Epic Real Estate Investing - How to Survive Economic Collapse (and the Housing Crash, too!!!) | 1207

Episode Date: May 31, 2022

In today’s episode, Matt brings up the hot questions about the current real estate market situation. Particularly: -      Is the economy going to collapse? -      Is the housing marketing destined to go down with it? -      What should you be doing in the event it does? There's one thing you should do before the economy collapses, if it does, and it's not what most people are thinking. Tune in and find out what! BUT BEFORE THAT, learn about how to invest during times of constant inflation and stagflation. How to cope with them and how to turn them into your advantage.   Are you ready?   Let’s go! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. Over the last couple of years, despite the pandemic, despite the mortgage forbearance, the eviction moratorium, inflation, war, the supply chain interruptions, I've still been very bullish on the housing market suggesting that if you're waiting for a crash, you're going to be waiting for a very long time. Yet, I always add the disclaimer,

that there is one thing that can bring the housing party to an end, and it's finally arrived, and it's starting to take its toll. I'm going to tell you what it is, it's current impact and what you can do about it. You ready? Let's go. Welcome to the all-new, Epic Real Estate Investing Show. The longest running Real Estate Investing podcast on the interwebs, your source for housing market updates, creative investing strategies,

and everything else you need to retire early. Some audio may be pulled from our weekly videos and may require visual support. To get the full premium experience, check out Epic Real Estate's YouTube channel, Epic rei.tv. If you want to make money in real estate, sit tight and stay tuned. If you want to go far, share this with a friend. If you want to go fast, go to rei-aise.com. Here's Matt.

Hi, I'm Matt Terrio, CEO of Epic Real Estate, where we show people how to invest in real estate so they can escape the daily grind and retire early. All right, so let's cut to the chase. The only thing that can stop this housing market from its skyrocketing appreciation is monetary policy and or the interest rates. And right now, they're both in full effect applying pressure to the market. Money printing is tightening, mortgage rates are rapidly rising,

and together they're cooling off the housing market significantly. For the third straight month, in fact, bringing the market to its weakest pace in nearly two years. Last month's real estate sales fell 5.9% year over year, and this month's report shows a 3.4% slip of existing home sales from last month. And the most recent data is suggesting this slowdown is going to be extending into May, as mortgage applications in the week ending May 13th slid 12% from the prior week and 15% from a year earlier. And only 19% of consumers surveyed in April said it was a good time to buy a home. That's down from 47% a year earlier and a record low in data going back to mid-2010.

And the market is seeing a lot of buyers bail the home buying process altogether. They're tired of shopping. They're tired of losing to multiple offers. I mean, they've been priced out of the market, and the rising interest rates are only making it worse. And it's the first-time homebuyers that are getting hit the hardest as the share of first-time home buyers in the market fell to 28% in April from 31% a year earlier. And this frenzied market that took off mid-2020, it's losing esteem.

But is it crashing? You know, home sales are definitely down, and the number of homes for sale is unusually low for this time of year, but most homes are still receiving multiple offers and selling quickly. You know, at the current sales pace, there was a 2.2 month supply of homes on the market at the end of April. Still, very much a seller's market, and all those sales are down, home price growth is not. Prices rose 14.8% in April from a year earlier to $391,200, setting a new record going all. all the way back to 1999. So despite what you hear about the slowdown, historically speaking, the housing market is still very hot.

The buyers who've been shopping for homes have lost out on multiple offers to buyers who offered to pay more or were willing to skip the home inspection or waive appraisals or remove their loan contingency as so many buyers in the market, they were flush with cash, and they are still flush with cash. About 26% of April existing home sales were purchased in cash. And that number is actually up from 25% in the same month a year ago.

Not to mention, the typical home sold in April was on the market for just 17 days unchanged from the month prior. So with rates rising the way that they are, buyers dropping out of the market, how are housing prices still on the rise? Well, look no further than the basic economic law of supply and demand. The supply of existing homes for sale is scarce. And builders are losing confidence in building new ones. You know, builders, they've tried to ramp up their activity. they know there's a lot of demand out there, but they've been slowed by the supply chain challenges, rising supply costs, and labor shortages. You know, a measure of U.S. home builder confidence fell in May

to the lowest level since June 2020. So what is the future hold four new homes hitting the market? Well, the closest thing that we've got to a crystal ball is the residential permit numbers, as they can be a bellwether for future home construction. But they fell 3.2% last month. So supply, it's ultra low, still in demand. How could it still be so high? Very simply. Many buyers are certainly getting priced out of the market, and you would expect that to reduce demand, but they're not all getting priced out of the market. For example, instead of a home receiving 10 offers, now they're receiving only 7. The fact is, we've got more people than we've got houses. We're not in a housing bubble.

We're in a people bubble. So what are all of these people that are leaving the market doing? Where are they going? Wherever they can. And they may be hopped. out of the frying pan into the fire, as rents in most places are rising faster than the home prices. Dallas rent prices seeing some of the highest increases in the United States. Denver's skyrocketing rental market is pricing people out of homes. Manhattan rental prices surge on pent-up demand. Study shows rent prices are increasing four times faster than income. Housing nightmare continues as rent soars. Rent prices keep climbing. No relief in sight. Rental prices. continued to soar in April. Rent prices in college towns across the country are skyrocketing.

Rents rising faster than Nashville home prices. And those headlines are all from just this past week. And to me, that would suggest in times of runaway inflation. Real estate is one of the safest places you want your investment dollars. And the rising rents that you receive as a landlord will offset the rising prices at the pump and the grocery store. If you've got the means, you want to be in real estate. If you need some help with where to begin, I've got some free information for you. Download an investor's guide to passive income

at cashflow savvy.com. Now, I stand by my prediction. If you're waiting for the housing market to crash, you're going to be waiting for a while. The supply and demand fundamentals are too strong. But keep your eye on the Fed, the monetary policy, and the interest rates. It has had enough of an impact to slow sales activity,

but not yet enough of an impact to push prices downward. Please stand by. We've got overhead to pay. We'll be right back. Boarding for Flight 246 to Toronto is delayed 50 minutes. Ugh, what? Sounds like Ojo time.

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19 plus Ontario only. Please play responsibly. Concerned by your gambling or that if someone close to you, call 18665331-260 or visit Conexonterio.ca. Remember that person that gave up on their real estate investing dreams? Neither do I. Let's keep going. Back to the show. Consumers, investors, and economists alike aren't just worried about inflation this year,

but also that growth could slow and unemployment could climb along with it. So together, worry, slow growth, and rise. unemployment could combine to form a major economic supervillain that hasn't been an issue since the 80s. It's something worse than inflation. I'm speaking of stagflation. So I've got what you need to know about it, including what's causing it and how you can survive it. Former Fed Chair Ben Bernanke said in a recent interview that the economy could face stagflation this year, as prices rise at the fastest pace in four decades, and the Federal Reserve ramps up plans to aggressively hike interest rates. So, some of the economy.

Some are starting to feel the pinch already. Now, what is stagflation? Well, stagflation happens when growth slows, demand falters, unemployment rises, and almost contradictoryly, inflation keeps rising too. And that's so out of the ordinary because unemployment doesn't typically bode well for growth. And when demand takes a nosedive, so can inflation. Businesses likely push back investments. Consumers are either spending less or have limited amounts of money to fund their purchases,

and such concepts are at the heart of the popular theory known as the Phillips curve, which suggests that as unemployment falls, inflation should rise and vice versa. But not in a stagflationary environment. Joblessness and inflation were both on the rise at similar points throughout the 70s and 80s, near the last time that we dealt with stagflation. So on a chart, their peaks and valleys often follow the same progression. In May, 1975, joblessness peaked at 9%. Just six months earlier, price increases peaked at 12.2%. Both would remain elevated until the early 80s, when the Federal Reserve essentially manufactured a recession and intervened by raising interest rates. And right now, we could be facing a similar period of time where incomes are not growing as fast as prices. Spending patterns dramatically slowed down, businesses stop investing, and all the while, inflation continues to climb. So what causes this? Well, there are a very specific ingredient.

that go into this disastrous cocktail. And a prominent one likely sounds familiar given what's happened in light of the pandemic and Russia's invasion of Ukraine. Supply Shah. At their basic nature, supply disruptions are stagflationary. For example, if a fast-spreading strain of the bird flu

affects a substantial portion of the chicken population, that shortage could raise prices on eggs and meat just as much as it could reduce production and employment. And that's been the case with today's semi-concounter inductor chip shortages, which have pushed up car prices because they've limited production. And we saw supply shock in the 70s, when an oil shortage prompted an embargo abroad, causing prices to nearly quadruple. What's more dangerous about those kinds of spikes is that they can go on to affect

other products and services in the economy. You know, when oil is more expensive, it not only becomes costly to heat up homes or fill up cars, goods and services that require a lot of energy can also get more expensive. Supermarkets can pass along higher shipping costs. Uber can add gasoline surcharges, of which we're actually seeing right now, all chalked up to the nature of inflation. But high inflation alone isn't enough to cause stagflation. And a large part of why that is is because price pressure, left to their own devices, can often be self-correcting. They can inspire consumers to pull back on purchases naturally.

And that's where other forces come into play to create this perfect storm, one of which is price instability and another worry and concern. even if inflation is high, businesses might be able to better strategize how to eat those costs if they know where they were heading. If inflation jumps around, however, that planning can become very challenging. And making matters worse, consumers and businesses, they notice when inflation is unstable. And it happens to be the number one issue for voters at this very moment. The people have noticed, they're feeling it. And the longer that they do, the bigger the risk that they see it as a facet of American life, of which can make it a self-fulfilling prophecy. Now, an important intermediary is the Federal Reserve. By acting tough with monetary policy and committing to cooling inflation,

officials can extinguish the flame before it becomes this raging inferno. But Fed historians argue the Fed wasn't tough enough in the 70s and 80s, and that their loose monetary policy contributed to the high inflation levels of the era. Well, that was then. Is the Fed doing enough right now? is stagflation going to happen? Now, the Fed's hawkish pivot will be key to keeping history from repeating itself. And Fed Chair Jerome Powell is talking tough, saying recently that there won't be any hesitation to keep hiking interest rates until inflation falls. And to that point, his words alone are having an impact on financial conditions.

The 10-year Treasury yield, so far this year is up 2.36 percentage points from its all-time low in August of 2020. And mortgage rates, they've followed Sue. with the average rate on a 30-year fixed mortgage rising to a 13-year high in May. Now, the stagflation deniers, they cite the unemployment numbers of just 3.6% near a half-century low. So that would be contradictory to a stagflationary environment with unemployment so low. But are the official numbers a real depiction of the job market? You know, currently, there are more than 11 million job openings and not enough people

looking for work to fill them, of which would suggest stagflation unlikely. But the large number of people that voluntarily left the job force over the last year could have the same impact of those that are involuntarily unemployed. Fewer people are in the workforce, and it might not matter much for stagflation as to why they aren't. Now, the rising pressures of a tightening economy could cause labor to return to the workforce, thereby mitigating much of our concerns about stagflation. So let's hope for that. But many have long forecasted that the financial system would hit a fiscal cliff this year anyway,

as the economy's stimulus-driven sugar high wears off. Now, growth in the first three months of this year also contracted 1.4%. And experts have attributed the decline to trade deficits. And all of that sets the financial system up on an unfortunate reality. One where growth was already set to slow drastically long before officials started taking their feet off the gas pedal. The S&P 500 approached bare market territory during recent trading, meaning the index plunged nearly 20% from its record high,

largely on recession fears as inflation rises and the Fed moves forward with rate tightening. Now, it feels premature to say we will definitely be there, but it might be the right mindset for the next 12 months or so, as we're likely to see slower economic growth and inflation isn't going to come down overnight. So what is there to do? Well, whether or not the experts want to declare officially stagflation, that debate might not make a difference to your bottom line.

So a little preparation in protecting your money can go a long way. So first thing, take advantage of today's strong job market while you still can. You know, even with the prospect of growth slowing, businesses still have a historic amount of demand for workers. So take advantage of that power by negotiating for a raise or hunting for a new position. Number two, make a budget. Now, I'm not a big fan of budgets because they're really difficult to stick to. But high inflation makes it all the more crucial to,

to evaluate where your money is going each month. So take a careful look at your discretionary spending, at least. Eliminate what's not necessary, and then look for cheaper options on what is necessary. Number three, plan for emergencies. You know, use that freed up cash to start adding to an emergency fund. It's not a bad idea, really, to always have six months of expenses stashed away somewhere anyway.

Even small contributions to an emergency fund can add up fast and make a really big difference. And take it a step further and just automate. it, set it and forget it. And number four, think about your bare market investing strategy. You know, no investor likes to stomach losses, especially if that money is going toward your retirement or a long-term goal. But in times of severe market volatility, it's important to avoid overreacting. So avoid the urge to sell it off. I mean, you may want to diversify your investments a little, but don't sell it off. And remember that the average bear market lasts around 15 months. Yeah, Matt, but this time it's different. You know, that's the popular

sentiment every time the economy struggles. Understand that this two shall pass. It always does, and the best is yet to come. We'll be back with more right after this. It's the matcha or the three ensemble Cadocephora of the fates that I just dennychee who energize so much. It's the ensemble.

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Let's get back to work. Is the economy going to collapse? I mean, it's not an outlandish question when you're experiencing firsthand, runaway inflation, rising interest rates, supply chain interruptions, growing corporate layoffs with many more expected, and then there's Biden's newest tax hike proposal. Can you believe it?

I mean, with the country hurting the way it is, raising taxes is the plan? however you look at it, you can't deny the economy is heading downward. And words at the bottom is what we're all wondering. Will it completely collapse? Well, if it does, there's something you most definitely will want to do before it does. If you wait until after, it might be too late. Now, if the economy were to collapse, there is something you want to do to save yourself. You want to do this before it does. And that's buy real estate. Now, I wouldn't be surprised if I just lost you with that statement. But I would be very sad if I did because when an economy collapses, there's

going to be fallout. There are casualties, and I don't want that to be you. So if you don't want to be one of those casualties, it might be worth it to hang out until the end. Now, everyone knows the housing market is about to crash, right? I mean, that's what the masses are thinking for sure. And if it's a thought like that or something similar that has you thinking buying real estate right now is a foolish idea. It actually tells me a lot about you. It suggests to me that you're either living in the past, you are watching too much CNN, you don't understand how inflation or money printing works, nor are you aware of Biden's plans for the second half of his term, nor do you understand how the basic law of supply and demand work in an economy? And what I'm getting at

is that there's so much more to the housing market right now than the simple cliche, you can't dismiss it with just what goes up must come down. With that said, I'll address the potential housing crash in just a minute, but let's look at why I'm suggesting to buy real estate now. First thing, real estate has proven itself as a sound hedge against inflation. You want to preserve your wealth as much as possible during these times, at the very least. And real estate over time has done just that for those who own it. Further, as inflation rises, so does the overall cost of living, including your shelter. This can be unwelcome new. for tenants, yet the landlords benefit from this. And this doesn't make the landlord evil or greedy.

No, they're not immune to higher food and gas prices. They're people too, with families to provide for. So if the market will support it, they will raise rents to pay their own rising costs. And that's another one of real estate's hedges against inflation, the income it produces. Second thing, interest rates are still historically low. You know, we've been spoiled for a while, but despite the recent hikes, the interest rates are still very favorable for investors, and they could rise even further and still have minimal impact on investor returns. And here's why. You see, it's a very rare occurrence when the CPI is higher than the mortgage rates. As of the recording this video, the last consumer price index, the index we use to monitor inflation, that number sits at

8.3%. Well, today's mortgage rate for a 30-year fixed loan is 5.8%. of which equates to a net negative 2.5% to borrow money, meaning the effective mortgage interest rate to you right now is negative 2.5%, not the 5.8% we see on the bank's website. And it gets even better, and I'm going to show you how in a minute. But the big result here is, regardless of the recent increase in mortgage rates, the bank is still paying us to borrow their money to buy our assets. And it works like this.

You see, inflation causes wages and business revenue, to increase. If you've borrowed money before that inflation occurred, you benefit from the inflation. You see, by locking in long-term fixed rate real estate loans, over time, inflation will cause that debt to be easier to manage because, you see, you will still owe the same amount of money. That number is fixed. It's not going to change. You owe the same amount of money, but now you're going to have more money in your paycheck to pay it off. Simply put, cash now is worth more than cash later. Inflation lets you pay your lenders back with money that's worth less than it was when you originally borrowed it. My good friend Jason Hartman calls this inflation-induced debt

destruction. And it's something the wise and the wealthy investors, they understand and they take advantage of this every chance that they can get. And that time is right now. Now, the third thing, taxes. I know. Taxes are boring. No one wants to talk about taxes. But right now on the table, Biden has proposed six new tax hikes, and they're significant. And don't be fooled when they say that they are taxes just for the wealthiest Americans. Not true. You see, when you actually read the proposal, it doesn't take a rocket scientist to see the trickle down and indirect impact on every American. Plus, the proposed repeals of the step-up basis and the 1031 exchange will directly impact the majority. But that's not what this is about. You see, if prices are rising, interest rates are rising,

and taxes are about to follow suit, you want to hold real estate for its tax benefits. You see, it's one of the last real tax shelters for the average person, and there are three ways that you benefit. The mortgage interest deduction is a good place to start. You see, the interest that you pay on your real estate loan, it's deductible. So if you're paying, say, $1,000 per month in interest, you know, most people are effectively only paying $600 a month, as the remaining $400 is a tax deduction. And then when you factor in the inflation-induced debt destruction that I spoke of earlier, you're being paid even more now to borrow money because of the tax benefit.

Also, the IRS allows you a tax write-off against the normal wear and tear on your property. This is called depreciation. And with a smart CPA, one can virtually eliminate their tax liability after owning just a few properties. It can be that easy. And Uncle Sam recognizes landlords as business owners, too, thereby granting them all of the same tax deductions business owners benefit from. You know, like deducting your cell phone bill, your internet access, your home office, office supplies, and I mean, there's so much more.

See, the benefits of owning real estate are becoming more and more commonly known, but is it really a good time to buy now? Shouldn't you wait until the prices crash? If we knew for sure that the market was going to crash and we knew when it was, then yes, I'd say wait. But we don't know the answer to either of those questions. Nobody does. But there is evidence in the market that a crash is inevitable, right? I mean, we're already seeing a little bit of a slowdown in sales. That's what the media is sharing. But what they're not sharing is that it's slowing down primarily because the lack of choices for homebuyers. Per the latest report, we're sitting at a paltry 2.2 month's supply of inventory and low inventory like this is not a precondition of a crashing market.

The opposite, actually. I mean, we may. may see a little pullback in prices, but it will be an artificial pullback if we do. You see, it'll be due to the Fed's monetary policy. And if they do take a more drastic measure that causes a market correction, it's going to be a short-lived one. Because the core fundamentals of supply and demand that drive prices for anything, it's just way too lopsided in favor of further appreciating home prices. You say, with such low inventory right now, and new home builders, they're completely losing confidence in building new houses, it'll be some time before the market recovers from its extended periods of underbuilding. The supply of homes for sale won't recover for a while.

It's going to take more than a decade per some expert's projections. Now, on the other side of the equation, the demand is enough to fuel the market for as long as you and I are walking this earth. You know, and in a nutshell, we have more people than houses. We're not so much in a housing bubble as we are in a people bubble. But we are indeed seeing a market slow. Yes, and that's not the whole story. Sales activity indeed slowed last month, but the median price reached a new all-time high again. Further, the number of all-cash purchases increased as well.

Rising inflation and mortgage rates have not yet been enough to kill the demand for real estate, but rather they have increased the demand, particularly when it comes to the wise and the wealthy. They know us up, and they're buying. All right, final thought. Let's say all hell breaks loose and the economy completely collapsed. say something like the Soviet Union did in 1991.

Well, if that were to happen, a housing crash probably would be our first concern. Survival would certainly be top priority. And if you look back and dig into the stories of Russia's citizens during the fall of the Soviet Union, you're going to discover that the ones that fared best were business owners of essential services and owners of real estate. The basic employee who owned nothing suffered the most. Real estate has produced more wealth during the best of times, and it has preserved more wealth during the worst of times. Don't wait to buy real estate.

Buy real estate and wait. And that wraps up the epic show. If you found this episode valuable, who else do you know that might too? There's a really good chance you know someone else who would. And when their name comes to mind, please share it with them and ask them to click the subscribe button when they get here and I'll take great care of them. God loves you and so do I. health, peace, blessings, and success to you. I'm Matt Terrio. Living the dream.