Starting point is 00:05:50 I think inflation at 9% a year and a half ago kind of really through people and put people in a pretty bad situation. I mean, we talk a lot about the wealth gap in this country. There's a big gap between those who have money, those who have hard assets, real estate and stocks. 10% of this country are millionaires, but the other 90% are struggling. And there's a big gap between the two. And those who are struggling, they don't want to be struggling.

Starting point is 00:06:19 And they remember 10 years ago when there was a crash after 2008 and all the people that had lots of money started buying up houses and buying up stocks and buying up all the hard assets and they want to go back to that time. And they want to have a chance to participate in that. Unfortunately, I don't think we're going to see that type of opportunity again anytime soon. And yeah, there's a lot of frustration out there. And it's also, I've talked a lot about this over the last couple weeks, there's a big disconnect between economic data. The economy is looking really good purely from a data standpoint, but economic sentiment or public sentiment is just the opposite.

Starting point is 00:06:59 There are a lot of people who don't feel like things are good. People don't feel like the economy is moving in the right direction. They don't feel like their personal finances are moving in the right direction. And so there's this big disconnect between what the data is telling us and how people are feeling. And so, yeah, it's a tough time out there right now. Okay. So I do want to dig into that disconnect that you just mentioned a second ago. And we're going to get right into that after the break, along with some of the other hottest

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Starting point is 00:09:55 Make it happen with PropStream. Welcome back to bigger news. I'm here with Jay Scott hashing out some of the most debated economic questions in real estate right now. If you remember right before the break, Jay pointed out that there's a big disconnect between what the economic data is telling us versus how people, the American people, actually feel. So let's dig into that. That's a great topic. Let's let's dump into that a little bit because I see the same thing. When you look at traditional measures of the economy, things like GDP, it grew in Q4 and it actually started to accelerate at the

Starting point is 00:10:30 end of Q4. We also see the labor market has been up and down a little bit the last few months, but generally it's just very, you know, unemployment rate is very low in historical context. And there are many different ways to measure the labor market, but many of them point to strength. And so when you look at sort of these old school or traditional ways of looking at the economy, it looks great. But you see people are frustrated. They have a lot of pessimism about the economy. And I'm curious, do you think it's because that gap in wealth that you mentioned?

Starting point is 00:11:03 because when you look at GDP, that's basically a measurement of how big the pie is growing. But it doesn't really tell you anything about how that pie is being divided up between people in the United States. Well, this is a weird thing because, yes, we have really poor public sentiment right now, people feeling stressed and strapped and not happy with their personal finances. But at the same time, they're spending money. I mean, you look at holiday shopping. We were up 14 percent year over year for holiday shopping. this year. People are spending money and despite the fact that that college loan repayments restarted, so people you would think would be more strapped there, the cost to rent right now,

Starting point is 00:11:46 52% more expensive to rent than own right now. So you would think people are feeling strapped paying their rent. Food costs have obviously gone through the roof and even though inflation has come down, we're still saying higher than typical food inflation. So that thing when people go to the grocery store once or twice a week, they're getting hit pretty hard. So you would think it would impact people's spending habits. But the fact that we saw GDP grow at 3.9%, the fact that we saw year over year holiday spending up 14%, that tells me that people aren't really feeling it. And I'm thinking that part of the issue or part of the reason for that is, number one,

Starting point is 00:12:29 we are seeing that credit cards are getting maxed out. Savings is at the lowest rate in history right now. So people are running out of money, but at the same time, the average homeowner has $200,000 worth of equity in their home that they can tap, not even including that 20% that the lender requires them to keep in. So people can tap home equity if they need to. The stock market is at all-time highs. So anybody that owns stock has the ability to cash out some of their stock holdings and

Starting point is 00:12:56 they have access to cash. anybody that holds Bitcoin or gold or other hard assets, those things are going through the roof. So people can sell their assets. They have access to cash and they can kind of just keep this gravy train rolling. And so I think as long as the economy is moving along and asset prices are going up, people are going to find access to cash one way or the other and they're going to keep spending. And so it's just a question of is this musical chairs? Is the music going to stop at some point?

Starting point is 00:13:25 and we're going to see everything come crashing down. I've been surprised personally, Jay, with some of the things that you mentioned. You know, back in September when student loans resumed, I was like, okay, things have to start slowing down. Or, you know, you periodically get these reports from the Fed or other sources that say that all the excess savings from the pandemic, from stimulus checks, that has all been depleted. But it keeps going. And, you know, we do, obviously the credit card stuff is concerning, but I personally felt like the writing was on the wall six months ago. But it continues to go on and I continue to be surprised. So I think that is one of the things I'm going to keep a close eye on going throughout this year is just what is going on with consumer spending because that makes up 70% of the U.S. economy. And so as long as people keep spending, as Jay said, like that bodes well at least for the traditional ways of measuring the economy like GDP. Now, I do want to get back to sort of the housing market a little bit. You mentioned that you don't think the housing market is going to crash. Can you just

Starting point is 00:14:32 talk to us a little bit about some of the fundamentals of the housing market and why you think the housing market is poised or at least remain relatively stable in the coming years? Yeah, so it all boils down to supply and demand. Just like everything else in the economy, if you look at supply and demand trends and supply and demand pressures, you get an idea of where prices are likely to head. And it shouldn't surprise anybody that we are in the single family world are seeing high demand and low supply right now. And anytime you have high demand and low supply, prices tend to go up, or at least they stabilize. And so historically, we generally see about 1.6 million properties on the property. the market at any given time in this country, we're at about half that right now. So there aren't

Starting point is 00:15:21 a lot of properties out there to buy. Supply is low. At the same time, heading out of the Great Recession, 10 years ago, we were at about 5 million units underserved. There was demand for about 5 million more housing units than we had. Well, we've been building units at about the same rate as demand has been increasing for units. So based on that, we can assume that we're still about 5 million units short in this country on housing. New homes, we completed, what, 700,000 last year, I think it was, or maybe we sold 700,000. So that's still like seven years worth of inventory that we need to sell to catch up to the demand in new housing. So long story short, low supply, high demand, not enough building basically means that prices are going to be propped up. And K. Schiller data

Starting point is 00:16:11 for November just came out a couple days ago. And that data is always a few months behind. But data for November basically indicated that we saw a 5% year-over-year increase in housing prices, and housing prices are once again at all-time highs. So things aren't slowing down yet. I suspect they will at some point. But again, I don't think there's going to be a crash because I think that this low supply and what's driving low supply people might ask? Well, it's the fact that millions of homeowners, 85% of homeowners or something like that,

Starting point is 00:16:45 maybe it was 87% have fixed rate mortgages at under 5%. Something like 70 some percent have under 4%. And so homeowners aren't going to sell their houses right now and get rid of these great mortgages just to go out and buy something else that's overpriced and have to get a mortgage at 6 or 7%. So I think this low supply is likely to persist. And I think the demand both from people who are paying 50% more to rent and now want to buy, investors who want to buy more property, large institutions like Black Rock and others hedge funds that

Starting point is 00:17:20 want to buy, there's going to be a lot of demand out there. So I don't see prices coming down anytime soon, even if we do see a softening economy. That's a great way of framing it. I think for our listeners, it's really important to remember that housing crashes don't happen in a bubble. It really does come down to supply and demand. And you can analyze each side of those. And as Jay said, when you talk about supply, it's very, very low right now. And so if you think that there's going to be a housing crash, or you want to know if there's going to be a housing crash, you have to ask yourself, where would supply come from? Like, where is it going to materialize from? And I just, I don't see it. You know, like construction is actually doing decently right now, but it would take years at this,

Starting point is 00:18:05 at this decent clip to eliminate the shortage you talked about. You mentioned the lock and effect, and that's constraining supply. It's also worth mentioning that inventory was already going down even before the pandemic because people have been staying in their homes longer. And lastly, I know a lot of people, especially on YouTube, talk about foreclosures coming in and starting to add supply, but there's just no evidence of that. You might see a headline that's up double from where it was in 2021. Great.

Starting point is 00:18:37 It's still about a third of where it was before the pandemic. and it's at one ninth of what it was during the great financial crisis. So I just, I don't see it. I don't, I hope I'm wrong because I do think it would help the housing market if there was more inventory, but I just don't see where it's coming from. At this point, it looks like there's only one thing that's going to drive more supply, more inventory, and that's mortgage rates coming down, interest rates coming down. Because at that point, people feel more comfortable selling their houses and buying something else because they know they can trade their 4% mortgage for, a 5% mortgage or a 5 and a half or a 4.5% mortgage. And so people are going to be more comfortable doing that. But what's the other thing that happens if interest rates come down? Demand goes up. Demand's going to go up.

Starting point is 00:19:21 So even if we fix the supply problem, it's just going to, the way we fix it is likely going to create more demand. And so I'm not saying that nothing could impact the market, but I think it would take some major economic shock. It would take a black swan event or it would take some major economic softening the labor market like imploding and unemployment spiking, something like that, before we really saw any major increase in supply. And there's no indication that we're anywhere near that. So I think we're going to see prices about where they are for the next several years. That's really important

Starting point is 00:20:00 to note that there's always a possibility of what's quote unquote called black swan events. Basically something Jay and I and no one out there can really predict. These are things like, you know, the Russian invasion of Ukraine or COVID, you know, things that just come out of nowhere and no pundits or people who are informed about the economy can really forecast those types of things. So, of course, those are always there. But just reading the data on the supply side, I totally agree with you. Jay, just to play devil's advocate for a minute here, one way to, even if you couldn't increase supply, you could change supply and dynamics in the market if demand,

Starting point is 00:20:40 really fell. Like if people just didn't want to buy homes in the same way. And I do feel like, you know, you hear these things that housing affordability is at 40-year lows. And so do you, do you have any fear or thoughts that maybe we see a real drop-off in the number of people who want to buy homes? And maybe that would change the dynamics of the market a bit. I suspect that we will see that trend. But I think that's a five, 10, 15-year trend. I don't think that's something that's going to hit us in the next year two or three because again it really it's pretty simple right now it costs 50% more to rent than to own and nobody in their right mind is going to trade their 3% mortgage to pay rent at 50% more and so i do see this becoming a

Starting point is 00:21:28 quote unquote renter nation over the next 10 years but again i don't see that being a a short-term thing i think that's going to be a consequence of the market fixing itself i don't think that's going to be a driver of the market fixing itself. So the one thing you mentioned that could change the market. And I think it's really important to mention that when we say quote unquote the market, most people think we're only talking about prices. And that is a very important part of any market. But when you look at an economic market, there's also quantity, the amount of homes that are sold. And that's super low right now, just so everyone knows. We're at, you know, I think 40, 50% below where we were during the peak during COVID.

Starting point is 00:22:10 So that's come down a lot. One of the things that you mentioned could potentially change, in my mind, at least, both sides of the market, both the number of sales and where prices go, is if mortgage rates come down. So, Jay, I can't let you get out of here without a forecast or at least some prognosticating on what is going to happen with mortgage rates in the next year. So what are your thoughts? So I think they'll come down.

Starting point is 00:22:35 It doesn't take a genius to make that. prediction. I think most people are predicting that. And the reason for that is as of December, the Federal Reserve, the Fed basically reverse course said, we are done our hiking cycle for interest rates for the federal funds rate. At this point, the next move will probably be downed. And when the government starts to lower that federal funds rate, that kind of core short-term interest rate, that's going to have an impact on other markets like the mortgage market and mortgage interest rates. And so the market is pricing in that core federal funds rate could likely drop from, whereas it's at like five to five in a quarter right now to somewhere between

Starting point is 00:23:20 3.75 and 4% by December. So 40% of investors are betting their money that the federal funds rate's going to be down around 4% by the end of this year. So that's about a point and a half less. than where it is now. Does that mean we're going to see a point and a half less in mortgage rates? Probably not because that spread between the federal fund rate and mortgage rates right now is smaller than normal. So that that spread will probably expand a little bit. But I think a point and a quarter drop in federal fund rate will likely translate to about three quarters of a point in a drop in mortgage rates. So if we're right now at about 6.6, 6.7, 6.8%. Three quarters of a point puts us around 6%. So if I had to bet, I would guess that by the end of this year, we're somewhere between

Starting point is 00:24:12 5 and 3 quarters and 6% mortgage rates, which is a decent drop, but it still doesn't put us anywhere close to that 2, 3, 4% that we were seeing a couple years ago. It will open up the market a little bit. There will be some people selling. You mentioned foreclosures increasing. it turns out that the bulk of the foreclosures that we're seeing are houses that were bought in the last two years. And so there'll be an opportunity for people that bought in the last couple years who are struggling to get out. And so, yeah, I do see mortgage rates coming down.

Starting point is 00:24:41 But if I had to bet, I would say five and three quarters to six percent by the end of the year. I hope you're right. And I do think that's kind of general consensus. I think for most of the year, it will probably be in the sixes and it will trend downwards over time. I do think personally that it's not going to be a linear thing. You know, you see that it's relatively volatile right now. You know, it went down in December. It's back up in January.

Starting point is 00:25:09 But I think the long-term trend is going to be downward, and that is beneficial. Do you think this is, you know, you mentioned it's going to open things up a little bit. Like, how do you see this playing out in the residential housing market throughout 2024, just giving your, your belief? that rates will come down relatively slowly? I think it's going to have probably pretty close to the same effect on demand as it does on supply. So I think rates coming down is going to encourage some people to sell and it's going to encourage some people to buy. And I think those forces will pretty much even each other out. In some markets, we may see prices continue to rise a little bit. In some markets, we may see prices start to fall a little bit. But I think across the country,

Starting point is 00:25:55 we're going to see kind of that same average, what's 3% per year is kind of the average of home price appreciation over the last 100 and some years. So I think we'll be in that 3 to 5% appreciation range for much of the country if I had to guess. Here's the other thing to keep in mind. You mentioned that this isn't going to be linear. This is going to be an interesting year. We have an election coming up in November. And historically, the Fed does not like to make moves right around the election. They don't want to be perceived as being partisan and trying to help one candidate or another. And so I think it's very unlikely. In fact, I think there's only two times in modern history where the Fed has moved interest rates within a couple months of the election.

Starting point is 00:26:40 And so I think it's very unlikely that we'll see any interest rate movement between July and November, which is a significant portion of the year when you consider that we're unlikely to see any movement between now and March. So that basically gives us March, April, May, June, and then December. And so we have about half the year where we could see interest rate movements. So if we do see any movements, it'll probably be big movements in that small period of time, as opposed to linearly over the entire year. That's really interesting. I had not heard that before.

Starting point is 00:27:12 And it sort of makes sense that the Fed doesn't want to be perceived as partisan. So that's definitely something to keep an eye out for. It makes you kind of wonder if there's going to be. a frenzy. It's already sort of the busy time for home buying, you know, what, what do you say, April through June, basically? So that's, that's the busiest peak of, uh, home buying activity and might be the most significant movement in interest rate. So we might see a frenzy in Q2 then. Yeah. And we can take that one step further. Um, while the Fed doesn't like to seem partisan leading up to an election, um, there is evidence that they tend to be in favor of supporting the incumbent.

Starting point is 00:27:52 regardless of whether it's a Democrat or a Republican. And they like to see that the economy is doing well in an election year. And so what we've seen historically, again, not right before the election, but typically the few months prior to an election or the few months prior to prior to the election, we see the Fed make moves that tend to favor the economy and to favor the incumbent. And so I wouldn't be surprised if we see a drop in rates in the March, April. May time frame, even if the economy isn't necessarily indicating that's necessary. And I think that's something that Jerome Powell kind of was preparing us for in December when he came out and said,

Starting point is 00:28:33 hey, we're open to dropping interest rates if we need to. After two years of basically saying, we're going to keep rates higher for longer, he suddenly reversed course and kind of prepared everybody for us to start considering dropping rates. And so I think that that just could be a just kind of a signal that they're going to be a little bit more dovish in the in the first half of this year than they otherwise would be. Okay, so we are getting into some of the good stuff here, and we're about to cover a recent economic change that will impact lending and the biggest economic risk to investors right after the break. People love to call real estate passive income, which is interesting because most of the investors I know are very busy.

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Starting point is 00:33:00 That's A-V-A-I-L-C-O-Bigger Pockets. Welcome back, everyone. Jay Scott and I are in the thick of it talking about the most pressing issues in real estate right now. Before the break, we got Jay's predictions on interest rates and what we can expect from the Fed in 2024. While we're on the topic of the Fed, and man, I pray for the day we don't follow the Fed as closely as we've had to the last couple of years. But they basically made an announcement in a different part of their directive here and announced that the bank term funding program is ending. on March 11th. Jay, can you just tell us a little bit about what this program is and what this

Starting point is 00:33:43 means for the financial system? Yeah. So last March, there was this big regional bank called Silicon Valley Bank, anybody that wasn't paying attention, basically. It feels so long ago. There's so much has happened since that I came with. That was only a year ago. It was less than a year ago. Crazy. But basically, this bank, they bought a whole lot of treasury bonds. And based on the movement of those treasury bonds, the value of those bonds fell considerably. The bank was in kind of in a bad financial situation or it was looking like they could be. So a lot of, not investors, but depositors in that bank, started to take their money out. And a lot of those depositors were venture capitalists and startup tech firms that had literally millions of dollars in the bank. And so some ridiculous

Starting point is 00:34:31 amount of money, like closer to $50 billion, was at risk of flowing out of that bank over a couple days. And the bank essentially became insolvent. The state of California basically took the bank into receivership. And the federal government said, we need to make sure that this isn't like

Starting point is 00:34:50 a broader issue that contaminates other parts of the banking sector. And so they set up this thing called the bank term funding program where they told banks, if you're in this situation where you bought too many treasury bonds and movement in bonds has caused you to lose a lot of money,

Starting point is 00:35:06 come to us and we'll give you a loan against those bonds to ensure that you have lots of cash on hand and you're not facing this crisis. So they set up this thing called the bank term funding program, which was a way of loaning money to these banks that said they needed it. And between March of last year and June of last year, banks basically went to the fund and said, we need $100 billion. Oh, just that? Yep, $100 billion. A lot of it was in the first couple weeks, but over the first three months, $100 billion was borrowed from this fund. For the next six months through November, December, essentially nothing was borrowed. Basically, banks indicated that they were in a pretty good position. They didn't need to borrow money from the government.

Starting point is 00:35:48 And they were very favorable loan terms, by the way. But banks basically indicated we don't need to borrow. Then in December, the Fed started talking about or the Treasury started talking about getting rid of this program. It was supposed to be a one-year term, which means the program would end in March. right around the time they started talking about getting rid of the program, suddenly banks started borrowing again. Banks went back to the program and said, I need money, I need money, I need money.

Starting point is 00:36:13 And it went from $100 billion borrowed to $170 billion over the course of about a month. So the most likely scenario here was that banks realized that they were getting near the end of having the ability to borrow cheap money from the government. And so not because they needed the money, If they needed the money, they probably would have gone and gotten it sooner. But because they saw an opportunity to get this cheap money, they went and they took another $70 billion. And so a lot of people are looking and saying, well, obviously this program still needed because another $70 billion was borrowed over the last two months. Banks are still in need.

Starting point is 00:36:51 But the more likely scenario is that banks were just taking advantage of this cheap money. And that's the reason they borrowed. And there haven't really been any banks that have needed the money since last June. So I don't see them phasing out this program as of March to be a big deal. They've also said, the Fed has also said, that anybody that's borrowed money doesn't need to pay it back right away. They can pay it back over years. So there's no risk to the banks that have already borrowed. And more importantly, even if they were to get rid of this program on March 11th, I think the date is,

Starting point is 00:37:24 if on March 12th there was a bank that was in trouble, I have a feeling the Fed would step in and say, okay, we're going to bail you out. So I don't think there's a lot of risk here. it's something that's going to be talked about over the next two months a good bit. But I think at the end of the day, it's going to be a non-event. And the government's already indicated they're going to bail out anybody that's in trouble. So anybody big enough that's in trouble. So I don't see this being any real issue anywhere.

Starting point is 00:37:50 In a way, you can see it as a sign of strength, right? If the Fed is feeling confident enough, as you said, they'll bail out people who need it. And if they're saying basically people don't need it, hopefully that means that the acute issues with the financial system last year with Silicon Valley Bank and a couple of the follow-ons after that is alleviated. And now there's a little bit more confidence in the banking system. So that's great news. Yeah. And those banks that had trouble last year, they were in a very specific sector. They were in the tech sector. Their profile of borrower and depositor was very different than the typical bank. And that led to a lot of the issues, not so much an issue with

Starting point is 00:38:30 the underlying banking system. All right, Jay. last question before we let you get out of here. Is there one economic issue or risk that's keeping you up at night? What are you most worried about or are going to be following the most closely this year? I've been saying this for a good six or nine months now, but I think the biggest risk to our economy is the cost of debt for small and medium-sized businesses. There are a lot of businesses out there that need debt to run. They rely on bank loans or SBA loans, or maybe they need equity. They get money from venture capitalists if they're in the tech space.

Starting point is 00:39:10 And a lot of businesses are running negative. They don't make a profit. They rely on this debt to kind of grow and get them to the point where they become profitable, but they aren't profitable yet. And a few years ago, they were able to borrow this money at 3%, 4%. In the case of venture capital, they were able to get investment money. money whenever they needed it. And typically these loans or these investments are on a two to three year runway, meaning that in two to three years, they either need to be refinanced or recapitalized

Starting point is 00:39:39 or companies need to go out and get new investment because they're going to run out of money. And here we are two to three years after interest rates started to go up. And a lot of these small and medium-sized businesses are now facing a situation where they need to refinance their debt or they need to get new debt or they need to get new investment. And it's a lot of turns out the cost of capital right now, for obvious reasons, because interest rates have gone up 5%. The cost of that debt has gone up tremendously. And so small businesses that were borrowing at 3 or 4 percent three years ago now need to borrow at 6 or 7 percent. And business owners can't afford this. And so to borrow at those rates, they need to cut costs. They need to lay people off.

Starting point is 00:40:21 They need to scale down their operations. And what we've seen is that bankruptcies have gone through the roof over the last year. And on the horizon, there are a whole lot more bankruptcies looming. And so I think this risk to small businesses is probably the biggest risk to the economy over the next 12 to 24 months until interest rates start to come down. This is a really underreported issue, it feels like. Because you hear these huge things where it's like, oh, tech, you know, UPS yesterday laid off 12,000 people. That's a huge deal, right? But when you look at who is employed and where, most people work for small businesses. You know, like you see these high profile things.

Starting point is 00:40:59 But the American economy in so many ways is based off of small business. And so if, as you say, a lot of these companies are facing bankruptcy or challenges, that is maybe going to keep me up more at night that it has spanned over the last couple of years or last couple months. Yeah. And it's not just the small and medium-sized businesses. I think they're the ones that are most at risk, but even companies like Target and Walmart, they finance their operations by issuing bonds. They raise money by issuing bonds.

Starting point is 00:41:29 A couple years ago, they could raise a billion dollars by issuing bonds at 3%. Well, nobody's going to buy bonds at 3% anymore because you can get U.S. bonds at 4% and 5% these days. So if Walmart or Target wanted to go out and raise a bunch of money to finance their operations and to continue to grow, they're going to have to issue bonds at 6 or 7%. And that's a huge difference in their bottom line, how much they're paying an interest. And so if they can't expand operations as quickly as they were or as much as they were, that's going to impact their business. That's going to impact GDP.

Starting point is 00:42:02 That's going to impact their hiring. That's going to impact how much they can pay in additional wages. And that's going to reverberate through the economy. So it's not just small and medium-sized businesses that are going to struggle. I think they're the ones at biggest risk. But I think even big businesses, we're going to start to see wage growth. slowing. I think we're going to start to see more layoffs, and I think we're going to see less growth over the next year or two, again, until interest rates start to come down. Well, Jay,

Starting point is 00:42:27 thank you so much for being here. Really appreciate your time. If you guys didn't know this, Jay and I actually wrote a book together. That's called Real Estate By the Numbers. It teaches you how to be an expert at deal analysis. If you want to learn more from Jay and myself, you can check that out on the Bigger Pockets website. Otherwise, Jay, where can people connect with you? Yeah, jiscot.com. So go there. and that links out to everything you might want to know about me. All right. Well, thank you all so much for listening to this episode of Bigger News.

Starting point is 00:42:55 We hope this discussion and insight into what's going on in the housing market and the economy helps you make informed decisions about your real estate investing portfolio and really what you do with your money, generally speaking. If this is helpful to you, we appreciate your feedback and a positive review. We always love knowing what types of episodes you like most here on the Bigger Pockets podcast. Thanks again for listening, and we will see you very soon for the next episode of the podcast. Thank you all for listening to the Bigger Pockets Real Estate Podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform.

Starting point is 00:43:53 Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calico content. And editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.com. The content of this podcast is for informational purposes only. All host and participant

Starting point is 00:44:15 opinions are their own. Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. Bigger Pocket's LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.

BiggerPockets Real Estate Podcast - 885: BiggerNews: America's Path to "Renter Nation" as Prices Rise, Rates Stay Put w/J Scott

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