Supply & Demand of the Rental Market | The Unrealest

Kyle Stoner: If you wanted to learn about the rental market and how it intersects with the buyer-seller market for residential real estate, you need to watch this because today I have a great pod for you. Our unreal stat of the day is: in July there are more housing permits issued in the Dallas Metro area, which has about seven million people than in the entire state of California, which has close to 40 million.

That is crazy, but that's a real stat. All of that, of course, ultimately flows down into both the renter market and the buy-sell market. So today I am happy to introduce you to my longtime friend John Njoku. He's the founder of w rent hub.com. Welcome to the show.

John Njoku: Thank you so much for having me. 

Kyle Stoner: Appreciate you. No, you're. You're welcome. I know what Renthub is, obviously, but please tell our audience. 

John Njoku: Yeah. Thanks for having me. So my name is John. I'm a founder of Rent Hub. I'm in Rent Hub. At Rent Hub, we're really trying to survey and understand rental housing markets.

We do this in a very unique way. We're compiling this giant rental market data set. We use what's called alternative data. So through different feeds or through our own methods, we're gathering data constantly from different corners, mostly on publicly available sources. And we take all that data and we make sense of it, parse it, normalize it, and then we're able to give people, really cool metrics and benchmarks and KPIs and insights on the rental markets such as what this neighborhood, or this zip code, or this area, is charging for rent...or maybe how it's trending. And there are so many different use cases when you have all this data in a certain way. If you're a big landlord, you can start to track what your competitors are doing. If you're looking to rent in an area, you can say, "Hey, does this match my thesis or not?"

And then just generally, I think rents are an important metric, like stock prices or the weather. You should just know what's going on in your specific area. So that's Rent Hub, in a nutshell. We're studying rent. 

Kyle Stoner: Awesome. Thank you for that. So let's talk about this unreal stat. This is something that we joke about and argue about all the time. First of all, this general idea of California versus Texas Then, in general, let's talk about this stat though. Dallas is able to, and I'm gonna assume because they've got much looser restrictions, et cetera, they're able to get all these permits?

The whole state of California can't muster to match just Dallas. So what do you think is up with that? What's going on? 

John Njoku: It's interesting. And I haven't fully fleshed this out. I do, talking about it with some friends and just thinking about it independently, some quick desk research.

I think there are two things. One: we just haven't quite built since 2008, 2007. The United States has not built many homes compared to what it was doing. What it's built is lagging household formation. So there's a little bit of a lack of housing supply.

And I think that you have certain areas of the country that can magnify those basic trends. So Cali is one of them, right? And maybe it's because there's not a lot of property tax income to be derived from housing, but you have NIMBY’s and YIMBY’s and then you have cumbersome entitlement processes all across the state. But the reason why this is fascinating for rentals is that when you look at the top 10 rental markets in the country, you're gonna have about half of them in California. You're gonna have the San Francisco Bay Area, L.A., San Diego, Riverside, San Bernardino, Sacramento... 

Kyle Stoner: Wait, let me interrupt you there. When you say top 10 markets, [do you mean] top 10 by price, by volume, by what? How are you defining "Top 10?"

John Njoku: Good question. And this is really simple. You know this one example of a metric, it's median rent price, and it's just on how high it is.

The priciest market around the country. That stack can be a little bit misleading or imperfect because you're gonna combine three-bedroom or single-family houses with studios. So then there's certain areas with a lot of studios and maybe those are expensive, but you're gonna combine it all and that's how you're gonna get that basic top 10 market metric.

Kyle Stoner: Okay, got you. So your take, in general, is that California - for a host of factors - is not building enough homes to keep up with demand and therefore that's pushing demand up.

So far that five of the 10 high, most expensive places to rent are in that. 

John Njoku: Absolutely. So the unreal stat of the day is connected directly to rentals. I think there's this narrative right now in the market, especially in light of interest rates, which we'll get to at some point, and just this pandemic, that rentals are ripping across the country.

And it's this weird thing, but the rents are ripping in the coastal markets, a lot of California. And then New York's gone bonkers since the pandemic. Boston's always up there, although it's a smaller market. So you have some of these coastal markets, but then you also have these fascinating work-from-home destinations that are "zoom towns." Austin's kind of "zoom town." Austin and even Huntsville, Alabama... Phoenix, of course. You have these interesting pockets where the narrative nationally is that rents are going crazy, but these markets are a lot more exacerbated than we think. I think that it's just fascinating when you think about rent, then you think about what's going on in the sales side of the market. Right now with home prices going crazy until recently, then does that show that rents are gonna continue to crank?

Can they continue to crank? What's gonna happen? So these are all the things that I'm trying to think about a lot as we're moving into that last quarter of the year and into next year. 

Kyle Stoner: That's actually a really good segue to my next question. J Powell just raised rates again. Everybody actually should go and watch [or read what he's saying], from the FOMC meeting from yesterday as well.

It's an hour or so, but he's basically putting on, he's doing his best Paul Volker impression. It seems to me that he's not only just raising rates, but he's also really signaling, to me, that he wants to keep them up there for some time.

All of a sudden, people aren't building enough homes. That leads to an inventory problem. Rates are now up significantly, maybe more than double, what they were earlier in the year. Some people are deciding they're gonna stay renting longer. Some people were maybe gonna buy, but they're giving up the idea of homeownership altogether. My first question for this is what are you seeing in your rental numbers?

Are you seeing more demand going to the rental side and therefore pushing rental numbers up? Or, because people are having a hard time with inflation, are some cities starting to push those rental prices down?

What is happening in the rental market? 

John Njoku: It's really bonkers right now. One caveat is that now you're seeing some seasonality. The quote-unquote leasing season is upon us, from March to September in Chicago. Not as many people are gonna be trying to lease or rent apartments in November in Chicago. That also rhymes with the academic calendar. Things are definitely chilling out.

But, for the most part, a lot of the country has positive year-on-year growth around rental markets in pretty substantial ways. And this gets back to during the pandemic. We have a pal that moved to New York during the pandemic. Got a great deal there. And then after his year was up, the light switch was flipped back on the city.

Rents went up like crazy. I have a buddy that moved to Miami. Miami never went "out," but a year later, after people started to get hip to whatever was going on, rents went nuts. And frankly, I think Miami became very attractive to people.

Just like New York's attractive to people now. If I'm gonna be working from home, I need to be in a pretty vibrant space. 

Kyle Stoner: Yeah. Remember New York was dead. Do you remember that whole bit? I was laughing. I remember seeing "New York will never return" and I think it was Seinfeld that maybe wrote an op-ed for New York Times or somewhere that was like, "You have to understand, New York will never quote-unquote die."

It's still New York. Like all the exciting things, after the pandemic, are exciting again. Therefore it's had this mad rush. That always made me laugh out loud after living in New York. I can tell you it's not going anywhere.

John Njoku: Not going anywhere. But you had, there were a couple other things that happened during the pandemic. People became obsessed with getting space and getting outdoors. Mortgage rates were super low. So people started saying I'm gonna go to Austin, Westchester, or Long Island. They were going just slightly outside of the city and getting great green grass and space and a pool. And then after people were like "All clear" and started moving back. We also had a new generation of renters that were coming into the city as well. People who graduated from college and whatnot. So yes, that's a dynamic that I think often gets missed in this housing dialogue, which is that household formation is real. The progression of renters turn into buyers in normal markets, or they have families in need of space and stuff like that. 

Kyle Stoner: So I wanna switch gears just for a moment. I think this is interesting, but both you and I are unique in PropTech and we have customers that are both consumers that are the end user and also institutions.

And institutions for us have typically been private. Asset managers, REITs...these are large institutions that buy and sell residential property for profit. And in the last five years, we've seen just an explosion of that activity. What sort of activity have you seen with that group in the rental sphere?

John Njoku: It's been crazy. It's been similar. And I think you've helped me understand the space better. The single-family rental (SFR) space or build-to-rent (BTR) space has just gone bonkers. And now, I would say that either the companies that cater to that market or the operators that are actually existing in that market are a good share of the clientele we have. A lot of the data and vendor and software product types were built for multi-family or commercial, but with the rise of this new asset class, you don't have a lot of things catering. A lot of these folks have built stuff themselves, but when you have vendors that can actually cater to them, it becomes really interesting straight away.

I think there are really two use cases. One is, they're just buying the data generally. They're conducting their own analysis with it. They're using it for comps. They're using it to actually build out valuation models. "What should the rent be for this new asset?" based off of data that we can feed them.

Maybe they're building visualizations with the data. For a large part, a lot of these groups come to us just for data. But I read a stat the other day. $15 billion has come into single-family for rent since the pandemic. 

Kyle Stoner: The debt on top of that becomes a big number but it's a $2 trillion annual market. It's a massive number. As a consumer, you've gotta compete against Wall Street buying homes.

It's tough. It also highlights something that is the intrinsic value of home ownership. If you didn't believe in it before, when the "smartest people in the room" are coming in and buying the home instead of you, that should convince you more of the value of actually owning the property yourself.

I want to get your take on this: I'm seeing a lot of podcasts and TikTok influencers that are really heavy into ownership models, real estate, et cetera. It's almost like I'm on the renter or SFR side of TikTok. There's this one TikToker and all he does is Section 8. He's showing you, "I just got this yacht, how to buy this yacht, a Section 8 home!" So there's this whole influencer thing. I'm wondering what are you seeing in that space? Grant Cardone's another guy. He's building up, almost selling, awareness of the rental market, multi-family, owning to rent...

What have you seen? How is that affecting your business? What are you seeing on that? 

John Njoku: There are a couple. I'm seeing the trend of the "Wall Street-ification" or institutionalization of the "mom and pop" space, single family, etc. People keep saying "Oh, they're buying up all the homes!" And I think that they're now buying a lot of homes, but I think the overall percentage is still under 5%. The impact's crazy. And so that's the first thing I think to consider.

But it's fascinating that you're talking a lot about ownership, because I still think, and I read this piece yesterday, I didn't forward it to you, but I'm sure you saw it. Pete Flint, truly a co-founder, talking about real estate 3.0 in PropTech. He's describing it as if 1.0 was just information and 2.0 was the transaction. 3.0 is ownership.

The question is: do we need to own homes the way we used to? My wife and I are doing the monthly Airbnb digital-nomad life. It's nice to just not worry about anything. It's definitely a little bit pricier than actually having either a rent or a note, but there's a lot of value in the serendipity to pick the next spot. I don't know that ownership is gonna be drilled into [the generation that's younger than us] in the same way. And I think that's what some of what Pete Flint was saying. I think he's saying "Look, we got crypto now, which can help track ownership better. You can fractionalize assets. If you look at, Picasso the vacation rental, it's really just a modern timeshare, but do you really need to own your own home in Maui or do you just want access to it?" So I think that's really fascinating, like access versus ownership, which is I think where we're really headed.

I don't know if we need to own. 

Kyle Stoner: I wouldn't disagree. I think it's funny, the idea that "Wait, maybe there's something in between. A fraction." That's where I keep ending up. I fundamentally believe one of the greatest ways to grow wealth et cetera, is through ownership. You own assets, then you can decide what you wanna do.

If you wanna sell a fraction of it as a token, sure. Do you wanna rent it out? Do you wanna make it at Airbnb? But, you become the "decider" if you own the asset. The more you own of it, the better. Of course, most people own the whole thing.

You have a mortgage. You wanna get a HELO, home equity loan? That optionality grows the more you own the asset. The prices for homes and real estate inflation is crazy, right? So when our parents could buy a home for, say, $50,000. That day, especially around big metro areas, is gone. People started thinking, "I can't buy, therefore I just want the experience of living in a place while renting." It really does start to restrict what you can do. And so I think some of this is what Pete is saying is somewhat inevitable because of some of the math. But I'm a very big proponent of home ownership. I think that's where it's at. 

John Njoku: What you just said about parents gifting the down payment because it's gotten so ridiculous...Startups are filling that void. It becomes another FinTech play. . . And I think that's fascinating. You had asked what am I seeing on the rental side? I thought about that as I was talking. I think what's interesting now is like, just think about 10 years ago.

Or longer than that. When we were maybe in college. How could you rent your house? You put up a classified ad, you put up a sign on the lamp post, you put something in the coffee shop. Now it's pretty easy to rent a house.

You can Airbnb or rent your attic, your coach house, etc. I think there is more supply coming into the rental space and therefore it's an easier thing for people to do. We have a growth of the asset class in general.

I think that supply and demand are going to teeter and find the optimal place. It is gonna continue to be a roving circle. It's just really a little bit of disruption into the whole rental space.

The last thing I'll say on this is: remember when the only way you could rent a home was for a year at a time, for whatever reason? It was just a 12-month lease. Now you can go in into a building and say, "Hey man, I got three months" and they'll say, "I got you." That wasn't always the case. 

Kyle Stoner: You're right. There's real optionality around the market. I think it's interesting that you brought up how different new companies are innovating and filling the void in different places around. I still think that we're seeing the tip of the iceberg on that. We've just scratched the surface. And real estate tech lags behind the overall market. We're so far behind when it comes to technology. We're gonna continue to see a ton of innovation. Because the average person can't call their parents and say, "You got $100K to throw down for my cause?" Since houses now average around $400,000.

There needs to be some sort of fix for that. It's not what we're doing. We save the user by cutting the commissions and fees. So there are huge savings there, but maybe a combination of the two all of a sudden could make it a lot more affordable for the average person. 

I would love to understand you, you did a summary on Rent Hub. What makes you all great? Why am I choosing you to help me, whatever my mission is? 

John Njoku: Glad you asked! I think it's important to take a step back to see what we're really doing at Rent Hub. I think that there's a really simple maxim to remember, and it's that on the for-sale side of real estate, buy-sell transactions are publicly recorded at the city, county, or municipal level. Therefore, there is a public repository of data and ownership and a trove of information available. And actually, this is what Pete Flint was referring to as real estate 1.0 when Zillow and Trulia came out, they took that information, made it public, and it democratized the whole process.

On the rental side, that dynamic is not there. These are private contracts between ourselves and our landlords. And that's about it. So when you know so much of the economy every real estate decision, so many other types of decisions outside of real estate are based on rent and what people pay for housing.

The underpinning of Rent Hub is the ability to give people some sort of understanding of this. This wasn't possible years ago when a lot of the rental markets were offline. But now with the internet, a lot of this information is somewhere publicly available and it's our job, whether it's through some web scraping or through some other feeds, to put all that data in one place, and help people understand it better. Zillow and Redfin and Zumper have great and very marketable summaries of markets but understand that their summaries are just from their own data sets. We take the publicly available, a clip of Zillow, Zumper, all that stuff, and we're almost like a super layer over that.

Our job is to conduct research on these markets and pull all the information together to give people the real picture of what's going on with rental markets. 

Kyle Stoner: It's funny, you keep mentioning Zillow and Trulia, but you don't mention Unreal Estate. That's really messed up.

John Njoku: Haha, Unless you were around in 03'... 

Kyle Stoner: Alright. I'll give it to you. 

John Njoku: But the future is Unreal Estate and they're the old guards. Like innovation is capped and trapped with those and that's why their principles have moved on to other things.

But Unreal Estate is definitely taking some of the foundations that they set rightfully. Moving and evolving onto the future which we're all really excited about. 

Kyle Stoner: Thank you. Let me do a quick recap.

We talked about this really weird situation where Dallas is getting more housing permits in the whole state of California and how that's flowing into a lack of inventory, pushing prices up, not only for homes that people wanna buy but also for rentals. Everything right up to the coming out of the pandemic, especially in these metro areas and really popular places like California and New York, where renting a place has not gotten any cheaper, continues to get more and more expensive. We also talked about the migration from Web 1.0 to where we are today. Where at first it was simply showing some of the data that was out there. Now we can do a lot more interesting things and really provide more optionality.

More opportunities for people that are buying, selling, renting, maybe going nomad like you've done with your wife. We covered that as well. Thank you so much for joining today. Been a pleasure.

John Njoku: There are always some stats to this to dissect, so I'm happy to do that. And thank you so much for having me on here. Later guys.