The Real Estate Espresso Podcast

On today’s show we are taking a look at what is happening with construction materials and how this might affect construction projects that you have in your current plans for this year. In the past two months we have seen lumber prices fall from their peak in March of $1,450 per 1,000 board feet to a new low of $667 per 1,000 board feet. Prices had dropped in April and then jumped back up to approximately $1,000 per 1,000 board feet in anticipation of the increased construction activity of the spring and summer. The drop in prices is coming from a number of factors on the demand side of the equation. New home sales are down across both the US and Canada. But the decline in housing starts is only 0.2%. That is not enough to cause a substantial impact on lumber prices. The major sell off in shares of national home builders like DR Horton and Lennar reflect an expectation that the combination of rising interest rates and rising construction costs will reduce demand for new homes. Some builders have stockpiled materials in order to secure supply and as spot prices fall they will want to consume their own more expensive inventory and buy new inventory when the low priced material works it’s way through the supply chain. I’ve had several discussions with contractors who have experienced massive scheduling problems as a result of material shortages of all kinds. The common lament is that they get booked for a job only to arrive onsite and experience material shortages. The sub trades are then left with no work instead of having too much work. Large scale projects are generally optimized to maximize the efficiency of the scarce resource which is human labor. But when the scarce resource is material and changes from one week to the next, it can cause delays all over the construction project. Scheduling of trades in this environment has become much more difficult and it’s common for a construction site to sit idle for weeks at a time. If the foundation is done and you have the wood and the framing crew, you should be good to go. You might be tempted to think that you should be able to make forward progress on structural framing, but that is not the case. Let’s imagine for a moment that the scarce resource is roof trusses. If you are going to wait 12 weeks to get roof trusses, you have to wait to start framing your structure until you can take delivery of the roofing structure. You can’t leave a partially framed structure exposed to the weather for months. It will suffer damage from wind and rain and will not meet the specifications when you are done. You then face the more expensive demolition and rework. Even if housing starts don’t drop at all, supply chain constraints elsewhere in the process are slowing the entire construction process, making it much less efficient than in the past. That inefficiency translates into a fall in demand for materials because houses and apartments are taking longer to build. My prediction is that we will continue to see lumber prices fall over the summer months. Some general contractors are fully booked for 2022, and are accepting large scale projects for 2023. But then others are recognizing the inefficiencies inherent in the current situation and are willing to accept new projects on very short notice as gap fillers. ------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about resilience in our daily lives. This past weekend my home city of Ottawa Canada has a line of summer thunderstorms come through the region. It was a few degrees warmer than usual and a bit on the humid side. By mid afternoon the sky had darkened . Then all the cell phones started chiming a severe storm alert in unison. Then suddenly this wall of wind hit thrashing the trees in all directions. Frankly, I’m surprised that the trees were left standing at all. Naturally we lost power. After the storm subsided we drove around the city looking for a restaurant that had electricity. There were vast areas of the city with no electricity and a few intersections that did have power. Let’s be clear. What happened is an inconvenience. We might be days without power. We have no internet connection at home and the local cell tower has exhausted its battery backup. We will probably lose the content of our freezer in this extended power outage. We rarely even think about food insecurity let alone plan for that risk. But this year 2022 is a year like no other. We are emerging from two years of global pandemic and that feels awesome. But at the same time we have a devastating war raging in Europe. Crops that needed fertilizer this year didn’t get it. Agricultural problems can’t be solved with money. If you and I were stranded on a desert island and if I have a case of bananas and you have $1M in cash, I’m rich and you are hungry irrespective of how much cash you have. Food and fuel security are at the foundation of our western society. They are so foundational that they are taken for granted. We talk about affordability when it comes to housing. The basic rule of thumb is that housing should not exceed 30% of household income. We don’t even calculate the percentage of food as a fraction of household income. But there are parts of the world like the Philippines where for major portions of the population food makes up 70% of household income. A 10-20% increase in food price here in North America is an inconvenience and for some households it’s a problem. Nobody wants to pay $2 for a head of lettuce, or $5 for Broccoli. But if food makes up a large percentage of your household expenses, you don’t have much tolerance for inflation before your very survival is threatened. We are already seeing social unrest in Peru, and Sri Lanka. The unrest was enough to force the resignation of the prime minister. The food shortages that are forecast for later this year will be like watching a train wreck in slow motion. I feel like I need to emphasize that I’m not a pessimist. If you have been following this show for a while you will know that I predicted the pandemic before it was mainstream news. I predicted the surge in inflation before the official reports. I predicted the fall in lumber prices before they happened. And I predicted the fall in the stock market. But with any of these predictions, it’s hard to know the precise timing. You can be prepared, or you can be surprised.

Brandon Schwab is based in Chicago where he specializes in boutique assisted living. We too are developers of boutique assisted living and it was good to compare notes. It seems that parts of the US are significantly under-served with this class of product. To learn more or to connect with Brandon, visit BrandonSchwab.com and you can set up a time to speak with him directly. ------------------- Host: Victor Menasce email: podcast@victorjm.com

Tom Dunkel is based in Wayne Pennsylvania where he specializes in self storage turnarounds along the East coast of the US. This is an asset class that requires strong systems and his background in corporate mergers and acquisitions has proven to be a distinct advantage. To connect with Tom or to learn more, visit belrosestoragegroup.com. There is a free e-book on how to conduct due diligence available on the website as well.  ------------ Host: Victor Menasce email: podcas@victorjm.com

On today’s show we are taking a look at how to fight inflation and the various efforts underway in Washington and other capitals around the world. Yesterday the national association of realtors published statistics for home sales in the month of April. Sales in April slid 2.4% from March to a seasonally adjusted annual rate of 5.61 million in April. It showed the third month of decline in a row for volume of home sales. Year-over-year, sales dropped 5.9% (5.96 million in April 2021). Federal Reserve chairman Jerome Powell has said earlier this week at the Wall Street Journal Future of Everything conference that the Fed was committed to fighting inflation through monetary policy. He pointed to the housing market as evidence that interest rate policy was starting to work by cooling off demand for housing and with the hope and expectation that this will eventually result in reducing price inflation in the housing market. He is correct that the cost of housing is very sensitive to interest rates and that raising interest rates will exert downward pressure on the housing market. But where else in the economy will interest rates cool off inflation? Elizabeth Warren has put a proposal for price controls forward as a way to fight inflation. This approach has failed every time it’s been attempted in history. Justin Trudeau’s father Pierre Trudeau attempted price controls when he was Prime Minister of Canada back in the 1970’s. They didn’t work. They didn't work in Argentina, or for Richard Nixon.  But this time will be different. After all, we have the internet and electric cars and we are so much more sophisticated now so those lessons from history don’t apply to our modern way of life. You see governments have control over very specific geographical areas. No single government has global control over markets. So if government attempts to control the market for wheat or oil or cars or housing, then business will adapt and shift supply to those locations where they can maximize their return on investment. What happens in markets where governments introduce rent controls? Investors shift focus to areas where they can generate a profit. If government makes it unattractive to build or buy rental property in NY or California, then developers will shift their focus to Texas or Florida where they can be free from the chains of rent controls. In the short term, these controls seem like a good idea. But if you legislate businesses to lose money, then you pull supply of that product out of the market. Eventually, an underground economy will form in response to the acute shortage of supply and push prices up anyway. Some buildings that can’t make a profit will be converted to condo, which has the exact opposite effect. You see the government can regulate the price that a landlord can charge. They can’t regulate the supply of apartments. Therein lies the problem. ------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are looking at what is looming as a water crisis in parts of the United States. It should not be a surprise to anyone that building a city in a desert is a bad idea. We all need water to live and water shortages will forever alter the usefulness and value of real estate. Many cities and towns in Arizona rely on groundwater for their primary drinking water. Some private wells compete with municipal water companies for the same resource. In a rural area North of Scottsdale Arizona, residents in the area are being told that they will run out of water this December. Some developers have built new homes in the area and the municipal water district has refused new connections to the water supply. Some area residents have wells that are over 700 feet deep. Those wells are now dry. The Community of Rio Verde is facing an existential threat. Part of the problem is that the city’s infrastructure is 60 years old. It has leaks that result in the loss of about 33 million gallons of water annually. It will cost $130M in repairs just to stop the leaks. The city is looking for $130M in grant money because the city has exhausted their borrowing capacity. Recent projections from water conservation engineers are suggesting that the Phoenix area will be uninhabitable by 2060. The thing to remember, is that if water levels continue on their current trajectory, problems will arise long before 2060. We are already seeing water being cut off in the Community of Rio Verde Arizona in this year 2022. This will become increasingly common which will result ultimately in shrinking population. We have seen what shrinking population does to a city. You only need to look at Detroit to understand the impact. As you look at investment opportunities, pay very close attention to the sustainability of city services.

Earlier this week we looked at the difference between an owner occupant versus an institutional owner. We asked if is it true that homes cost the same to operated regardless whether the owner is an individual or a corporate investor? We concluded that the costs were the same. On today’s show we’re asking whether institutions are driving the market and pushing people out of home ownership? Is the large scale purchase of homes by investors reducing home ownership rates across much of the country? Is the middle class shrinking and are we indeed becoming a nation of renters instead of a nation of homeowners? Is the American dream, or the Canadian dream alive and well, or is it dying? We’re going to look at some numbers from several states in the US to see what is happening in terms of home ownership. The Federal Reserve Bank of St. Louis publishes some very useful statistics. There are regional differences in home ownership to be sure. On today’s show we’re going to look at those places where home ownership is the highest, and those places where it is lowest. --------------- Host: Victor Menasce email: podcast@victorjm.com

A number of people exited the workforce during the pandemic. That reduction in workforce participation is largely credited with the worker shortage. Some people chose to retire altogether. We have seen a big reduction in the participation in the workforce. People concluded that they were tired of their old jobs, they liked the at-home environment, and they would retire early. The theory is that people in retirement spend less than at the peak of their career with kids and college and two cars, and sports. There are a number of different calculations out there for how much money you need to retire. They’re all a variation of the net present value calculation. But NPV calculations are complicated. Most people don’t know how to perform that calculation. To make it easier, some financial planners use simplified math. There is the 4% rule which is often quoted. That says that if you’re going to spend $x a year in retirement and you plan to retire at age 55, you should plan on spending no more than 4% of your retirement savings per year. But that’s a highly simplified calculation. There are a number of variables which can erode the value of retirement savings. The first question is how much income can you expect your retirement savings to earn on an annual basis? Many actuarial tables used by pension funds assume an investment income of 8% per year. But that income has been cut down in recent years as a result of a decade of low interest rate policy. Many pre-retirees look at the value of their stock portfolio and calculate the 4% based on the value of the stock portfolio. If you had a stock portfolio worth $1M, and let’s say that inflation was running at the government benchmark of 2%, and let’s say that you were earning a conservative 4% in your retirement account, you would need $1M to have your money last you all the way to age 90. But there are a whole lot of assumptions in that amount. When we see a pull back in hiring as companies experience a reduction in earnings, and at the same time you will also see a wave of people re-entering the workforce. The Federal Reserve pointed to strong underlying economic metrics for their more aggressive interest rate policy. They pointed to strong ongoing hiring and historically low unemployment as to why they believe the economy has inherent robustness. But they have forgotten that the jobs picture is the result of years of loose monetary policy. The demand for employees and the shortage of workers is a direct result of the monetary policy. Asset price inflation is one of the reasons that there are so few workers. Once people wake up and realize that their retirement is at risk, they will be forced to return to the workforce in large numbers. They will realize that not only will they need to get a job, but that the job market will quickly dry up when the economic downturn takes hold. You won’t see this narrative in the Wall Street Journal. You won’t see economists from the Federal Reserve making this assertion. You won’t see members of Congress talking about this in the middle of a mid-term election campaign.

On today’s show we are talking about the merits of large scale landlords on the housing market. The affordable housing advocates are highly critical of institutional buyers removing inventory from the market by competing with buyers for single family homes. These big bad landlords are making huge profits on the back of these poor tenants. As interest rates increase, it is true that many first time buyers will get shut out of the market at least for a while. But if someone has the monthly income to rent, presumably that exact same property would cost the same amount of money to hold it if it was owner occupied versus owned by a landlord. The intrinsic cost of a given property should be very similar regardless who owns it. On today’s show we are looking that basic premise and asking: 1) is it true, or at least is it substantially true such that the differences between an individual buyer and an institutional buyer don’t materially affect the dynamics of the housing market? --------------- Host: Victor Menasce email: podcast@victorjm.com

Nathaniel comes from Los Angeles where he specializes in luxury properties in the celebrity segment of the market. On today's show we talk about how the celebrity segment of the market differs from other segments in the market. To connect with Nathaniel, please visit instagram and search for GetzelsGroup. ---------------- Host: Victor Menasce email: podcast@victorjm.com