What is happening in the mulit-family market today with Neal Bawa

Oct 1, 2022

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Neal Bawa
This podcast guesting of Neal Bawa is hosted by Roofstock of The Remote Real Estate Investor
In today's episode, Neal gives his take on what is happening in the multi-family market today, the dynamics of the current economy, and what he sees coming over the next year.

Transcript

Before we jump into the episode, here’s a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only and is not intended as investment advice. The views, opinions, and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I’m Michael Albaum and today joining me again is Neal Bawa, who is the founder of MultifamilyU and a big-time multifamily syndicator Neal is gonna be putting his finger on the pulse of the multifamily market and sharing with us some pretty hard-hitting facts. So let’s strap in, and let’s get into it.

Neal, welcome back to the show. Thank you so much for taking the time to hang out with me. I really appreciate you coming on.

Neal:

It’s great to be back, Michael. Great to be back.

Michael:

Thank you, Neal. So last time, in our prior episode, we talked a lot about the single-family space and what we saw going on with the market today. I’d love it if we could focus our conversation on multifamily since I know that you do quite a bit in that space as well.

Neal:

That’s right. I live and breathe multifamily. I started with single-family like a lot of you know, the folks that are using your platform did, but multifamily is more scalable. So we currently have about a billion dollars of multifamily 31 projects about 4800 units that are either in construction or in lease-up or you know, are stabilized, right? So, you know, a significant portion of them are already stabilized that we’re holding, but we’re also building a bunch of them, and working on the construction of some of them. So you know, what’s happening today is so dramatic and so unusual. We know, one could compare, maybe it’s not as dramatic as the first three months of COVID. But otherwise, it’s pretty crazy. It’s pretty dramatic, dramatic. So it’s, it’s a great time to talk about multifamily.

Michael:

Yeah. So a billion dollars and just turning back the clock a minute. I’m curious, how long did it take you to get to that point from when you started?

Neal:

So I know, ignoring a past company where I was a partner, this particular company has basically gotten to that billion dollars since February 2018. So, so about four and a half years, roughly.

Michael:

Holy smoke, I was just interviewing a gentleman who’s got a business he wants to scale to a billion dollars over a nine-year period. So you mourn cut that in half, that’s incredible growth.

Neal:

Well, keep in mind, I don’t want to demean what we’ve done, because we’re very proud of it. But when you’re purchasing multifamily, the numbers get big, pretty, you know, quickly, right? So 100-unit multifamily today is $20 million. So you do get up there very fast. So I still consider myself to be a mid-level syndicator. There are dozens and dozens and dozens of companies that have bigger portfolios than I do and also, for reference, a billion-dollar portfolio usually only equates to about 10 employees in a syndication business. Now, in my case, I have 30 employees, because I’ve 20 of them in the Philippines and that’s helping me scale and so I have 20 full-time employees in the Philippines in addition to those 10 people. But I think it’s useful to have that frame of reference, I think that you’re setting targets in multifamily, a billion is actually not a bad target set.

Michael:

Okay, I will definitely keep that in mind as I scale my portfolio. That’s, that’s really great to know. But Neal, let’s transition and I would love to get your thoughts because you are a data scientist, and you have so many great analytics to kind of back up your thoughts and opinions, and viewpoints. Tell us what like what’s going on in the multifamily space as we record this today late, mid to late September.

Neal:

Prices are falling and they will continue to fall. It’s a bad time to buy any kind of multifamily in any market in the US and I rarely, I’ve never actually said that before, maybe with the exception of you know, the first month of COVID. It’s currently right now, no one should be buying anything in the United States. But here’s the good news. You don’t have to wait very long. The market is now adjusting very rapidly. So I think that I think February or March of next year would be a terrific time to buy you know whether it’s the one to four units that get listed on Roofstock. By the way, I currently have a triplex listed on roof stock, check it out, it’s on Brandon Avenue in Chicago. Whether it’s those units or it’s you know, the larger unit we were also selling, you know, a 200-unit property at this point in time not on Roofstock but we’re not buying anything. I mean, we’ve basically told our acquisition people to pencil down stop looking, stop talking to brokers stop traveling to properties, because we are halfway through a correction.

So and I’ll explain why. A multifamily is a very different animal from a single family. So let’s say Michael is buying a single-family property and it’s next to another one that’s identical to it. So there are two-row houses next to it. Well, if somebody last month paid a million dollars for the first one, Michael can get a loan that appraises for a 1,000,000 value for his property, he can get that easily, regardless of what really happens in the market, he can get that, you know, and prices take so long to fall that even if the price actually falls, Michael can use a comp from half a mile away to still get that million dollars in value. So the banks on the single-family side are really trusting you to do you, you know, to not to overpay, right? So if they’re just looking at it, is there a comp that matches it and if it does, we’ll just give this guy alone, right and if they feel like the times are hard, they might change their LTVs from 75 to 70 and but that’s pretty much as far as the single-family market goes. The multifamily market is radically different because a multi one multi-family property is a business. It’s like you’re buying Tommy’s carwash, or you’re buying, you know you’re buying a subway or a chain of subways, that’s the best way to look at it. It’s a business. So your underwriting really doesn’t matter. It’s the bank underwriting that matters, the bank that’s giving you the funding, and the moment that we start seeing interest rates go up in the market, the value of the property immediately decreases. Why? Because the bank’s underwriting decreases the value of the property, because multifamily properties are based on just two things, something known as a cap rate, which is basically the market’s estimate of what the property should be worth, and then something else known as as net operating income, which is basically rents minus expenses right? Now, the moment and you know, the moment your interest rates increase, and most multifamily today in the US is on floating rate debt. So what that means is, as interest rates go up, your mortgage is going up something a number called DSCR. I won’t go into that detail on that. But there’s a number called DSCR, that basically starts to fall. So the higher your mortgage goes, the lower that number is. This means that you know, let’s say I’m a buyer and I’m selling two multi families and they’re right next to each other, right? So they’re the same number of units, same occupancy, same design, so that their net operating income for both of these properties is exactly the same, like down to the last cent right? Now, let’s say one soft sell sold for $30 million. Okay, and I waited a month like 30 days, and the Fed raise interest rates by 100 bits right, but basically 1%? The second property now is worth less. It’s worth less, even though there’s another property that sold 30 days ago, that’s identical with the same number of tenants with the same rents. It’s now worth less so multifamily is on a sliding scale and that sliding scale is affected by interest rate hikes much sooner than single family.

Obviously, a single-family is also affected. We’ve seen there are 90 bond markets in the US where single-family prices are coming down, but they’re coming down really slowly, right? I think the average decline in the last six weeks has been 2%, right I mean, seasonal declines are bigger than 2%. So I don’t even know what to make of that 2% yet, but on the multifamily side, depending upon the market, we’ve seen declines of six to 12% in multifamily prices already, and remember, the Fed only really started raising in May of this year that you know, we’re doing this in the middle of September, right. So in five months, the Feds basically raised everything there was a tiny raise back in March, but it was so tiny that it really didn’t make any difference. So in five months, the Fed has basically affected multifamily prices to the tune of six to 12%. Here’s the bad news. That’s not the end, because everybody including yours truly was thinking that when last week’s inflation report came out, we would see a downward trend, and the Fed would give us some guidance that yeah, okay, well, instead of raising my 75 bits this week that there’s a Fed meeting going on this week, we’re gonna raise by 50 and then we’ll see what happens in November, maybe we’ll raise it by 25 and we were like, okay, if that happens, great. You know, where the Fed funds rate is at 2.25. They raised 50 pips this week, then they raised about 25 pips in November at 3%. We’re done with the Fed funds rate, and that means that multifamily doesn’t have to drop any further. Well, it sucks but that didn’t happen. Inflation didn’t drop and so now the Fed this week is definitely going to raise interest rates by 75 bits, maybe they might even do it by 100 and that basically will spike up interest rates by 100 points immediately and then they’ll have to do 75 points in November and maybe another 50 points or 25 points in December. So because of that bad news, we now know that we’re midway through this drop in multifamily, right? So we think that there’s another five or 6% drop coming by February or March.

Is this bad? No. If you’re not, you know, if you’re not buying anything, just wait for five or six months and you get five or 6%. You know you know the benefits. What the heck is wrong with that because the market isn’t bad. Rents haven’t decreased, and rents are continuing to increase nationwide for both single-family and multifamily. So this isn’t like 2008, when there were 5 million empty homes show me empty homes. I mean, there really aren’t any, the market is amazing occupancy levels. This is just one single factor, the cost of debt. So, if you can, in February, buy a property for 5%, cheaper, you will have two advantages. Number one, for the next six months, you’re not paying for that high cost of debt, right? Number two, you would, you know, say 5%. So your property is cheaper, so your debts are less right? Number three, you will be within six months of the Fed cutting interest rates. This is the part that most people don’t understand. The Federal Reserve is not trying to kill us. They’re just doing their job. and their job is to control inflation because if you don’t control inflation, really bad shit happens really, really bad should happen. So it’s much better to control inflation and obviously the industry that is most affected when you raise interest rates is real estate. No other industry in the US is affected as much as real estate by interest rate hikes. Here’s the good news though. If you look at the last 61 years, the Fed raised interest rates nine times sharp up sharp down. So if you buy in Feb, by, I think July or August, the Fed should be dropping interest rates or at least talking about dropping interest rates.

Why is that important? Mortgage rates are guesses. So single-family mortgage rates and multifamily mortgage rates in the US are just guesswork where the market tries to guess what the Fed will do next. So if the Fed starts talking about interest rate declines, the market starts to prices in., right and when the Fed says oh, well, we might hold, right the market reacts. So the interest rates basically adjust even before the Fed actually does anything. A perfect example of this: In December, the Fed started talking about interest rate hikes, but didn’t actually raise anything. They didn’t change anything until March. But in those four months, interest rates went up 100 basis points, they went up an entire 1% because the market was guessing what the Fed would do. So if you buy multifamily in February and the Feds basically start to lower rates by June, July, and August. Now you’re in a better environment and as long as your rates are floating, they may float the other way, they may float down and give you a benefit. Where you start high and then float downwards. That’s why I think it makes sense to wait. I’ve seen a lot of my friends that have larger portfolios and me 2 billion 3 billion send emails to their investors saying we’re pencils down. mean, what that means is we’re not even underwriting a property you know, we see 10 properties a day and normally we underwrite three or four of them. Pencils down means you just click the delete button 10 times and you’re done with your job for the day.

Michael:

Wow, I have so many questions. But I guess the first one is, why are mortgage rate guesses? Why don’t, why don’t banks look at actual data and what the actual borrowing rate is today and not worry about forecasting, but use hindsight? So it takes the guesswork out of it.

Neal:

I’m not 100% sure about that. Just so you know, that’s what the multifamily market does, right? So the multifamily market has two kinds of loans or I should say three kinds of loans. One of them is the guesswork kind where they try and guess what the Fed is going to do. The other one is one that’s based on LIBOR or now called Sofer, these are basically and basically, they’re based on like treasury bonds and what those numbers are those loans. The moment the Fed hikes they’re going to hike this week, right so that they have a meeting on Wednesday, that we’re probably going to hype it by 75 pips. Well, if I have that kind of loan, and I do at some of my properties, guess what, on Thursday, my debt is a lot more expensive. 75 basis points more expensive. So you can see that on the multifamily side. I have never, ever seen a single-family loan do that. Every mortgage that I’ve seen 30-year 15 years five year ARM, they’re all guesses forward-looking guesses on the Feds rate. Why? I have no freaking clue.

Michael:

Okay… We’ll have to find someone out there that can give us a definitive answer as to why that is. But I’m also curious now, you mentioned at the beginning of our conversation that in the single-family space, the banks are kind of depending on us as borrowers to look at the value of the home and determine hey, this is worth or not, which seems very counterintuitive because the majority of multifamily investors that I know, tend to be able to underwrite really, really well, oftentimes better than the bank and so why is the bank’s taking the power away from a multifamily investor and really giving it to a single-family owner it seems a little bit backward now.

Neal:

Single Family is considered to be a REIT in the United States and single-family lending is encouraged by politicians. The overall banking system believes that even if they go a little over on the single-family side, it’s not such a bad thing, obviously, 2008 was 2007 was different because it was not a real estate failure. It was a failure of lending standards, you know, they were basically giving gardeners million-dollar loans, right? So that’s not going to end well. So obviously, I don’t see any evidence of that kind of stupidity existing today. So there are lending standards, they’re pretty tight on those lending standards, they’re not going above them, you have to be, you know, a good, good buyer. But beyond that, as long as there’s an appraised property that is similar your property will appraise. I am not in favor of this other countries do not do this. Banks underwrite single-family loans in other countries, the way that we underwrite multifamily loans. But because Americans believe that single-family is a very key part of their life. We’ve seen this appraisal-based system for the last 30 or 40 years and every once in a while it blows up a bubble just like it did in 2007. So this is a conscious decision that the people that run this company had a country have made, and it has lots and lots of good sides because it tends to overall increase the prices of single-family appraisal, you know, somebody buys for more, your property is more than next was more next ones more. So generally, it has a beneficial effect on the real estate market. But it also tends to create more bubbles than other countries.

Michael:

Interesting. Okay, that’s really good insight. So knowing that this isn’t the ideal time to buy multifamily. What should people be doing? Is this the time to get educated, is the time to go get capital is the time you know, what should folks be doing right now?

Neal:

Um, I think that I’ll give you some ideas, right? So I’ll give you kind of a sense of, Well, what would Neal Bawa be doing and what would maybe somebody that’s newer than Neal Bawa, you know, doesn’t have a lot of multifamilies should be doing. So let’s just focus on that piece first, right, what I do is really different from what you should be doing, depending upon where you are in the process. So let’s say you’re early in the multifamily process, you should be educating your investors, that an extraordinary opportunity is going to present itself most likely in q2 of next year. So that’s, you know, April, May, June, and that opportunity is there for the first time since the Great Depression, that in 2008, depression, we have an unusual thing happening, and that will be multifamily prices, not single family, but multifamily prices will be low in q2 next year, compared to let’s say, now, or compared to, especially compared to a year ago, they will be low. But the economy will not be anywhere like in 2008, it’ll still it’ll be weak, and it will be in a recession. But this is what is known as an artificial recession. So recessions are of two kinds, they come in two flavors. Number one, a recession that is artificially created by the Fed to cool down inflation, and we’re about to go into one of those recessions, those tend to be shallow, and they don’t damage the economy in the long term, they create short term damage, and the economy tends to recover fairly quickly from those unemployment doesn’t tend to go down too much. You know, so, so go up too much, I should say, you know, so. So we’re about to go into one of those and those are the kinds of recessions where you want to buy multifamily. Why because multifamily prices still decrease as interest rates go up, regardless of the strength of the underlying economy. So the underlying economy right now is amazingly strong, right? So with all the hand grenades that the Fed has thrown at us for over five months, they’ve managed to move the unemployment rate from a historic 3.5% to a historic 3.7%. In five months, they basically haven’t managed to dent the unemployment market at all and even at that point, a 2% increase has largely been because of being because of more people joining the workforce.

So post COVID, a lot of people took a year and two years off, a lot of those people are now returning to the workforce because they’re running out of that stimulus money and that’s really what that point to otherwise when you seem like you might see, you know, news about layoffs in the United States, Google it actually looks at the statistics. Anytime at any point in the economy, there are layoffs, right? But there haven’t been more layoffs than they were six months ago or 12 months ago. It’s just the regular layoffs that happened in a normal economy. So there’s the economy is extraordinarily strong, and it’s going to get dragged into recession simply because the Fed is going to keep throwing hand grenades until the economy goes into recession. But because the underlying economy will stay pretty strong during this shallow recession, you’ve got a one-time opportunity to buy cheap multifamily because multifamily is just as affected in terms of price. Whether the economy underlying is weak or strong right and you have a quick chance to come out of it and make a lot of money. You should be educating your investors and telling them about this opportunity because I haven’t seen that opportunity at all since 2013.

Michael:

Interesting.

Neal:

That’s what you should be doing, telling every investor about this and telling them, I am not buying anything now. Well, you probably know me, you know, don’t have the investor money to buy anything now. But what’s the harm in saying it’s still true?

Michael:

Right, right, right. Do you think though, Neal, that at that time, q2, next year, that folks, sellers, owners are going to see that, hey, there’s this dip in prices, and therefore, I’m not going to sell because I don’t want to sell at a loss I bought 234 or five years ago, I’m going to hold on to my property and no, there will be an inventory shortage, or do you do not foresee that happening?

Neal:

There is already an inventory shortage in multifamily prices have still dropped. So if you look at the inventory available to sell in the multifamily market, it’s half of what we had a year ago. But multifamily is different from single-family in single-family is a shortage of inventory tends to drive prices up. With multifamily, a shortage of inventory cannot drive prices up because banks are underwriting and they don’t give a flying F about what the inventory is. They just care about your debt cost and your debt cost is going up. So when so the key thing is that the single-family and multifamily markets are fundamentally different. One of them is just a business and the business is based on its debt cost, its net operating income, and nothing else right. Whereas a single family is based on demand. If there’s nothing available on your street to sell whatever appears is going to sell for more. That’s not how multifamily works. So even right now, supply is pretty low. But that doesn’t mean that people are over able to over bid, because if they overbid, guess what happens, Michael, they can’t get a loan for that amount, and now they have to raise lots of extra equity, which reduces their returns and so a lot of them are like this is painful, we’re just going to sit back for three to four months for the market to adjust. Buyers have sellers have to understand that either they just keep their property off the marketplace, which you know, you can do infinitely, you can do it for some amount of time or they will adjust their pricing as they already have. Remember, we’ve already seen a six to 12% delta in just six months. That’s how quickly multifamily reacts and I think that’s why I’m in the multifamily business because I liked the logic of that. If your costs are increasing and your profits are decreasing, you should get a lower price, right?

Michael:

It’s pretty black and white.

Neal:

Yeah, yes and that’s how it works in multifamily. With a single family, you can very often see costs increasing, but because everyone’s holding off, nobody’s basically selling their property. Everyone’s like I’ve got lots of equity in the property. Now there’s no property in the marketplace and even with costs increasing, you can often see an increase in pricing. To me, that has no logic and so I don’t play in in that in that field.

Michael:

Yeah, yeah, no, it makes total sense. Neal, let’s talk about multifamily loan products and some of the different ones that are out there. You mentioned there are three different loan types. There’s the fix for five 710 years, there’s the LIBOR, floating rates, what’s the third one?

Neal:

So the second one is tied to so I’ll go back, right? So the first one is straightforward and fixed, usually, it’s five years and 10 years fixed. The second one is tied to a number called LIBOR or LIBOR or so far, these days, it’s called Silver. That’s kind of the new version of LIBOR. So it’s a number and the loans will be, you know, LIBOR plus something LIBOR plus 2.25, right and what that means is the moment the Fed changes interest rates, that’s gonna change, right? So, the interest rate, you’re paying changes the very next day, right, the bank’s gonna send you a letter saying, hey, Sofer has changed, therefore your interest rate is now x, right, and boom, you’re paying more, the third one is available, that is basically a rate that’s a floating rate. right, but it’s not tied to LIBOR. It’s not tied to Sofer. It’s speculative in some sort of ways. Now, it does tend to go up as interest rates go up, it’s really tied to treasuries. Now, US Treasury bonds are a speculative product, right? So today, something happens in China or something happens in Russia, something happens in Ukraine, and all of a sudden, treasury bonds will shoot up or shoot down and so that particular rate is tied to the treasury bonds. So it’s speculative and so, you know, Fannie Mae and Freddie Mac, often these floating off of these floating rates. Now, in the end, the rate is going to end up more or less where the Sofer one is, but it’s not immediate. It’s not like you don’t get that happening the next day after the Fed raises interest rates and I’ll tell you why because it’s tied to treasuries and treasuries move upward. Are downwards because of 100 different factors. Only one of those is interest rates. So geopolitical situations can often make treasuries move downwards. For example, if the Chinese economy collapses tomorrow and there’s blood on the street, treasuries will go downwards, even if the Fed continues to raise interest rates. Does that make sense? So, to these sorts of things, these movements can happen so that rates that are tied to the US Treasury bonds tend to move up and down with Treasury bonds. So those are the three kinds.

Michael:

Okay, and who is do you think well suited or conversely, not well suited for each type of loan?

Neal:

So in terms of who is the lender?

Michael:

No, if I’m a buyer, and I’m going to buy … Yeah…

Neal:

I think, yeah, yeah. So there’s also something known as a bridge rate when it bridges loans, which no one is getting, I don’t know, if a single person that’s gotten a bridge loan in the last 30 days, because there are simply very high there are 7%, or even higher in the last, you know, 30 days. So the vast majority of people today that should be buying, let’s say you have to buy for whatever reason, you’re not stopping you want to buy the key advisors, everyone should today get a floating rate loan, because if you believe like I do, that the feds job is to raise rates and then drop them and that’s what they’ve done nine times in the last 61 years, then you have to believe at some point in the future 6-12 18, 24 months rates will be lower because right now, they’re pretty darn high, right? So if you believe that locking in your rates doesn’t make sense. So the market today, all we have is really Fannie Freddie floating lanes, and rate rates, which are similar to what your local bank would provide. So maybe you have a smaller project, you want to go with a local bank, those are the same kinds of rates that Fannie Freddie provides, they’re probably charging you a quarter point more, but you’ve got a relationship with them, their points are lower. So lots of people go with local banks. But I think that’s the only game in the market for multifamily today and the other thing that’s happening in the multifamily market, which is driving prices down as you get multifamily, you might in a real boom time environment, you could get loans that are 75%, loan to value, right and then when the market starts to tighten up, they go to 70. Well, a few weeks ago, most lenders went to 65. So they’re giving you a lot less loan to value for the same property forcing you to raise more equity. When you raise more equity, your returns go down, and your underwriting suffers. So once again, people are like this not working. I’m not going to make any money. My investors have something known as pref or preferential treatment. So the property underperforms, they’re going to make their pref I’m gonna make nothing. So a lot of people are stepping back, pencils down.

Michael:

Yeah. Yeah, that makes total sense. That makes total sense.

Neal:

And, none of this has anything to do with a crash, you know, the 2008 scenario. If you believe that that is going to occur in the next 12 months, you’re not data-driven because of the 2008 scenario, if you look at every if you list the top 10 factors that caused it, because it wasn’t any one thing, right? None of those factors, not one of those factors exist today, right? What we do have is we pulled demand forward in 2021. In 2021, we basically helicoptered $10 trillion, worldwide, not 10 trillion in the US, luckily, 4 trillion in the US, but 10 trillion worldwide, we helicopter money to people for the first time in modern history. We’ve done a little bit of it before in 2009. But remember, we were bailing out banks, we were bailing out General Motors, and the money wasn’t going directly into people’s pockets, right? So here we helicopter $10 trillion worldwide, and there’s an inflationary effect. It pulled demand forward, everyone, all of a sudden had money, everyone spent money and so we pulled demand forward from let’s say, 2023, next year, to 2021 and when we did that, we ended up creating massive amounts of inflation, nothing to do with the economy itself, but it created massive inflation and now we have no choice but to deal with it. I can tell you this if on the one side you said you know will you take 7% single Family interest rates right over the Fed stopping you know their program now just let him stop it I would say don’t do that. Hyperinflation is so insanely dangerous, and so insanely destructive, that I would, even though it would really hurt me. I would take 7% interest rates any day, and I will take 8% but I wouldn’t tell the thread to stop doing what they’re doing. 9% inflation if it gets entrenched if everyone believes that two years from now we’re going to be at 9% It’s astonishingly destructive.

Michael:

Wow, wow. Okay and Neal, I’m just curious based on your research the nine times over the last six to 10 years, the Fed has raised rates and then pretty succinctly thereafter dropped them. How far do you think we’re gonna get, how low do you think inch rates are gonna go? I want the Neal Bawa prediction the crystal ball if you will…

Neal:

The federal funds rate, right, the Fed funds rate is what the Fed raises, they don’t raise or lower mortgage rates. It’s currently at 2.25% and in two days, it’s going to go to 3%. We believe currently that the peak is going to be either 3.5 or 3.75% for the Fed funds rate and we think that on the downward path, they’ll cut it all the way down to 1.75%. So from their peak, they’ll go down 2%. So from the peak, whatever that peak interest rate is, it should go down 2%, right? Now, sometimes they have to go past that 1.75 on the downward leg because they’ve hurt the economy so much when they were raising rates that they have to compensate. But we think that the Meet the perfect equilibrium rate for the Fed is around 1.75. Now, in there, in their public, in the public, they talk about it being 2.25. That’s where they would like equilibrium to be. But they never seem to ever achieve that. It’s always lower than that in a normal market. So they just like to talk it up a little bit to set expectations. So we think that whatever that top interest rate is that you’re going to see the highest interest rate, the mortgage rate. Once the Fed is done and brings it down, you should see mortgage rates 2%, lower. So there’s a possibility that sometime in the next 180 days, you’ll see a 7% mortgage rate, right? So it might touch that number, but I don’t think it goes further beyond that. Okay, but I could be completely wrong, because if the Fed doesn’t kill inflation, then all bets are off.

Michael:

Right, right. Yeah, this is all under the guise of inflation getting tampered back because of the moves and so just to kind of put that in perspective for people as the end users, a 2% reduction of the Fed funds rate will typically constitute a 2% drop on what a borrower is going to pay. So if rates get up to 7%, and then Fed Funds pull back to two by 2%, we would expect mortgage rates to hover on that 5% in the consumer market.

Neal:

Yes, exactly four and a half to five and a half going up and down a little bit, you’d remember it’s speculative, but you’ll have plenty of opportunities to you know, lock something in under 5%. So I think the key message is this, never be afraid of 5%. It’s really beyond 5%, that the single-family economy starts to you know, it starts to miss heartbeats. That’s where it starts to be problematic until five, I’ve really not seen much of an impact in the marketplace, there’ll be a little slowdown in price increases and right now a slowdown is healthy, they’ve gone way too much way too fast and so retrenchment is a very healthy thing.

Michael:

Yeah. Okay and just for a frame of reference for folks, during COVID, the Fed funds rate was zero, right?

Neal:

They dropped it. It was zero, correct? So there where we’ve gone from zero to 2.25, in five and a half months, right and they were threatening to do it for about four months before that, but they wanted the market to adjust before they actually raise the rate. So we’ve gone up to 2.25. It was zero for two consecutive years. So two years, in two months, the Fed funds rate was zero.

Michael:

And has that ever happened in American history that you know if?

Neal:

No, I think that pandemic is very unique. We saw the Fed funds rate fall to about 1% in 2009 and 2010. But they didn’t take it down to zero. So the only time they’ve ever taken it to zero is this time, I expect all future crises will go beyond zero now that the eurozone has gone negative and Japan’s gone negative. There’s no stigma attached to going negative. So I think the next crisis will go below zero.

Michael:

Wow and that’ll be an interesting time to have a loan tied to LIBOR or Sofer.

Neal:

It’ll be is it’s fantastically interesting. I think what we are, Michael, we’re living in the middle of the greatest financial experiment in history and it’s, it’s an experiment that has no precedent, it doesn’t have anything that you can look back to, right? We’re doing some truly crazy stuff and we’re hoping that it will work out even though we have about three years three or 3000 years of monetary history that says it’s never worked out for anyone in the past. So we’re just hoping that we are different so right it’s all about you know, as long as the musical chairs are going people are you know, people are walking and that’s how it’s going to be and I don’t know when the real challenges happen. I think we’re getting closer and closer. I feel like China is just about ready to combust at this point. We’ll see what happens.

Michael:

Okay, well, I will definitely stay tuned, Neal. This was amazing as always, for people that want to pick your brain more, continue the conversation learn more about you. Where’s the best place nice for them to do that,

Neal:

Um, you can connect with me simply by typing in my name. I’m the only Neal Bawa on the world wide web. So just NEAL BAWA hit enter, there are a couple of 100 podcasts that I’ve appeared on. There are webinars, and conference recordings, where I’m on stage. If you’d like to chat with me on LinkedIn, once again, I’m the only Neal Bawa on LinkedIn. So go ahead and connect with me there or go to my website, multifamilyu.com. So that’s multifamily, followed by the letter u.com. There are about 30,000 people that attend the webinars that are on that site, we have a new one coming up, which is the impact of interest rates on the economy, and the upcoming recession. So real estate at this point is officially in a recession. The housing market is now in a recession because it’s declining. But I think the rest of the economy is going to follow it and so we have a webinar on that and I think that’s going to be in three weeks.

Michael:

Okay, fantastic. Well, Neal, thank you. Again, really a pleasure to chat with you and have you on and I’m sure we’ll stay in touch.

Neal:

Awesome. Thanks for having me on.

Michael:

You got it, take care.

All right, everyone. That was our episode a big thank you to Neal for coming on love his data-driven approach to his conclusions, which I think we probably all could use another dose of that. As always, if you enjoyed the episode, feel free to leave us a rating or review wherever you get your podcasts and we look forward to seeing the next one. Happy investing…

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