BiggerPockets Real Estate Podcast Summary
Episode: J Scott: We’re Due for a Recession, But It Isn’t All Bad for Real Estate
Release Date: January 10, 2025
Host: Dave Meyer
Guest: Jay Scott

Introduction

In this episode of the BiggerPockets Real Estate Podcast, host Dave Meyer engages in an insightful conversation with Jay Scott, a seasoned real estate investor involved in over $60 million worth of transactions and co-author of several books with Meyer. The discussion centers around the looming possibility of a recession in 2025 and its multifaceted impact on the real estate market.

1. Mortgage Rates: Current Trends and Future Outlook

Understanding the Rise in Mortgage Rates

• July 00:00 - 04:12: Dave Meyer opens the discussion by highlighting the importance of understanding mortgage rates, especially as the new year begins. Jay Scott explains that despite the Federal Reserve's recent cuts to the federal funds rate, mortgage rates have paradoxically spiked, exceeding 7% at the end of December.

  Jay Scott [04:12]: "Mortgages rates are often influenced by what investors believe inflation's going to do over the next 10 years."

• Factors Influencing Mortgage Rates

  Jay elaborates that mortgage rates are primarily driven by the 10-year bond rates, which reflect investor expectations about long-term inflation. Due to growing fears that inflation may not steadily decline, bond yields—and consequently mortgage rates—have increased.

  Jay Scott [06:10]: "This fear over inflation is driving up the long-term bond rates, which in turn are pushing mortgage rates higher."

2. Impact of Potential Political Policies on Inflation and Mortgage Rates

Tariffs and Economic Policies

• July 06:34 - 11:01: Jay Scott discusses how impending political decisions, particularly those proposed by the incoming administration led by Trump, could influence inflation. Tariffs, as a form of taxation on imported goods, are highlighted as inherently inflationary because they increase the cost of goods for consumers.

  Jay Scott [10:45]: "Tariffs are inflationary...they are a tax that are paid by US companies when they import goods, and typically these costs are passed on to consumers."

Deportations and Labor Market

Jay also touches on the potential impact of mass deportations on key industries reliant on immigrant labor, such as agriculture and hospitality. A reduced labor force would necessitate higher wages, further fueling inflation.

Jay Scott [14:22]: "If we have mass deportations, industries will see a reduced labor force, leading to higher wages and increased inflation."

Federal Reserve Control

Another concern is the potential for increased political influence over the Federal Reserve, which could lead to lower interest rates contrary to economic needs, further exacerbating inflation.

Jay Scott [18:05]: "If Trump takes more control over the Fed and convinces them to lower rates when they shouldn't, it could drive further inflation."

3. Housing Affordability: Challenges and Prospects

Current State of Affordability

• July 17:38 - 22:12: The conversation shifts to housing affordability, noting that despite being near 40-year lows, the current market conditions—with mortgage rates around 7-8%—discourage both sellers and buyers. Sellers are reluctant to part with low-rate mortgages, while buyers find it financially untenable to purchase properties at these rates.

  Jay Scott [20:05]: "72% of mortgages were under 4%, and about 91% under 5%. Sellers don’t want to give up their low-rate mortgages, making it hard for new buyers to enter the market."

Potential Improvements in Affordability

Jay suggests that significant improvements in affordability would require a reduction in mortgage rates, which could stimulate increased transaction volumes and potentially lead to a modest decrease in housing prices through price discovery.

Jay Scott [19:30]: "If mortgage rates start to go down, we could see increased transaction volumes, which would likely push prices down a bit."

Impact of a Recession on Affordability

The possibility of a recession—triggered by high debt levels and government austerity measures—could further impact housing prices negatively as job losses and reduced wages decrease individuals' ability to afford mortgages.

Jay Scott [21:14]: "A recession could lead to more people being unable to pay their mortgages, thereby putting downward pressure on housing prices."

4. The Looming Recession: Causes and Implications

Debt Accumulation and Economic Cycles

• July 21:55 - 29:48: Jay Scott delves into the root causes of a potential recession, emphasizing the unsustainable increase in various debt forms—government, personal, and corporate. He explains that beyond certain debt thresholds, an economy is prone to entering a recession as the accumulated debt becomes unmanageable.

  Jay Scott [28:06]: "Debt levels have increased significantly, and at some point, it's unsustainable, leading to a recession."

Global Economic Influences

Jay also highlights global factors such as ongoing conflicts in the Middle East and economic instability in Europe and China as external pressures that could precipitate a recession in the US, given the interconnectedness of the global economy.

Jay Scott [33:43]: "Global economic instability, like the war in Ukraine and China's slowing economy, will impact the US and could trigger a recession."

Government Policy and Stimulus

He critiques the prolonged government stimulus since the Great Recession, likening it to keeping an unhealthy economy "on life support," which masks underlying economic deficiencies and delays the necessary correction through a recession.

Jay Scott [28:46]: "The stimulus has kept the economy moving forward despite underlying health issues, delaying a necessary recessionary correction."

5. Real Estate Investment Amid Economic Uncertainty

Resilience of Real Estate as an Investment

• July 37:52 - 40:37: Despite the economic uncertainties, Jay Scott remains optimistic about real estate as a robust investment. He argues that real estate has consistently appreciated over long periods and serves as an effective hedge against inflation.

  Jay Scott [37:52]: "Real estate has historically been the single best inflation hedge on the planet... as long as you invest conservatively, holding onto property for 5-10 years is beneficial."

Diversification and Stability

Dave Meyer concurs, noting that compared to other asset classes like the currently expensive stock market or volatile cryptocurrency, real estate offers greater stability. He emphasizes that with inflation risks high, real estate remains a safer and more predictable investment avenue.

Dave Meyer [39:13]: "Real estate offers more stability during uncertain times, and with inflation being a significant risk, it remains a solid investment choice."

Strategic Investment Practices

Both hosts highlight the importance of informed and strategic investment practices, such as understanding economic indicators and maintaining cash flow to avoid forced sales during downturns.

Jay Scott [24:34]: "Get good at following economic data and understanding how different parts of the economy interact to make informed investment decisions."

6. Conclusion and Final Thoughts

In wrapping up the episode, Jay Scott reiterates the importance of staying informed and adaptable in the face of evolving economic conditions. He underscores that while a recession poses challenges, real estate remains a resilient and valuable component of a diversified investment portfolio.

Jay Scott [40:37]: "As long as you believe the US will remain the top economic and military power, owning real estate is a wise investment."

Dave Meyer echoes this sentiment, acknowledging the inherent risks but affirming that the fundamentals of real estate investing—stability, inflation hedging, and long-term appreciation—remain unchanged.

Dave Meyer [39:48]: "Despite short-term uncertainties, the fundamentals of real estate investment are strong and offer a reliable path to wealth building."

Key Takeaways

• Mortgage Rates and Inflation: Mortgage rates are rising due to investor concerns about persistent inflation, influenced by potential political policies and global economic instability.

• Housing Affordability: Current low affordability is a barrier for both buyers and sellers, with improvements likely only if mortgage rates decrease or a recession adjusts the market.

• Recession Risks: High debt levels and global economic pressures increase the likelihood of a recession, which could depress housing prices and affect the real estate market.

• Real Estate as a Safe Investment: Despite economic uncertainties, real estate remains a robust investment due to its historical appreciation and effectiveness as an inflation hedge.

• Strategic Investing: Success in real estate during uncertain times requires staying informed, understanding economic indicators, and maintaining financial flexibility.

Notable Quotes:

• Jay Scott [04:12]: "Mortgage rates are often influenced by what investors believe inflation's going to do over the next 10 years."

• Jay Scott [10:45]: "Tariffs are inflationary...they are a tax that are paid by US companies when they import goods, and typically these costs are passed on to consumers."

• Jay Scott [20:05]: "72% of mortgages were under 4%, and about 91% under 5%. Sellers don’t want to give up their low-rate mortgages, making it hard for new buyers to enter the market."

• Jay Scott [28:06]: "Debt levels have increased significantly, and at some point, it's unsustainable, leading to a recession."

• Jay Scott [37:52]: "Real estate has historically been the single best inflation hedge on the planet... as long as you invest conservatively, holding onto property for 5-10 years is beneficial."

• Dave Meyer [39:48]: "Despite short-term uncertainties, the fundamentals of real estate investment are strong and offer a reliable path to wealth building."

This episode provides a comprehensive analysis of the current economic landscape and its implications for real estate investing. Jay Scott and Dave Meyer emphasize the importance of understanding macroeconomic trends, staying adaptable, and recognizing the enduring value of real estate as a cornerstone of wealth building.