Inflation Is Back, and It's a Warning Sign for Mortgage Rates

0:04We're in a stretch of the spring housing market where the stories on paper that you're reading and the stories on the ground don't exactly match. Listings are picking up, the government is meddling in the housing market, and single rate moves or single headlines can change the mood of the entire market overnight. So if you're trying to make sense of what is actually happening, you're not alone. I'm Dave Meyer alongside Kathy Fecky, Henry Washington, and James Daynard. And today we're breaking down the latest housing market headlines from scary inflation to an important provision about build to rent, avoiding scams, and the latest rent trends.

0:44Today, we're breaking down what you need to know. This is On the Market. Let's jump in. I'm going to go first because I am scared. I'm not really all that scared. I'm just frustrated because have you guys seen these inflation numbers the last couple of days? It's not pretty. They suck. They just suck. That's the only way to talk about it. We were like getting control of the story, you know? We don't, it's gone. I know. And like, just so everyone knows, like the headline inflation that most, we talk about a lot and that you probably hear about in the media is the CPI, the Consumer Price Index. And that wasn't good.

1:24That has shot up to the high threes year over year, 3.8. As you'd probably know from listening to the show, they want it around two. We were down to about 2.5 the last couple of months. It's turned around. But the thing that really worried me, Kathy, I know you saw this. You made something about Instagram about it. But the PPI, which is the producer price index, basically what it costs for manufacturers and companies to build the stuff that they sell you, absolutely just skyrocketed to scary numbers. It is up 6 % year over year. That is the biggest increase since December 2022, which if you remember, no one was happy in December of 2022 about what was going on with inflation.

2:08I don't like the sound of that. Right? And so I don't know. I mean, I guess the long and short of it today, mortgage rates bounce back up. They're at 6.6 now. Bond market's going up. So I got curious about this because I'm a dork. And I was like, it just logically made sense to me. Like if the producer price index goes up, does the consumer price index follow like the next month? Right. Because there's kind of this subsequent correlation. The answer is yes. No, because the businesses love to just swallow the cost. Yeah, they don't want to pass it on. I feel like they used to. Right. Like it used to be a little bit.

2:45But now like people just pay it. And like that's I guess that's what I'm curious about. Like, does that ever end? because what I found is for seven months after the PPI goes up, the CPI usually goes up, and the PPI is still going up. And I honestly think oil prices might go up even more than they have. So I look at this. I think mortgage rates are going to be very high. And I think we're going to see prices start to come down in the market. I just think, you know, nationally, I've said this for a while, but I think we're going to have a weak housing market this year. I don't know if you guys, if I'm overreacting, but Henry James, what do you guys think?

3:20No, I'm loving that I'm about ready to list 15 homes. So in the next four weeks. Oh, man. The housing market is definitely weak right now. The demand across the board, and I'm talking to builders, investors, retail people. It's just everyone's like in this state of shock, not knowing what's going on. And they've just gotten through deals and they haven't really clicked out of return. But I am seeing some extremely good buys on dirt. Oh, really? I was trying to peddle a lot this week. and this lot is a great location in seattle columbia city 6600 square feet the lot two down same lot sold three years ago for 850 000 the highest number a builder will pay for this lot right now is 500 000 jeez whoa that was i was like i'll just keep it what are you guys talking about like i mean i'll just land bank this thing because you 500 grand for you know a site that you can potentially put four to six houses on.

4:18Is that slow market, higher costs, both? You know, I think it's just higher costs, controlling costs. The debt cost is really beating up builders. And then the time and duration to dispo these things with the slow housing market, the debt's just eroding these deals. If you look at it on paper, like what they bought it for, they built it for and sell. Yes, the bill cost went up maybe 10%, but that's not the detrimental part. It's the forecast of the hold and the debt that's really beaten these deals up. But I mean, 500 grand for this lot was unreal. I was like, okay, well, maybe it's not a good development site now, but is it a good rental site?

4:53Right? So there's low demand, but then it also pops up new investment opportunities that you weren't able to buy the last couple of years. Are you going to build on that? Or? No, you wouldn't. What I think I'm going to do on that one is just burr the property. and that will be a little bit of a negative loss and then start permitting out two or three in the back of the property i'm doing that on another site right now too that i got in cheap and the math will work but those are really good properties the 1031 later when the dirt catches back up because dirt goes up and down and what i do know is if someone was paying 800 850 for that lot two three years ago well it will go back up to that number or get real close because this is like a core in-city infill lot.

5:35And those are the ones that I'm really trying to focus on. Okay, how do you put that in your portfolio? You kind of eat the loss for a little bit, but the goal is really to just sell it in two years and then trade it out for higher cash flow. And that's where I'm seeing a lot of the opportunity. All right. Well, I hope you're right. I have a few properties we're supposed to be selling and maybe we won't be. Maybe we'll be holding a bit longer. I got three offers uh this week on properties that we had listed one has been listed for ages the other two we one was listed for two weeks and the other one was listed for two days so uh that's because you're on the other side of the universe the part of the country that's actually functioning very well it's so weird i'm selling a property in in michigan right now i got six offers all around the same price and three of them they've canceled they're just all canceling the contract it's just super weird people are just getting cold feet yeah got it under contract the fourth time at the same price that i wanted hopefully this one will go through it's just super weird it is weird because i would think the high interest rates would affect a little bit more the first time home buyers and the the kind of more affordable price point but those are the listings that we are selling we're actually selling a bunch of uh homes for a hedge fund where they're newer construction priced in the three to fours a couple hours out of seattle those are all selling the in-city metro properties are the ones that are sitting a lot more which is that's actually where the money is so it's it's kind of the i feel like everything's out of whack right now yes yeah yeah i mean coming back to the the story on how that's gonna how these how inflation is going to affect us and the fact that we don't really see we see it moving in a trajectory that's the wrong the wrong one.

7:19It's going up, which means rates are going up, which means the Fed is probably not cutting rates, which was their plan. The plan has been to like two rate cuts this year. It could be two rate hikes this year. So a lot of people in commercial real estate are in for some more pain. Do you think the new Fed chair is going to hike rates? Yeah. It's not up to him. He's one of 12 voters. Yeah. And he's pretty, he's, I think he's going to be independent. Let's hope. I hope that's true. I know that that's, Henry does not agree. We shall see. But it's not up to him. He doesn't, you know, he does not unilaterally decide.

7:58Oh, because that's mattered on anything else that's happened so far. It does. It's, there's 12, there's voters, like 12 people vote on, on monetary policy. And last time, last vote, 11 of them voted to keep rates the same. Only one person voted to cut rates last time. So even if Warsh votes to cut rates, that's two out of 12, right? He's got it like maybe he can convince. Maybe he can convince everyone. But the data is suggesting the other. I don't I'm not expecting rate cuts anytime soon. Are you expecting rate hikes? Because I kind of think that's where we're headed. I think that might be politically too far.

8:42I think there's probably, if I had to guess, they're just going to keep it where it is. But I think you're right, Kathy. The big losers here are probably going to be existing multifamily operators, right? People who have been trying to kick the can down the road to a rate shop. Because just so everyone knows, commercial loans are much more correlated with what the Fed is doing than residential. Residential is really much more about the bond market. That's going up. That's not looking pretty, but it's not going crazy. And there's not the sense of urgency in the residential market for people to refinance.

9:15In the multifamily, large multifamily space, there absolutely is. And I was already starting to hear a lot of grumblings about distress in multifamily. And I think we're going to just have more and more of that. There's going to be more. The time's coming. Because it's not just the operators that were banking on the rates to drop. They've been getting extensions from banks because the banks are hoping that the rates drop and these things stay in the grain. And they're not giving them anymore. They're done with the extend and pretend. They're foreclosing. I'm literally signing a purchase sale agreement right now on an apartment.

9:48And it looked great. But now with rates going up, I'm not sure. All right. Well, we got to take a quick break. But we'll be back with three more headlines right after this. Most investors spend more time chasing deals than reviewing their insurance. But a quick coverage check can be fast, easy, and one of the smartest ways to protect and even improve your property's cash flow. As the months get colder, frozen pipes, icy walkways, and seasonal wear and tear can increase the likelihood of claims. And traditional insurance companies aren't always built to handle these claims quickly or smoothly. That's why more real estate investors are turning to steadily.

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12:46Welcome back to On the Market. I'm Dave Meyer here with James, Kathy, and Henry going over the headlines. Before the break, we all complained about inflation for a little while. But we have other real headlines to go over. So Kathy, what's your story this week? Well, you know, these are headlines that just come up way too often, more than they should. And I just feel like I am doing everything I can to help people not fall for fraud. This AP article came out, ex-Brooklyn judge accused of swindling real estate investors out of millions of dollars. So basically a former New York City judge who resigned last year while under investigation for professional misconduct was charged Wednesday.

13:30In November of 2024, prosecutors say that he offered two investors an opportunity, an opportunity, that's a word that scares me whenever I see it in an email, to buy commercial real estate in New Jersey through a bankruptcy auction. And he said, look, I'm an attorney. I have a trust account. just deposit six and a half million in here so that we can buy this in the auction. We got to have the cash ready. They did it. And days later, millions were gone and spent in his own account. So imagine that it's like tricky because here's this judge and people are like, well, he must be, you know, trustworthy, trustworthy, might be it.

14:13But the bottom line is it does not matter if it's your mother. Like don't do things no matter who it is, if you're not protected. And was it really a trust account? No, it was not clearly, especially this. This is the thing that always blows me away when when people do this with millions of dollars. I see it all the time. Like, OK, maybe you gamble with 10 ,000, still a lot of money and still a bummer to lose. But millions? Well, I just why? Why is there so much scams in real estate? Because it's so easy. Because people get excited, and especially if there's any kind of credibility like that. Like, oh, they have a podcast.

14:52Somehow that makes you credible, right? Well, not in any of our cases. Yeah, but it's true. I mean, I don't care if people feel like they know you because you're a celebrity. It should be no different than, like I said, with your own family. You know them pretty well, and you still shouldn't do certain things. You know, it just all needs to be done properly. And that's why we have escrow accounts. That's why we have title companies. It's why there's real estate attorneys. There are places you can go, especially when we're talking millions of dollars, to make sure your funds are secure. So just like what can people do if you're interested because there are real opportunities.

15:34Not all syndications are scams, right? Like there are good real deals out there. Like how should people do this diligence? Well, in a syndication, you have a private placement memorandum. You have an operating agreement. You read those things to make sure you understand what the deal is, where the money's going, how the money's going to be spent, the underwriting for that. That should all be spelled out in there. And then when you wire the money, you are part of the operating agreement. You're part of the LLC. At least that's the way we structure it. Also, I mean, that's just with syndications.

16:07But with other deals, I've got a colleague who has now been accused of fraud. I probably know 20 people who have been accused of fraud, and many of them are in jail. One of the ways that I've seen this happen is people taking promissory notes. So it's just not secured to anything. It's just you're just giving people money, and you get a note in return. And right now, one of the most popular things right now is note investing. Everybody talks about it like it's the safest way. And if you're not experienced, you might think, well, I have a note. I invested with this person and we signed an agreement, but it's not secured against the real estate, gone through a title company.

16:48You just literally wired this person money and they gave you a promise to pay, which if they don't pay, you're out of luck. You don't get, there's no collateral to take the property. So I think, Dave, there's a lot of ways that people find themselves in a fraudulent situation. So have at least an attorney review what you're doing. And in this situation, it sounds like they really just threw money into an account with no deal or property named that they were going to purchase. And that's got to be the first red flag if you're investing in some sort of syndication to just throw money somewhere to buy a potential property at a foreclosure.

17:27That's weird. It's just if it sounds too good to be true. That's just weird. Just question it. That's just weird. It's just so bad. Yeah, there's like gap funding, right? Where a lender will say, hey, can you just fund this? We'll pay off. Buy it at the auction on Friday. We'll pay off by Monday. And that does happen. Yeah, but it's still tied to a particular property at that point, right? It is. Yeah. Or if you're getting a promissory note, I mean, promissory notes float around everywhere. And those are as good as an IOU if the person doesn't have assets. And what if the promissory note, if you're not getting a promissory note and you haven't vetted the person, their finances, what they're worth, what kind of liquidity, it is worth nothing.

18:05You always want to have it secured against the property. It's worth nothing. It's a promise. It's literally called the promise. It's like, I promise to pay you back. I mean, there are other kinds of investments where it makes sense, but real estate absolutely does not make sense. I mean, at the end of the day, no matter what, if you're investing in anything, have attorneys read the paperwork. Yes. There's a difference between bad operations and fraud and the fraud word's getting thrown around right now. And it has nothing to do with fraud. It's just they had a bad performa and they structured the deal wrong.

18:37Yeah. And they can't cover. But at the end of the day, before you decide to give anybody money, read the paperwork and understand the risk. This is no matter what, this is not sunshine and bunnies. You should be able to read through the documents, understand what they're buying, how they're buying it, why they're buying it, when you're supposed to get payouts, when you're not. What's the history of this operator? Have they done this successfully before? Like if you can't check all of those, like all of those boxes, then you either need to run this by somebody who has more experience than you or don't do it.

19:10It's not worth it. Yeah, totally agree. Put your money in the stock market, an index fund, and just forget about it if you're not going to do the work to learn what you're investing in. A hundred percent. I do want to echo what James said, though, is like there is a difference between a scam, a bad deal. That could not just be a bad deal. That could be a poorly structured deal and overly optimistic or just like a high fee deal, which is not a scam. It's shitty. They shouldn't do that. But that's in you to avoid. That's the easiest due diligence you could do. Look at the fees. Figure out, are they charging too much?

19:48That is the easiest thing you can do. You don't even need to know anything about the asset. And the expenses. Absolutely. That's been a gray area in some of the deals I've done. And if it's not fully outlined, like if there's a little line that says expenses will be, there'll be office expenses or whatever, what does that mean? Does that mean we're paying for your whole office, your assistant, you know, like you've got to spell it out and how much? Pool boy. If you're paying the pool boy, run the other way. I can't pay the pool boy. They do like to skim off the top. Oh!

20:26That's a perfect out. Let's move on. All right. And with that, Henry, give us a story. You're the only one making sense right now, so you just give us a story. All right. I brought an article from The Real Deal. It says, House Knox build to rent provision from amended Senate bill. So this is about the Road Housing Act, which had bipartisan support, which in this day and age is pretty hard to come by. But the House just released its amended version of the Road Housing Act, and it dropped two major provisions from the bill. The first provision it dropped was the provision around institutional buyers.

21:14So the original bill said no institutional buyers. If you have more than 350 homes, you cannot buy single family homes. That is not the case anymore. They have dropped that from the bill. So shocking. Yeah. Right. So that is out. And the other thing that they changed in the bill was they removed the seven year sell-off rule for build to rent. So in other words, if you're building a build to rent community, the previous bill said that you have to sell the properties within seven years. So you can build them and you can rent them, but then you have to sell them. Obviously, many build to rent operators didn't like this, said they were gonna lose a lot of their profitability, it wasn't gonna be worth it.

21:58And so there was gonna be this big problem with all of this inventory that they were building. that has now been dropped. The seven-year provision has been dropped. So now they don't have to sell within seven years. They can essentially continue with Build to Rent Communities. Why would that be in there in the first place, though? You don't put handcuffs on people that are providing housing. Yeah. Here we are bringing on more housing for renters. It's almost like there's so much focus on buyers. What about the renters who would love to have a beautiful home to rent that's new? I know. We have our build-to-rent community, and we would have sold it within those seven years anyway.

22:36That's part of our business plan. But who's going to buy it, right? They only get to hold it for seven years, or they might want to hold it longer. But the bottom line is this is bringing on new supply. It happens to be for renters, but don't renters get a voice? Don't they get to have a nice place to live? So I'm really glad this was dropped. There were so many build-to-rent communities that just stopped. They just have been sold. The owners didn't go forward with construction. So that was really not good for the market. This says that provision originally ended up freezing about$3.4 billion in build-to-rent investments across 14 firms.

23:14So that's roughly 10 ,000 units that operators just stopped building. So it was essentially going to stop this inventory that's going to come online. And that seems to have been what was a big driver in them dropping this part so that that inventory now will come online. It'll come online for renters, but they were hoping, it seems like, that they wanted to bring that inventory on for the traditional family or home buyer. Yeah. I get both sides, but I do think it doesn't really make sense. Like, we need more housing units. It's just like, what's the difference between building a multifamily and a build-for-rent community?

23:48It's just like the type of asset. Right. Why would you disadvantage people who are creating single-family homes for rent versus apartments for rent? This just seems kind of like a trivial distinction to me. Yeah, it's just a horizontal apartment, really. I said when the bill first came out that institutional, or when we were talking about the ban on institutional investors, I'm just like, there's a lot of wealthy institutional investors with a lot of pull in Washington. So I'm not surprised that it changed. It hasn't completely ruled them out. There's just less restrictions in what they're really calling an institutional investor and what they can buy.

24:24But it's a little funky. All right. Well, if it does actually pass, we will do another episode or segment on the show to remind everyone what's in there because there are some really interesting things in there in addition just to the build to rent stuff. So we'll get to that. Today, though, we do have one more story from Mr. James Daner, but we got to take one more quick break. We'll be right back. You've upgraded how to buy properties. But did your insurance get the memo? When investors start scaling, insurance can't be an afterthought. Most policies were designed for a single property, not multiple rentals, LLC ownership, short-term stays, or properties mid-rehab.

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