Amazon and Disney See Ad Dollars

Summary

Motley Fool Money: Amazon and Disney See Ad Dollars
Release Date: January 10, 2025
Hosts: Dylan Lewis, Ricky Mulvey, Mary Long

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1. Introduction and Big Macro Outlook

Motley Fool Money kicks off the episode with Dylan Lewis navigating the macroeconomic landscape for 2025. The hosts, including senior analyst Jason Moser and Ron Gross, delve into the implications of the Federal Reserve's latest meeting minutes from December, shedding light on interest rate policies and inflation concerns.

Key Discussions:

• Federal Reserve's Stance: Ron Gross highlights the Fed's indication that interest rate cuts are unlikely before mid-2025 due to persistent inflation and uncertain impacts of recent trade and immigration policies.
• Job Market Resilience: A robust jobs report revealed 256,000 jobs created with unemployment ticking down to 4.1%, contrary to market expectations for a slowdown.

Notable Quotes:

• Ron Gross [01:07]: “It's a little dicey, Dylan. I think what the weak stock market has been telling us lately is that we still actually may have an inflation problem after all of the soft landing talk.”
• Jason Moser [03:21]: “This is about interest rates, it's about inflation. We’re in this sort of twilight zone regarding interest rates right now… it’s volatile time.”

2. Online Retail and Holiday Spending

The hosts transition to discussing Adobe's report on online holiday spending, which saw $241 billion in online sales between November 1 and December 31, marking an 8.7% increase from the previous year.

Key Highlights:

• Mobile Dominance: 54.5% of total spend came from mobile devices.
• Buy Now, Pay Later (BNPL): BNPL services grew to over $18 billion, up from $16.6 billion.
• Earnings Implications: Increased discounting could impact retail margins in the upcoming earnings season.

Notable Quotes:

• Jason Moser [04:35]: “We saw mobile gain share representing 54.5% of total spend coming from mobile devices.”
• Ron Gross [05:46]: “Let’s keep an eye on credit card debt and savings balances… Let’s see how consumers funded those expenditures.”

3. Delta Airlines' Strong Earnings

Delta Airlines presented a stellar earnings report, surprising the market with a 10% share increase despite a weak Friday.

Key Points:

• Revenue Growth: Up 5.7%, surpassing guidance.
• Cost Controls: Operating margins improved from 9% to 12%.
• Future Outlook: CEO Ed Bastian anticipates continued growth in corporate bookings and international markets.

Notable Quotes:

• Ron Gross [07:42]: “Revenue growth up 5.7%… That’s a nice beat there.”
• Ron Gross [09:48]: “So things look like they’re going pretty well for Delta, only trading nine times forward earnings. So not necessarily expensive.”

4. Advertising Landscape: Disney and Amazon

Disney's Ad-Supported Tiers

Disney reported that 157 million users globally have opted for their ad-supported tiers across Disney, Hulu, and ESPN, echoing a return to traditional ad-supported models.

Insights:

• Market Shift: Transitioning back to ad-reliant models to offer more affordable subscription options.
• Impact on Revenue: Average revenue per user decreased due to the popularity of cheaper, ad-supported plans.
• Strategic Moves: Acquisition of Fubo TV and cancellation of Venue Sports indicate a need for clearer streaming strategies.

Notable Quotes:

• Jason Moser [10:36]: “Advertising continues to rule today… they want to push more of those ad subscriptions because over the long haul they can be more lucrative.”
• Ron Gross [12:24]: “I think there’s a lot of things going on here… Disney looks interesting to me as a value investment.”

Amazon's New Retail Ad Services

Amazon announced its new retail ad service, allowing U.S. retailers to customize ad placements on their sites, mirroring Google's offerings for web publishers.

Key Points:

• Strategic Expansion: Enhancing Amazon's advertising capabilities to complement its retail and cloud businesses.
• Data Utilization: Leveraging ad data to improve recommendation systems and overall user experience.
• Market Position: Amazon's ad revenue has surged to over $14 billion, making it a formidable player alongside Alphabet and Meta.

Notable Quotes:

• Jason Moser [14:01]: “This is the Google-ification of Amazon… become a little bit more of what companies like Google historically have been.”
• Ron Gross [15:02]: “That third division now could start to creep up on maybe even the cloud business in a year or two.”

5. Meta’s Transition to Community Notes

Mark Zuckerberg announced that Facebook and Instagram will replace professional fact-checkers with crowdsourced community notes to manage content moderation.

Implications:

• User Experience: Aims to create a more transparent and community-driven approach to content verification.
• Advertiser Impact: Potential risks of backlash and uncertainty in content moderation could affect advertiser confidence.
• Financial Perspective: Ron Gross maintains a neutral stance, holding Meta shares while acknowledging potential risks.

Notable Quotes:

• Jason Moser [17:12]: “It points to actual source material with the facts. It’s a heck of a lot cheaper and then that it’s sourced from the community itself.”
• Ron Gross [18:11]: “There’s a lot of potential backlash that could come from this, which is a risk that I think investors have to keep in mind.”

6. Real Estate Outlook for 2025

Dave Meyer from BiggerPockets discusses the real estate market's transition from a recession to an expansion phase. Despite current challenges with affordability and high mortgage rates, signs point towards recovery in 2025.

Key Insights:

• Affordability Crisis: High home prices and mortgage rates have significantly reduced demand and supply in the market.
• Market Dynamics: Increased inventory and transaction volumes signal the end of the real estate recession.
• Investment Advice: Meyer recommends a long-term investment approach, emphasizing the benefits of cash flow, tax advantages, and property value appreciation.

Notable Quotes:

• Dave Meyer [21:01]: “Affordability in the housing market is just a measure of how easily the average American can afford the average priced home.”
• Dave Meyer [26:55]: “I don’t advise waiting because you might be waiting for a long time… real estate has historically been a very good hedge against inflation.”

7. Radar Stocks: Paylocity and Gannett

Jason Moser's Radar Stock: Paylocity (PCTY)

Jason highlights Paylocity, a cloud-based human capital management and payroll software provider. The company is leveraging AI to enhance its services, including schedule optimization and employee engagement.

Key Points:

• Financial Health: Cash flow positive with a growing net margin exceeding 15%.
• Market Position: Targets smaller businesses looking for cost-effective HR solutions.
• Future Prospects: Strong potential for growth through AI-driven innovations.

Notable Quotes:

• Jason Moser [35:27]: “Paylocity is a compelling business. I’m enjoying digging into it.”
• Ron Gross [36:55]: “The founder and director Steve Sarawitz still owns about 16% of the company. So clearly he sees good days ahead as well.”

Ron Gross's Radar Stock: Gannett (GCI)

Ron focuses on Gannett, a media company transitioning from traditional newspaper revenue to a content-driven model. Despite declining traditional ad revenues, Gannett is investing in diversified content areas like sports coverage and entertainment.

Key Insights:

• Strategic Shift: Moving towards high-margin content segments to compensate for declining newspaper revenues.
• Market Challenges: The internet's impact continues to challenge traditional media business models.
• Investment Perspective: Positioned as a value investment with potential for growth through new content strategies.

Notable Quotes:

• Ron Gross [37:32]: “Legacy newspaper business is a tough business in this environment… Gannett is shifting more into a content business.”
• Ron Gross [38:55]: “It could be a real value investment here from our friends over at Value Hunters.”

8. Conclusion and Closing Remarks

Dylan Lewis wraps up the episode by encouraging listeners to explore real estate resources on BiggerPockets and reminding them to consider the discussed radar stocks. The hosts emphasize the importance of strategic investment decisions amidst a volatile market landscape.

Final Thoughts:

• Long-Term Perspective: Whether in stocks or real estate, maintaining a long-term investment horizon is crucial.
• Market Adaptation: Companies like Disney, Amazon, and Gannett are adapting to changing market dynamics through strategic shifts.
• Investment Opportunities: Paylocity and Gannett present potential value investment opportunities amidst evolving economic conditions.

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This detailed summary captures the essence of the January 10, 2025 episode of Motley Fool Money, providing insights into macroeconomic trends, advertising strategies of major corporations, real estate market outlook, and noteworthy investment opportunities.

Transcript

[Unknown Speaker]

FOREIGN.

[Dylan Lewis]

We'Re checking in on the big macro and the state of real estate. This week's Motley Fool Money radio show starts now.

[Dave Meyer]

Everybody needs money.

[Ron Gross]

That's why they call it money.

[Unknown Speaker]

The best things in life are free but you can give them to the present.

[Dylan Lewis]

Be the money from cool global headquarters.

[Jason Moser]

This is Motley Fool Money.

[Dylan Lewis]

It's the Motley Fool Money radio show. I'm Dylan Lewis. Joining me over the airwaves, Motley fool senior analyst Jason Moser and Ron Gross. Fools, as always, great to have you here. Hey, and Dylan, I'm doing great. We're putting a bow on the holiday shopping season. We're going to be checking in on what to expect from the real estate market in 2025. And of course, you guys are bringing your stocks on your radar later on in the show. But first up, our first look at the big macro for 2025. This week we got the minutes from the Fed's latest meeting in December, adding a little bit of fuel to FedWatch 2025. Ron, what is the outlook right now?

[Ron Gross]

It's a little dicey, Dylan. I think what the weak stock market has been telling us lately is that we still actually may have an inflation problem after all of the soft landing talk. Friday's job report appears to perhaps confirm that. And I think on Friday, quite frankly, the market was also reacting to the ongoing wildfire tragedies in California with both human and economic impacts being considered. And certainly our hearts go out to all involved there. It really is a tragedy. I'm going to circle back to Friday's job report in a minute, but let me just provide some general context first. Earlier in the week, investors digested the minutes from the Fed's December meeting where officials basically said that the pace of interest rate cuts would slow this year as a result of what we see as lingering inflation and also the impact of some of Trump's trade and immigration policies, which we don't really know how they're gonna play out yet and what impacts they're gonna have. So that scenario has all but done away with the hope that the Fed will cut interest rates again before the middle of the year. And of course, the markets do not like that. Treasury 10 year treasuries jumped to 4.7%, highest since April. And we have a risk that the economy is actually growing too quickly and the markets don't like that. Now on Friday, back to the jobs report. The market was hoping for a weak jobs report to say things are finally calming down. We got the opposite with 256,000 jobs created much more than expected with unemployment ticking down to 4.1%. Wages grew slightly less than expected, so bad for workers but somewhat good for the inflation story. And the 10 year treasury yield jumped again to 4.77%. That's the highest since 2023. So the markets are shaky, inflation seems to be persisting, job market is strong and interest rates don't look like they're coming down from the Fed anytime soon.

[Dylan Lewis]

So Ron, it sounds like you are pausing that appointment for the soft landing tattoo that you had been planning all of 2024.

[Ron Gross]

I'm optimistic, I remain optimistic about the economy. I think we're going to be just fine.

[Dylan Lewis]

Jason, Ron just gave us a great rundown. Anything that you want to zoom into there?

[Jason Moser]

Well you can be forgiven if you're new to the investing world and you would think that a good jobs report would bode well for strong results and a positive outlook. Everybody's glass half full and lo and behold we get this market sell off. Ron, really I think hit the nail on the head there. This is about interest rates, it's about inflation. You would think a report like this would be cheer because it portends economic growth, growing corporate profits. But this one kind of comes back to what are they going to do about interest rates. We're in this sort of twilight zone regarding interest rates right now and as Ron mentioned with the Fed, it seems like they are all on board with feeling like inflation hasn't quite fully been defeated yet. So time will tell. But yeah, this is volatile time.

[Dylan Lewis]

All right. The Fed minutes not the only information from December that we're catching up on. We've also got the final tally for online retail activity for the holidays from our friends over at Adobe. The sticker figure 241 billion in online holiday spend between November 1 and December 31, up about 8% over 2020. Jason, did you do your part to help push the numbers higher this year?

[Jason Moser]

We did our part. It was a great holiday season. I hope everyone had a wonderful holiday season. Again, pointing to that strong economic growth thing, there were a lot of positive takeaways from this report like you mentioned there in regard to total online retail spend up 8.7% from a year ago. That's strong considering we've been talking a lot about the state of the consumer lately. I think very encouraging. We saw mobile gain share representing 54.5% of total spend coming from mobile devices. We gave it a hard time in the early days but buy now, pay later. It's establishing itself as another tool for consumers to use. BNPL had another good year. It represented just over $18 billion of total spend versus 16, $16.6 billion a year ago. Now, a point made in the report that will be worth following as earnings season starts to roll out here. There was stronger than expected discounting. So while we always pay attention to margins in these retail numbers, I think that'll be even more the case here this coming earnings season. We'll pay very close attention to what those margins look like.

[Ron Gross]

I think we should. Whenever we talk about a strong consumer, the first thing that comes to my mind is let's keep an eye on credit card debt and let's keep an eye on savings balances perhaps being draw because that will have repercussions down the road. I don't know where we'll shake at it on that yet, but they always go hand in hand. To me. I'm happy to see strong numbers, but let's see how consumers funded those expenditures.

[Dylan Lewis]

Looking through Adobe's report, one of the things that jumped out to me was they identify some of the hottest segments on some of the biggest shopping days. Looking at Black Friday in particular this year, makeup and the skincare category was an incredibly hot segment seller. Jason, I'm guessing that bodes well for a company like Alta.

[Jason Moser]

It does. We've talked about it a lot with Alta. It's a longtime wreck in the foolish universe. It's partly because that cosmetics and makeup market opportunity that's just such a resilient one. Even through difficult times, it still does. Okay, we saw Alta this week make a couple of announcements. They have a new CEO. Dave Kimball has stepped down and the former COO of the company, Kesia Steelman, is taking his place. She's been with the company for, I think about 10 years now. She was the COO since June 2021. She seems like a very natural fit to take that role. Then, along with that announcement, they also announced they raised their guidance for the holiday quarter just a little bit. Just stronger numbers based on stronger traffic and stronger spending. And that ties back with what you were just mentioning there in the report.

[Dylan Lewis]

We'll see how all that winds up flowing through to retail earnings over the next couple weeks and months. But if you are hungry for earnings results, don't worry. Delta is here to get the party started this earnings season. Ron, this was what looked like an incredibly strong report. The market reacted incredibly positively to it. Shares up 10% today on a very weak Friday.

[Ron Gross]

That's hard to do, but the report backs that up they reported their best ever annual revenue and CEO Ed Bastian sees the momentum carrying into 2025. He added, we're seeing growth in the corporate space, double digit growth in corporate bookings. We're seeing the international area showing very healthy growth. So that that portends well for the next year or so. Revenue growth up 5.7% on acceleration in demand. That was versus guidance of only 2 to 4%. So a nice beat there. They have a diversified revenue base as many airlines led by premium and loyalty. That was 57% of revenue in 2024. So that's been moving up nicely. All three international geographies improved sequentially and relative to expectations. So that's strong corporate sales up 10%. So you have really on the revenue side, things look quite strong. And now on the margin side, cost controls perhaps even better. Operating margins widened to 12% from 9 and they generated pre tax income of 1.6 billion, up 500 million from last year. And they raised guidance. They see $4 billion or more of free cash flow in 2025. Their investment grade debt. All three credit agencies now have them as investment grade. So they've been really focusing on the balance sheet. So things look like they're going pretty well for Delta, only trading nine times forward earnings. So not necessarily expensive. That is where airlines trade. But I certainly wouldn't call the stock expensive here.

[Dylan Lewis]

Ron, Delta is on the early side when it comes to reporting earnings and quarterly results. They are one of the better providers in the airline industry right now. Based on what you're seeing, how do you think it portends for some of the others that will report over the next couple of weeks?

[Ron Gross]

United was up on Friday in response. I think people are looking for good numbers from them as well. Southwest has really been struggling. Southwest at 20 times earnings because those earnings are so depressed right now versus somewhere like seven to nine for the rest of the industry. Let's keep an eye on Southwest and see if they can turn the corner.

[Dylan Lewis]

All right. Coming up after the break, Amazon's got its eyes on Alphabet's Cash Cow. Stay right here. You're listening to Motley Fool Money. Welcome back to Motley fool money. I'm Dylan Lewis, here on air with Jason Moser and Ron Gross. We're going to spend a little time surveying the advertising landscape today because we have a few stories that are getting at some of the different shifting dynamics there. I want to kick us off with Disney, the House of Mouse giving its first look at total ad supported users this week across Disney, Hulu and ESPN. 157 million users globally have opted for their ad supported tiers. Jason, meet the new boss. Same as the old boss. Advertising.

[Jason Moser]

Yeah, it all kind of has come full circle, hasn't it Dylan? I mean, we're basically back to where we started decades plus ago with just watching TV with commercials. I mean, granted it's a little bit more user friendly with the Internet, TV obviously and things that are more on demand. But what we've seen here through and through is that advertising continues to rule today. These companies, Disney and others, they've just done a very good job of creating value. They're saying, hey, listen, if you don't want to pay for an ad free subscription, well, we've got this tier for you that's going to have some ads in it. It's going to be a cheaper tier. Honestly, they want to push more of those ad subscriptions because over the longer haul they can be more lucrative. This made me think immediately of Netflix with those numbers that Disney reported. Netflix ad supported tier that now reaches 70 million users around the globe. That's versus 40 million they reported in May and I think like 22 million at the beginning of the year. So it's not just Disney that's witnessed a lot of this fantastic growth. Right? I mean, Netflix and others are feeling the same.

[Dylan Lewis]

It's interesting to hear you mention the upside there because if we rewind to Disney's last earnings call, management noted that the average revenue per user for their Disney subscribers actually went down. That was because a lot of people were opting for this ad supported plan and those were a little bit less lucrative for them right now. Ron, when you look at this, we have seen plenty of times where businesses have had to pivot a little bit and it's done some weird things to some of their core metrics. Is this one of those things that you're saying, okay, we're willing to stomach what might be some bumpiness in a core metric here because we think the long term opportunity is better for Disney's monetization.

[Ron Gross]

Yep, I think, I think you nailed it. I think that's basically the strategy. I think we're seeing some streaming fatigue. I think the numbers bear that out. Consumers in general just have too many streaming services and they're too expensive. So they're looking to offload some of them, they're looking to pay less for others. Streamers have to adapt to that. I think we're seeing Disney do that. As far as the stock goes, don't sleep on the stock. Only 20 times forward earnings for Company like Disney, which granted, has struggled really since the pandemic to get his act together. But as far as maybe a value investment, dare I say Disney looks interesting to me.

[Dylan Lewis]

I was going to say Disney largely unmoved this week by this news. I think it was actually down about 2%. And I don't know if that's because the market is not all that interested in Disney's streaming ambitions or because they also announced that they were buying Fubo TV this week, then announced that they were not going to be launching Venue Sports with some of the partners for that joint venture. Do we feel like we need a little bit of strategic direction on the streaming side from Disney, Ron?

[Ron Gross]

Communication is key. Let's get some good strategic communication. I think they've got some strategies there, but we just need a clear guidance on them.

[Dylan Lewis]

All right, sticking with the ad theme, this week Amazon announced its retail ad service product which will allow retailers in the US to show ads on their sites. Users will be able to customize the design, also the placement and ads that are shown, and use some of the ad measuring tools and analytics that Amazon makes available. Jason, summarizing that, it sounds an awful lot like what Google offers to web publishers for ad tools.

[Jason Moser]

Yeah. Well, this is, this is the Google Ification of Amazon, right? I mean, they are becoming a little bit more of what, of what companies like Google historically have been. And that's because they recognize the opportunity there in the advertising space. I mean, it's not just streaming, right? I mean, it's just advertising in general. And I think that this is something that can provide Amazon with a bit of a one, two punch, so to speak, in the ad space because not only do they make money from selling the ad space, but it's going to provide, as you mentioned, it's going to provide Amazon with valuable data that it's going to be able to use to bolster ad predictions and recommendation technology, which makes its retail business, which is the core of the business, ultimately even stronger. Just a lot of different ways that Amazon can win from this. It wasn't that long ago we were just looking at advertising as an afterthought. With Amazon, ad revenue in the latest quarter came in just over $14 billion. It's third to Alphabet and Meta. It's become a major player in this space in a short amount of time, it feels like.

[Ron Gross]

Yet that's their third best revenue stream at 61 billion for the online stores, 27 billion for the cloud computing. Only in quotes, $14 billion for the ad revenue business. This could Be a nice bump there. Something that I think people were wondering when this would happen. And here we are. That third division now could start to creep up on maybe even the cloud business in a year or two.

[Jason Moser]

Well, yeah, I think that's a lot of investors probably have looked at Amazon over the last couple of years or so and said this is a business that's extracted so much value from its retail operations and its Amazon Web Services. And is this a stock that's really worth owning today, given how large the company is? It's a fair question. But I think when you look under the hood a little bit and you see the opportunities that still exist there, not only on retail, not only on Amazon Web Services, but obviously now in advertising and how all three of those businesses can complement one another so powerfully, as an Amazon shareholder myself, I have zero intentions on unloading that stock anytime soon.

[Dylan Lewis]

I'm with you on all the strategic vision here. I think for me it's nice because to me it shows that they are getting levers outside of just bringing more ads onto the core Amazon E commerce experience, which I think as a user, as a buyer, as a shopper, I have noticed the search results have gotten deprecated a little bit recently.

[Ron Gross]

Ron, it's not a great experience some days searching for whatever you're searching for, but it's still worth my prime membership year after year after year.

[Dylan Lewis]

That quick shipping, it's going to get you all right. Rounding us out on advertising news, in an address this week, CEO Mark Zuckerberg announced that Facebook and Instagram will stop its use of fact checkers and will replace them with crowdsourced community notes, similar to how moderation is currently handled on X. Zuckerberg essentially saying the guidelines were meant to create platforms that were more inclusive and they have gotten complicated and overly restrictive, preventing free speech, filtering out activity that maybe shouldn't be suppressed. Jason, is this a user friendly move? Is this an advertiser friendly move? Is it both? Is it neither?

[Jason Moser]

I think it's something that ultimately can serve all parties well. Right? I mean, I think I'd like to believe he's making this decision because of what he said and the fact that there is some proof of concept out there that the Community Notes way of things can actually work quite well. If you look at X as just an example formerly Twitter, I know that that's a platform that elicits strong opinions and that's understandable. But they've clearly proven that the Community Notes is a promising way of managing information that flows through the platform. It is more transparent. It points to actual source material with the facts. It's a heck of a lot cheaper and then that it's sourced from the community itself. The odds are that they want this to be a thriving community of accurate information to begin with. So, I mean, there are a lot of opportunities to capitalize on there. It's not to say it's a perfect way, but it certainly has been a very effective way in my experience as a user. So I'll be interested to see what his feedback is over time on this.

[Ron Gross]

I have been a long term owner of Meta Facebook and I don't think I'm selling anytime soon. 25 times earnings seems fair to me for this business. There's a lot of things going on here though that I need to digest and I need to kind of shake, see how it shakes out. I think the business is fine, but there's a lot of potential backlash that could come from this, which is a risk that I think investors have to keep in mind.

[Dylan Lewis]

Yeah, we know the X side when it comes to users. We don't know what it means in terms of financials. We don't get access to what's going on quarterly over at X. We'll see what happens. All right, Jason, Ron, we'll see you guys a little bit later in the show. Up next, we're going to get the download on the state of real estate for 2025 with bigger pockets. Dave Meyer, stay right here. You're listening to Motley Fool Money.

[Unknown Speaker]

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[Dylan Lewis]

Welcome back to Motley fool money. I'm Dylan Lewis. We love talking stocks here at the Motley fool, but we know there are plenty of places that you can put cash to work, including real estate. When we want to talk about buildings and homes, we turn over to our friends at BiggerPockets. This week, my colleague Matt Argersinger caught up with Dave Meyer. He's the head of real estate investing over there. Matt and Dave talk through Dave's annual look at the state of the real estate market report and why the hottest markets might not be the areas with huge population increases in 2025.

[Unknown Speaker]

Dave, in the report, you describe the state of real estate investing as transitionary. I'd love to know what you mean by that. And maybe the better way to put it is what is the real estate market transitioning from and maybe what is it transitioning to?

[Dave Meyer]

I believe that real estate works in cycles similar to other markets. They may not be as obvious as stock market cycles or broader economic cycles, but you do still see the traditional phases of a business cycle in real estate, where there's an expansion, there's a peak, there's a quote, unquote recession or a reversal, there's a trout and then it starts growing again. And I actually believe we are coming to in 2025. I don't know if it's today as of a recording or five or six months from now, but I think we're coming to the end of the last quote, unquote real estate recession. And we can talk about what's characterized that. But I do think we're entering a new expansion era for single family real estate, particularly in terms of sales, volume and inventory. And that is a real key thing here because when I say that the real estate market's been in somewhat of recession, it's because no one's buying houses right now. We've seen the number of transactions drop 50% since 2022. And although prices are probably in my opinion, going to remain somewhat flat for the next year, I do think we're going to start to see some health restored in the, in the real estate market in terms of more transactions happening, more homes being listed for sale, more people moving a little bit and unlocking some of the just the gridlock, frankly, that we've been in, in this industry for two or three years now.

[Unknown Speaker]

Yeah, you mentioned the, the home transactions and one of the charts you have in the report is, you know, shows existing home sales. And it's amazing to see that right now we are at the Lowest annualized volume of sales since the global financial crisis, since kind of right after the major, the last major recession we had. What is the chief culprit of the sluggishness in your view?

[Dave Meyer]

For me, almost everything. You'll probably get bored of me saying this in our conversation, but for me, almost everything in the housing market right now comes down to affordability, or the lack thereof. Affordability in the housing market is just a measure of how easily the average American can afford the average priced home. And that's made up of home prices, people's wages and mortgage rates. And just in the last three years, we've seen affordability evaporate as prices continue to go up and mortgage rates have skyrocketed. As pretty much everyone knows. Now, this lack of affordability has dual impacts on the market. The obvious one is a reduction of demand. I think that one makes sense to most people that, hey, things are getting more expensive, I don't want to, or not that you even don't want to buy a home, but you can't afford to buy a home anymore. The other thing that's happened though is that low affordability, it's kind of unique to the housing market, reduces supply as well. And that's because in the housing market, nearly 80% of people who sell a home go on to buy one. And so when you have these rough buying conditions like we have today, it stops people from selling as well. And you know, we can go back to Econ101 and draw our little supply and demand charts, but when you see supply go down and demand go down at the same time, volume or quantity in a marketplace declines. And it's just kind of a textbook example of that going on.

[Unknown Speaker]

So yeah, you mentioned the mortgage rate skyrocketing, which is just interesting because we know we've been on a Fed easing cycle since the fall and we still think we're on one. We're not exactly sure as we get into the.

[Dave Meyer]

Yeah, we'll see.

[Unknown Speaker]

But can we have a recovery in existing home sales? Can this market get unstuck? If mortgage rates remain where they are, which is close to 7% right now.

[Dave Meyer]

I think it's going to be very slow. And that is sort of my hypothesis for the, the cycle changing right now is that even if rates come down, I do think it's still going to be slow. Either way, in real estate we see behavior, especially for sellers, driven by two things. One is opportunity. You know, if there's good opportunities to buy, people trade up or even trade down or you know, Move to different places, look for new opportunities. That's one thing. And the second thing is just necessity. People change jobs or you not need to move for your kids school or there's death or there's divorce and those things don't really go away. That basically sort of sets the floor for volume in the housing market. And the hypothesis, and we're starting to see this bear out in the data, is that even with higher interest rates, people have sort of been able to defer some of those life changes for a little while. But eventually people get used to mortgage rates, they need to move, they want to be closer to family, they want to be in a different school district and they just start getting used to it. And we're starting to see that, you know, inventory has likely bottomed. It's starting to increase right now. And we're starting to see transaction volume just tick up a little bit. And that's even despite, as you said, mortgage rates have gone up since the Fed started cutting rates. And so if the Fed cuts even rates even more, if rates come down, mortgage rates start to come down for some of the external reasons outside of the Fed, I think that will just add a little bit of fuel to the recovery.

[Unknown Speaker]

So if you're, if you are a real estate investor. So yeah, people, you know, people, obviously life changes, moves have to happen. But if you're looking at it from an investing lens, should I wait for rates to come down? I mean, you know, I know that you like the Fed. We don't know what the Fed's going to do, but it seems like they've telegraphed hopefully at least two more cuts this year. Yeah, not certain, of course, but should I wait then for that to take place and for more, you know, for that to translate into lower mortgage rates or what's, what's the advice there?

[Dave Meyer]

That is the million dollar question. And my advice is not to wait. I'm not waiting. It's January 9th today. I've already made my first offer on a property this year. I'm waiting to hear about today. So we'll hear. But here's two reasons why. First is I am much less optimistic than I think most people are about mortgage rates coming down this year. And I agree the Fed probably will cut rates one or two more times. But as we've seen, the federal funds rate and mortgage rates are correlated, but not perfectly correlated. Mortgage rates are much more closely tied to the yield on 10 year treasuries. They are, you know, that's almost a perfect correlation if you look at the two charts, they just move basically in lockstep. And what we've seen since the election, sort of the run up to the election, when the market started to feel like Trump was going to win. And since Trump's victory, there is now a bigger fear, it seems, in the bond market, you probably know this, of inflation than there was of recession. And so that switch in market sentiment from fear of recession to fear of inflation sort of drives yields up and has kept mortgage rates up. And I think they're going to stay up until we get a better line of sight on which economic policies Trump has campaigned on that he actually will implement and what the shape of those policies actually start to look like. Because if you start implementing 20% tariffs, which he said across the board, that's probably going to be inflationary and keep yields up really high. If he cuts taxes, that could provide a huge boost to the economy, but it also could be inflationary. And so I believe that we'll get some clarity about that, but not really. We might not be in the first, and that's not going to be the first week of his, you know, his term. And so I think it's going to take a little while for the market to feel comfortable about the direction of economic policy. And until then, they're probably going to, you know, yields are probably going to stay a bit higher and so will mortgage rates. So I don't advise waiting because you might be waiting for a long time. The second reason is that home prices are expected to grow this year. I sort of said that they would be flat. That's in real terms, I think in nominal, non inflation adjusted terms, they probably will go up a little bit. And so by buying sooner, you first start to pay down your mortgage, which allows you to build principal and equity. And second, you get sort of the upside potential of any, any appreciation. And real estate has historically been a very good hedge against inflation. And so if you're fearful of inflation, then real estate could be a good avenue for you to park money to at least keep pace with inflation in terms of home prices. And then you enjoy a lot of other benefits as a real estate investor beyond just home values.

[Unknown Speaker]

Right, let's, let's, let's stay on the, the, the price and value a little bit. One of the things I, that was also interesting from the report is where you're actually seeing year over year price increases. And recently I think it's flown in the face of what a lot of people expected, which is it's really happening on the coastal and sort of your legacy markets, California, your Northeast, your Midwest. And we know in the years before the pandemic and the immediate years after the pandemic, a lot of that demand was going to more Sunbelt states, Texas, Arizona, Gulf states. That's kind of shifted, even though that's where we know the demographic tailwinds are. Why do you think this shift is happening and is it simply there was too much demand and so therefore too much construction, too much building in places like Austin, Texas, and now we have a kind of a supply overhang.

[Dave Meyer]

Yeah, that, that is the, I think the majority of it is that a lot of the markets in the Sunbelt, some of them in the Mountain west, have become victims of their own success in a way. When you see, you know, back in 2020, 2021, we saw this huge migration shift and demographic shift to the south, to the south in general, the Sun Belt. And that drives up home prices and developers love that. And so they all started building both single family homes and particularly multifamily apartment buildings. And with multifamily, it takes a few years for those things to be built. And so they were getting permitted and funded through 2022. And they're still coming online right now. We actually, you can see it, it's pretty striking if you look at the data, the number of deliveries, which is just an industry term for how many units are finished and put on the market for lease or for sale. It's at a 50 year high right now and then it's going to last through the first half of 2025 and then it's basically going to stop. The pendulum has swung back in the other direction. And so I do think this year will, will be a rough year in terms of pricing for Texas and Florida. And by rough, I don't mean like we're not talking financial crisis declines or, you know, 2 or 3%. You know, it's not going to be a great year for them. Whereas these markets that have sort of been more, it's sort of a tortoise in the hair thing, you know, slow and steady. Midwest markets, New York markets, they. We didn't see this huge boom in construction, but there's still demand in those places and that's why prices have gone up there. I expect Midwest and New York, Northeast, those prices to moderate a little bit this year. They've been up pretty high, but I still think they'll continue to grow, particularly in nominal terms.

[Unknown Speaker]

All right, well, I think let's leave it at this. Besides, of course, reading the report, besides joining bigger Pockets, which our listeners should absolutely do. What is the best advice that you can give an investor who is, you know, looking to get more active in physical real estate in 2025? You've mentioned a few things, but is there anything you can leave maybe our listeners, someone who's saying, you know, hey, I think this might be the year I want to buy my first rental property or my first, maybe my first multifamily property duplex or something like that. What's kind of your advice?

[Dave Meyer]

Real estate is a long game. It's I, I know at Motley, you guys often talk a lot about long term investing and real estate is sort of like the same thing. It's, you know, I personally buy deals for 10 years from now, for 15 years from now. I try and find good assets in good neighborhoods that are probably going to keep growing. We're in a weird economic time. Everyone knows this. Like no one knows for certain what's going to happen in the next year or two. So I really recommend people sort of look beyond that because just like in the stock market, if prices go down a little bit, if they're a little flat in the next year or two, it's just a paper loss. And in real estate, you're still getting the benefits of amortization. You get cash flow, you get amazing tax benefits. And I think a lot of people just get hung up on property values. It's super important, don't get me wrong. But you can still earn a 6, 7, 8% return even if property values are flat in real estate. And as you know, just go Google the median home price in the US if you look at over the time home prices do go up in the United States, they are going to keep going up. And so as long as you sort of have this long term mindset, I think finding deals is not as hard as it's made out to be right now.

[Unknown Speaker]

All right. Well, Dave Meyer, Biggerpockets, thanks so much for coming on. Molly, Full Money. Thanks for the comments for having me.

In the middle of our street, Our house.

[Dylan Lewis]

Listeners, you can catch Dave on Biggerpockets on the Market podcast and get a ton of great resources on real estate Investing [e-mail] Coming up after a quick break, Jason Moser and Ron Gross returned with a couple stocks on their radar this week. Stay right here. You're listening to Motley Fool Money.

[Unknown Speaker]

Our house in the middle of our street. Our house in the middle of a street.

[Dylan Lewis]

As always, people on the program may have interests in the stocks. They talk about and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Motley fool only picks products it would personally recommend to friends like you. I'm Dylan Lewis, joined again by Jason Moser and Ron Gross. And we're diving right into radar stocks this week, guys. Each week you bring a stock. Each week our man behind the glass, Rick Engdahl hits you with a question. Jason, you're up first this week. What are you looking at?

[Jason Moser]

Yeah, Dylan. So this week I'm looking at Paylocity Ticker is pcty. You know, next Wednesday we have an exciting AI event that will be available for all us Premium members. And part of my presentation is on Paylocity. So I've been digging a little bit more into this company for that event. Paylocity is a provider of cloud based human capital management and payroll software solutions here in the US So they offer products and services like payroll and tax services, human capital management, including things for like employee self service and talent management solutions for recruiting and onboarding. They benefit from actually participating at the lower end of the market. Smaller businesses that may not have access to those types of products or at least alternatives can be tough to find or more expensive. And you know, this is a business that's also leaning into our AI driven future with things like AI driven schedule optimization which helps meet the needs of employees, AI led learning recommendations to aid employee development and career paths, as well as AI powered recommendations built on generative AI to increase overall employee engagement. It's an interesting business. Cash flow positive. Even after stock based compensation, it's profitable. Net margin continues to grow hitting better than 15% over the last 12 months. I tell you, it's a compelling business. I'm enjoying digging into it.

[Dylan Lewis]

Rick, a question about Paylocity Ticker pcty.

[Rick Engdahl]

Well, you know I like to go to the website and learn a little bit about the company.

[Dylan Lewis]

Sure.

[Rick Engdahl]

I'm looking at the Paylocity difference here, which is our all in one solution combined with award winning service makes us the best partner to help your business. Now that doesn't sound a lot like a difference to me. So I'm wondering, does this company have a moat?

[Jason Moser]

Well, I think it's a very competitive industry to say the least. So I don't know about a moat, but I do like the fact, like I mentioned, they participate on that low run of the market where businesses are looking for more Cost effective solutions. And it's worth noting too, the founder and director Steve Sarawitz still owns about 16% of the company. So clearly he sees good days ahead as well.

[Dylan Lewis]

Ron, Jason is gazing to the future, riding the AI wave with his radar stock this week. Where are you going?

[Ron Gross]

Backwards. I'm taking a first look at Gannett thanks to my friends over at our Value Hunter service ticker symbol gci. It's so new to me that I don't know if it's called Gannett or Gannett.

[Dylan Lewis]

I heard Gannett. I've heard Gannett.

[Ron Gross]

Yeah, I think Gannett, a media company, most people would know it as the owner of USA Today, but they also own hundreds of regional properties like the Arizona Republic, Cincinnati Enquirer, Detroit Free Press and many, many more generate revenue primarily through the sale of subscriptions and advertising. Now the rub here is that it's widely believed that the legacy newspaper business is dying. And I think that's probably correct. Their revenue, for example, fell from 2.2 billion in 2020 to 1.3 billion in 2023 as readers and advertisers shifted online. But the good news is they are shifting as well. They're turning themselves more into a content business. Think things like games and puzzles, high school and college sports coverage, full time reporters hired to cover fan favorites like Beyonce and Taylor Swift. Much more content generated, much less. Not like the legacy newspaper business. That's actually a higher margin business. It looks like it could be an interesting company, a real value investment here from our friends over at Value Hunters.

[Dylan Lewis]

Ron, we know you're a Swiftie, so we knew Gannett was going to work its way in there. Rick, a question about Gannett Ticker gci.

[Rick Engdahl]

My friend David Gardner taught me to invest in the world that I want to see in the future. Is it a better world when all of these local newspapers are owned by a company like Gannett? Is that part of the problem? Is that part of why the press is dying is that they've all been consolidated like this?

[Ron Gross]

I think. Well, the Internet is probably the primary problem.

[Rick Engdahl]

I love primary problem, but not the only problem.

[Ron Gross]

I love the idea of small town newspapers as Warren Buffett has said in the past as well. But it's just a tough business in this environment.

[Dylan Lewis]

Rick, which one's going on your watch list this week?

[Rick Engdahl]

I want to be paid so I'm going to go with Paylock.

[Dylan Lewis]

Love it, Jason. Ron, thanks for bringing to Radar Stocks listeners. If you want to become a member of Stock Advisor ahead of the AI Summit and get that Wednesday day of content. You [e-mail] signup if you're listening to the podcast version of today's show. We'll drop that in the show notes as well. That's going to do it for this week's Motley Fool Money radio show. The show is mixed by Rick Engdahl. I'm Dylan Lewis. Thank you for listening. We'll see you next time.