Altos Blog

Building a Rental Business with Michael Zuber from One Rental at a Time

Written by Mike Simonsen | June 12, 2024 11:00:00 AM Z
In this episode of the Top of Mind podcast, Mike Simonsen sits down with Michael Zuber from One Rental at a Time to talk about how he built a thriving rental business and the big market trends for people who are building now.

About Michael Zuber

Michael Zuber is Author of One Rental at a Time, a story of working full time and building a real estate portfolio that eventually replaced two six-figure incomes. Having successfully made the leap from W2 to Financial Freedom 5+ years ago he now spends his time helping others see what is possible with a little focus and daily discipline.
 
 

Here’s a glimpse of what you’ll learn: 

  • How he knew to sell everything in 2006 before the bubble burst
  • Where he sees bubble activity today
  • How building a rental business today is different than 20 years ago
  • Why we should expect builders to build significantly smaller homes
  • When he thinks home sales will really pick up again
  • Why he thinks 7% mortgage rates are the current threshold for buyer demand, and why as an investor he wishes rates were 10%
  • Why we should pay attention to the spread rather than the Fed this year
  • Which macro risks worry him the most
  • His predictions for mortgage rates, transaction volume and inventory for the rest of the year
  • The biggest risks and opportunities in 2025.

Resources mentioned in this episode

About Altos Research

The Top of Mind Podcast is produced by Altos Research.

Each week, Altos tracks every home for sale in the country - all the pricing, and all the changes in pricing - and synthesizes those analytics to make them available before becoming visible through traditional channels.

Schedule a demo to see Altos in action. You can also get a copy of our free eBook: How To Use Market Data to Build Your Real Estate Business.

Episode Transcript

Mike Simonsen (01:00):

Today we're talking about investing, investing in rental properties with Michael Zuber of one rental at a time. Michael's been a real estate investor since 2002, lived through the bubble and burst, and has recently built a really interesting business model with one rental at a time, which I'm excited to hear more about today. Michael is also an excellent prognosticator when it comes to market trends and the macro economy. I like his take on the economy as it relates to housing and what comes next. So we're going to talk about that today too. So Michael, welcome to the show.

Michael Zuber (01:35):

Mike, this is such an honor. I've been following your data forever. I've had you on my show a couple of times and this is such a treat to speak with you about this. I think it's very important.

Mike Simonsen (01:43):

Great. Yeah, I am looking forward to it. You've done a few of your videos lately that have really caught my attention, thinking about some of the big interest rate things and the implications of those things, and so I like the way you distill the data, and so we're going to talk about all that stuff today. Let's start with a background though, so people know who you are. How did you get here and the decades long journey? Tell me about that.

Michael Zuber (02:11):

Yeah, so I think for this audience, it really starts 30 years ago I got an economics degree, went back to school, got an MBA. When you're an economics student follower, you really got to pick something to focus on because the economy is so big and so complex and so many moving parts, you really have to orient to something. Even the PhDs can't really look at everything. So I really chose to focus on the consumer. The consumer as most people, is roughly 70% of the economy. They are big enough to move the needle, and if you're fortunate enough to see where the herd is going, you can make some pretty interesting moves and predictions. So that's where it all started. 30 years ago, my journey in finance started in the stock market. Like many people, I am old enough to remember and participate in the.com era.

(03:03)
I turned seven grand into 200 only to lose 80% of it, at which point I never went back to the stock market for 15 years. Instead, choosing to focus on real estate, specifically single family homes. I happened to live in the Silicon Valley. Silicon Valley does not produce cashflow. So after roughly a year, I was forced to choose a new market, which I chose Central California, and I started buying homes in 2002. Ultimately had seven homes in a duplex and 2006, and if you know anything about 2006 that was at or near the peak depending on where you are. And I looked at the market and realized something was unhealthy. I knew pain was coming. I did not know how much pain was coming. We sold all of it. We sold all of our houses and we did what's called a 10 31 exchange. And we went from eight houses to 80 units, all large small apartments, and that's where we were sitting when the single family home market imploded, at which time we found a way to raise private capital, buy a bunch of homes. And ultimately, long story short, after almost 20 years of investing, my wife retired and then I retired after that from cashflow That happened, I retired in 2018, so over six years ago, and I've been watching housing every day for almost 30 years. So that's my story and that's a quick run

Mike Simonsen (04:30):

Through. That's an excellent, excellent intro. So I lived through that as I like to say, two bubbles ago, Silicon Valley, and I had that fourth quarter of 1999. I had the same, I'm a genius stock trader and I've 25 years since I've proven over and over again that I am not a stock trader. And so I've been through that lesson too. That was quite a journey. And in fact, it's funny because that bubble living in Silicon Valley, in that bubble really helped identify the housing bubble where even for folks who were 2006 and seven at that time, even where the talk was starting to happen, there was very few people who knew what to do about it.

Michael Zuber (05:22):

Yeah, no, I mean you're absolutely right. Having been in the valley in the great recession, you're absolutely right. I hadn't looked at it that way before. The consumer behavior, the parties, the interactions you would have with people were very much can't miss, never goes down, double, triple up, add leverage. You're absolutely right. And thankfully I didn't get burned the second time we got out of the way.

Mike Simonsen (05:48):

Didn't run us over. One more bubble, I won't screw up. It's funny because after those two experiences, I developed my little rule of thumb of how I identify bubbles, and the first one is like, oh man, you made some money. Good for you. You worked hard and that was in the stock run-ups in the real estate. Then the second stage is like you're looking around and you're like, man, everybody's making money. And then the third step is to go, wait, that asshole, that guy's making money.

Michael Zuber (06:26):

Exactly.

Mike Simonsen (06:27):

He's not smart. And he might be kind criminal. That guy's doing it. And that's when I start seeing that. So it's when I look at Buzz now and I'm like,

Michael Zuber (06:40):

It's funny. It's funny how you bring that up because I pointed that exact thing in 2019 and that was in what now we call syndications I, I'm the boring buy and hold guy. I go to a meetup, I'm the keynote speaker of 200 people or whatever, and at the end I always ask what people are doing and everybody in that room, this is the valley, so everybody has some stock money, RSUs grants, whatever, and they're all brand new syndicators. Not only are they brand new syndicators, they're brand new out of market syndicators who have, oh, by the way, never owned real estate. And that led to my call several years ago to get out of the way this syndication is going to blow up and be a bubble, and now we're living through it as well. And again, I'm a guy that takes action when I see 'em. So I sold apartments in 19 because I saw stupid prices. Little did I know free money would come and I lost out on some money, but I would argue I made the right call in 19 selling at stupid cap rates. But that stuff's blowing up right now. Bridge debt io, it is just another do we repeated the same mistakes in housing, short-term debt, variable rate debt, bad assumptions, new operators, financial engineers, it's so predictable.

Mike Simonsen (07:58):

Yeah, I'd love to talk more about that syndication, but you made a couple other comments along the way about your story. You said Silicon Valley doesn't cash flow

Michael Zuber (08:07):

Doesn't

Mike Simonsen (08:08):

Cash flow. So you're talking about houses in Silicon Valley, it doesn't cash flow because the cost to buy the rent, it just doesn't work.

Michael Zuber (08:18):

And frankly it hasn't worked in 20 some odd years. I mean, I would love to invest in my backyard. There are just some markets that are appreciation markets and some markets are cashflow. I was doing this, I was working so hard to not have to work. My initial vision, Mike, was to have four units at 60, free and clear. Obviously the story didn't go that direction, but I don't want to bet on appreciation. I've seen appreciation take people out and appreciation to me is like musical chairs. It works until there's no chairs and somebody's going to get you. So yeah.

Mike Simonsen (08:54):

Okay, so that makes a lot of sense. So some people, I mean buy and hold in Silicon Valley and you've held for, you're an electrician who bought a rental house in 1982 and now it's worth a couple million bucks and it cash flows because you've had it for

Michael Zuber (09:09):

45 years. Yeah, yeah. You've had it for low basis. Yeah,

Mike Simonsen (09:11):

Absolutely. And no taxes and you don't pay taxes on it. Okay, so that's useful. You said you started out with a vision of having four homes. I did. And how many did you end up with

Michael Zuber (09:23):

At the peak, they call 'em doors, right? We had apartments as well. We ended up, our peak was a hundred eighty seven, a hundred eighty seven

Mike Simonsen (09:29):

Doors. And so you've lived through that. Are they in all states? Where did you

Michael Zuber (09:35):

Come? Central Valley,

Mike Simonsen (09:36):

California, central Valley, California. Okay. And then now you've shifted to one rental at a time. So you're not in the operating real estate business anymore. What's one rental at a time doing

Michael Zuber (09:48):

So one rental at a time is really, it's grown into a community because when you retire, so let me paint you a picture. February 2nd, 2018, I'm 45 years old. I had always dreamed of working till I was 50, not because I needed the money, but just because it was a nice round number. I happened to be a sales guy, software sales. That means every year I would get a new quota, a new team, and all of these variables. And unfortunately what I was given on February 2nd, which was the first day of the year, because the first was a Sunday, was something I could not tolerate. And I decided to part ways with my employer in a 15 second kind of moment. So I text my wife, I head home, you would think, Mike, you're super excited. You're 45, you're good financially and now you don't have to work anymore for a couple of days.

(10:43)
I mean, you couldn't wipe a smile off my face. Unfortunately, what I did not prepare for was not having a purpose. I didn't have anything to drive me to. I didn't have motivation. I did not realize how much of my life and ego and mission was wrapped up in my job, which I just threw away. So over the course of the next six weeks, I go from being a very positive glass half full person to depressed and really thinking about suicidal thoughts. I have no mission anymore. It's just like a horrible place to be. So I was there on a weekend, probably six, maybe eight weeks after leaving, going, I'm just going to get a job because this is not healthy. Or I could try to do something. So what I decided that day was to write my book one Rental at a time because why I'd never seen one like it.

(11:38)
The book is basically, Hey, I lose all this money in the stock market. I read Rich Dad, poor Dad, then what? It's not a how-to book, it's a look back through the lens of 20 years of investing. So that book allowed me to be positive. I wrote, I dunno, five pages a day for weeks that goes well. And then I'm on a trip in Asia with my wife because we just got to get out of here. I can't have this feeling of being depressed. So we decided to go to Asia for a month or whatever it was, and I'm in the back of the family van. My wife's family's from there and she speaks Mandarin and it's just loud and I don't speak Mandarin. So I put on a YouTube channel and I bump into Graham Steffen. Graham Steffen at the time is like 40,000 subs.

(12:28)
Today he's 4 million, but he's talking about owning three homes or four homes or whatever. I'm like, YouTube's a thing. You can actually tell people what you're doing and educate them. And it was in the back of that van that day I decided to create one rental at a time just to help people. So one rental at a time is just a framework buy box, daily discipline. You could do it, believe in yourself. And I spend about 15 hours a week now trying to help people move forward. I have decided I reserve the right to change my opinion that we're not in growth mode anymore. We add about one, maybe two units a year. So if something comes across my plate, that's a great deal, I buy it, but I'm not as aggressive by any means because I can spend 10 to 15 hours a week helping others and I'm satisfied, I'm happy. So one RINs at a time is simply there to help people believe it's possible and hopefully change their financial future.

Mike Simonsen (13:28):

Terrific. I haven't read the book yet, but I do watch the videos of One Run All a Time. So I will read the book. I always love reading my friend's books, so thank you. I'm in for it. And so you were still selling software when you had 150 homes or

Michael Zuber (13:43):

Foundation? Absolutely, yeah. And not only selling software, I was all around the world. My job was running the country, either the US or the world for different, because I could have been in three countries in a week very, very easily.

Mike Simonsen (13:55):

Wow, good for you. You have a bigger span, a capacity than I do. I was like, I'm running the company and I'm not buying houses, I'm running the company. But that's great. You mentioned Rich Dad, poor Dad as like an inspirational moment for you.

Michael Zuber (14:13):

For sure. No doubt.

Mike Simonsen (14:14):

That's Kiyosaki, right?

Michael Zuber (14:16):

It is. It is. Robert Kiyosaki. Do

Mike Simonsen (14:18):

You follow that guy now?

Michael Zuber (14:20):

No, he's gone Looney Tunes, but you've got to give credit where credit is due. Rich Dad, poor dad. And it's actually a sad statement on education frankly. I've already shared you. I have an econ degree, I have an MBA and freaking Rich dad. Poor dad is the unlock. I mean Cohan folks, rich dad porn ads, the unlock for this whole other avenue of real estate. I think it's funny in hindsight, but no doubt that book's changed my with no question.

Mike Simonsen (14:52):

That's terrific. Okay, that's great. And it powers some excellent words, which you're in the business of now, so that's terrific. Okay, so one rental time is about YouTube and it's about educating people and about building a community of people who are real estate investors. So now it's 2024, mortgage rates is 7%, prices are at an all time high. Tell me about one rental at a time now compared to 2002.

Michael Zuber (15:24):

It's really funny when you look at the market all I've looked at the market every day since 2002, I've been investing in the same market, same thing. So I will agree with you that affordability today is really, really bad. It's not record bad record bads 1981, which a lot of people failed to realize affordability was marketably worse than 1981, but today is bad. It's the worst in 30 years today. So that's a fact. Another fact is the Fed broke the housing market. Alright, what the heck does that mean? The housing market as operated in a rather structured mechanism for decades entry-level housing. You stay there between six and eight years. At some point your job goes up, the family gets bigger, you sell that home and you buy the move up home. Then you're there for eight to 10 years and then maybe there's another move after that.

(16:19)
Well that's now broken. We are going to see the lowest turnover that we've seen since the early eighties because people are just either A, they don't want to move or worse, they won't get approved. You just won't get approved. A lot of folks at today's rates couldn't buy the house they're in, let alone the move up house. So what we are in today that a lot of people don't get and frankly got wrong, is we're in a transaction depression. This is something I called early and got right because everybody else was saying, Hey, rates went up 500% or from one to 5% prices have to come down. I'm like, no they don't. Hello, go look at 1978 to 1990 doesn't have to come down, but transactions will, and I called it really early, that transactions would fall roughly 50% and they have the lowest mark was 3.79 was the lowest annualized monthly number.

(17:21)
So the first thing to realize is we're going to be in a transaction recession for several years, probably the next three to five years. We are not going back to five and a half to 6 million existing home sales for the foreseeable future. So that's the first thing to realize turnover is going to go up. We've talked about that, but now we need to talk about price. If you look at what builders have been doing for since the Great Recession, they have on par been building big luxury homes because that's all that penciled and the well off home buyer were the ones that were buying. Unfortunately, that is now done in my opinion for a while. And if a home builder really wants to make hay, they need to build smaller homes. And I'm talking marketably, smaller homes. I think last year the average home was down 3% in size.

(18:17)
I think it's going to be down five or 6% this year and probably down again next year. Why? Because the first time home buyers got no choices. The fed broke housing, the people that own the first time homes aren't selling them and now there's no supply to back it up. So home builders I think right now are burning through inventory that they built at they had planned for at a different time. And as we go forward over the next several quarter quarters, they're going to go smaller. I think Lennar is leading the way. I think they had a 661 square foot home in San Antonio. They had a 997 square foot home somewhere in Sacramento area of El Dorado I think or something. So I think you're going to see builders go smaller, which oh by the way is going to lead to new home prices crashing. They're not crashing, they're just smaller homes. People stop listening to those crash idiots. So I think builders are going to meet the market and meeting the market's going to mean smaller homes with where we're at. So that's kind of a quick run

Mike Simonsen (19:18):

Through. I love that insight and we have seen size of homes tick down. I like the prediction that we'll see it keep coming down the next few years I think powerful. And I see we interact on Twitter and you see people in the Lennar Homes in San Antonio, these little tiny boxes and people derive them. They der them as like, oh, I can't believe this. But I bought my first Silicon Valley house was a 19 52 3 bedroom. It was a thousand square feet. It was a three bedroom, one bath. The people that we bought it from, raised a family of five there for 50 years and then we bought it and then when they sold it, they went and built their dreamhouse in Nevada and that was great, but small, it doesn't particularly scare me or think step down, I mean. Well

Michael Zuber (20:16):

Let's poke at that a little bit. We also need to realize we have some generational behavior going on. We obviously have a young millennials and Gen Z that are delaying life choices right now. If you compare them to boomers and X, they're doing things six years later than past generations. So what might that mean? We might see a lot more single people and specifically women buy homes. So okay, if you're a single person, do you really need the classic 3, 2, 20, 100 square feet? No you don't. It's probably a liability. But instead of renting, could you enjoy a one, one and a half, 750 square foot with your own lot and backyard for your little dog or little cat or whatever it is? Absolutely. Think about the generational, the generation in prime buying, they're behaving different. But if builders come to meet the market, which I think is sub 1000 square feet, it's the unlock.

Mike Simonsen (21:15):

Yeah, sub 1000 square feet will be fascinating and see if we can get And is that an angle to help solve our affordability challenge?

Michael Zuber (21:28):

Absolutely it is. Without question, if you take the new, I forget what new home average price is today, I'm going to call it 400 for a round number. You start building homes that are 500 square feet smaller than average, you can whack a quarter off the price. So yes, that is an answer to affordability. It will undoubtedly allow idiots like the crash bro, to say new homes fell 25%, but who cares? It solves the problem. Small homes solves the problem.

Mike Simonsen (21:57):

That's a terrific insight. How does that impact investors who are starting now?

Michael Zuber (22:05):

So you have to deal with the market you have not the market you wish you have. What does that mean? Well, as we're sitting here today recording this on May 15th, this is the market. We have a market where interest rates are 7%. As you said, we have a market with very little inventory. We have a market as Alto's research highlights, which I consume your stuff every Monday. Inventory has been building all year. However, all inventory is not equal because if you look inside the inventory numbers, something becomes very clear, clean, safe, move in condition. Homes below the median are like unicorns. They sell very quickly and possibly over ask what is starting to linger? What is starting to build? What is starting to see days on market rise? It's the non-perfect, outdated, older home. So as an investor where you need to shop, where you need to look for motivated sellers, I am not looking at anything that's less than 30 days on market.

(23:14)
If it's the under 30 days on market, I don't care. So I want 30 days on market. I want non updated homes and I want to buy from a seller who needs to sell, not wants to sell. The thing about real estate as an investor is you actually want a slower market. So the market we are in and entering in the near future is one that is slower and a slower market allows me to find motivated sellers. That's my job. So that's what's coming and I'm excited about the last two years have been rough, man, you want to try to be a real estate investor when there's only 250,000 homes on the market and rates are 3%, good luck. That's not the market I want. I want the market that's slow. That's

Mike Simonsen (24:00):

Slow. Even though the cost of money is a lot more

Michael Zuber (24:02):

Right now. Yeah, I wish, you know what, you want to own something crazy. I wish the cost of money was 10%. Why do I want that? Because Mike, I want to buy from people who need to sell instead of people who want to sell. Somebody who wants to sell will hold on their price and they'll just take it off the market. They'll wait for a better day. But if I can find somebody who needs to sell for some life event, I can either A, get my price with a 10% cost of capital or B, I can get seller terms. And I've been doing this long enough where I've done millions and millions of dollars in seller financing first or seconds. When you're a real estate investor, it's not always about price. Sometimes it's price, sometimes it's terms, sometimes it's both. So a slower market is good. I want days on market to go up. I want inventory to build. It makes my job easier.

Mike Simonsen (24:55):

So you're looking at these conditions and looking back at like 2002 actually rates were, I dunno, probably in the six to six and a half about the same as where they're now. And so you're looking at for investors who are in your community as like, look, this is finally an opportunity for us to build this business again.

Michael Zuber (25:16):

So let's be very clear. In 2002 the job for me was buying turnkey properties in 2002. The idea was to buy something that was set it and forget it because I didn't have the extra cash to do the remodel. Today those properties are the only thing selling. So today I have to buy a fixer upper, I've got to negotiate a price and or terms or both that allows me to maximize. So you're absolutely right, the cost of capital roughly the same, but what I'm buying is completely different. In 2002 it was clean. Perfect. Today it's junk and dated.

Mike Simonsen (25:51):

Okay. Okay. So then now today it it's by the junk it's dated that part of the job is to A, find the motivated seller and then B have figure out a way to make that and update the property and make it.

Michael Zuber (26:05):

Yep. Correct. Yeah, I mean the beauty of this is buying something that's dated is you don't have to do a homeowner remodel. You could buy something where the tile is the classic eighties, yellow and green, but as long as they're safe and not shipped, maybe you don't even update those. I've never gotten more rent because my tile is white versus green. Right, so you have other options. Yeah,

Mike Simonsen (26:27):

Yeah, yeah. Okay. That's great. Love it. Love the insights. Let's shift to macro, and I like your views about everybody has an opinion about where rates are going and why and things like that. I'm not convinced that anybody can predict where rates are going, but I'm interested in your thought process about how you get to your conclusions. And so let's talk about rates and inflation and the numbers that you care about right now. I know you've got your giant 54 year spreadsheet that you include all these things in. So tell me, let's talk macro, tell me what's on your mind and what we should be thinking about.

Michael Zuber (27:06):

Yeah, so I love this. Absolutely right. Nobody knows where rates are going, but I think if you look back at the last 12 to 18 months, something for certain below 7% mortgage rates, owner rocks, unlocks marginal demand above 7% freezes it. So where have we been the last six to eight weeks, rates have gone from seven to seven and a half. We've been above seven. We have seen at least twice and quite possibly three times in the last 18 months where rates went as low as six nine. Nine and demand came off the sidelines. So again, as I said earlier, I've studied the consumer for 30 years. The consumer is telling us rather clearly that something with a six on it is good and something with a seven on it is bad. So instead of trying to predict mortgage rates, just watch the daily update. And if they go below seven and the trend continues, we will see marginal demand uptick, which in altos research speak, you will see pendings rise. You report on it every Monday. So I made a call this morning that I thought rates were going sub seven this week, and if I'm right, you will see pendings rise 2, 3, 4 weeks out. It takes a little time in the system. And then my big call was we would see active inventory rollover in four weeks

Mike Simonsen (28:35):

Rollover and start declining because of that.

Michael Zuber (28:37):

Exactly. Yeah, absolutely. That's my call.

Mike Simonsen (28:41):

This is great. Let's unpack this a sec. So 7% is the threshold you see right now. Correct. And the language that I use on that is that consumers have a really short recency bias.

Michael Zuber (28:55):

Correct.

Mike Simonsen (28:56):

And so if I'm shopping at 7.3, 6.99 feels like a bargain.

Michael Zuber (29:02):

Exactly. That is exactly what the consumer is thinking. There was two years ago when we went from three to six, they remembered three, now they're remembering eight. It's

Mike Simonsen (29:12):

That simple. Yes, exactly. And in fact, they may be remembering 7.3 because that was three weeks ago when I started my search. But on the other hand, if it goes to 7.5, I walk away. It's

Michael Zuber (29:24):

Got to be, it has to have a six on it. It is that fine line 6 9 9 is a yes. 7.01 is a no, which is really weird. If you do the math, the difference is like $2.

Mike Simonsen (29:36):

Yeah, it's nothing. Okay. So I like that as a window. And for sure since we've had, since March, I think it was in March, well since January one, rates have been basically climbing and so being in the sevens in April, so then in May if we could, we have some momentum. The 10 is falling a little bit, so maybe we get back under 7%. You think it's going to happen this week, which is terrific. I love having concrete predictions in this.

Michael Zuber (30:06):

I love to make calls. I have two shirts which I flaunt because I will either flaunt, it's a shirt called Nailed It if I get it right and if I miss, which I don't mind missing, that's what happens when you make calls. I wear swing and a miss.

Mike Simonsen (30:19):

Great,

Michael Zuber (30:19):

I'll own it either way.

Mike Simonsen (30:21):

And so therefore inventory to roll over and decline

Michael Zuber (30:24):

In four weeks, it'll take time to get approved to get in four weeks out. If rates go below seven and stay there, rate inventory will roll over and four weeks. That's the prediction.

Mike Simonsen (30:34):

Okay. So I could see that could happen. I would say that I maybe tempered that call with what we've had is since November, beginning of November, we've had inventory growing relative to last year. Correct. Even the weeks when last year was climbing, these weeks were climbing more so whatever, 35, 30 6% more homes on the market now than a year ago. Correct. What I could see is rates drop into the sixes. I could see that compressed for the first time in whatever that is, 25 weeks or however long it's been since it's been climbing. And then we have inventory would normally peak normally would be like August. If rates fall into the upper sixes, I would expect inventory to keep climbing but at a slower pace and compressing versus last year rather than expanding. And then unless it falls more dramatically, like rates fall six and a half, then I could see us peak in inventory earlier this year. And then well let's

Michael Zuber (31:36):

Poke at that a little bit. Let's poke at that a little bit because again, as you know, but for the audience, the other thing we've been dealing with is a wide gap between historical spread on the 10 year and mortgage bonds. It peaked at I think 3 0 9, 309 basis points today. I think it's at 265 average is 180 historical average. So if we have banks which are hungry for loans, if we have bank presidents and the banking system realized that the feds no longer going up. One of the reasons we had the spread is nobody knew where the bank was going and they wanted to remove refi risk. Well now that's coming off the table. We just got a low CPI print lower than expected. We have weak retail sales, we now have the Fed looking good not to raise. Right. That's now off the table rate cuts or at least in the thought process. So even if rate cuts don't come this year, the bank, you could see the spread come in another half a point all by itself.

Mike Simonsen (32:33):

Right. And part of the spread is the uncertainty in the changing rates. And so even if rates start staying stable, then that uncertainty starts to ease and so the spread comes back down and compress.

Michael Zuber (32:45):

Exactly right. Exactly. So you could see six and a half, probably not in a month, but you could see six. I'm not calling that, I'm just saying

Mike Simonsen (32:52):

It's possible it could be in the mix. Okay. Let's talk about the Fed and fed funds and what we see and what we should look at there. So you said low CPI today, the PPI was yesterday, right? Correct. And that one headline was hot, but then in the components it actually turns out it maybe wasn't that

Michael Zuber (33:12):

Hot in the Yeah, more mixed. More mixed in the headline looked, yep.

Mike Simonsen (33:15):

Okay. And so the 10 year fell actually. Yes, correct. Okay. So then what am I thinking about in inflation and rates and what should I be paying attention to for the rest of the summer?

Michael Zuber (33:28):

Oh, for rest of the summer rates are, the Fed isn't going anywhere. The Fed, my current best guess is the Fed cuts after the election, which I believe is November 7th. That's their first meeting in November. So no cuts till November is my current best guess. And it'll be one cut this year.

Mike Simonsen (33:49):

Okay. And what does that mean then for the rest of us? What's the downstream of that?

Michael Zuber (33:55):

Well, I think the downstream of that is the market finally realizing the Fed is serious because again, the Fed came into this shear saying I'm not cutting and the market said six, right? So I think the market finally catches up and we finally start to normalize rates again. I think the market right now is anticipating two cuts, which is a lot closer to one than six, but I think we really have to be concerned about, I think the biggest risk for us is something you and I experienced as kids and that was stagflation. You and I were alive, but we were kids during stagflation in the seventies. That's a real risk. We could have below trend growth and sticky inflation. That's a recipe for yuck. That's my current concern is stagflation is looking more and more like a base case.

Mike Simonsen (34:46):

And in a stagflation world, what happens to housing?

Michael Zuber (34:50):

Well, again, we have historical presidents, folks, you talked about the 54 year spreadsheet. The answer is on there. Transactions stay muted. Prices when adjusted for inflation go nowhere but nominally they go up. I mean, that's what people don't realize. We had the most unaffordable market ever, 1981 and prices went up, nominally speaking. So again, it's just a yuck. Transaction's down, adjusted for inflation, nothing. We got to pay for the sins. A lot of debt out there. It takes years to work through this stuff.

Mike Simonsen (35:27):

Great. Talk to me about your view about employment.

Michael Zuber (35:31):

I would tell you the number I'm watching is 4.2% today. I think the last reading was three nine. I know there's a lot of people that think 4%. The psychological round number is a problem. I don't think it is. I think 4.2 kicks off something called the SOM rule. The SOM rule simply said is anytime employment is up half a percent from the preceding six month average, a recession happens. And today, given the calculation, 4.2 is the magic number.

Mike Simonsen (35:59):

I love that you have the sum rule. The specifics of the sum rule memorized other than unemployment is the indicator of recession. She's really Claudia sum

Michael Zuber (36:11):

Really specific. Really specific.

Mike Simonsen (36:13):

And so you think that if unemployment goes to 4.2,

Michael Zuber (36:18):

That's

Mike Simonsen (36:19):

A problem, then we will cross the sum rule threshold which says now recession's coming

Michael Zuber (36:24):

Recession's here,

Mike Simonsen (36:26):

Recession is here. Right, this is the onset of the recession.

Michael Zuber (36:28):

Correct.

Mike Simonsen (36:29):

Okay. Okay. So you're watching, so the one that really matters is 4.2 because then it'll be above the threshold. Correct. And that would mean

Michael Zuber (36:38):

That'd mean a

Mike Simonsen (36:40):

Problems our problem now a recession and unemployment can move quickly, that number can move

Michael Zuber (36:46):

Quickly. Oh yeah, absolutely. Yes. What typically speaking, if you go back and look at the unemployment chart, which people can on the St. Louis Fed, when it breaks, it's an elevator.

Mike Simonsen (37:00):

It's a spike. Yeah, a real spike there. Have you thought about, lemme run this by you. This is top of my head. I have a hypothesis about the employment market right now. And in real estate we talk about the lockin effect, the mortgage rate, lockin effect. I have cheap costs, I have a good thing if I make a move now my costs change. And so there's a lot of reasons transactions are down and we're starting to come out of that, but we have a muted market because costs were super cheap and making a move now makes 'em expensive. I see parallels with the employment world. So unemployment is low, correct. But also hiring is low. So it's like we're not buying and selling on the people on the employment side as well. It's like both of these markets are locked in to pre pandemic goodness, and we don't want to make these big moves. So even though unemployment is low, actually hiring is really low too. What do you see those parallels?

Michael Zuber (38:06):

I do think there's parallels, and again, I was a leader and responsible for hiring the last 15 years or so of my career and that included recessions. There are some times when executives make the choice, it's like we won't hire, but we're also not going to fire because we anticipate coming out of this and it's very expensive to retrain and lose that ip. So yeah, there's probably a lot of validity in that. There are probably a lot of companies that won't be hiring but won't be firing because again, the down cycles typically are nine to 18 months where the up cycles are eight to 10 years. So there's probably a lot of that going on.

Mike Simonsen (38:44):

So then we did a little bit of prognostication rate cut after the election. You're thinking, I love your call about size of homes declining by five or 6% per year for the next couple of years. What else do you see for 2025 and beyond?

Michael Zuber (39:05):

Yeah, so if you're talking real estate investors, the opportunity and Grant Cardone says lots of crazy things just to say them, but I do agree with one thing that he's putting out there that we could have the greatest generational wealth opportunity coming, but that's going to be in multifamily, that's going to be in commercial. And we talked about this a little bit earlier. We did the same stupidity in commercial and now we got to pay the price. The debt's coming due. Commercial banks are sitting on this. They can't extend and pretend forever. We are seeing buildings, if you watch real deal that are trading for 90% off, we just had the tallest building in Fort Worth, Texas go for 15 million when last sold for one 50. I mean, just crazy things are happening. Some people are going to make a lot of money cleaning up the pieces in commercial. Unfortunately for the crash bros, I think prices are basically flat. My call for single family is basically existing. Existing home sales is we had all the appreciation we're going to see for the decade in the first three years. So it's basically going to be flat until 2030. We will reevaluate then

Mike Simonsen (40:18):

In terms

Michael Zuber (40:19):

Of price,

Mike Simonsen (40:20):

Price,

Michael Zuber (40:21):

Medium price,

Mike Simonsen (40:22):

Price flat for the decade,

Michael Zuber (40:24):

For the rest of the decade. Yeah.

Mike Simonsen (40:25):

Yeah, that's a strong call. And I don't disagree strongly with that call. I see a lot of those factors for the decade and that is, are you thinking nominal or real prices in that sense?

Michael Zuber (40:38):

I'll go real. I mean just like the eighties. I mean people don't like it, but there's a good chance we follow the eighties, so we might be up nominally, but again, if you strip out inflation, we're going to be basically flat.

Mike Simonsen (40:50):

And you said that you expect two or three years of the transaction volume to be muted. And so do you see any growth in that like this year and next year?

Michael Zuber (41:02):

I'm sorry? Do I see what

Mike Simonsen (41:03):

Any growth in transaction volume in this year?

Michael Zuber (41:08):

I forget what we did last year. I think we did like 4.1 if the full year. I don't think we're above four or five, Mike until 2027. 2020. Yeah. 2027.

Mike Simonsen (41:19):

Okay. Those are great. Really, those are nice, precise. And I think well-founded views of the future. Let me shift gears a little bit. What do you think are maybe things that people are getting wrong, like the headlines are getting wrong or I like to call out and you've been pretty clear on some of these things that your view on some of these, but are there assumptions that I'm making that you think I should reevaluate?

Michael Zuber (41:48):

Well, I love what altos research out because part of being good at housing is consistency. And that's what you are remarkable at it. If you only look at it once a month, that's not every week, every day because it does tell you things. And I love the stats you have. You talk about active inventory number, new listings, how many went immediately pending? Current pendings, price cuts. Those are all interesting. If I had one ask, and it's probably tough to do, I think we have a bifurcated housing market. It's being lost in the numbers. I want to know the numbers below the median for a market and above the median because my evidence from talking to people on the ground across the country is clean pretty properties below the median, sell fast and sell above. Ask where the luxury stuff one and a half, two x are sitting and having price cuts. So for example, it's one thing to say you have, I forget the latest number, 33.7% price cuts. My guess is you have like 45% price cuts above the median and you have 21% below the median. That's a distinction worth exploring in my opinion.

Mike Simonsen (43:07):

I can do that. In fact, in the Altos data, we track every zip city, state, every metro. We track in four price range segments. So we can track the high end of the market behaving differently from the low end. And in fact, back to our original part of the topic in 2006, 2007 Silicon Valley, when I had just started Altos, we could watch when subprime broke, the subprime lenders broke. We could watch San Jose and I could watch, normally if you watch days on market per price range, you could imagine more expensive stuff takes longer to sell. Correct. And so you could imagine that happening when subprime broke and the top of Silicon Valley in 2006 was like a million bucks and the bottom was three 50, but all the three fifties were all subprime loans.

Michael Zuber (43:55):

Correct.

Mike Simonsen (43:56):

And they were all garbage. Really junky,

Michael Zuber (43:58):

Really toxic. Yeah. Bad. Yeah.

Mike Simonsen (44:00):

You couldn't get a loan for those anymore, but you could still get a million dollar loan without even blinking.

Michael Zuber (44:06):

Correct.

Mike Simonsen (44:07):

And so we watched the days on market invert for those price segments like that. And it was really fascinating at that time watching that for San Jose and you could see that where the demand was happening. And so one of the things that'd be interesting to see, I will try to tease some out of that and see if I can get some examples. We also have regional things happening. Correct. Right now and for example, Florida has 63% more homes on the market than a year ago 63%. And actually Arizona's up to 60% more now. Wow. Yeah, Texas is about 50% more, but New York still has fewer homes on the market than a year ago. And if you're shopping in upstate New York, there's nothing available now it's about to crossover and even New York is about to go positive versus a year ago, but it is a dramatically different market there. We also seeing I think cash heavy markets. So some of the Orange County California stuff where people, San Francisco, they are cash buys and going quickly because it cost money is more expensive. So there is regional things going on as well.

Michael Zuber (45:34):

For sure. Absolutely.

Mike Simonsen (45:35):

Okay, so then let's talk about longer term future. We talked about a little bit of prices flat for the rest of the decade. You mentioned generational wealth transfer. And so in that one you're saying in the generational wealth transfer you're saying like, look, we're going to have these massive price cuts on apartments that got funded with short-term financing and their costs are out of whack. So they get sold. And so you think that there's big opportunities and that's what you mean by generational opportunity. Like I'm buying something at a 90% discount right now.

Michael Zuber (46:12):

Absolutely. And again, it'll be out there for the small people. It's just not houses. It's five to 40 unit buildings. That's where I'll be playing. I've bought and sold those before for I've been through this cycle before. There was a building we bought in the Central Valley that was once listed at 1.5. We bought it for 700. It's coming around again and this time I'm more prepared. So the other thing, again, if you want to talk at single family homes, there are a couple of markets that are getting nuked by Airbnb changing the rules like Palm Springs and others. So there are pockets where if you happen to be an astute shopper, you could find deals. But we're not going to have a national housing crash that's just not coming. It's not in the cards. The debt structure is not set. We could see unemployment go to five point a half percent and single family won't crack. If unemployment went to seven point a half and stayed there for two years, that'd be a problem. That would be a problem. But it's not happening.

Mike Simonsen (47:13):

That's not happening. Okay. We talked about, I love the perspective of starting 20 or 25 years ago and starting now. One of the assumptions of 20 years ago was we had growing population, we had boomers in peak home buying years, and then now we have millennials. What about the 2030? What do you see about,

Michael Zuber (47:41):

I have some very base thoughts on this. There's really two things. One, inflation is a feature, not a bug. If you understand inflation is a feature, not a bug. You invest some way. What's the best way to do that? You find an asset that you can have fixed rate debt for 30 years, that cash flows day one and you hold it for 30 years. That's the single family home. That's the fourplex. Simple changes the way you invest, because again, over 30 years, the debt you're paying back, which oh by the way, with somebody else's money is smaller. It's less. So inflation's a feature, not a buck. Second, getting wealthy is remarkably simple. You have to create disposable income. Disposable income becomes the seeds that you plant. You need to become a great investor at something. For me, that was three and four bedroom homes, 9, 3, 7 0 3, 2 car garage, two car, two baths between 12 and two. Between 1200 and 2000 square feet. That's all I looked at for three years. I knew that widget, that buy box better than anybody. And then you buy the great ones and you don't buy the others. And then lastly, do it for a decade. That's it. You do that for a decade. You understand? Inflation's a feature, not a bug. You win.

Mike Simonsen (49:04):

Okay. So it seems unlikely that the assumptions about inflation will change at times. That seems like a long-term bet. What about demographics though? Changing? What about a world where we don't allow immigration into this country anymore and suddenly

Michael Zuber (49:22):

If America locked down or became the place that the best and brightest don't want to come to, that would be a problem. Now I happen to believe given all, even though we have a lot of nonsense in us and them and left and right and red and blue nonsense, I still believe, and maybe it's because I live here, I choose to live here. Believe me, I can live almost anywhere I choose to live here, that America is still the place where the best and brightest want to go. So as long as legal immigration of the best and brightest want to come here, I like our chances. But if we lock down and become just this isolation, like maybe Japan or something like that, yeah, I would probably change my opinion. Then it would become very much big city versus small town because we would just retreat in versus expand out. But those are decades in the making. People looking at demographics are decades, not years. Decades,

Mike Simonsen (50:20):

Yeah. Yeah. Okay. So you'd see us in a shrinking or an isolated world we infill basically.

Michael Zuber (50:32):

Correct. Correct. We go closer and closer to employment and facilities and support and it's basically play the clock backwards from the 1940s to the 1970s, that's what we would do. We'd be going towards the city from the farms. It'd be reverse of that.

Mike Simonsen (50:48):

Cool. That's a terrific insight. This has been outstanding. I appreciate it. Every bit of the call has been terrific. So one rental at a time, YouTube and also on Twitter. Any place else? Your book? I guess we should, we can link to your book.

Michael Zuber (51:03):

Yep. I've done very few things, but one of them is one rental at a time. Website, YouTube, Instagram, everything.

Mike Simonsen (51:10):

Great. I will point people there. Michael Zuber, really appreciate you getting your take on things and precision with your views of the future. That's really useful and it's really why I wanted to have you on because it can be so hard to make those kinds of calls. And so I like that. It's been a real pleasure.

Michael Zuber (51:30):

Thank you buddy. I think it's important to make a call, give a base case, and if you're wrong, own it. I think there's a lot of people that hide from mistakes and mistakes are just opportunities to figure out what you missed and what you learn from. So I have no problem making calls. I make calls almost every day, so I enjoy it. It's fun.

Mike Simonsen (51:45):

Excellent, excellent, excellent. Michael Zuber, one rental at a Time. Thank you so much. Thank you everybody. It's the top of mind podcast. Thanks for listening. And as always, if you leave a review helps other people find us, give us a bunch of stars. I appreciate that very much and we'll be back next week and with more guests. Thanks everyone.