The “Engine” of the U.S. Economy is Starting to Crack (It Will Affect Housing)

0:00The engine that drives the US economy, the American consumer, is in trouble. New headlines are coming out daily, showing the strain on the average American citizen. But it's not just headlines. It's not just fear-mongering. The strain Americans feel is real. It's starting to show in the data, and it's even starting to change real estate investor behavior. All of this is unlikely to just be a blip. These are long-coming trends that are going to impact the economy, they'll impact our businesses, and our investing for the foreseeable future. So today on On the Market, I'm sharing an analysis with you that I've done on how ordinary Americans are faring in today's economy.

0:46We're going to talk about sentiment, we'll talk about the labor market, we'll talk about the American savings rate, or lack thereof, and surprising new data that shows how real estate investor behavior is starting to change in the face of our current realities. This analysis is a genuine look behind the headlines of what our economy really looks like and will help you make decisions about your own finances and investing.

1:18Hey everyone, welcome to On The Market. I'm Dave Meyer, Chief Investment Officer at BiggerPockets. I'm a real estate investor and also a housing and economic analyst. Last week, I was making my rounds on the news, data sources I check on a daily basis, and something struck me. A clear theme was emerging. American consumers aren't looking very good. Chart after chart, report after report, showed different views of the exact same problem. But at the same time I was looking at this, I also see talking heads on the news talking about how strong the economy is, how resilient everything is. So I decided to dig in myself to check the facts, to get the source data and dive into what ordinary people are facing and feeling right now.

2:12Because this stuff matters a lot. Of course, it matters on a personal level. After all, we are all American consumers. We are part of the data and we are impacted by what's going on at large in the economy. But it also matters in a macro sense as well, because 70 percent of GDP, of our country's total economic output, is made up of consumer spending. So if consumer spending slows, so does everything else. And that could impact the stock market. It could send us into a traditional recession. it could impact the performance of our portfolios. And it is actually already starting to do that. I'm going to share with you some recent data that shows how real estate investor behavior, not just sentiment, actual sales and purchasing behavior has changed over the last several months.

3:08This stuff does really matter. So I want you to have all the facts. Here they are. Let's start with how American consumers are feeling. And we're going to talk about their behavior and go into some other data in just a minute. But I really like to track how consumer confidence and consumer sentiment is tracking over time. And a few weeks ago, I actually reported on this because there was a major headline saying that consumer confidence hit an all-time low. I know a lot of people like to throw out things like that and say, oh, it's a record low when they just mean it's the lowest it's been in a while.

3:44This was actually the lowest it has ever been in the history that consumer confidence has been tracked. More than 70 years of data last month was the lowest it's ever been. Until this month, where it went even lower. If you look at it now, it goes to a 45. I know that number probably, you know, in a vacuum doesn't really make any sense to you, but I'll just give you some context here. that the average consumer sentiment over seven years that it's been tracked is an 85. We are now at a 45. Now, it's been below that 85 average for a while, basically since rates started to go up, but it was in the 60s or 70s.

4:25So coming all the way down to 45 is a significant deterioration. It's basically just been going almost straight down for the last six to eight months. And this doesn't happen often. This is lower than it was during the great financial crisis. So something significant is happening here. What is it? Why are consumers feeling so bad about the economy? Well, there are a couple of things and we're going to dive into each one of them. The first one is the one I personally just believe to be the major variable that has people so down on the economy, And that's the cost of living. It's just become very expensive as inflation continues to rise and people are starting to feel it.

5:11I've mentioned it briefly in other episodes, but I just kind of want to share with you exactly what's been going on with inflation just over the last couple of months. As of April, which is the last month we have data for as of this recording, the inflation rate as measured by the Consumer Price Index is up to 3.8%. That is the highest it's been in three years. Last time we saw it that high was May of 2023. Thankfully, we are nowhere near how high it was in 2022 when we hit 9.1%. So we're really not back to where we were then. But 3.8 % is nearly double the Fed's inflation target of 2%. Now, there's another measure of inflation that people look at.

5:58It's called the core CPI. This strips out food and energy because those prices are very volatile. And that was up to that went up to 2.8%. And in different economic conditions, I would usually look at the core inflation rate and say, OK, food and energy are volatile. It's only really 2.83 percent. But I think right now we have to look at the whole picture. We need to look at the headline CPI because food and energy are the entire story here. Right. Because of the war in Iran, energy prices have skyrocketed. We've also seen fertilizer costs go up. Food costs have gone up a lot. All the analyses I've read show that food prices are likely to keep going up in the next couple of months.

6:45So personally, while I would normally look at that core number, I think that 3.8 number is what Americans really care about right now. Maybe some economists or academics are going to look at the core. But when we're talking about why people are pulling back on spending, why their sentiment is so low, it's because the whole picture is up 3.8 percent. Now, there are other ways of measuring inflation, too, but they look pretty similar. They're actually a little bit higher. The PCE is actually what the Fed looks at for their inflation gauge. That was also at 3.8. Their core, again, which strips out food and energy, was also up 3.3%.

7:24That's pretty high. When you're not even factoring in oil costs or food costs, that is a significant increase. Remember, just a year ago, we were starting to get closer to the Fed's target. We are down below two and a half. And so it's really come back up here. And one of the key things here is something that I mentioned. I did a show a couple of weeks ago on the quote unquote Main Street recession. Just as a summary, if you haven't listened to that episode, I believe that we should be tracking real wages as the number one barometer of how good the economy is doing. And real wages is just are people's incomes going up faster or slower than the pace of inflation?

8:04And the answer to that is no. We have actually seen that wages, according to our last month's report, wages dropped 0.5 percent monthly. And so it's not just that we are seeing inflation. It's that wages are not keeping up with inflation. That is the key differentiation here, because if inflation was three percent, but people's wages were going up six percent, I don't think sentiment would be as low as it is because spending power would be going up. But spending power is starting to go down. And this is not just theory. I do believe strongly in this real wage as a metric of measuring the health of the economy.

8:44But we are starting to see this trickle into other data and other parts of the economy. The one that really caught my attention last week is that the savings rate in the United States is going down quickly. As of right now, the average savings rate basically just measures what percentage of your income the average American saves is now at just 2.6%. It's not great. For the record, American savings rates are never that good. You know, they're never 30%. They're never 20%. But back before the pandemic, it was about 5%, a little bit higher. During the pandemic, things went crazy. It went up to like 20 % or 30 % because of stimulus checks and people were saving that money.

9:29But it has been falling since 2023, but it was going down kind of gradually. For 2023 and 2024, it was still above 5%. Now, half of that, so 2.6%. And I know you might be thinking difference between 5%, 2.6%, does that matter? I think, yeah, I do. I know it doesn't sound like a lot, but to me, we are getting close to, hey, I can save a couple of bucks every month after all of my living expenses to this is getting pretty darn close to being even or maybe even going negative. And the pace at which the savings rate is declining is also pretty notable. Like at the beginning of this year, it was 4.7%.

10:14So it's gone from 4.7 % where it hangs out to 2.6 % in just five months. That is a very significant, rapid decline in the savings rate. And if you combine that with other things that we're seeing in the economy, it starts to paint a picture, right? We are also seeing delinquencies on consumer debt go up. I talked about this a couple of weeks ago, too. You can check out that episode where I talked about credit stress in the market, but we are seeing credit card delinquencies go up pretty rapidly. We are seeing auto loan delinquencies go up. We are seeing student loan delinquencies go up. Actually, the one area where we're not seeing delinquencies really go up is mortgages, which is why continue to say that a crash in the housing market is unlikely.

11:00But consumer debt is under strain. So the cost of living isn't just a theory. It's not just people saying that things are getting more expensive. We're actually seeing the result of this higher cost of living in other data, right? We are seeing the savings rates go down. That happens when people are getting stretched, when inflation goes up and pushes the cost of things up and their wages are not going up. What happens? Savings rates go down. What happens when they don't have any savings rate? Delinquencies go up. These are these things are all connected. So if you ask me why consumer sentiment is down at the lowest level it's been in 70 years, is it because this is the weakest economy we've had in 70 years?

11:45No, certainly not. I don't believe that this economy is nearly anywhere close to how bad it was in 2007 and 2008. Not even really close. But people are tired after years and years of inflation. And just seeing it start to go back up and not having the safety net to fall into is, I think, the biggest thing dragging down sentiment. The second thing that I do believe is impacting this number is the labor market. The labor market is not that bad. I know people are going to argue with me about this, but if you look at the big picture, because there is no perfect measurement of the labor market, but if you look at it all, you look at the unemployment rate, continuing unemployment claims, initial unemployment claims, accounting for part-time work.

12:32If you look at all of this stuff together, the labor market's doing OK. It's not the best. certainly not as good as it was in 2022 or 2023, but it's not completely falling apart. But if you dig into this a little more, you can see that people are genuinely afraid about their jobs. And I think this is for two things. I think one is that it has to do with the media. They report on high profile laughs, which they should, right? You see these headlines that UPS or Meta or Amazon are making big laughs and they are. But more than 50 % of the economy is employed by small businesses. And so these big high profile layoffs aren't necessarily the reality.

13:13There's actually data that you can track. It's called initial unemployment claims. You can go Google it if you want, but it's a good measurement of layoffs. It just shows how many people are filing for unemployment insurance in any given week. And it's really not that changed. It's not really that high. And so the big picture layoffs aren't that bad, but people are afraid and that impacts behavior as well, right? If you're asking why consumer sentiment is so low, it's because they're afraid. And I think in large part, this is because we're being told every day that AI is coming to take our jobs.

13:48Every article, every media outlet is reporting on this. And we're starting to see this impact people's behavior. There's actually a really interesting data set that you can look at. It's called the quits rate. It's not one you'll probably hear about very often, but it's a really good one. It shows how many people are quitting their job. And the reason this is important is that the logic goes that people quit their job when they're feeling confident about the economy and confident about the labor market. But what we are seeing is the quits rate dropping really dramatically as well. So back a couple of years ago in 2022, it was at 3%.

14:27That's come down a full percentage point to 2%. May not sound like a lot, but that's 33 % fewer people quitting their job any given month. It's lower than pre-pandemic levels. And so to me, that reflects a environment of fear in the labor market. And so look at these things together, right? You see lower savings rate, higher delinquencies, lower wages, lower quits rates. No wonder consumers aren't feeling happy. It's not just people complaining. This is actually showing up everywhere in the data. In fact, I haven't seen really any data that suggests that American consumers are doing well. I really try on this show to look for contrasting arguments, to look at both sides of every question.

15:10And I don't really have any data. I mean, mortgage data is good. I share that with you guys all the time. The mortgage data is pretty good. And the stock market is certainly good, right? But consumers, the average consumer, not the average asset owner, not the average person who owns real estate or owns equities in the stock market, just the average consumer and their finances don't look good. And I really honestly, if you have some data that shows that they're doing well, send it to me. I'd love to see it. And honestly, I could go on. There's other stuff I could point to about consumer sentiment and the stress they're under.

15:46401ks, right? You can actually take out a hardship withdrawal from your 401k to access capital in there. That's going up, right? Everywhere you look, there are just signs that the American consumer is cracking. Now, all that being said, for right now, consumer spending, remember, we've been talking about sentiment, consumer spending has actually remained strong. And that's one of the reasons we see GDP continuing to grow. It was revised down last week for Q1 from 2 % to 1.5%. So it didn't grow as strong as we initially thought. But right now, consumers are continuing to spend. But when you see that savings rate start to dwindle, right, you have to wonder how long that can go on.

16:27People are literally like if you put all this data together, it just shows without a doubt that consumers are spending faster than their income is going up. Right. That means they're eating into their savings to maintain their spending levels. And maybe that's holding the consumer spending data up right now. But if these trends continue, it has to stop. Right. Like that cannot happen forever. All right, so this is a brief picture of what's going on with the consumer in the United States right now, but I have more data to share with you. We'll get to that right after this quick break. Stick with us.

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20:12Welcome back to On the Market. We're talking today about consumer activity, consumer behavior, and the realities on the ground for the average American. Let's get back into it. So what does this all mean? Well, to me, I think the chance that we go into a traditional recession is going up. I've talked about this a lot on the show. I think traditional recessions are a silly measurement. of GDP and it is completely subjective. But I think the chance that we see negative GDP growth, maybe not in 2026, but in the next year or so, I think there is an increasing chance that that happens. The second thing that real estate investors should pay attention to is this is probably going to mean this housing market remains slow, right?

20:55A lot of the data we even have about the housing market and that I've shared with you was before the war in Iran really pushed up mortgage rates. And we're starting, we're already seeing low mortgage application volume. We're seeing low new listings. So housing market recovery not happening anytime soon. So just keep that in mind. The more practical tactical thing that you need to know though, is I think rent growth is going to remain very slow and it may not exist at all. I've been trying to warn about this for a year now, maybe a year and a half now, but even though we are working our way through this glut of multifamily supply that has suppressed rent growth for the last two or three years.

21:35Because of that, a lot of people have been forecasting that rents are going to grow. I disagree personally. I just don't think there is going to be demand. I do not think that people are going to be able to afford higher rents. And so as a property manager, I would not forecast higher rents. I would forecast higher vacancy rates. And I would, if it were me, and what I will do with my properties is prioritize keeping good tenants in place rather than trying to increase my rents. Because when people are under this strain, when we are seeing savings rates dwindle, when we are seeing delinquencies start to go up, not the time to raise rents, in my opinion.

22:14I know that's not the best news. I know it's not what everyone wants to hear, but that is my honest read, my honest assessment of what's going on. And I would prepare for this to be around for a while. I genuinely let me know in the comments. I would love to know how does this get better? I really don't see a way that this gets better in the near term. Inflation is getting higher. Wages aren't going up. And even if the Strait of Hormuz opened tomorrow, we're still going to have inflation stay high. Every analysis says this. And even if it goes down to three, we just aren't keeping up with that either.

22:54And so I don't know how this unwinds, how something gets better. But from the data I've looked at, I don't see any signs that this is going to get better anytime soon. So my recommendation is to prepare for this for the foreseeable future. And I know it stinks. This is a hard time in the housing market. It is a hard time for real estate investors. There's just no getting around that. But there still is opportunity. there are things that you can do. You just got to stick to the plan that we talk about here on On the Market all the time. If you're going to buy, which you can, there are going to be good opportunities.

23:31You have to buy below current comps to protect yourself from potentially declining prices. You need to be extremely patient and only buy good assets in good locations. Think more about protecting against downside risk than taking big swings to get huge upside and be very diligent about conservative underwriting, especially in terms of rent growth, vacancy, and appreciation. That said, motivated sellers are going to emerge, in my opinion. Days on market are starting to go up. I think we're going to see more and more motivated sellers, so there will be opportunity. But make sure you are following the playbook that works when you are investing in this kind of uncertain, stalled out market like the one that we're in right now.

24:22So that was the big picture stuff on consumer sentiment. But I want to drill down into what's going on with real estate investors because we have new data from Redfin that shows how real estate investing activity has shifted pretty considerably in Q1. I'll share that with you right after this break. Stick with us. If you think property management is expensive, try mismanaging a vacancy or an eviction or a maintenance issue that turns into a five-figure problem because no one caught it early. That's expensive. A good property manager isn't overhead. They're protection against small mistakes turning into big losses.

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