0:00

This is the BiggerPockets podcast

0:02

show 775. The

0:05

problem here, it's not so much

0:07

the rent level, it's the pace at which they've

0:09

increased. And these households, particularly

0:12

lower income households, when you deal with something

0:14

like apartment leases, which are only about a year,

0:17

they're going to get quite the shock, especially

0:19

because their income isn't gonna keep pace nearly

0:22

to those types of levels to which

0:24

the rent can be increased. What's

0:27

going on everyone? It's David Green, your host of the BiggerPockets

0:29

Real Estate

0:29

Podcast here today in Hawaii,

0:32

recording with the other Dave, my

0:34

partner in capitalism, not

0:36

partner in crime, different PIC,

0:38

Dave Meyer. And we are here bringing

0:41

you the information that you need to

0:43

make money in real estate and find financial

0:45

freedom. Today is an awesome show where

0:47

Dave and I are interviewing Lu Chen and

0:49

Tom LaSilvia from Moody's Analytics,

0:52

talking about

0:53

the housing unaffordability problem,

0:56

crisis. How would you mark it, Dave? Yeah,

0:59

I think either one. We all know

1:01

that housing has become really

1:03

unaffordable. This is impacting

1:05

both first-time home buyers, people who are just trying to

1:07

buy a home, and

1:09

for investors too, it's become really challenging to

1:11

afford most markets

1:13

in the country right now.

1:15

And Tom and Lu provide some

1:17

information, not just about housing unaffordability,

1:21

but rent unaffordability, and

1:23

how that's impacting everyone, including

1:26

real estate investors, many of whom who have benefited

1:28

from the

1:29

increase in rents, but they also provide some

1:31

really interesting perspectives about

1:33

why

1:34

fixing these unaffordability problems is

1:37

really in everyone's best interest. Yes,

1:39

it is, and that is such a good

1:42

point. And if you listen to today's show, you will understand

1:44

more of the why we have this

1:46

problem. And if you understand the why, you will

1:48

see the moves that you can make

1:50

to actually earn income, build profitability,

1:53

and build wealth in this market, all while doing

1:55

something to solve a problem and hopefully make housing

1:57

more affordable for everyone else.

1:59

One thing about this episode that's really

2:02

interesting, and like you said, understanding the why

2:04

is a lot of the narrative I hear, you might

2:06

hear this too, is like people are like,

2:08

rents are going to crash or the housing market's

2:10

going to crash. What goes up must

2:12

come down, which is just

2:15

not true in economics. But

2:17

I think they do a really good job of explaining

2:19

why they think unaffordability

2:22

is going to be a problem that permeates

2:24

the housing market for the foreseeable

2:27

future, unless some deliberate actions

2:30

are taken. And I think this is helpful

2:32

both in the context of, again,

2:35

improving the affordability

2:36

issue, but also just in understanding

2:39

what is going on in the housing market,

2:41

why prices are the way they are. They

2:43

do a really good job and provide some really interesting

2:46

data that will help you just contextualize

2:49

your understanding of housing.

2:50

That's exactly right. And the more

2:52

you know, the more you can take advantage in making smart

2:54

financial decisions, which gives you an advantage over

2:56

all the people that are not listening to this

2:59

podcast.

3:00

So buckle your seatbelt, strap yourself in. We've

3:02

got a great show for you. Before we bring

3:04

in Lou and Tom, today's

3:06

quick tip

3:07

is see how you can be a part

3:09

of the solution and check out the Moody's

3:12

analytical report that we refer to today

3:15

on housing unaffordability. So they put together

3:17

something very cool that shows major metro

3:19

markets and where rents are in relation

3:22

to wages.

3:23

Understanding 30% of your income on rent

3:25

is now the new normal in many US metros

3:27

and some are even higher. So go ahead and check

3:30

out our show description if you would like to download that

3:32

report and check it out. Arm yourself

3:34

with more information and be a little bit more like

3:36

Dave Meyer tomorrow than you are today.

3:39

That's my advice. Dave, anything you'd like to say before

3:41

we bring in Tom and Lou? No, not at all.

3:43

I think you covered it all. So let's

3:45

bring on Tom and Lou.

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6:46

All right, welcome to the show, Thomas

6:48

and Lou. Thomas, if you don't mind, we're gonna start

6:50

with you. Can you tell us a little about yourself?

6:52

Thomas Lasalvia, Director of Economic

6:55

Research, Moody's Analytics, CRE,

6:58

CRE being commercial real estate. I've

7:00

been in the industry for well over

7:02

a decade, had some background in academia,

7:05

was a instructor for quite a while,

7:08

but very happy to be bringing my

7:11

knowledge expertise to the show, thank you

7:13

for having me. Let me tell you something that I've always thought

7:15

that you didn't ask, but I'm gonna share anyway. I think it's hilarious

7:18

that the name Moody's is Moody's because

7:20

when you think of Moody's, you think of objective,

7:23

factual, trustworthy, reliable,

7:26

boring, yet, like I can stand

7:28

on that, right? It is the opposite of someone who's moody,

7:30

whose opinion changes all the time. Have anyone

7:33

else ever mentioned the funny hypocrisy

7:35

in your name and your company?

7:37

We do occasionally get some conversations

7:40

that go into laps regarding

7:42

the name, but no, it's a wonderful long

7:44

history with our founder.

7:47

So that's where that name's coming from. Of

7:49

course. Okay, I'm glad it's not just me.

7:51

And then Lu, welcome to the show. Thanks for being here.

7:54

Can you tell us a little about yourself and your role at Moody's?

7:56

Absolutely, thank you for having us again,

7:59

David. My name is Lu Chen.

8:01

I'm senior economist on Moody's

8:03

Analytics, the HR leadership team. So

8:06

I have over a decade of capital

8:09

market, working experience,

8:12

working on the team. My main focus is

8:15

apartment market, migration, senior

8:17

housing, housing affordability,

8:20

affordable housing, you name it.

8:22

Everything within this residential circle.

8:24

Okay. And as the senior

8:26

economist, in layman's

8:28

terms, I've always wanted to ask this, does that mean you're

8:30

the oldest? Does that mean you're the strongest?

8:33

Does that mean that if like a lot of people,

8:35

like if you died, somebody else takes your

8:37

position. Does that mean you work on certain

8:40

things? Like what does that mean in practical terms

8:42

that you get to be the senior economist?

8:44

I really think it's because of the age

8:47

and then no complaints. Okay. Well, you would

8:49

have fooled me with that, Lu, because you look much

8:51

younger than I do. If anybody's watching on YouTube,

8:54

you'll easily tell. So you

8:56

got the best of both worlds, right? You have your

8:59

looks, look young, and your wisdom is

9:01

there as a senior economist. So we are very lucky

9:03

to have you on the show today.

9:05

Thank you, David. All right.

9:07

Well, Tom and Lu, it's great to see you again,

9:09

guys. Welcome back. I'd love

9:11

to just hear a little bit about

9:13

this incredible housing

9:16

affordability report that you both

9:18

put together. It really is impressive. Everyone should

9:20

go check it out.

9:22

Can you tell us just a little bit at a high level

9:24

what your findings were? So really,

9:27

this is a very interesting journey for

9:29

our team to start it on since

9:32

early 2022.

9:34

So thinking of at that time, the

9:37

United States was really at

9:40

the ramping of having

9:43

higher inflation. And

9:46

people's migration pattern has changed

9:48

because of COVID.

9:50

So at the beginning, we have seen people coming

9:53

out of some of the bigger metros going

9:55

to some of the destinations,

9:58

Florida, Texas

10:01

really to enjoy that flexibility of working

10:04

elsewhere doesn't

10:07

necessarily have to be close to where they work.

10:10

And that created this interesting dynamics,

10:13

which we have not seen very

10:15

often in the past. It was seeing

10:18

rental prices taking up, housing

10:20

prices taking up, in some

10:22

of the hot destinations or call

10:25

them pandemic darlings. But

10:27

then people realize

10:29

they still have to come back to work.

10:31

Even if that doesn't mean they have to come back

10:34

to the office five days in a week, they are

10:36

getting themselves prepared, geared

10:38

up to come back to the office at

10:40

least one or two days in a week, every

10:42

now and then, mingled with friends, coming

10:45

back to the city life. So we are seeing

10:47

some of the reverse or normalization

10:50

of that migration pattern.

10:52

And that quickly filled up

10:55

the rental level, the rental prices

10:58

in some of the traditionally very

11:01

run burdensome, expensive metrals,

11:03

including New York,

11:05

including Boston, and many

11:07

other places.

11:09

And we noticed that we observed that

11:11

in our dataset, and this

11:14

idea bubbled up and came up

11:16

to the surface.

11:18

This is really something we

11:20

should be putting effort on. We should

11:22

be diagnosing, understanding

11:25

the pattern of the rental affordability.

11:28

Because if you are looking at the

11:30

rental price taking up double digit

11:32

year over year, that means

11:34

exponential growth of the rent

11:37

burden to individual household.

11:40

So early on in the spring

11:43

of 2022, the team is really the team effort.

11:46

Although I know you would like to put names to

11:49

this report, the really is a team effort we

11:51

started off, we observed that

11:53

rapid increase of this rental affordability

11:56

until at the end of 2022.

11:59

as a whole, we are finally

12:02

seeing the median income

12:04

household are paying roughly

12:06

around 30% on

12:08

an averaged

12:10

rental unit

12:12

on the market.

12:14

And that 30%

12:16

is a critical number. That usually

12:19

means on an average basis,

12:22

the median income household in the United

12:24

States have been

12:27

rent burdened. And it's a very tough

12:29

journey for us to continue observing

12:32

how the rental price dynamics, how the rent

12:34

changes are reshaping, affecting

12:37

some of the nuances.

12:38

And the latest report that we

12:41

have published by the end of last

12:43

month

12:44

really depict that nuance picture

12:46

that we are seeing the rent decline

12:49

at the beginning in the spring of

12:52

2023 started to shed some

12:54

light at the end of the tunnel. So

12:57

we are seeing slight retreat in

12:59

the rent burden from about 30%

13:02

now somewhere in that 29.6 percentage range.

13:07

It's a little improvement, but

13:09

we are still uncomfortable

13:12

seeing the rent burden being elevated

13:15

close enough to the 30% rent burden threshold.

13:18

I've asked you this before just as a teaser,

13:21

you both were on the market episode 81

13:23

if you guys want to hear about that. But

13:26

to me, this idea of the

13:30

rent burden being 30% is

13:32

something worth exploring a little bit

13:34

more. I've heard this number a few

13:37

times that the maximum

13:39

or ideal

13:41

percentage of income that renters

13:43

should spend on housing is 30%.

13:47

Why 30%? Symbolic,

13:50

it's not 30%. So 30%

13:53

is supposed to signify that

13:56

if you are spending more than that, you

13:59

may have to make sacrifices

14:01

in terms of other necessities.

14:04

Any less than that, and it frees up income

14:07

for you for those necessities,

14:09

but not only those necessities, but

14:11

other qualities of life.

14:16

It's the HUD number,

14:18

Housing Urban Development Number. It's been

14:21

used for quite a while, but reaching 30%

14:25

more symbolic than anything. We

14:28

have a housing crisis. Rent is

14:30

too damn high, and

14:33

ultimately, this

14:35

is not going away anytime soon.

14:38

So to piggyback off of Lou's

14:40

earlier statement why we're doing this,

14:43

because this story is going to stick around for a long

14:46

time, and we want to be part of that solution.

14:48

That's a great point, Thomas, that

14:51

many of these numbers,

14:52

30% of your income should go to rent.

14:55

There's a lot of other data

14:58

points in the personal finance space just

15:00

like that that are not based on

15:02

any objective assessment of anything.

15:04

It's just a number that a human brain likes,

15:06

and it creates sort of a baseline understanding

15:09

so

15:09

that you don't go do something crazy like

15:12

spend 70% of your income on

15:14

housing. But people hear it,

15:16

and they just take it at face value like, okay, the experts

15:19

say don't do that. So if the rent would be 30.5%

15:22

of their wages, they're like, oh, I can't do that.

15:25

That's too expensive. And there's a lot of things that

15:27

float around in our space that work the same way. And I'm

15:29

just glad to hear that you pointed out.

15:32

Someone pulled it out of their butt somewhere. Ask anyone

15:34

in New York City, and they'll tell you they're spending

15:36

a lot more than 30%. Yeah, I mean, in high income

15:38

areas, it's

15:41

been over 30% for a long time,

15:43

right? Lou, you have those numbers, right? New York

15:45

City's been rent burdened on the average

15:47

level for quite a while.

15:48

So if we look at the rent burden history,

15:52

New York City, as far

15:54

back as we start tracking the time series

15:56

across all the major measures in the United

15:58

States, New York

15:59

was the only one who breached

16:02

that 30% threshold back in 1999. So

16:05

that's the earliest data points that we were able

16:07

to track and provide to the marketplace.

16:11

And ever since then, we start seeing

16:13

the increase of the rent and not being

16:15

able to catch up the income growth

16:18

has created the pockets around

16:21

the US map

16:22

to join this room burden

16:24

list. So we have Miami,

16:27

Boston, San Francisco,

16:30

at the first 10 years

16:32

of the new century, which has been

16:34

joined in New York as the rent burden module.

16:37

And all these metrics have become

16:40

rent burden for various reasons,

16:42

whether that's technology boosted,

16:45

whether that's travel destination boosted,

16:47

better weather,

16:50

migration destination,

16:52

both internationally or domestically.

16:54

So they,

16:56

because of various reasons, have joined

16:58

that list.

16:59

So fast forward to

17:02

end of 2022, early 2023.

17:04

So there are

17:06

seven metrics

17:08

which has breached the 30% rent burden

17:10

threshold. And again, that's a symbolic

17:13

number. So if we look at down the list,

17:15

New York, Miami, Los Angeles,

17:17

Boston has always been rent burden

17:19

over the past decade.

17:21

We also have Fort Lauderdale, Palm

17:23

Beach, Northern New Jersey,

17:26

Tampa, Orlando, and

17:28

San Francisco, close either already

17:30

crossed that 30% or close

17:32

to that 30% threshold. So

17:34

all these metrics

17:36

for various reasons have joined

17:38

this.

17:39

And that's at the metro level.

17:41

But on the other hand, if you look

17:43

at individual neighborhoods

17:46

within the metro,

17:48

in certain neighborhood,

17:50

going back to the New York example, for

17:53

immediate income family, for

17:55

average renter to live in

17:57

Manhattan, most likely they

17:59

will feel new. not just rent burden, but severely

18:02

rent burden, meaning they have to pay more

18:04

than 50% of their

18:06

income on rent. But if

18:09

you

18:10

move them to the outer

18:12

borough, if they decided to live

18:14

in Bronx, the situation will improve

18:17

quite a bit. So it's very interesting

18:19

to see how this bigger metro has been

18:21

evolving over the past two decades

18:24

and having this agglomeration of

18:27

luxuries, class A apartment

18:29

building clustered around certain

18:32

neighborhoods, creating that

18:34

natural bifurcation between the upper tier

18:36

and lower tier apartment markets and

18:39

boosted the average rental

18:41

affordability app at the metro

18:44

level. I'm hoping maybe we

18:46

can put this into context by just

18:48

understanding not rent,

18:51

obviously in terms of share of median income

18:53

is super important, but also just absolute

18:57

numbers. How much has rent

18:59

gone up since

19:01

the beginning of the pandemic? And where are

19:03

we sitting in terms of the median

19:05

rent right now?

19:06

So for New York, from

19:09

pre-COVID up until the first quarter of 2023,

19:12

cumulatively, the rent has increased

19:15

by 16.8%. And

19:17

you have to take that number with the green of thought,

19:20

because if we look at the absolute

19:23

average rent level for New York City,

19:25

and that's uncomfortably sitting

19:27

about $4,000 per month. So

19:30

as of first quarter 2023, average

19:33

rent for New York City is $4,270.

19:35

And

19:38

the second one on the row, Miami,

19:41

which has the current rental

19:43

income ratio way up above 30%

19:45

threshold sitting at 42%, is

19:48

average rent $2,149.

19:52

And that is significant

19:55

increase, nearly 30% drop as

19:58

compared to pre-pandemic. Third

20:01

one, for a lot of deal, also in

20:03

Florida, increased more than 30% cumulatively over

20:07

the past three years. So

20:10

if you look at where the rent

20:12

level was pre-pandemic

20:14

versus where they are, so

20:16

that percentage number really

20:18

tells a strong story of

20:21

how significant the positive

20:23

migration pattern has been creating

20:25

this inflationary pressure

20:28

on the rental market for some of the

20:30

hub markets, especially in

20:32

Florida. The problem here,

20:35

not so much the rent

20:37

levels. Obviously they're incredibly high in

20:39

certain metropolitan areas, but as

20:41

Lou alluded to,

20:43

it's the pace at which they've increased.

20:46

All right, this is very similar when we talk about

20:48

how the commercial real estate

20:50

market and investors are upset with

20:52

the Federal Reserve. Well, it's not

20:54

that interest rates are going up. I mean, obviously

20:57

they would like them to be lower and money to be cheaper

20:59

to make investments in lending, but at

21:01

that pace. And when you have that pace

21:04

of increase, it's an actual shock

21:06

to the market that people can't

21:08

really

21:09

prepare for. And

21:11

these households, particularly lower income

21:14

households in those areas,

21:16

being unprepared for that

21:18

type of shock. And when you deal with something

21:20

like apartment leases, which are only about a year,

21:23

they're

21:24

going to get quite the shock, especially

21:26

because their income isn't going to keep pace nearly

21:29

to those types of levels to which

21:32

the rent can be increased. Very helpful

21:34

context here.

21:35

I'd like to just try and understand

21:38

from both of you, but Tom, let's start with

21:40

you. What does

21:42

the fact that rent has gone up so much

21:45

and is now becoming burdensome

21:48

in more and more markets tell us about

21:50

the nature of the housing

21:52

market and housing stock in the

21:55

country right now? Yeah, great question. And

21:57

you used the words housing stock.

23:59

more expensive and creating

24:02

this bigger bifurcation between

24:04

class A versus class B, C. If

24:06

you look at the class B and C units,

24:10

so the vacancy generally sits around 2

24:12

to 3 percentage point. It's extremely

24:15

tight market, which fits into the appetite

24:17

of median income household,

24:20

workforce household, or even lower

24:22

income families

24:24

on the income spectrum. And that also

24:26

created this

24:28

tremendous opportunity when people

24:31

are migrating back in

24:33

early 2021. We are seeing above

24:36

average household formation. And sorry

24:38

for using that jargon. It's really just

24:40

to

24:41

quantify how many new households

24:44

are forming in this marketplace.

24:47

So how many people have to leave

24:49

their parents couch, breaking

24:51

up with their roommates, having to rent

24:54

individual unit on this market that

24:56

has been above average for about a whole

24:58

year since the second

25:00

half of 2021, all the way to the first

25:02

half of 2022 that create this tremendous

25:06

demand shock to the marketplace.

25:09

We don't have enough units and we have increasing

25:12

amount of demand, which had demanding

25:14

to live

25:15

in the rental unit.

25:17

And then

25:18

you combine with what we have seen

25:20

at the beginning of the pandemic, many

25:22

of the expensive metros were having all

25:24

these people leaving the metro, leaving

25:27

elsewhere. It actually created

25:29

this, we call it a pandemic discount

25:32

in many cities, San Francisco, New

25:34

York, Boston, right? So

25:36

when people are coming back, they are seeking

25:39

that opportunity of this

25:42

once in a lifetime pandemic shock

25:44

created discount

25:46

and quickly boosted that rental

25:49

increase,

25:50

which we have seen in the later half of 2021. And

25:54

that has been going on as

25:56

Federal Reserve has been increasing the interest

25:59

rate. And single-family

26:01

housing was one of the first

26:03

factors which are absorbing that

26:05

shock. So we started seeing

26:08

and recording single-family housing decline,

26:11

the price decline,

26:12

in many of those expensive metals.

26:14

New York, San Francisco were among the first

26:17

which we started seeing the single-family

26:19

housing price decline because the demand

26:22

instantaneously cooled.

26:24

And thinking of those potential could

26:27

be homeowners

26:29

have no option

26:31

but to live in the rental units for

26:33

a longer period of time

26:35

so that actually sustained multifamily

26:38

fundamentals. Even

26:40

though that was the time when the consumer

26:42

sentiment was at the historic low, we

26:45

are seeing all these recessionary

26:48

fueling in the single-family housing

26:50

sector. It actually

26:52

created this opportunity to stabilize

26:57

the rental market. So that's

26:59

really what has been created this

27:01

boost and then sustained

27:03

the growth

27:04

for the multifamily rental across

27:07

the United States

27:09

and eventually push us up to that 30% threshold

27:12

which we have seen by the end of 2022. This

27:15

begs the question we're talking about housing

27:17

supply, housing stock. Why

27:20

not? And what's going on now?

27:22

There's a couple of things I want to say to this because

27:25

I think this conversation is really valuable because

27:27

I don't want to just sit here and complain about rent being

27:29

too darn high. I want to actually talk about the

27:31

economics and what's going on and

27:34

how maybe the market or maybe

27:36

the market can't help alleviate

27:38

this problem.

27:40

Right now, what we're seeing is

27:42

a halfway decent amount of

27:44

construction within multifamily given these

27:46

rent increases.

27:49

But a lot of those projects were started

27:51

when financing rates, construction costs

27:53

were a lot lower.

27:55

Through the pandemic, we all know supply

27:57

chain issues, construction costs went up.

27:59

Obviously, right now, we're dealing with

28:02

high

28:03

interest rates, high financing.

28:06

What we have is we have this bit

28:09

of a bump in new supply

28:11

coming online this year. That will help. In

28:14

fact, we're anticipating slightly

28:17

below average rent growth for this year, but then

28:19

we move forward.

28:21

Because of still high construction

28:23

costs, labor

28:25

supply issues, particularly in the construction

28:28

industry, high interest rates that aren't going

28:30

away anytime soon, and

28:32

we're going to start to see a decline

28:35

again in new construction

28:37

and deliveries in multifamily

28:40

in the next few

28:42

years. That's going to bring this problem back

28:44

to a head.

28:46

This problem of a shortage isn't

28:48

going away because the numbers have stopped working.

28:51

Often when we look at the data points, like Israel

28:54

State going up or down, is housing affordable

28:56

or not? We interpret it

28:58

through an emotional lens. I'm angry because

29:00

housing is expensive. Something

29:02

needs to be done. I pound the table.

29:05

A wiser approach is to ask the question of why.

29:08

Well, we import a lot of our

29:10

building materials from other countries, and as supply

29:12

chains get disrupted, they become more expensive.

29:14

It becomes less efficient.

29:16

I don't have any data to support this, but I feel pretty confident

29:19

that

29:19

there are less people that are

29:21

wanting to enter into the trades than we used

29:23

to have. The younger children are not growing

29:26

up saying, I want to work in the hot sun and carry

29:28

around wooden beams

29:30

and nail them to things. They're all wanting to be

29:32

an influencer, working in software

29:34

development. They're

29:36

wanting to be an entrepreneur of their own business.

29:39

It's not as popular like there was to be finding

29:41

plumbers and people that want to hang drywall and

29:43

do those jobs that really make the country

29:46

run.

29:47

It's going to lead to inefficiencies

29:50

in the construction process. I

29:52

also think in general, I see more

29:54

regulation from local municipalities than

29:56

when I was a kid. Is that another thing you want to

29:59

comment on?

29:59

going to say that absolutely has

30:02

hindered development.

30:04

And

30:05

yes, while you were a kid, but also

30:07

prior to that, or not as much as maybe

30:10

while you were as a kid, but still prior to that as

30:12

well. It's a problem that I think

30:14

has been here for a long time. And

30:17

one of the reasons I wanted to comment on this, and

30:19

I don't want to jump around too much, but

30:21

I do potentially see this current

30:24

housing affordability crisis, the rapid

30:26

increase in rent to income ratio prices,

30:30

along with some of the changes and

30:32

dynamics during the pandemic is

30:34

that policy makers

30:37

are starting to see the errors

30:40

that have been made

30:41

over the last 50 plus

30:44

years, whether they be zoning regulations

30:47

or other types of regulations that have

30:49

hindered the supply side of this equation.

30:52

And so I do see a little

30:54

bit of positive movement there,

30:57

maybe not enough yet, but maybe that's a silver

30:59

lining with all of this. It's a great point, because

31:01

we're getting hurt on the supply side from

31:03

all the things we just mentioned.

31:05

And we're feeling pressure on the demand side,

31:08

because we've created all of this money that

31:10

has to go somewhere. And real estate

31:12

is where most of it's going. And so we have an

31:14

ever increasing demand, you're kind of getting

31:16

pinched on both ends, which creates

31:18

the unaffordability. And you also

31:20

had mentioned something earlier in the podcast I

31:22

wanted to comment on. When

31:25

housing becomes unaffordable, it disproportionately

31:27

hurts low income people significantly

31:30

more than someone with higher income. So

31:32

if you're living in New York,

31:34

you're making $20,000 a month, and you want to spend 30%

31:36

of that

31:39

money on rent, that's

31:41

right around, I believe, what, $6,000? So

31:43

you have $6,000, this

31:46

means you have $14,000 to live on, assuming

31:48

we're not talking about taxes here.

31:50

Well, the car you're going to drive,

31:52

the food you're going to buy, the movie you're going

31:54

to watch is probably slightly more

31:56

expensive in New York than it's going to be in

31:59

Louisiana.

31:59

or Oklahoma, but not that

32:02

much. So with $14,000

32:04

left, you don't need to worry

32:06

about going broke. You can buy plenty

32:09

of food, you're fine. So if your

32:11

housing expense was 50% and you had to spend

32:15

10 grand, you have enough money to get by.

32:17

Now you take that same person who's making $3,000 a

32:20

month in Louisiana.

32:22

At 30% of their income, that's closer

32:24

to almost $1,000. They got to live on

32:26

less than two grand a month.

32:28

Food costs pretty much the same as it does

32:30

in New York. It's very close.

32:32

All of your other expenses are going to be similar.

32:34

They don't have enough to make ends

32:37

meet. And so every time we see this unaffordability

32:39

thing, of course it sucks for the rich, just like

32:41

it sucks for everyone else, but it doesn't suck as bad.

32:44

And that's what's concerning

32:46

about the situation that we're in with

32:49

inefficient political structures that make

32:51

regulation tougher, with our insistence

32:53

on importing everything from other countries, which

32:56

puts us in a vulnerable position where they get leverage

32:58

in the relationship as well as what

33:01

we saw during COVID when supply chain issues were

33:03

disrupted. I think we're still trying to work through some

33:05

of the

33:06

problems that came from that. And then you couple

33:08

into that, that there's not a whole lot of 14 year olds

33:10

in high school right now saying, I want to grow up to hang

33:12

drywall. I want to build roofs

33:15

in the middle of the summer. They're all wanting to do

33:17

something that's a little bit easier and cooler.

33:19

This unaffordability thing, does it seem

33:21

like it's going away? Is that the same perspective

33:24

that you two have, Lou?

33:25

Absolutely. So

33:27

David, I really like your perspective.

33:29

At the peak of when we are seeing the rapid

33:32

increase of the rental affordability

33:34

issue across many of the surprising

33:36

metros, I have to say,

33:38

many smaller metros in Florida,

33:41

Las Vegas, when we are looking at

33:43

how fast double digit growth in

33:46

many cases over 20, 30% of the rental

33:48

increases

33:49

from pandemic over to a

33:51

good chunk of 2022, surprisingly,

33:54

their medium income

33:57

households' income. actually

34:01

declined. It's very interesting to

34:03

see a smaller population

34:06

which, for the benefit of

34:09

migration, came to the city, pushed

34:11

the rent high. But on the

34:13

other hand, the local residents who's

34:16

earning the hourly wages, especially

34:18

for those metals which has a bigger

34:20

population on the leisure

34:23

and hospitality, some of the hourly

34:25

wage industries,

34:27

they didn't really enjoy the benefit of

34:29

increasing rental. So

34:32

that really created this social

34:34

aspects of this issue, which

34:37

is really demanding the public

34:39

and private partnership to solve

34:41

this big puzzle for us.

34:43

So some interesting development because I'm

34:45

personally located in California.

34:48

So even prior to pandemic, we created

34:51

this

34:52

accessory dwelling

34:54

unit, ADU,

34:56

in the policy making,

34:58

and we're expanding on that

35:01

policy front. So we are allowing

35:04

more than 500 square footage of ADU

35:06

being built either attached or detached

35:08

to your single family

35:11

residency.

35:12

You're referring to the legislation that stops

35:14

cities from preventing that from happening. They can't

35:17

come in and say, no, no permit, you're not allowed to

35:19

build the ADU. They have to allow it.

35:20

They have to allow that. And they are actually

35:23

eliminating a lot of the barrier so that

35:25

the permitting process is extremely

35:27

easy. It's easy to get approved. You

35:29

just have to set up, hook up individual units

35:32

for the kitchen. You have to have

35:34

separated doors, but it's

35:36

fairly easy to go through that loophole. And

35:38

just a few months back, the San

35:41

Francisco city has also created a policy

35:44

to allow in rezoning,

35:46

converting some of the obsolete

35:49

office properties into residential.

35:52

So they could be high resits located

35:54

in the premium location of the city, right

35:56

in

35:59

the downtown area. but converting

36:02

vacant office building into multi-family.

36:05

So those are some of the creative ways

36:08

of revitalizing the city

36:10

vibe, saving the downtown, but

36:13

also creating these additional units

36:15

to solve

36:17

the housing shortage. Not a panacea,

36:20

but cumulative, all of these

36:22

regulations that are relaxed

36:25

or some of these public-private partnerships

36:29

will be helpful, right? Don't let a good

36:31

crisis go to waste. And again, that's

36:33

my glass half full look at this

36:35

situation as it comes to this. And

36:38

they're, you know, just speaking

36:40

with some of the industry players, there

36:43

seems to be a bit of movement in

36:46

further developing

36:49

what they call workforce type housing

36:51

or lower income housing as

36:54

both a social

36:55

benefit to society that

37:00

they wanna be part of, right?

37:03

And some of them are starting to see

37:05

the tax benefits,

37:08

some of the other benefits associated with

37:10

it paying off. So it not

37:12

going away, David, you said it, I said it

37:15

a couple of times already, not going away.

37:17

There are no panaceas when it comes to this,

37:20

but,

37:21

you know, we can add up everything, right? All

37:23

the things you mentioned on the supply side, all

37:26

the things from the regulatory perspective,

37:29

and then even on the demand side, I'll throw one

37:32

more thing into this conversation that

37:34

we haven't addressed yet. We're

37:36

Americans, we like big houses. And

37:39

when you build a big, big house, those

37:41

are scarce natural resources

37:44

and scarce

37:46

labor resources that are being

37:48

devoted towards that one large house

37:50

for that one family, where those resources

37:52

if divided up, sounding like

37:55

a socialist here, but if

37:57

they were divided up in some way, you

37:59

know,

37:59

more housing for a lot more people and take

38:02

the pressure off prices. Tom and

38:04

Lou, I have a question. In

38:06

a way, just playing devil's advocate

38:08

here, and I just want to get your understanding

38:10

of this. But most of the people who listen

38:13

to this podcast are real estate investors

38:15

who are interested in real estate investing.

38:17

And

38:18

many of us have, in

38:20

ways, benefited from rising

38:22

rents as it's gone

38:25

over the last couple of years. So

38:27

I'm curious, what role do you see real

38:29

estate investors having in this?

38:32

Why should real estate investors be concerned

38:35

about this problem? And if we are

38:37

concerned about this problem, what can real estate

38:39

investors do to try and improve it? From

38:41

a long-term perspective, I think we

38:43

all need to care. I'll

38:45

give you a really astute

38:47

example of why it matters maybe

38:50

for a particular city or neighborhood.

38:52

If you're focusing on only

38:54

building Class A and you have rents

38:56

going up and you're happy about that, that's wonderful.

38:59

You made a good investment. It's doing well.

39:02

What happens when the service

39:05

workers, the nurses even,

39:08

can't live anywhere near that

39:10

particular location? And

39:13

now they're way far away. How does

39:15

that work out? There's

39:17

a gap there. And then the people

39:20

within your building that

39:22

were living there and doing well and paying

39:24

higher rents all of a sudden might move

39:27

because their services are gone from that area

39:29

because no one was building that workforce housing

39:31

anymore for that area. So there is

39:33

this argument to be made that we

39:35

need to balance that out from a societal perspective,

39:39

but from a longer-term investment perspective,

39:41

you want to be in an area that

39:43

has housing for all

39:46

income classes because ultimately

39:49

we're a society and we need that. That

39:51

makes sense.

39:52

I'm sort of asking just from

39:54

a devil's advocate standpoint, but you

39:56

see that a lot in a lot of

39:59

of markets, I invest in

40:02

an area in a small mountain

40:05

town in Colorado. And

40:08

it's almost impossible for

40:10

a

40:11

lot of the people who support

40:14

the economy of the town to live there. And it

40:16

has really negative impacts for the

40:18

entire

40:19

society there. So that's definitely something

40:21

that we've seen over the last couple

40:24

of years. In law enforcement, my previous

40:26

profession, this is rampant in the

40:28

Bay Area.

40:29

Wages are high, but housing is higher. And

40:31

so I didn't know any cops that lived

40:33

in the Bay Area cities, none of the San Francisco

40:35

PD guys, Oakland PD guys, they don't live there. They

40:38

live 45 minutes, an hour and a half away,

40:41

where housing is somewhat affordable, especially when they're new.

40:43

Same thing for a lot of the nurses that work in the industry.

40:46

I suppose the doctors can afford to live there, but they

40:48

usually don't want to be raising families in the middle

40:50

of those areas. So

40:51

what you have is people that are already working 10 hour

40:54

shifts, eight hour shifts that are now tacking on

40:56

an hour to hour and a half of commuting sometimes both

40:58

ways,

40:59

lost productivity. They're not doing anything

41:01

to benefit society when they're sitting in commute traffic.

41:04

I mean, I suppose they're listening to our podcast, so we benefit

41:06

from that.

41:09

Which might be one of the reasons that podcasts have taken

41:11

off, right? Like there could be a point

41:13

there is housing and affordability created

41:16

a run in the YouTube and podcasting

41:18

space, but it is like, it doesn't get talked

41:20

about, right? So you may not get,

41:22

you may be getting raises. However, your

41:24

workday is 20% longer because you have to commute

41:27

so far to be getting into work. You're not being compensated

41:29

for that time, but you're still

41:31

having to put in some form of work. And I think

41:33

it leads to a lot of frustration. It can lead to a

41:35

lot of feelings of unfairness. It is

41:37

a

41:38

really bad problem. And then I don't know, we haven't

41:40

got into this a lot, but I know you guys have also

41:42

found that wages though they can be

41:44

increasing are not increasing at the same

41:46

degree that food, energy

41:49

and housing are increasing. And so it ends

41:51

up being like a pay cut when you really balance

41:53

it all out.

41:54

Absolutely true. I know Federal Reserve

41:56

doesn't like to see this wage growth

41:58

spiral, which creates this increasing

42:01

amount of inflationary pressure created

42:04

by the increasing of the

42:06

wage level. But on the other hand, while

42:08

we are looking at the data, so how we

42:10

have started off from early 2000

42:12

all the way, now reaching 30%

42:15

thresholds is really that gap

42:17

between how fast the income has been growing

42:20

versus how quickly our rent has been growing.

42:23

And

42:24

for the investors, I really want to say, if

42:26

you look at what has happened over the past

42:29

economic cycles.

42:30

So single family housing

42:33

sector usually will

42:35

get a hit.

42:36

And usually that hit is very strong. But

42:38

if you look up and down the

42:41

historical cycles,

42:43

multifamily was able

42:45

to hold up fairly well,

42:47

although I wouldn't say it's counter cyclical,

42:50

it does follow the business cycle. It

42:52

usually hold up really well until

42:55

the end of each economic cycle where we

42:57

started to get some shock when people start

42:59

moving back to the single family housing market.

43:02

And even with that, the rent decline

43:04

was very marginal.

43:06

So this is a

43:07

good asset class to be invested in

43:10

and especially be holding for a longer period of

43:12

time that actually preserve

43:14

that housing stock, creating

43:16

that

43:17

rental unit, rental

43:19

society, which allows renter

43:21

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47:25

All right, so Lou, for investors that

47:27

want to help with this housing affordability

47:30

problem, what advice do you have?

47:31

So there are many ways the investors, developers,

47:35

architects, the real estate society

47:37

can help solve this problem. Of course,

47:39

building more houses,

47:41

contingent on the available

47:43

land, available zoning policies,

47:46

but more importantly, I do see a

47:48

great opportunity for us, the real

47:50

estate participants, to step into this affordable

47:52

housing space. So what

47:54

is trending on the market is a concept called

47:57

inclusionary housing.

47:59

So it really pulls an opportunity

48:03

that we could have introduced both

48:06

market rate rental units

48:08

and with an allocation of somewhere

48:11

between 10 to 20 percentage affordable

48:13

units

48:14

on the same floor, in

48:16

the same unit, in the same building.

48:19

And that creates this policy benefit

48:21

for investor to enjoy some of

48:23

the tax exemption,

48:26

some of the equipment,

48:29

and also enjoy some of the capital funding.

48:31

We all know we are in this market

48:33

where

48:34

the available capital is very scarce.

48:38

And then especially 2023 or even early part of 2024 got

48:40

to be very, very tight. But

48:45

affordable housing funding is

48:47

the

48:47

area which we can always

48:49

seek potential opportunities. And

48:52

that is both economically

48:56

and socially beneficial for the lower

48:59

income

48:59

households, because we do

49:02

in desperate need of this affordable

49:04

housing market. And

49:06

especially we're facing

49:08

extremely long waiting list

49:10

for many of the expensive markets. If

49:12

you look up and down California, we are looking

49:14

at years of waiting for low income

49:16

families to get affordable housing units. But

49:19

that's a great market that we can consider

49:21

for potential investment.

49:23

Lou, what does it look like for an investor

49:25

to actually invest

49:28

in low income housing?

49:30

How does that work?

49:30

So usually, it creates

49:33

this opportunity for low

49:35

income families earning 70% of area media income,

49:39

we call it AMI, to

49:40

apply for such unit.

49:43

And when they are applying for the building

49:45

permits, they will go

49:47

through multiple different certificates and

49:50

different permitting process to

49:52

get applied with special funding

49:54

for building out affordable housing. With

49:57

that, there are often policy

49:59

limitation of...

49:59

what kind of housing and where

50:02

such affordable units can be built out. So

50:04

it's a whole industry which typically

50:07

involves close collaboration

50:09

between investors and mortgage lender

50:12

and banks, even the

50:14

federal and local government level,

50:17

to be involved in creating that opportunity.

50:19

It's really a joint venture between the public and

50:21

private.

50:22

Just asking from pure

50:26

investor standpoint here, is

50:28

the objective here to make it

50:30

so that for an investor,

50:33

the returns or the

50:35

risk and return profile

50:38

for building or investing in

50:40

affordable housing is similar

50:43

to that of building

50:45

or investing in private housing, you know, free

50:47

market housing, whatever you want to call it?

50:49

I wouldn't say similar. I would say

50:51

the risk profile is going to be lower

50:54

because oftentimes the low income

50:56

families are subsidized

50:59

by Section 8

51:01

and other housing vouchers. So

51:03

the housing units will be rated

51:06

at a slightly below

51:08

market rate,

51:10

but you would be getting steady

51:12

income cash flow because all

51:14

these

51:15

rental payments will be heavily

51:17

subsidized

51:18

by the public sector. All right, Thomas,

51:21

with all this information at play, the

51:23

burdens and obstacles that affordability is

51:25

going to have to make its way into the housing

51:27

market like we'd all like to see, how

51:29

confident do you feel with real estate

51:32

as an industry that is a solid place

51:34

for investors to be putting their capital?

51:36

Real estate, residential real

51:38

estate in particular, has tremendous

51:40

long term tailwinds. So

51:43

while we talk about the

51:45

problems within the market,

51:48

that doesn't necessarily mean that

51:50

the market is going to falter. Right?

51:53

If anything, we want more investors, right?

51:56

And even with more investors, this is where

51:58

I want to caution because investors might say, well,

51:59

more investors, more development, that's just

52:02

going to pull rents down. And we

52:04

want an affordability issue. But David, it kind of

52:06

goes back to what you were saying earlier in the conversation

52:08

we were having about

52:11

the value of having

52:13

a variety of

52:16

class of apartments and housing

52:19

through communities all around the

52:21

country that will supersede

52:24

all. So again,

52:26

kind of talking in circles here about this,

52:29

multifamily as an asset class, incredibly

52:32

valuable,

52:34

overall very steady. We're

52:36

going to see a slight

52:39

bit of stress in

52:41

the next year or so for certain properties

52:44

that have to refinance because

52:47

we are seeing rent levels

52:50

stagnate a little bit. We're

52:52

seeing high

52:53

interest rates. And if you finance

52:56

that property a few years ago at very,

52:58

very low interest rates, you're

53:01

going to get close on that debt service

53:03

coverage ratio that banks want to see

53:05

and lenders want to see back

53:07

to 1.5 plus. So

53:10

without going into that jargon, but you guys

53:12

are investors about that type of stuff.

53:15

There's a little concern there. But again, if

53:17

you're buying multifamily,

53:20

residential in general and holding it

53:22

for the long haul, if you're buyers and not

53:24

sellers, you're in great shape now. You're in

53:26

great shape for a long time within

53:29

multifamily. And I hope that

53:31

what Lou just mentioned about

53:34

low income housing tax credits and some of the

53:36

other public private partnerships going on,

53:39

that the numbers start working better

53:41

for the workforce and affordable housing.

53:44

Awesome. That's a great sort

53:46

of segue here to the end. Last question,

53:49

I have here for you, which is

53:51

everything that you've learned

53:54

about affordable housing

53:56

in the United States and given the fact

53:59

that most of our audience

53:59

audience here, real estate professionals,

54:02

real estate investors.

54:03

Are there any last things that you think

54:06

we should know or think

54:08

that we

54:10

could benefit from your research

54:13

before we get out of here?

54:14

Absolutely, so I just feel like not

54:17

just us, not in academia,

54:19

industry, but even up at the policy

54:21

making level.

54:23

Everybody has been putting a lot of attention

54:26

on this rental affordability issue,

54:28

so we've seen various actions

54:31

trickling down from the federal

54:33

level to the state level to the municipal

54:36

level on addressing this issue. And

54:38

they realize

54:40

the policy barrier is one thing, but

54:42

also there's tremendous

54:44

opportunity for the public sector

54:47

to work together closely, both

54:50

on the capital side, on the zoning side,

54:53

policy making, and every

54:55

single part of this

54:57

economic cycle. They have to work

54:59

closely because

55:01

we realize the private entity often

55:06

time cannot shake up what

55:08

was already up there. But

55:11

when we realize the tightness of

55:13

the market, when we realize the affordability

55:15

pressure,

55:16

when the public sector started stepping

55:19

in, if you look up and down across

55:21

the United States, how many states and municipal

55:23

actually pass legislation on affordable

55:26

housing, whether that's bond, whether that's

55:29

zoning, whether that's tax, every

55:32

single component surrounding this affordable housing,

55:34

housing affordability, we are

55:37

moving in the right direction of creating,

55:40

nurturing, and reinforcing

55:42

that strong relationship between

55:45

the policymaker and the private investor,

55:48

architects, developers, the entire

55:51

circle to work close to that goal. It's

55:54

economic driven, but it's also policy

55:56

driven because this has become not just

55:58

economic phenomenon.

56:00

but also a very important

56:02

social aspect

56:05

for every single rental household's

56:07

well-being.

56:07

I thought opportunity zones were

56:10

like the perfect marriage of exactly what you're talking

56:12

about.

56:13

It was this idea of we need investors, we

56:15

have a problem, we need the government

56:17

to cooperate. Rather than pitting us

56:20

against each other, we cooperated and

56:22

a lot of areas that really needed infrastructure

56:24

and revitalization all benefited from

56:27

people that were good at understanding how to develop

56:29

areas.

56:30

They understood concepts like highest and best

56:32

use. We improved a lot of areas for people.

56:34

We stabilize a lot of markets. You actually now have

56:36

jobs that feel comfortable moving into those areas

56:39

because there is a stable living

56:41

situation for

56:43

the workforce. And we fixed a problem without

56:45

the government solution of the DMV,

56:48

which is always what happens when they step in and they try

56:50

to do it themselves. So I love what you're saying

56:52

there of this marriage of

56:54

these two people working together to solve

56:56

the problem. I hope we see more of that in the future. If

56:58

you want to hear from me, I'm going to make it really simple

57:00

and concise here. And this is very

57:02

broad across multifamily

57:05

and really CRE investing in general.

57:08

I love what's going on with

57:10

mixed-use neighborhoods, whether

57:13

they are master-planned or they

57:15

are within existing

57:18

areas. This could be a whole other podcast

57:20

for you guys, but there's something really, really fantastic

57:23

happening in terms of how,

57:25

again, we're breaking down some of those zoning laws

57:27

and we're really building up the value

57:30

of a mixed-use area. And I think there's going

57:32

to be a lot of potential in those going

57:34

forward. Awesome. Well, thank you both

57:36

so much for being here. We really appreciate

57:38

it. People want to get your

57:40

amazing report. Where

57:43

should they do that? Go to CRE.moodysanalytics.com

57:49

backslash insights. And

57:52

you could see all of our

57:55

most recent research, including this

57:57

report. Sorry, Dave. I really have to crack

57:59

time. on that. It's a forward slash. No,

58:02

it's not. Is it? They're always forward slash.

58:05

Of course, they're always forward slash.

58:08

No, no, no, no, no, no, no, no, no, no,

58:10

no, no, no, no, no, no, no, we're

58:13

leaving this in here. We

58:15

love the mess ups. It's the best part. Quick tip

58:17

of the show. It's always forward slash. Oh,

58:19

that's the best tip we have to leave with.

58:22

Darn it. All right. Thomas Liu. It's been

58:24

wonderful having you on. Thank you so much for taking

58:26

some time out of your day to talk with us about

58:29

the numbers of what's going on in real estate and

58:31

even more importantly, how we as

58:32

investors can use these to make better financial

58:34

decisions and what we can do to improve the situation

58:37

for everybody involved and give investors

58:39

a better name

58:40

in the world of real estate. Really appreciate you guys sharing

58:42

your knowledge. And Dave Meyer,

58:44

you think I wasn't going to mention this. This is like your fifth

58:46

recording today. Dave has been going

58:49

hard in the paint for the entire day.

58:51

He actually outlasted

58:53

his camera. Dave works longer

58:56

than his camera could exist.

58:58

It melted down in the middle of

59:00

the show. We had to start it over. So if you're watching on YouTube,

59:02

that's why he looks a little bit different. That is how much we

59:04

at BiggerPockets care about bringing

59:06

you the information that you need. So

59:08

thank you for joining us. And if you can appreciate

59:11

Dave, please go leave us a five star review wherever

59:13

you listen to podcasts. Those mean a lot

59:15

to Thomas Liu. Thanks so much. Where

59:17

can people find out more about each of you? Welcome

59:19

to reach out to me at Thomas.Lasalvia

59:23

at Moody's.com. Happy to answer

59:25

questions, talk more about the real

59:27

estate

59:28

market, or certainly go to our

59:30

Moody's website. Lu.Chen at

59:32

Moody's.com. Easy peasy. I think

59:34

your easy peasy might have been my favorite part of this

59:37

entire episode. Thank

59:39

you. Thank you for having us. You guys are

59:41

phenomenal. It was our pleasure. This is

59:43

David Green for Dave that terminates

59:46

Meyer signing off. Someone

59:48

get that man a sandwich.

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