Investing with High Rates, Stubborn Inflation, & Low Supply

Dave:
The real estate industry has been changing rapidly over the last couple of years. We’ve seen high interest rates, soaring inflation, a constrained market, and the question is, what should investors do? On this episode of Bigger News, we are going to answer all of your burning listener questions about the housing market and economy. Hi investors. I’m your host, Dave Meyer, and for this episode of Bigger News, we’re bringing back our very first bigger news guest way back. I think it was like 2021 or 2022, but we have Kathy Fettke joining us. If you don’t know Kathy, she’s the co-host of our sister podcast on the market, and she is one of the most data-driven, informed investors out there. She extensively studies and understands the economy and housing market to help her make her investing decisions. In today’s episode, we’re gonna be bringing it back to our community to answer the questions that you all have about the macroeconomic situation and the housing market.
And I think even more importantly, we’re gonna dive into what you should do with that information, because a lot of times you may hear these stats or these figures in the news, but it’s hard to understand what does that mean for me and my personal real estate portfolio. We are gonna answer that for you all today. Before we jump into your questions, I just wanna remind you all that if you have a question that you want answered either by the BiggerPockets community or on the show, you can do that. Just go to biggerpockets.com/forums. It’s a completely free way where you can have some of your most important burning investing questions answered. But that let’s bring on Kathy. Kathy, welcome back to Bigger News, our first ever guest. It’s really nice to have you back on the show.

Kathy:
Oh, it’s so fun to be here. Thank you.

Dave:
Good. Well, I think it’s appropriate that we have you here for our first ever bigger news user generated questions mashup here. And we have four or five really good questions that I’m very excited to get your opinion on. The first question is, why are interest rates staying so high and what can investors do to still get into the game? So let’s just start with the first part of that question first, and let’s hear your take on why interest rates or mortgage rates specifically are staying higher than I think a lot of people thought they would be at this point in 2024.

Kathy:
Yeah, I mean, the way to sum it up, it’s a very complicated topic, right? But the way I would sum it up is that this is the undoing of the stimulus from Covid. So when there is any kind of major shock to the economy or like a pandemic or, uh, you know, people not paying their mortgages like in 2008, then the government actually kind of learned in 2008, Hey, we can fix this problem by increasing the money supply, printing money, making money cheap to borrow. And they created this new thing, quantitative easing, where they could also buy mortgage backed securities. So years later, in 2020 when the pandemic hit, uh, the, the Fed decided, let’s do this again. And, and bought mortgage backed securities, lots of them to keep rates low. It’s very manipulated the housing market in that regard. So then when the economy basically recovered and all over recovered and actually became too hot, uh, they had to pull all that back. So to just sum it up, they’re pulling back the stimulus that they did during COVID and part of that is selling off these mortgage backed securities. So that’s one reason. And then the other reason is the economy’s just been super hot, you know, super hot probably from all that stimulus over covid.

Dave:
Thank you for providing that context, Kathy. And I just wanna make sure everyone, uh, is following here and understands. But basically, mortgage rates depend on a lot of things. The Federal Reserve and their current policy is one of those things, and they have indicated that they’re likely to lower their federal funds rate and that will put some downward pressure on mortgage rates, but that hasn’t happened yet. But even if they do that, there are other things outside of Fed policy that impact mortgage rates. One of them is bond yields. That’s probably the most important thing that we’re, that impacts mortgage rates and bond yields are staying higher than I think a lot of people have expected. And actually over the course of 2024, like the first quarter, they’ve actually gone up. And so that’s why we’ve seen mortgage rates start to creep up a little bit.
And then the third thing is, what is going on in the mortgage-backed securities market? When you go out and buy a mortgage, uh, the bank doesn’t hold onto that. They actually usually wind up packaging it together, uh, with other mortgages and sell it to other investors. That’s called a mortgage backed security. And when there’s a lot of demand, when a lot of investors wanna buy that stuff, mortgage rates tend to be lower. But when there is not a lot of demand for mortgage-backed securities banks have to offer higher interest rates to those mortgage-backed security investors to entice them to go out and buy them mortgages. And that is one of the things that is happening right now, is that there is a lot of mortgage-backed securities hitting the market. There’s not enough demand for them, and that is pushing prices up. So just those things together probably give you a decent picture of why mortgages are staying a bit higher than a lot of people were expecting at this point in the year. So Kathy, let’s actually switch gears now that we’ve answered that and talk about what investors can do in this higher interest rate environment to still get into the game.

Kathy:
So I’ve been doing this for over 25 years, and one thing I can tell a new investor is real estate’s really exciting because it’s never the same. It’s always changing their cycles. And with each cycle you have to learn a new strategy. So that’s all it is today. Don’t, don’t freak out. That was a cycle of low interest rates because of what we just said. And that meant, wow, you could buy lock in rates at really low prices, you could buy more and have a lower payment. Uh, now it’s of course changed. You’ve got higher rates and that really has cut out the competition. So this is a different cycle. And before, when rates were low, there were, there was lots of competition. Now you don’t have that. So this gives you a better chance to negotiate. Just a few years ago, I, I know at least where I’m from, you know, in California there was no negotiation.
You made an offer, you couldn’t even get inspections. Like, it’s like, no, I’ve got a hundred other people who want this property. You get what you get. It’s not like that today. So you have more opportunity to negotiate. You can look at properties that have been on the market for much longer. You can negotiate with builders who are sitting on inventory and they can’t sell it because of these interest rates. So it’s just a different strategy and it’s a good one. It’s a great one. I prefer it. I would rather negotiate with one person than have to fight off a hundred investors or buyers. Right?

Dave:
Absolutely. I I, I totally agree. And actually just in the last couple of weeks I’ve noticed even less competition. I don’t know if it’s because mortgage rates have, like they were hovering at like 6.8, 6.9, they’re now, they’re like a bit above seven and maybe there’s some psychological thing. We’re also starting to see inventory come on the market and start to tick back up. I personally, like literally in the last week or so, have started to notice like a lot better inventory. So uhhuh, um, that’s exciting to me. And the other thing I just, I think about a high interest rate environment is of course there’s, there’s trade offs, but I see one big benefit in having higher interest rates is that it’s sort of this forced discipline. Mm-Hmm. <affirmative> because it is harder to make deals pencil, but they still do. I don’t know about you.
I’ve done actually more deals this year than I did last year. Yes. Um, and it forces you to be really good at underwriting. Mm-Hmm, <affirmative>. And then if rates go down, which they probably will, I don’t know if that’s gonna be this year, next year, two years from now, but your deal will probably just get better over the course of the next couple of years. So if you find a deal that is good right now, it could become great. If you find a deal that’s great right now, it might become a home run. So it does make it a little bit more challenging to identify that deal, but the performance of your deal might actually be better because you’re investing in this more challenging environment. Alright, we have to take a quick break, but as you know, interest rates aren’t the only burning question on your minds. So we’re gonna get into inflation, whether the trend towards working part-time is pushing us towards a recession and if housing prices are those damn millennials fault after the break. So stick around. Welcome back investors. I’m here with Kathy Fettke and we are answering your questions about the economy and the housing market. So let’s jump back in.

Kathy:
And I just wanna add one thing, Dave. These are not, this is not a high interest rate environment <laugh>. That’s true. It’s, it’s higher than it was, but people are are freaking out. Like we’re in the 20% range or something. Six to 7% is normal, it’s average. We’re just back to normal. But that’s confusing to people who were enjoying not normal for a while, right?

Dave:
<laugh>? Totally. Yeah. If you, if you look back to the, the early eighties, so, you know, in the late seventies things went crazy. Mortgage rates were up at like 18%. If you look at, since that they came back down, the long-term average is about 7% or six and change, I think. So, you know, we are back to that. I I do think that we’ll probably see rates get down to the low sixes, maybe high fives in the next year or two. Um, uh, but I think, you know, the era of 3% may be gone forever. I think 4% is unlikely anytime soon. And so we’re all gonna have to get used to this in some way. And of course we’d like to get the best possible rate. Everyone should be trying to get the, the best possible rate. But, uh, I think the sooner you can adjust your tactics to this new reality, the better. Because this is reality.

Kathy:
Yeah, it’s reality. And you can negotiate the interest rate. I just got a four and three quarter percent interest rate because I have a stressed out builder, pay that down for me. So you’re not stuck with these rates, you know, and that’s part of negotiation. It’s like, yeah, I’ll buy this place that’s been on the market, but you need to put in some money and pay down my rate.

Dave:
Wow. That’s a, that’s a great deal. Good for you <laugh>. I’m, I’m happy for you. You found that deal and uh, yeah, just a pro tip that, uh, builders are doing a lot of buydown still even into 2024. Uh, it’s a good tip there. That’s sort of a good transition. Now then to our second question, which is, uh, quote, with inflation concerns on the rise, how might real estate investors adjust their investing strategies to hedge against potential inflationary pressures? So there’s a couple things to this question. Lemme just start. Thi this, uh, person asked with inflation concerns on the rise, are your inflation concerns on the rise? Kathy?

Kathy:
No, inflation has been coming down steadily. So just be careful of headlines. That’s my been my, like what I’ve been trying to tell the world, like be careful of headlines because inflation went up ever so slightly these last few months, but it’s down dramatically from where it was. And if you’re in construction and we are at real wealth, we do a lot of new, new builds, it has come down dramatically where the numbers are making far more sense. Now. There is inflation in insurance. And this is just a, a hearsay thing, but I spoke with someone last night who is very close to some upper level people in insurance and she said, you know, it’s gonna come around. It’s, they’re making up for losses and eventually, and at some point insurance rates will come down too. I don’t know if that’s here, you know, I don’t know if that’s true, but we, we infl, um, insurance is definitely an issue, but otherwise overall inflation’s been coming down. So no, not a concern for me at this time. Yeah,

Dave:
I think for me, I am a little bit concerned that inflation is going to stay at its current rate longer than we would like. Mm-Hmm, <affirmative>. And just for context, the Fed has this target that we won’t get into it as somewhat arbitrary. It was made up in New Zealand like in the nineties, and for some reason everyone, every country in the world just follows this 2% target. Um, but they wanna get to it, they wanna get to this 2% target. And right now we’re a little bit above 3% and I don’t personally have a lot of fear that we’re gonna see a re-acceleration of inflation. You know, it might fluctuate a little bit over the next few months, but I don’t think we’re gonna see four or 5% anytime, um, in the next year or two. Um, my concern is that it’s gonna, that we might just get stuck where we are right now and that means that the Fed is gonna keep rates really high and although they’re only gonna do that if the economy’s doing well, I do think that that could have some longer term implications for the housing market because if the Fed keeps rates high, if mortgage rates stay high, that doesn’t mean you can’t invest per our previous conversation, but I do think it’s gonna keep inventory really locked up.
I think that’s sort of the key thing here is that if mortgage rates stay high, we’re unlikely to see a breaking of the quote unquote lock in effect, which if you’re unfamiliar basically just means a lot of people don’t wanna sell their house right now ’cause they have these amazing mortgage rates and who would want to get rid of them <laugh>. And so, uh, I think that that is sort of one long-term, um, sort of implication here. So I, I don’t personally agree that there’s gonna be, uh, re-acceleration of inflation. But given, given this question and that inflation is still, you know, around it’s higher than it was really for the last decade or so, um, and less except the last few years, Kathy, like how do you account for inflation in your own investing decisions?

Kathy:
So because we have a lack of supply, that means that we’re probably going to continue to see inflation in housing, which is good for the owner of that asset. Not great if you’re trying to get into it and acquire it ’cause it’s gonna cost more, but as you hold it over time, and if you look historically for decades, uh, how, uh, real estate prices have gone up over time. So for me, inflation is great if you own the asset. It’s really hard if you don’t. And that, in my opinion is what separates the wealthy from those who are struggling.

Dave:
Yeah, I I mean I think that the fact that this person who asked posed this question is thinking about real estate is the answer, right? Like there’s all sorts of tactics within real estate. Most of them are good inflation hedges over over time. Real estate has proven to be an excellent hedge against inflation. So whether, you know, Kathy and I are correct and we’re gonna see inflation stick around sort of somewhat where, where it is right now or if this, uh, question the person who asked this question is correct. And inflation does accelerate either way. If real estate is a good way to hedge against that inflation, uh, because it is a physical asset and because even if the value of the dollar gets further diluted, the income earning potential of physical assets stays relatively similar regardless of the currency and the strength of that currency.
And so, um, that is one of the reasons I love investing in real estate, um, is because it’s such a good inflation hedge. So I I think don’t overthink it, buy and hold things, you can even flip houses in an inflationary environment. But if you’re in real estate, you’re probably thinking about things the right way to cope with inflation. So the, the third question here actually flows right into this great job to our producers. Uh, the question is about part-time work. It says that a record number of Americans are choosing to work part-time despite a strong labor market. What does this say about the American economy? Are we entering recessionary times? So have you heard this that people are working more part-time? I’ve

Kathy:
Heard this kind of rumor running around, but again, I think if you just look at demographics, it would make a lot of sense. It’s nothing to be concerned about. Um, you have two extremely large demographic groups today. You have the millennials, it’s the largest group, and then you have the baby boomers and the baby boomers are retiring. So maybe they want a part-time job, but certainly not full-time. And then you’ve got millennials that are forming families. And if you, if you look at the cost of daycare, um, you, you need to be working and making a lot of money and working a lot of hours to cover the cost of daycare. So a lot of people who are just have got a lot of, you know, they’re forming families, they have young kids, maybe they just wanna work while their kids are in school, you know, and, and part-time. So I, again, I don’t think it’s anything to worry about. It just makes sense.

Dave:
Yeah, I I think there’s a, a combination of factors that are leading to this and some of them is people who can’t make ends meet with a full-time job. And that stinks, right? Like you would expect and hope that people, um, who work full-time are able to earn a living. Um, so that is maybe a, a one of a bad sign for the US economy, um, in general. That that is one category. I think there’s another category here. When you look at some of the data, it’s people who are, and, and this is the bigger categories, people who are opting to work part-time and there’s categories within categories here. So some of those people are just getting a side hustle ’cause they want to earn more. I, I’ve certainly done this in the past. Um, I’ve had more than one job, um, and uh, try to get extra income to invest in real estate or to do whatever.
And so people are still continuing to do that. And one of the good parts of the American economy, I think is that it’s easier to do a side hustle now I think, than it ever has. And so I do think that is probably one of the reasons we’re starting to see these numbers tick up. Um, a third sort of bucket is exactly what Kathy said is like some people, and I think this accelerated during COVID just decided that maybe they don’t wanna work part-time. They wanna, you know, work halftime, whether it’s raising kids or perhaps they’re worked really hard in their career to get ahead and now they’re like, you know what, I could just work 20 hours a week or 30 hours a week. So that’s one. And then the last category, which I hadn’t really thought about but I looked into the data here, is that there are millions of people who are forced to work part-time because their employers cut their hours.
And so that is another group that I think that is a little bit concerning for the economy. Like if you, if employers are starting, you know, maybe we’re not seeing those, uh, negative outcomes reflected in some of the unemployment numbers or some of the, the, uh, labor statistics. But if that is happening, that does show a cooling economy. But overall, um, even when you add all those things up, like the amount of people who are working part-time because they’re forced to is actually really low compared to historical rates. And so, yes, to me, I don’t think this is a negative sign for the economy just yet, but if those numbers start to tick up, then I think it’s something to pay attention to.

Kathy:
This particular article, it says, oh yeah, we’ve job, you know, the number of jobs has come down dramatically. Well that is a very, very good thing. People <laugh>. So you have to understand like, what’s the context here? We had too many jobs, like 12 million job openings and now we’re down to like eight, or I think it went up to nine. So I don’t see it as an issue with the economy. There’s still 9 million job openings, <laugh>, right? Yeah, yeah.

Dave:
Right. So I think generally speaking, people often ask me about labor market data and job data. And it’s not for the faint of heart. There is no one good labor market data source. Like you kind of have to look at a lot of ’em Yeah. To get a generalized picture of what’s going on. Like unemployment rate should be an easy number, right? It’s not, it’s missing a lot of stuff. It includes a lot of stuff. Look at unemployment insurance or job openings or the labor force participation rate. There’s all these things. So I would caution people against just looking at one headline or one data source if you truly wanna understand what’s going on in the labor market and maybe either follow someone who really understands it really well or look into a variety of sources to try and get a more holistic picture about what’s going on. ’cause these, these single data points don’t really give you a full enough picture to make investing decisions off of.

Kathy:
Totally. Yep.

Dave:
Okay, we’re about to get into our last and spiciest question, but before we do it, we have to take one more quick break. And during that break, if you appreciate getting economic news that’s relevant to you as an investor right here on this podcast, go ahead and push the follow button so you never miss an episode. We’ll be right back. Hey everyone, and welcome back to Bigger News. I’m here with Kathy Fettke. So far we’ve covered interest rates, inflation and the labor market. Let’s get back into it. All right, for our last question today, it’s a forum post from the BiggerPockets forums. It said, oh God, this is everyone always blaming millennials. The question is, are millennials to blame for keeping housing prices high? Millennials are the biggest demographic cohort ever and they’re just entering prime home, buying age <laugh>. So Kathy, I’m a millennial, so I’m gonna give a very biased answer here, but you’re not, so what is your take on this?

Kathy:
I just wanna say I just love you all out there and I’m sorry for all these headlines that you know. Thank you. Baby boomers got it too. So, you know, who’s to blame is the people who didn’t see 30 years ago that this was the largest baby boom, right? We had, we already had a baby boom from the prior generation and, and the baby boomers are called that because there was a lot of them and they affected the economy, right? As soon as they went to college, every, you know, then it was hard to get into college and and so forth. So we already knew what it’s like to have this python, you know, this, um, you know, what, what am I trying? Elephant within the python, you know, going through the system. Yeah, exactly. It affects it. And, um, so to prepare the powers that be should have been thinking, wow, this group is going to be at home buying age at age 30, perhaps we should have some housing available for them.
That didn’t happen. And, and then there was a lot of thought, well, all those baby boomers are gonna be dead by then, so there’ll be plenty of housing that that story’s still going around. But they, they failed to believe, you know, to learn that hey, baby boomers are actually really healthy, healthier than any other generation and living a long time. So that’s not happening. So I blame the powers that be that have made it very difficult to bring on new housing supply. And because at real wealth, we’re builders, and I know I deal with this on a daily basis of how difficult and expensive it is to bring on new supply. I’m gonna blame regulation, you know, <laugh>, I’m going there. Millennials, you go form your families, buy a house and ignore the headlines. <laugh>.

Dave:
Yeah, I totally agree with you. And in a way, this person is right because millennials are a big factor in why housing prices are so high and so unaffordable right now. But the word blame I think is maybe a little bit off because it’s not like millennials made some decision that other generations haven’t made. Like everyone wants to buy a home, at least in American society, you know, most Americans want to buy a home somewhere between the ages of about 29 and 35. Yeah. And right now the biggest demographic group in the United States is between 29 and 35. So, like Kathy said, it does not take some statistical genius or some brilliant prediction to know that like we were gonna see a lot of demand for housing over the last couple of years. And so that is really important. And I, I think what Kathy said is really also true is that for years people have been predicting that it would be offset by the quote unquote silver tsunami, which <laugh> is this term that was coined that basically said that people, you know, boomers would be reaching retirement age, they’d be wanting to downsize, they’d be, you know, dying off.
I know that’s morbid, but it is a fact of life. Um, and though that would free up housing, but that’s not happening. People are living longer. And we were seeing a much like way, way higher percentage of people choosing to age in place, which means that they want to stay in their existing homes and not go to either, you know, an, uh, assisted care facility into a nursing home, whatever it is. Um, and so that is taking up more inventory. So are millennials to blame? No, I think it’s this whole complex demographics and societal thing, but is the demographics of how big the millennial generation is a big factor. Yeah, absolutely.

Kathy:
You know, I think if we’re gonna play the blame game, we should blame the boomers for having children <laugh>. Yeah.

Dave:
It’s not like we chose to get born when we,

Kathy:
That wasn’t, that was my decision.

Dave:
<laugh>, that’s my parents’ fault

Kathy:
Exactly. To blame the boomers. But

Dave:
I do think that this is sort of, it, it’s a good thing to think about because it does in my mind, provide a tailwind for housing prices for the next several years at least. And I do get a lot of people asking like, okay, so when the, the millennials move through, does that mean that housing prices are gonna tank to me that, you know, I I think there is a chance that we see less rapid appreciation because we will see like a, a a relative decline in demand. But that doesn’t mean that like all those millennials who just tried really hard for decades to buy a house are all of a sudden gonna start selling them. You know, by most estimates we have a, a shortage of somewhere between three and 7 million housing units in the United States. Um, and, uh, you know, there are a lot of reasons to believe there’s gonna be sustained levels of demand relative to the amount of supply that we have in the market.

Kathy:
Yeah. And if you’re worried about that, then you really need to pay attention to, again, the what drives housing. And there could be places where they overbuilt and there could be places where they’re not encouraging job growth. And in those areas where they may be overbuilt and they’re not making it and they’re not job friendly, there could be a real softening in prices. Just like we saw a softening in the San Francisco Bay area in, um, in rents, uh, as people were kind of able to work remotely and, and live somewhere less expensive. So I just to protect myself from that possibility, I’m always making sure I’m investing in an area where there’s robust job growth and population growth, but they, they’re not on the path of overbuilding.

Dave:
All right. Well, this was fun, Kathy, I, this I appreciate you joining us for our first ever user generated user question show on the bigger news segment of the BiggerPockets podcast. That is, that is a mouthful. We’re gonna have to work on that one. You did

Kathy:
Well, that was good. <laugh>

Dave:
<laugh>, thank you. It was, it was really difficult. Thank you. <laugh> <laugh>. Alright, well thanks again Kathy, and thank you all for listening. We really appreciate you. And just as a reminder, if you want to have your question answered on the BiggerPockets podcast, just go to biggerpockets.com/forums, ask a question. It will hopefully be answered by a lot of people in our community, but there’s a chance that me, Kathy, or one of the other podcast hosts will be answering your question right here on this podcast For BiggerPockets. I’m Dave Meyer. She’s Kathy Fettke, and we’ll see you soon.