Newscasts - Market Insight: Building confidence - is U.S. real estate set to gain?

VICI Properties

01/10/2024 18:18

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Source: 'Reuters - Business videos'

Description: September's bumper rate cut from the Federal Reserve is already
feeding through into a positive outlook for the struggling U.S. housing
market, according to Gerber Kawasaki President & CEO, Ross Gerber.
Short Link: https://refini.tv/3BlNSVm

Video Transcript:

Building confidence - is real estate set to gain? Welcome to Market Insight.
I'm David Pollard. Jerome Powell, not in a hurry to lower rates such was the
message drawn from comments by the Fed chief on Monday, as he sought to manage
down hopes for a second bumper rate cut. But homeowners may already be feeling
the positives of a first bumper cut with the recent drop-in mortgage rates
translating into roughly $300 a month of savings on the purchase of a $300,000
home compared to a month ago. Well, for his take on all that, I'm joined by
Ross Gerber, President and CEO of Gerber Kawasaki. Welcome, Ross. Many thanks
for joining us. The tone of the housing market has been a bit brighter of
late. How quickly and how directly will Fed rate cuts feed into the US real
estate market?

Well, in some ways it's feeding in really rapidly and in other ways it's going
to take time. And what we're seeing with the Fed now actually lowering
short-term rates because we had an inverted yield curve. Mortgage rates really
high, whether you had a short loan or a long loan, it was still a 6% or 7%
rate, which is where it is today. But now with the short end coming down, what
it does is it allows people to buy our mortgages or interest only mortgages
with shorter durations like 5, 7, and 10 years. And now those rates are coming
down into the fives. So, what we expect over the next year is we'll see
mortgage rates at 5% or so in America or maybe lower depending on the economy.
And that will spur a whole new renaissance sort of a buyers that have been
sitting around not doing anything for years because rates are so high, it's
literally impossible to buy a home in America. So, this is going to bode very
well for not only real estate, but all the ancillary businesses of that
benefit from when people buy homes.

Where the US housing market is split, of course, between new home sales and
existing home sales for the first of those homebuilders' sentiment did improve
in September for the first time in a few months. But analysts talk of a raft
of challenges there, particularly around labor costs and availability and cost
of materials. What's your take on homebuilders at the moment?

Well, we own Lenore and my fund GK and I firm in. And the homebuilders are
still having pretty good margins. But all the issues you brought up are
legitimate along with higher rates causing them to have to like add incentives
to help buyers be able to afford their homes. So, with lower rates, it allows
them to sort of take away the need for these incentives increasing their
margins, which will help offset some of those costs. Now in general
construction costs have mitigated considerably from a couple of years ago and
now with a slower economy that's still growing, the demand for construction is
still pretty high, but it's much lower than it was just two or three years
ago. So, this is sort of an ideal environment for the Home Depot's. And just
owning good assets in especially residential. Commercial real estate is very
troubled and we're staying away from that area of real estate. So, I want to
be very specific. I'm talking about residential single-family homes, I think
are one of the best investments you can make today.


Okay, and in the meantime, an estimate is 86% of existing homeowners are
locked into mortgage rates below 6%. You say rates are now dipping into the 5%
sort of territory, but are they going to have to fall quite a lot further
before we see much stimulus on that section of the market?

So, this is going to be an interesting thing as rates come down, as what
happens to all the people with the 2.5% and 3% rates that are in houses that
maybe are too small. We're talking about the 5Ds, the things that make you
sell your home, like death, or divorce or losing your job. And so, there are
certain reasons that people just have to sell their homes. And it's very, very
hard to look at buying a more expensive home with twice the interest rate that
you're currently paying when you already own a home today. So, I think it's
going to be an interesting thing as loans mature and people are forced to move
so they'll have a certain amount of supply increase, but then also many people
who are probably not going to move just because until those loans mature, they
have a deal that they'll never see again. So, it's an interesting time, but it
really bodes well for real estate, especially residential and prices
continuing to rise.

So, tell us a little bit more about where you can invest in this sector. You
mentioned Home Depot and the other home improver retailers and one or two
homebuilders. Where do you see value?

Well, another place that we're investing is in REITs. REITs give you access to
the income stream of real estate. And because we expect rates to be much lower
in the next, five years. So, as economy is slowing and we're seeing it in
Europe particularly quickly, the economies have slowed, but we're going to see
it here in the United States in the next couple of years as the economy slows
these rates. Still will work their way through for many, many more years to
come. And it will continue with demographics and AI and technology to force
prices down and slow the economy. So, I think the real reality is if you own
real estate that's paying you 5% or above, there's a lot of upside. And one
way we're playing this is VICI Properties or what we call VICI Properties,
which is all the hotels and casinos in Vegas. And so, these are very solid
assets that pay rent every month, every quarter on time and it pays about a 5%
dividend and it's growing over time and they're just wonderful assets to own.
So, we like REITs of really strong performing assets with yields over 4.5% or
5%, where we think yields like that are going to be really hard to find in the
next couple of years.

And finally, this is a week which is dense with labor market reports. How is
the jobs market looking? Is it strong enough to keep the housing market
strong?

And I think this is where it's we just don't know what will happen in the
next, six months to a year with labor. I suspect the economy is stronger than
what people, expect and because rates are now moving down, it encourages
people to spend, and they'll have more money in their pockets. As credit card
rates, home equity lines all these rates go down it saves me money. I have a
home equity line. So, just for me the rates are saving $300 a month right
away. And so that money translates into higher spending. So that supports the
job market over time. But the real momentum is down now. So, I think that's
where it gets tricky. Can the Fed really thread the needle with rates and keep
employment strong enough in the economy, but without creating more inflation?
And I think that there's a pretty high likelihood this will happen because the
underlying strength of the economy is pretty high. And so, despite the Fed
kind of jiggling around, not sure what they're doing. They have been fortunate
enough that the US consumer is strong, and jobs are so strong, and the economy
is still strong, and demand is still strong. So, with lower rates picking up
real estate that will very much help the job picture.

Okay, Ross Gerber of Gerber Kawasaki, many thanks for sharing those thoughts
with us today. That is Market Insight