Data Driven Real Estate Podcast #2 – The Pandemic and Reflation DDRE#2

Data Driven Real Estate Podcast #2 – The Pandemic and Reflation DDRE#2

With so many great questions after our first show, Aaron Norris and Sean O'Toole are back to answer the question: How will the recession impact real estate in 2020? And, how will government recession intervention impact real estate? Sean goes into more detail on the three things he warned real estate professionals about in 2016 and we review how well his predictions held up. Hint, shockingly well! Sean also gives more insights into the options the Fed has at their disposal to handle the recession because of Covid-19. Will the Fed print money, try austerity, raise taxes? Will this cause see inflation, deflation? And, what should real estate professionals be focused on right now to grow their business? So much to cover in this week's show.

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Show Transcript

Aaron Norris [00:00:02] Welcome to the Data Driven Real Estate Podcast. A podcast for real estate professionals dedicated to driving business success using data. I'm Aaron Norris. And, with us once again, is co-host Sean O'Toole.

Sean O'Toole [00:00:14] Thanks, this is going to be another good one, I hope. We got a lot of questions after the last one. Hopefully, we can answer some of those.

Aaron Norris [00:00:22] Yeah. You know, everybody wanted to talk about how you disappeared in 2016, why you stopped talking and really wanted to have a little bit more insight because of the pandemic. A lot of people are very worried about the strategies of owning rentals right now. Just where is the economy going to go? So why did you stop speaking in 2016? I guess that's a good place to start.

Sean O'Toole [00:00:42] Yeah. Jump right in, huh? So, you know, after the foreclosure crisis ended up on 60 Minutes and ended up talking a lot about foreclosures and housing. Housing affordability. You know where the market was headed. And all the rest, kind of like your dad got a really good reputation for letting everybody know to get out in 2006. I mean, one of the things that I said was foreclosures are going to slow down faster than we think. And a lot of people were surprised to hear that in 2009, 2010. But I saw some regulatory changes that turned out to play out. So fast forward to 2016, I've been talking economics for a solid eight years. And I realized that for like about three years I was saying the same thing and that things weren't really changing. And I didn't think they were going to change until we had another event, as it were. So, you know, I basically did kind of my last rounds with the real estate investment clubs and Realtor associations and brokerage offices and mortgage companies and kind of laid out what I thought was going to happen from there. And I had three primary takeaways.

Aaron Norris [00:02:12] You did. So let's go through those, because I. I last heard you speak at the Coachella Valley Real Estate Investors Association. Hi, Janet. Larry, I actually had we had dinner a couple weeks ago and I was telling them this and. You had three takeaways. Yeah. Let's just, I guess, start there.

Sean O'Toole [00:02:32] Yeah. So the first one. Right. Is that, you know, we're having increasing debt and debt was gonna be a drag on growth overall. And, you know, it's a long story can start back in the 1970s. And but just on that one. Right. In the 1970s, we had this period of really high inflation. We got to really high-interest rates and we kind of deflated. When you have periods of inflation. Right. The dollar become less valuable. So does the debt. The debt gets kind of compressed in these periods of high inflation. So we had very little debt, very high-interest rates. And from the 70s to today, if you kind of look at interest rates, they're in this kind of trajectory. It's not a perfectly straight line. It's going down, down, down. And as that line goes down, right, we can take on more debt for essentially the same payment. So you can think about that at the household level, right. My income may not go up, but if the interest rate goes down, I can take on some more debt. Right. And same thing for corporations. As rates go down, they can take on more debt, stock buybacks, whatever. Right. And same thing for the government. And I really believe that's what's fueled our economy now for 50 years or 40 years since the late 1970s, 40 years. So, you know, I'm a tech guy, so I'd love to say that it was tech that fueled the economy. But if you look at the line of increase of debt and the line of increase of GDP, those two are far more correlated.

Aaron Norris [00:04:14] If you're not on YouTube, I will put the chart up that he's talking about, because it is very interesting to sort of see the lions just sort of cross. Dad likes to tell the story. Is he got into real estate investing and full time in 1980 time the market perfectly and got in at 17.5% interest rate. He refiled his owner-occupancy home so he could be a full-time real estate investor. So you look at the chart of interest rates and it was literally probably the worst day on record. But when you say, just the inflation piece in the and the devaluation of debt. So you're saying, you know, one year it's 15 percent and then it goes to 16. If you were the owner of the debt at 15 percent and then it went up to 16. Nobody's going to want your 15 year note.

Sean O'Toole [00:05:00] So they will, but they'll want a discount to make it 16 percent rate. So that's where the debt itself is getting deflated. Right. In that situation, we haven't had for a very long time. That was the 1970s.

Aaron Norris [00:05:14] Right. OK. So we've been building an economy based on cheap money over the last 40 years. I can definitely see that come in.

Sean O'Toole [00:05:22] We're getting closer and closer to where we can get cheaper. We're zero from seven, 16 to 15 to 14. Right. Lots of room there. But now we're pretty close to zero. And so that was a big part of my thinking after 2008 is like, holy moly, how do we rescue things now if we can't just go cheaper interest rates and create bubbles? And you know, where we really saw this was this kind of bubble crisis cycle that started in 2000 with the housing crisis. And with the dot com premises. So we had the dot com bubble in 2000. Right. Followed by the World Trade Center and that. But a lot of stuff going on right then. And so we had this major crisis as major drop and especially tech stocks, telecom stocks, etc.. Unemployment, lots of impacts. And we kind of rescued the economy by blowing up the housing bubble. Right. That was fully backed and supported by the Fed. In fact, cheered on by the Fed. Right. And so we used this housing bubble to save us from the dot com bubble. And then the housing bubble kind of collapsed under its own weight. And we then the Fed bought mortgage-backed securities and put in a lot of stimulus into it. And we put a lot of stimulus into the economy and the rest. Right. And so we kind of, you know, bought ourselves out of that housing crisis. Really, you see the lines of kind of all debt, student loan debt being the fastest growing corporate debt. Government debt, you know, even mortgage debt is kind of come back. Despite everything that went on during that time, you know, debt just skyrocketed after 2008. Right. And that's kind of how we rescued ourselves from that crisis. And so my second big conclusion after debt will be a drag on growth. We're gonna see slower growth. Harder to achieve growth. Right. Is that the next time something goes wrong? The Fed's going to act even more aggressively. And I joked at the time, my cartoon was Janet Yellen standing behind the "Honey, I Shrunk the Kids" shrink ray. And whatever the problem it is, she's going to shrink it. And I had a whole bunch of different possible things, black swans, as they were, that could go wrong. Right? We could have another bubble blow up burst, but we could also have other things. Right. Cybersecurity incidents, terrorism incidents. You know, lots of things can cause these dislocations.

Aaron Norris [00:08:25] How do you define Black Swans is somebody hasn't read the book. How do you define it?

Sean O'Toole [00:08:29] Yeah, so a black swan is a there are these things that happen that are unexpected. But unexpected things always happen. So we should expect them, right? So, you know, 9/11 was a black swan. The Internet actually was a black swan. Right. So, you know, think about a year. If you're selling modems and the Internet comes along at or wouldn't you know, maybe modems is the wrong example, but. Right. Like things get display straight. The Internet's certainly been a black swan for cable TV, for telephones, for lots of things.  It's these things they're not necessarily bad, but there's these things that come along that cause unexpected change and consequence. You know that often we can be quite negative, at least some. What's interesting, though, is one of the ones that I had on my show was pandemic. I had the guys in the full hazmat suits and all the rest was one of my possible things. And, you know, that is one of the ones that, you know, I felt at the time could be one of these things that could happen.

Aaron Norris [00:09:56] We can say is very random because I don't know, I'm forty-three, I don't recall anything like this ever happening. So for you to pick that one out is very interesting.

Sean O'Toole [00:10:06] Well, it's hardly like I picked it. Right. I mean Bill Gates, back in 2016 I think, he'd already done his talk, and lots of people were talking about, it's only a matter of time until we have one. The fact that we weren't prepared for this is disgusting. Right. It's just it's awful. It was going to happen. It was just a matter of when.

Aaron Norris [00:10:31] And the fact that globally it's happening, anyway.

Sean O'Toole [00:10:34] So we'll come back to what's going to happen. Let's keep going. So I said something else is going to happen and the Fed that is going to step in. So that was my second thing. And then its third big thing that I thought was important for everybody in the real estate community to understand is that automation is accelerating. Right. So productivity and wages went up kind of in lockstep into the 60s. And then they separated and wages went flat and productivity continued to go up. Right. And that happened basically with the introduction of business application software. And as automation is continued, that's continuing. Right. Anybody who thinks we're gonna bring jobs back to America. you know, manufacturing jobs, the rest, we're not bringing manufacturing back. But it's not going to bring jobs back in the way that it was in, you know, the good old days. Right. China is going to have as much of a problem with workforce disruption from automation in progress as we are ready. So it's you know, that's not a war we should even be fighting or talking about. It's not the future, I think dissembling stuff is not our future.

Aaron Norris [00:11:57] You had something in the presentation saying that we had only lost a certain percentage due to exporting it. It really had a lot more of the loss of jobs, it was because strictly because of automation. So I think there is that narrative that, oh, we're gonna bring those jobs back and we're going to get those union paying manufacturing when automation and robotics at this point, those are never coming back.

Sean O'Toole [00:12:18] Right. Yeah. Now, I think I'm just looking for that. Twenty-five percent of manufacturing job losses due to globalization. The other 75 percent is due to technology and automation.

Aaron Norris [00:12:33] And I will go back there as well because I have a lot more concerns.

Sean O'Toole [00:12:38] Here's the bigger one that people don't realize. U.S. manufacturing output is at an all-time high. U.S. manufacturing employment is lower than it was in the 1940s.

Aaron Norris [00:12:53] 1940s?

Sean O'Toole [00:12:57] Yes, it's not that we've lost manufacturing. We've lost some of this high labor, cheap labor, manufacturing jobs. We probably don't want to do anyways. But our actual manufacturing output is higher than ever. So anyways, there's a lot of bad information and bad data around all of that. But I think it's important for the real estate community because we are seeing Opendoor and ibuyers like Zillow and all this disruption, and I think that even in real estate, which is not one of the most forefront in the technology and automation industries. Right. Most at the forefront, I think it's important for those of us in the industry to be thinking about how do we work more efficiently, how do we do that better? So those were my big three things, right? Growth is going to be tough. We're going to have something else come up and we're probably going to have things be pretty stable until that happens. Right?. And when it does happen, that is going to come out with their shrink ray. And automation is accelerating. And if you want to be successful, you should get on that bandwagon rather than fighting it.

Aaron Norris [00:14:18] So got it. And then 2016. What were some of the things that maybe strategies that you were talking to investors or about doing to make sure they were taking advantage of the market?

Sean O'Toole [00:14:30] Yes. In a market that's not growing. Right. So based on growth slowing, there's really just one way to win, which is to take business from your competition. It is what it is. There's a certain level of business, a certain level of transactions. If you're a Realtor in California, there are four hundred thousand transactions that happen a year. If you want more of them, you've got to take them from somebody else. It's just it's that simple. And, you know, so tough for competition and focusing on the competition, focusing on how to use them back to the automation to have an advantage over the competition. I think we're really important things. And the bigger picture, I said, you know. Be prepared. Don't get caught. Like many of you got caught in 2008. Right. We will have another dislocation. I don't know what it will be, but we will have. Something's going to happen. Terrorist attack. Cybersecurity event. Major utility outages. There's so many possibilities. And don't you know, you can live in fear of those things, or you can say: You know what? Somebody you know, who wasn't it? Schwarzenegger was like, you shouldn't have a plan B, right? If you have a plan B, that's all you'll ever accomplish. You just got to go for your plan A. I'm all for a plan A, but I believe in safety nets like on all good with the safety net. Right. And, you know, so that was my kind of advice, was, you know, hey, swing for the fences. Go climb that big rock. But wear the safety harness. Right. So that if something does not rock comes loose, something happens. You know, you're not dead. So basically, you're saying it's going to be a pretty stable market. It's not going to be a high growth market. Go steal from your competition business from your competition. Do better than them. Focus on automation and just know something's going to happen at some point.

Aaron Norris [00:16:48] OK. So we're back four years later. Let's dissect those three things that you were talking about. I mean, just the leverage piece alone. What's happened over the last five years? You look at the student debt. What's interesting is when you look at the chart and I'll make sure on YouTube that we show this is that, you know, the breakdown of the debt that's exploded. What's interesting is that the mortgage debt finally started to uptick. But you see that the GDP growth is no longer attached at all to the leverage. That's concerning.

Sean O'Toole [00:17:21] Yeah. You know, so you have debt and GDP kind of all going up together. And then suddenly most debt just goes straight up and GDP is kind of still, it is what it is. It is down a little after 2008. And that's been kind of steadily ticking along as it's always just ticking along, yeah, for sure.

Aaron Norris [00:17:42] You know, you've got some European countries looking at negative interest, having deployed negative interest rates in it. You know, I haven't looked at any housing pricing charts for those areas because it's still less than a year old, I think, for the markets that I was looking at. But do you think that'll happen here in the U.S.?

Sean O'Toole [00:18:00] Yes, a native interest rates. That's a good one. I don't think it'll happen. You know, our next black swan is here. Right. COVID. So, you know, if there was a time to hit negative rate rates. Right. And probably be right now, and I don't know. It looks like we may avoid it this time. They've poured the gas on it enough other places that they haven't done that with rates. And I understand there's some contagion possibilities with pushing rates down. So you have to say you have a lot of funds in money markets. And if you push rates down too much, people will pull their money out of there. And that could cause a run on bank which causes other problems. And so they've got to play with all the pieces of the puzzle. I'm not an expert in this. Right. But, you know, they've been buying corporate bonds this time, which they didn't do after 2008. That's big. That's new. You know, you've got all these other things that have been going on. But I think, you know, just to take one little step back. Right. So the next black swan came. It's Covid. And massively deflationary. So if you think about the economy, like suddenly every boat is leaky and sinking, right. Like it is just a very deflation, bad hit, people are staying at home. They're not spending as much. Bars, restaurants. Right. It's awful. And so, you know, when something like that happens, you have to have some response. You don't have to, but you should have some response or some strategy. You know, as monetary and fiscal policy, the Fed and Congress basically should have some strategy. What how are we going to address this? And there's just really four options. So one option is austerity, right? Just don't do anything. We don't we're not going, we're going to tighten our belts. We're going to live with it. Right. And we're just going to suffer this deflation.

Aaron Norris [00:20:30] Now, Greece. Greece tried to do that. It didn't feel like that worked out so well.

Sean O'Toole [00:20:34] Yeah, Iran did it somewhat successfully. So it depends on the degree and stuff. Right. I think. I think a year ago would've been a good time to think about some or two years ago or three years ago, I would have a good time to think about a little austerity. Economy's cooking along pretty good, right? We could tighten our belts a little bit without very much pain. Right.

Aaron Norris [00:20:58] So sexy to run for political office. I'm the austerity candidate.

Sean O'Toole [00:21:04] Which is why all democracies fail. Right. Because we don't vote for doing the right thing. We vote for doing something. And, you know, so. So we're gonna face that at some point in time. So austerity is really hard. Especially when you've already got this huge deflationary first, not provide some sort of support into that, it's super hard. Not suggesting it's what we should be doing at all. I don't think it's a bad thing to do a little bit of the good times, balanced the budget, get things right, kind of even build some reserves. State governments, you actually have to have a balanced budget. You can't print money. So if you're in a state government listening like the next time, there's a big boom. Right. Don't blame Prop 13 when it goes bust. Understand you squandered all the money in between. OK. Awkward. So austerity, the next one is, you know, debt restructuring and defaults. Right. So you have this major downturn and you let people restructure their debt. You let them default or you just have defaults and you kind of let that go. You pull a lot of debt out of the economy that allows people to start spending again because they don't have to pay repay debt. Right. It gets the economy going again. And you can get things done. So the tough one there is. You're really picking winners and losers. Holders of debt, which tend to be fairly powerful folks like are losing and losing bad debt. You know, borrowers, you know, are kind of getting a free pass. They may lose their asset or whatever. But, you know, perhaps they're getting a free pass. Perhaps they're, you know, they get some sort of penalty. But still, it's ugly. Tough, tough thing and picks winners and losers and can create a lot of strife. So not a great one. The next one is wealth redistribution. So you basically tax those that have money and give it to those that don't.

Aaron Norris [00:23:24] Already talking a lot about that as we're going into the election season. I expect we'll see a lot of that.

Sean O'Toole [00:23:32] This is going to happen as part of this at the state and local level. Yeah, I expected at the federal level. But, you know, I think California went from like a four billion dollar surplus to fifty four billion dollar projected deficit. The state of Nevada is talking about adding an income tax. You know, you've got a lot of stuff going on there. There's a lot of folks who, a lot of states, a lot of local governments who aren't going to be able float those holes without picking somebody's pocket. So we're going to see, well, the primary form of wealth distribution is taxes, and we're going to see some of that as a result here for sure. The final one. Number four is to print money and devalue it. Right. Pump money into the economy. And that's what we're doing, right? A lot of it. And everybody's agreed, right. The Fed said we have to do it right. The Democrats have said we have to do it. The Republicans there's been zero debate about. That's the one out of the four that we choose. All right. We're going to just print money like now and go for it.

Aaron Norris [00:24:47] How many T's? That's the only thing we're fighting about. So I know we're talking Trump just came out this week, said he's looking at another trillion and they're back later in July. So, yeah, for sure. It's coming.

Sean O'Toole [00:24:58] And you know what? We're so fortunate and this may sound terrible. We're so fortunate that this crisis that hit us is a worldwide crisis because guess what? Every central bank, every government is doing the same thing. So it's not going to put us on a significantly worse footing. Right. Everybody's doing this for the most part. Right. Especially folks that have their own currency. Right. You know. Anyways, what's happening to countries that don't in this kind of a situation where, you know, we print lots of money and they still have to pay back. It's not good. So in any case, that's clearly what we're going to do. And, you know, and that's where we're at.

Aaron Norris [00:25:48] All right. Well, you print all that money. I mean, obviously there's a big conversation about inflation not impacting prices. If you own real estate, you're in the real estate community that gets you excited because real estate is a basket of commodities and prices go up. I mean, is that, are we looking at inflation?

Sean O'Toole [00:26:06] Yes. So when you have this much massive stimulus, you're going to have massive inflation, right? Which basically is the value of the dollar goes down. Two interesting things here. We already have massive deflation from Covid, right? Yes. Add this inflation and what you did, hopefully, if we do it right, is reflation. So not inflation. We just kicking things back to where they were. We reflate the economy. There'll be a dip in between. But if they do it right, that dip will be shorter and less severe. Right. That's reflation. So instead of having massive inflation on the other side of this, if they get it wrong and do too much, we will. If they do it wrong or do too little, we still have devaluation. Right? And if they get it right, we reflate. We get back to where we were.

Aaron Norris [00:27:07] This is going to be so interesting to watch. We talk last show about urban centers, lots of articles coming about winners and losers when it comes to people rethinking their urban existence. I was reading an article I shared with PropertyRadar today to all the employees about New York and specifically people leaving in mass, how that's going to impact commercial real estate prices. And then just knowing because we're in Florida and watching prices and demand. And it's just going to be really interesting to see how people handle this and how long this lasts. Because, I mean, if this if we do not control the pandemic, I don't think people have a choice. But like, I'm uncomfortable here. This is not sustainable. At some point, if the government doesn't continue writing those checks. So right now, we're in July. The government is looking at all the programs. Do we extend the pandemic unemployment? Six hundred dollars per week. It ends at the end of this month. Holy cow. What happens if in August comes and this continues to be really bad and there's no end in sight for controlling it?

Sean O'Toole [00:28:15] So let's be clear, Republicans, Fed, Democrats, they'll continue to provide stimulus for as long as necessary. There's no question in my mind about that. So, you know, they're going to keep trying to hit reflation. You know, there's three options just aren't really viable options, especially for a politician. Right. So as a politician, it's really the only thing you're gonna do. And the bottom line part is the government's not very good at this. So you take something like the six hundred dollar a week extra unemployment. Right. It's awesome in terms of if you look at it, you know, kind of a wage equivalency. Right. It's been great about keeping money in the economy and all the rest. A really good successful program from that side. But now you're a small business. You're allowed to reopen. You need people to come work for you to reopen. And your people are saying you're paying me fifteen bucks an hour and I'm getting fifteen bucks an hour on top of regular unemployment to stay home and watch The Simpsons. Right. I'm not coming back to work, you know. And then the employer goes, well, if I tell the unemployment office that I offered you a job, they're going to cut you off of unemployment. And then the employer goes if you do that. Right. Like, I'm in a bad mouth you, and I have, you know, it left it's leaving employers in an impossible situation.

Aaron Norris [00:29:57] Right.

Sean O'Toole [00:29:58] So the government just is not very good at this. Right. They're picking winners and losers like the intense grades. Right. So the outcomes are great. But some of the outcomes are bad. Same thing with PPP. Right. You've got companies that it's been absolutely wonderful for. They were able to keep all their employees on, all the rest. You've got others that you know, they can't bring people back because they're still shut down.

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