The Most Insightful Hour in CRE Part 21 with Dr. Peter Linneman, Leading Economist, Professor Emeritus, The Wharton School of Business
Willy Walker: Peter, before we dive in, what I wanted to do is first of all say hello to everyone here in Chicago. I'm in front of a group of some of the most successful and talented commercial real estate and multifamily developers in the country. Before I got to you and your perspective on the world, what I wanted to do was get a show of hands in this room. You've got three options. I'm going to ask you to close your eyes so you're not looking around to see what the herd mentality is in the room on the answer to this question. In a second, I'll give you the three things to raise your hand to, and then just close your eyes, and we'll do it real quick. Then I'll give you a sense of where this room's mood is. The first is that everything that's going on right now, from an economic standpoint with the Trump administration, is exactly what we need to be doing, and it's gonna turn out great. Second, everything that's going on in the Trump administration right now is not where we need to be going, but it's not going to succeed, and we're going to be fine. And third is, hang on, I don't want to see you show hands yet, I'm going to have you close your eyes. The third is that it's all terrible, and it's going to end terribly. So one is we're doing exactly what we need to be doing. Two is, we are not doing what we're supposed to be doing, but it is going to turn out OK. And three is we aren't doing what we ought to be, and it is gonna turn out really badly. Okay, eyes closed. Number one. Okay, number two. And number three. All right, great. So on number one was, this is exactly where we need to be going and what we need to be doing, I'm going to take a guess that there were 15 hands that went up. Two, this is not what we should be doing, but it's going to fail, and we're going to do fine, is without a doubt the overwhelming response in the room. If there are 200 people in here, there are 120 hands. And number three, which was, it's poor policy and it's going to end up poorly, was about where number one was on its good policy and it is going to turn out great. So interesting perspectives from this room, Peter. Where are you on that?
Dr. Peter Linneman: More or less number two, we're doing some things that are good. We are doing some things that are stupid, which is always the case, through my lifetime at least. We do some things well, and then, we find a way to get in our way and do some negatives that knock us down a peg or two.
Willy Walker: But hang on a second. We don't have a time when we get $11 trillion moving out of the equity markets in two days. So, understanding we clearly have normalized mistakes and positive things going on, $11 trillion moving out to the equity markets and the 10-year going from 398 to 450 in one day is not in any way normal.
Dr. Peter Linneman: I didn't say it's normal. Remember, what was it? On October 23rd, 1987, the market fell 23% in a day. It wasn't as many dollars, but it was more dollars relative to where we were. Second, I haven't done what I'm about to say today, but at the close yesterday, S&P was where it was at, I think it was August 8th, last year. Now, if I would have been talking to people on August 8th last year and said, “Are you more or less happy with where the market is?”, they just said, “Yeah, kind of pretty good, could be better, could be worse.” And if I say, “Will you be in tears if eight months later it's at the same level?”, most people would have said, “Well, I won't be thrilled, but I won't be in tears if it's at that level eight months from now.”
Willy Walker: But that's only because he pulled back on the policy. That's not because the policy was put in place and the markets recovered because they've digested the policy.
Dr. Peter Linneman: But that's part of the game. I mean, people adjust. That's part of when you ask the question, “Are we gonna be all right?” That includes adjustments, right? It's not on autopilot.
Willy Walker: Well, so then jump into your math on tariffs, because as it relates to that policy, many people are sitting there saying this tariff policy, if enacted to where the president either proposed it or even the modifications that have come subsequently, is going to have a dramatic impact on U.S. GDP growth, inflation, et cetera. In this quarter's Linneman letter, you walk through the math behind tariffs and why you think it's actually not as significant as most people think. Will you walk through your math?
Dr. Peter Linneman: Well, let me set it up. When I wrote that, it was before the revolution, right? And it looked like it would be about a 3% increase in tariffs from about $2 to $3 per $100 of imports to $5 to $6 of tariffs on $100 of imports. The new math that came out right after we went to press says it's closer right now to $20 of tariffs on $100 we import on average. That's the weighted average. Well, that's obviously a lot bigger. So here's the basic math. First, what's a tariff? You understand that most people had no idea what a tariff was before the last two, three, or four weeks. A tariff is a tax. People say, well, do you think it's going to be good for the economy? If you raise taxes a lot on 10 percent of the economy, that's not going to be good. I don't care if you're raising income taxes by 17 percent. I don't care if you're raising corporate taxes by 17 percent; if you raise taxes on a significant part of the economy, it's not going to be good, and that's all that this is. I say 10 percent of the economy. We’re a $30 trillion economy, and imports are about $3 trillion. That's last year's numbers, but about $3 trillion. That means that at $20 per 100, it's a little different, Willy, than the math we had. At the math of $20 on imports, it says that for one year, prices on average are going to go up 1.2 percentage points more than they would have otherwise. But once they've risen, it doesn't keep inflating on top of it unless we keep raising the tariff more. So you'd have a one-time shock to inflation of somewhat in excess of one percentage point. Curiously, as you move to subsequent years, it's actually modestly deflationary. Why modest? That's because if you're caught in a big thunderstorm, do you just stand there? No. You get out of the thunderstorm. You try to get an umbrella. You get in a car. You get under an awning to minimize the damage. As we minimize the damage, the average tariff will go down from 20. Even if no individual tariff is changed, the effective impact will diminish over time. So that 1.2% actually in subsequent years would moderate a little down as we adjust. Okay, then the other is GDP. GDP at the number being floated around, which is $20 per 100, is about 1.7% impact negative on GDP. That's big. Think about how, in a normal year, we grow 2.3 to 2.5% a year. You're wiping out three-quarters of a normal-year growth. We get some of that back by deregulation, but we're not going to get all that back by deregulation. So it's a big negative impact, and I'll just end the arc, Willy, by saying what I did. Imagine you came on and your lead question was not about tariffs per se, and you said, “What do you think will happen if we raise taxes a lot on 10% of the economy?” You're not going to be shocked when I say it's going to have a negative impact. Now, there is a bright side. I guess it's raising tax revenue. So if we have $3 trillion in imports and you put a 20% tax on it, you're gonna get about $600 billion. That's just math, right? About $600 billion in tax revenue. And our current deficit is about $1.8 trillion. I only give that to an order of magnitude.
Willy Walker: Yeah, but you're going to lose the commensurate income tax off of, I mean, your GDP falls by 1.2%. Your economy is crashing down, and you're gonna lose it on tax revenue from everything else. And oh, by the way, as you accurately point out, our economy today is geared toward income tax and corporate tax and not on tariffs. As you shift that and say, we're going to bring in $600 billion of additional tariff income, you're going to lose a lot more than that as it relates to overall growth if you've lost 1.2%. And the interesting thing on that, Peter, one of the things I think people need to understand here is the order of magnitude of where things have moved over the last two weeks. Peter's numbers in the report were, “Hey, we're gonna take tariffs from 2% to 3% today up to 9%, which is gonna return us to 1967 level tariffs.” And if you do that, that's gonna cost you somewhere between 20 and 40 basis points on GDP growth, okay? If you think about it in that context, it's not that big a deal because it's only 15% of the economy that gets hit by those tariffs. So Peter, in the letter, sits there and says it's not that big a deal at these levels. I think one of the reasons why last week was so impactful was that what President Trump launched in the Rose Garden was so outsized in comparison to what anyone had thought he was gonna do during the campaign and what Peter had in his numbers all of three weeks ago. That's what caught the markets by such surprise.
Dr. Peter Linneman: I totally agree. Remember that the original numbers would have been closer to 25, 27% on 100. So you're exactly right. So there is one wild card, and the one wild card is we don't live and we've never lived in a world of free trade. And one of the things we found out is that everybody started publishing what everybody else's average tariff was. And they're high, right? It wasn't like we had all these places with zero tariffs. A lot of places have big tariffs. But by the way, just because others poked their eyes out doesn't mean we should poke our eyes out, right? We should be smarter. Having said that, Willy, all this fluster and bluster and whatever you want to call it led to a systematic reduction in global tariffs, including ours. That would be a win. I don't know what probability to put on that. We've just never seen anybody rattle the cage this much. What Trump would say is they're all going to come. They're all gonna say they're going to cut their tariffs to basically zero. And then I'll reduce mine. If that world ever transpired, that's a win-win. But right now, we're in a lose-lose.
Willy Walker: Right. So let's jump into two other things quickly, as they relate to inflation and GDP growth. You mentioned the inflationary impact of tariffs. Let's pick your number. I don't care whether it's 6%, 9%, or 20%. As you said, Peter, that's a one-time charge. The cost of this iPhone goes from $1,800 to $2,500. It's that movement that will be captured. But the question I have for you on that is Jerome Powell and the Fed know that, and for two years post-pandemic, they sat there and said all the supply chain issues are transitory, inflationary pressures they're gonna move through, so we're not gonna move rates. So they've said, historically, we can look through and see transitory things. Is not a tariff the most blatant transitory hit to the inflation print that would allow for Jerome Powell and the Fed to say, “You know what? It's come in one time, but then we reset prices, and we're gonna look through that and not raise interest rates.”
Dr. Peter Linneman: You're 100% right. You got an A. And by the way, that's not a great inflation Ivy League A. That's a real A.
Willy Walker: I've got Olivia sitting in the front row here, Peter, and I was just looking at her because I know she got an A in your class at Wharton.
Dr. Peter Linneman: Oh, she did spectacular. That's a real A.
Willy Walker: Yeah, right, that's a real A. That's exactly right, hers is a real A and mine is a false A. That is exactly right.
Dr. Peter Linneman: So the inflation part, you got right. Remember, the Fed views that they have two missions. One is inflation, and one is the economy in general. And so on the inflation side, I think they'll do exactly as you say. However, the minus 1.7% on GDP, that's what they're gonna look at. And they're going to say, “We’re going to cut rates.” As you know, I was saying before all this, four rate cuts this year, because inflation is in the distant rear view mirror; the most recent data said it. However, the cuts that they will do now are not about inflation; they're about the economy being hit. Okay? In fact, they are going to do it in addition to giving Trump the finger. The interesting thing is, as Trump has been saying for some time, the interest rate is too high. But I say, “Give him the finger.” What they're doing is saying, “If you're gonna destroy the economy, we're not gonna let it happen. We're gonna come to the rescue. We're going to come as the Lone Ranger and save the day.” The interesting thing is that Trump will be happy when they cut the interest rate because he's been saying that for some time. A true cynic would say this is all a way to get the Fed to cut the interest rate.
Willy Walker: Well, if you're Scott Bessent, who's so focused on where the 10-year is…Everyone in this room and many people listening to the webcast ought to be thrilled that we have a treasury secretary who is, I don't want to say myopically, but is very focused on getting the 10-year treasury rate down to go and refinance $6 trillion of US or issue $6 billion of US debt this year. We actually have a treasury secretary, no criticism of anyone in the past, just focusing on the current, that actually understands the capital markets and understands the fact that we have a huge amount of country debt that needs to be refi-ed and that he wants to do that in a way that is most economically advantageous to us. Some past treasury secretaries sat there and said, “Hey, rates are at two percent, but I'm going to go short and issue two-year paper at two percent.” The fact that our treasury did not sit there and say, “Let's go long when we've got rates this low” is what has set us up for the predicament we are in today.
Dr. Peter Linneman: About back when we had that discussion.
Willy Walker: Big time, we had that conversation back when.
Dr. Peter Linneman: By the way, among the things that help keep the 10-year down right now, don’t get the Chinese to where they want to dump.
Willy Walker: Talk about that for a second, Peter. First of all, do you think last week's move in the 10-year was due to the Chinese and the Japanese dumping? The other thing I'd ask you before you respond to that is this: You know these numbers very, very well. The Chinese only hold $800 billion of US treasuries. The Japanese only hold one trillion dollars of US treasuries. And while those sound like big numbers, in comparison to $36 trillion outstanding, it's a rounding error. That's 40 basis points that the Chinese hold. So they can manipulate the market for a week, but they can't manipulate it forever.
Dr. Peter Linneman: You're correct, although your debt number is wrong because you didn't net out the debt that the government owes itself.
Willy Walker: Okay. $36 trillion is total outstanding. We can go through backing out the six billion. You go down to about 20 trillion. You're gonna get back to it. But you're not gonna argue with me on the fact that there's $8 trillion of U.S. paper that is owned by foreign countries. And of that eight trillion, the Japanese have a trillion, and the Chinese have 200 billion. That's correct.
Dr. Peter Linneman: I think they're going to say I don't want half of that dumped because I think you're right. In the big scheme, it wouldn't matter, but it sure would matter in the window in which they dumped.
Willy Walker: Yeah, no doubt. No doubt whatsoever. But do you think that's what made the market do what it did last week?
Dr. Peter Linneman: No, I'm not a market maven, but if I had to say what it is, no one can figure out what the hell's going on, and the risk premium goes way up. And I said the last time, the whole yield curve, but let's just focus on the 10-year treasury for the moment. You do understand that the 10-year treasury quote is effectively trying to figure out the Super Bowl winner 10 years from now and betting on it. Namely, the circumstances that are ultimately going to create what should have been the 10-year treasury with perfect hindsight, right? We're betting on today. Imagine you were betting on the Super Bowl winner; the yield curve is who's gonna win the Super Bowl next season, the season after that, the season after that, the season after that? Well, just as in the Super Bowl context, some of those kids, when you get out there, nine, 10 years, they're not even out of high school yet. They will be the players on the 10-year—the events that will cause what the 10 years should have been. Many of them aren't gonna happen for three, four, five, six, seven years. So I can't do better. Don't misunderstand. I'm not saying I can’t do better, but noise really affects it. There's no doubt there's a lot of noise. And in fact, the biggest thing right now is if you've ever had a time to focus on fundamentals, it's now. Turn down the noise. Every day, everybody should wake up. And I also have this phrase, leave the fright house. A fright house is fun for two hours before Halloween, but you can't stay in there all the time. It jangles you; it disorients you. Imagine if you were in one of those fright houses endlessly, and if all you watched were horror movies, you'd be a wreck. Leave the frighthouse; tune down the noise. What's “tune down the noise?” Okay, give you a tune down noise. Tune down the noise, is that, say what you will, GDP was pretty strong in the first quarter. Say what you will, employment was pretty strong in the first quarter. We're only a few weeks past the first quarter, right? It's not that we're forever past. Say what you will, unemployment insurance claims last week were very solid. And I could go on; inflation is down. Focus on the fundamentals, and tune out the noise.
Willy Walker: If Turkey can grow, we'll grow. You just told us a moment ago, hang on a second, because you just told this a moment ago. We could have a 1.2% hit to GDP. So your 2.7 number, which you gave me three months ago in January, 2.7%.
Dr. Peter Linneman: Could easily be down to 1% for one year.
Willy Walker: It could easily be down. It could be at 1% for one year. Are you revising your 2.7 for this year?
Dr. Peter Linneman: Not yet. Oh, no, not yet, simply because we're in early innings on this thing. And any adjustment that I would make is not being made on fundamentals. It's being made on noise. And I just don't want to adjust it on noise; I can do the mathematics. Okay. But I don't want to adjust it until I see a lot more distance on where this is going.
Willy Walker: So you said S&P was going to be up 7% to 9% in 2025. It's off 8% year-to-date. Where are you for the end of the year?
Dr. Peter Linneman: Same type of answer. I think it will actually be up a bit, but not as high as I thought. And the reason is very simple. Most of what I think is down on is confusion. By the way, I'm confused, you're confused. You follow this stuff very closely. I follow it closely. Confusion raises the risk premium. I think as time goes by, the confusion will go down. That may or may not mean we like the policies, but the confusion factor will go down.
Willy Walker: So let's turn to oil for a second, Peter, because you and I spoke last week, and we were talking about the inflation impact of tariffs. And I said to you, “How much does $60 a barrel of oil impact the CPI?” And your response was, with no hesitation, by the way, to those in the room, in the south of France on a yacht. That was Peter, not me. Italy, Italy. But be that as it may. But the same deal was a hundred basis points. Yeah, a hundred basis points.
Dr. Peter Linneman: Yeah. So, that's why I say I'm willing to change my forecast, as there are just too many moving parts still that are moving by the moment. It's almost “Why do you waste your time running through the calculations and pretending you've got better?”
Willy Walker: I mean, it sort of feels to me like why you go and do what your actual unemployment number is versus the Bureau of Labor Statistics. You do it on a quarterly basis. Every quarter, you're somewhere between 200. You basically say the BLS is 200 to 250 basis points underreporting unemployment on where your numbers actually are. And my question to you is, “Then, why do you keep track of it if it is a nonsensical data point?”
Dr. Peter Linneman: Well, it's not nonsensical; it's just that the nice thing about their data is that it is the same data.
Willy Walker: Right, it's consistent, right?
Dr. Peter Linneman: It's consistently wrong, if you will, but it's consistently collected, right? And that's useful. That's useful.
Willy Walker: Well, it's useful to an extent. Talk about this for one second. Everyone plays into commercial real estate and the cost of inputs and labor. I think one of the things on the tariff that has been most unsettling to people in the commercial real estate space has been, “OK, we don't have clarity on tariffs, but one of the reasons for it might be to reshore manufacturing.” If they are successful in reshoring manufacturing, that means that the labor pool is only going to get tighter, and that someone could go work in a factory or come work on my construction site. If we're already at 4.2% unemployment, if you're really successful at reshoring all this manufacturing, and also, you're successful at deporting illegals, it's going to create a much, much tighter labor base. Therefore, my cost of manufacturing that single-family home or that multifamily property or the office building is going to go up precipitously because of the cost of labor in the United States going up a lot. Tell me where I just went wrong on why people are scratching their heads.
Dr. Peter Linneman: Well, I just don't see how you get a lot of reshoring happening in any reasonable period of time.
Willy Walker: Okay, so we take that off the table.
Dr. Peter Linneman: Yeah, I mean, you're suddenly going to have…. what? You think we're going to have a lot of US factories by June next year, but people in this room….
Willy Walker: No, but people in this room are looking at plans. If you look right now, we have a quarterly deck at Walker& Dunlop that our market intelligence group puts out, and we just published it last week. And it talks about a couple of things. One, consumer sentiment, and the University of Michigan consumer confidence numbers, which, Peter, have fallen off the table so dramatically. Even before last week, they'd fallen down. Normal run rate there is about 75. It's down at 56, 57 right now. So it's way, way down. So, consumer confidence has come down dramatically. But the other issue is, if you look at the sentiment of owners of multifamily, of either buy, sell, or build, the top of the graph has got built. And it got pretty big a couple of years ago. And build is now this little tail at the top. And what you have is a sentiment in the market that has shifted dramatically from, in 2022, everyone wanted to sell, and there were actually few buyers. Now there's a stack of buyers waiting to buy. But then, nobody wants to sell it where cap rates are right now. And so consumer sentiment has changed a lot. I think what people in this room are trying to figure out is, am I going forward with planning to put a shovel in the ground and build into that market, and thinking about where labor is going to be, not six months from now, because no factory is going be built in the next six months, but a year from now. Two years from now. Three years from now.
Dr. Peter Linneman: I'll give an agnostic answer to the audience. I would bet that, if you had it to do over again, over the last 10 years, you wish you had been a buyer in at least seven of the 10 years, with hindsight. And by the way, if we went over 20 years, I'll bet you wish you had a buyer in about 14 to 15 of years. And over a 30-year window, I'll bet you wish you had been a buyer in about 23 of the years. Now, what's that say? Unless you're looking to flip, go in and be prepared for a rough ride if things go wrong. That is, keep your leverage low, et cetera. Second is uncertainty is going to knock down construction beyond what import costs are gonna do, beyond what interest rates are gonna do, just uncertainty is going to have a near-term impact. Willy, we talked, I think the last three times, about how very late ‘25 and into ‘26, you're gonna have a balancing market because that supply spurt is gone. It's gonna be gone longer than we thought, say three months ago, because of this uncertainty currently.
Willy Walker: Yeah, let's dive into that for two seconds, because you just said a balancing market. It's not a balancing act. The market is going to become an unbalanced market. You use the term in this quarterly Linneman Letter that you are reiterating rent spikes in multifamily, rent spikes, not rent increases, rent spikes in ‘26 and ‘27. You want to talk about a balancing market. 2024 was a balancing market. We had historic deliveries in 2024 in multifamily, and all of it was absorbed. All of it. So, ‘23 and ‘22, we were upside down on absorption versus deliveries, and we had negative absorption. In 2024, we actually had positive absorption in a year that had more supply come online than we've ever seen before. So when you talk about balancing, it's going to be wildly imbalanced in ‘26 and ‘27.
Dr. Peter Linneman: Well, you're right. Stating it a different way, what I meant was you're going to see positive rent increases again, and you're gonna see them to a fairly large extent in almost all markets, because supplies come down, but demand has stayed pretty well. And I don't see demand going away in the near term. I don't see a recession happening. I do see the economy could slow, though, if we keep taxes that high on 10% of the economy, right? And so, it is a little unclear, but I feel good that multiple people are going to live somewhere; we still have this massive shortage of single-family housing. That's not going to go away. None of this is going to help the single-family housing shortage go away. So if I'm in the multi space, I feel pretty good. Maybe I only feel pretty good because I could be in other spaces. I don't know, but not bad. It's just not bad.
Willy Walker: So let's talk about that for two seconds. You just talked about single-family housing, which is obviously, if you will, the competitive alternative to multi, okay? And you talk in the letter about a million single-family homes being developed on an annual basis. That doesn't close the three million shortfall that you have been stating exists since the GFC to today. In that deck that I talked about that we just put out, there's a really interesting graph that I'll just talk through quickly to then prompt the question to you, Peter, which is just that the median U.S. Single-family home in 2020 cost $285,000. Today, that home is $385,000. So it's added $100,000 on the median-priced single-family home in America over that period of time. Then if you go in and look at what the average cost of renting in America back in 2020 was and what the at average P&I payments on that single family $285,000 home was, if you own the home, you were somewhere between $200 and $300 in the black as it relates to your P & I payments were $200 to $300 less than if you were the average renter in America. $1,500 to $ 1,800 is the delta between those two. Now move up to the $385,000 single-family home today, and you're completely upside down on your P&I payments versus your average rent. Your average rent is today somewhere between $400 and $500 less than P&I payments on that $384,000 home. So, single-family housing has become thoroughly unaffordable for middle America.
Dr. Peter Linneman: So, yes, but.
Willy Walker: Yes, but now go. There's a different twist.
Dr. Peter Linneman: Slightly different twist. First of all, again, you're not going to stand in the rain. What people are going to do in the face of that, or a lot of people don't buy the corner house; they buy the house two lots in. They, don't buy the one with the fancy new kitchen; they buy the one with a kitchen that needs to be…
Willy Walker: Let me push back on that for a second, because here's the deal with that. As you well know, everyone who owns that house that's not the corner one, but in the middle of the block has a 3.2% 30-year fixed rate mortgage that is not going to have them sell that house, which means the only way you move to that cheaper one is that you get new supply that hits that lower price point. The single-family home builders are not building that lower-price point.
Dr. Peter Linneman: And I think I was the first to point that out about…
Willy Walker: Where do you think I get all this sh*t? I get it from you. I'm not the smart one. I get this from you
Dr. Peter Linneman: And it truly came true, and you are getting some of those homes sold because people die, people get jobs in a different city, they retire. But it's slow, there's no doubt. The other way that people will deal with it is that they'll stay in multifamily longer, whether they like it or not. They'll build up a bigger equity cushion because if instead of putting 10% down, they put 20% down, they bring down that number you were talking about, right? It's not quite apples to apples, but it brings it down to be affordable. That's good for multifamily because they stayed not only because to get a 10% down payment took longer, but to get a 20% down payment or a 25% down payment instead of a 10 also kicked in. And that's not gonna go away. My memory is Ivy's got a number not so different from mine in terms of the shortfall. I think Goldman has a number, not so different, I think Ken Rosen has a number, so it's not even, “just Peter's number” in this case. It's kind of anybody who's awake’s number. Single-family is fundamentally underproduced. And that's why home prices keep rising.
Willy Walker: And you say we're not going to close that shortfall for a decade. In this quarterly letter, you say it's going to take us a decade to close that shortfall. Does that mean that you ought to just go out and buy any home builder today and just hang onto the stock for the next decade?
Dr. Peter Linneman: More or less, yeah.
Willy Walker: That's what I wanted to hear.
Dr. Peter Linneman: The question is, how much of it is priced in? Some of it is already priced in. But I don't know how it gets eliminated even in a decade. I really don't. That would mean for 10 years, including a year or two that had a cycle of the downturn, right? And a year or two that crazy stuff happened.
Willy Walker: You're doing a million to a year.
Dr. Peter Linneman: 300,000 more a year than normal. I don't see that happening, right? With NIMBYs and so forth. By the way, I came to a conclusion the other day. I was talking to somebody who was saying these are unprecedented times. It's a once-in-a-lifetime kind of time. And I said, I'm 74. And every year I've been alive is unprecedented. It is just unprecedented in a different way.
Willy Walker: You talked about that one thing that I thought was an interesting stat was where real per capita net wealth when you were born, where today I think it's at $89,000, and when you were born, you said it was $22,000 on a weekday.
Dr. Peter Linneman: I think it's fair to say people should look at it because it's staggering, the increase, right?
Willy Walker: Yeah, it's incredible, the wealth accumulation that's happened.
Dr. Peter Linneman: The wealth accumulation, the income accumulation, the longevity accumulation is stunning.
Willy Walker: But that's a good segue to the consumer. So you have in the quarterly Linneman Letter a ton of data on the US consumer and what they own and their assets, and where we are. The one data point that I always go to on a quarterly basis is your debt-to-disposable-income ratio, which basically says, “Take a look at what they have as far as cash flow coming in and what all their liabilities are and where they are.” And it struck me this quarter, Peter, the debt-to-cash-flow ratio that you calculate has dropped from the high 80% to the high 70%, 10 points of improvement from 2019 to 2025.
Dr. Peter Linneman: And by the way, you described why earlier, and that's because 42% or so of the population is locked in a super cheap mortgage, which allows their total debt service to be a lot lower than it would otherwise be. But when I say otherwise, by historic norms, right? Would be.
Willy Walker: And so, I mean, you and I've talked about this extensively, a lot of people have been concerned about credit card debt and you have said consistently the fact that there's a trillion dollars of credit card, debt outstanding is more of people using it as an ATM card and not the fact that they're using the credit behind it. They're just using it because it's an ease of pain, convenience, transactional convenience.
Dr. Peter Linneman: Exactly.
Willy Walker: But if you look at the bank earnings and credit card charge-offs... And you mentioned it in the letter, they have ticked up. Not a lot, it's basis points, not percentage points, but we're back at a normalized credit card delinquency rate in a normalized economy. Obviously, they got much, much better in the pandemic because everyone was getting checks from the US government, and therefore, we had no credit card delinquencies. They've come back to a normal run rate. So if credit card debt is okay, if mortgages are locked in, and if the overall debt-to-consumer-income ratio is down at almost a historic low, you're saying the consumer is strong and will be able to get through whatever downturn in GDP we get over the next year?
Dr. Peter Linneman: Yeah, and remember the one thing you left out. They still have huge cash balances.
Willy Walker: Right. So jump in on that because the numbers on cash balances are staggering.
Dr. Peter Linneman: Staggering. We pumped a lot. The reason we didn't get runaway, truly runaway inflation, either after the financial crisis or after COVID, and we know in both instances, huge amounts of money was pumped into the system, right? But we didn't get Milton Friedman kind of way, way more of the cash. So the so-called velocity of money, the speed at which we turned it over, went down almost commensurate with the rate at which the money came in. That means they're sitting on good cash balances. Now, by the way, just to be fair, you hear this number, whatever it is, 22% of Americans can't come up with $400, right? I'm not saying every individual is in the catbird seat, but I can tell you, in the aggregate, it looks pretty good. They have jobs still. We have growth. Yes, it could get knocked down considerably, but it still would be growth. They still have inflation that is moderated and not stunning. Look, I don't want to knock 1.7 percentage points off of GDP growth. That can't be good, right? That's why I'm generally for lower taxes, including tariffs, right? I mean, I want lower taxes. It is funny, by the way. I have to say one thing. I'm not political. I'm kind of a Milton Friedman libertarian who always thinks whatever's in is doing stupid stuff. But you have to admit, it is funny. Ironic and funny that the Democrats were talking about we're going to have to raise taxes, we're gonna have to raise taxes, when we get elected, we'll raise taxes and we're going to raise taxes. And Trump's saying, nope, we're not gonna raise taxes. We're not going to raise taxes, and Trump has raised taxes on 10% of the economy by a lot. And the Democrats are the ones saying, no, no. Don't raise taxes, don't raise taxes. There is a bizarreness to all that.
Willy Walker: Well, there's a bizarreness of it, and there's also an understanding of the political system, where he can do these trade deals on his own without going to Congress, whereas if he's gonna do a tax deal, he's gotta go to Congress. I thought the other thing that you do say in the letter, Peter, is you don't think that this administration expends a whole lot of time and energy on the tax bill, that you think that they're gonna just basically ask for an extension of the existing tax rates, which is interesting, because you do see the Trump administration moving to,” This isn't tax cuts. It's an extenuation of what actually exists today,” which is a little bit of their messaging to say, “We're not coming in to bring taxes down further. We just want to extend the Trump tax credits, tax cuts from 2017.”
Dr. Peter Linneman: And they'll do the couple they promised, or not promised, promoted during the campaign, which was no tax on social security income, no tax, no income tax.
Willy Walker: On tips, which you gratefully point out as a rounding error.
Dr. Peter Linneman: It's a rounding error in revenue. It's a rounding error. It makes me feel that I got something, but I didn't really get much, right? And so they'll do that kind of stuff.
Willy Walker: Which I would just make one quick point on, which I thought about when you talked about the small impact of tips. And I was thinking about the campaigning on it and how big an issue that was in the campaign, where it actually turns into nothing. And one of the things I think is so interesting about this is that in an interesting way, when Trump goes and talks about reshoring manufacturing, what he was able to do in places, West Virginia and Ohio, is give those voters hope that there was going to be a job for them in the future. And it's really interesting to think about the politics of this. Barack Obama won two terms on hope. He was successful at branding hope, that things were going to get better, that your job was going to get better. What you clearly have seen is this big swath of the American public, whether they worked in manufacturing or lower-level service jobs, had lost hope that they could ever get a job again because they hadn't been retrained; they hadn't been retooled. And all of a sudden, along comes Donald Trump saying, “I'm going to get all these plants out of other places in the world. Don't worry whether you like the job or don't like the job, I'm gonna give you hope that you, at some point, are going to be employable again.” And I think that that's the way, from a political standpoint, whether it's an economic reality or not, doesn't really matter. The reason so many people backed him is because he was actually giving them hope that they might be able to get a job, which I think is not a minor thing to keep in mind as you think about why he's in the seat today and who actually supports his efforts.
Dr. Peter Linneman: Now, I would agree on that. I'm not a political maven, but clearly people were reacting against what is loosely called woke. And I think that part of his program I think has pretty broad support, not 100% support. If you go back to your one, two, three kind of model and you said on the woke dimension, I think you would find a lot of ones that were on the right track. And that was also a big part of the election.
Willy Walker: So I want to close off on cash for a quick moment because there's some stats in there that are important for everyone in the room and watching the webcast to keep in mind. And then I want to go to a couple of other asset classes, and then we've got to close it down, and we're going to go to Q&A here in the room. On the cash one, though, Peter has this data, and I'm not reading notes, so I'm just going to use it off the top of my head. I had specific notes on it, but there's about $ 165 trillion of assets in the American zone, $165 trillion. If you look inside of that about $70 trillion, and these are rounded numbers, but about 70 of it is non-equity financial assets, which is treasuries, corporate debt, muni bonds, all that kind of stuff, about 70. $37 trillion is equities. $35 trillion is home equity. I thought that it was interesting that equities in the stock market and home equity sit about the same. And then cash is $22 trillion. Cash and money market. So just, I mean, to Peter's point, as it relates to the U.S. consumer having cash, now Elon Musk may have $18 of that $22 trillion sitting in his bank account. But my point is that there is a massive cash cushion. And if you think about the assets that we have, how much is in debt capital markets at $70 trillion, equity capital markets is roughly $35 trillion, same as home equity, and then cash at $20 trillion, I thought as I read through Peter's numbers on that it was really helpful to understand that when he talks about that, how big a cash pile the U.S. consumer sits on.
Dr. Peter Linneman: So let me pick up one thing, and I'll just take the simplest version of it. As you say, equities are about the same as people's equity in their home. Remember, I said that since August 8th, the stock market has been flat. Okay. What's happened to people's home prices in that intervening time? Therefore, people are wealthier than they were eight months ago, even though the market has just fallen by whatever percent from its peak. Real people are wealthier today than on August 8th, the last time the market was at this level. And so when I say try to filter the noise, that's what I mean. So filtering the noise is every time you see the stock market fall, first thing I do is go back and say, when was the last time it was at this level? And was I panicked when it was at that level, or did I feel good? All right, that's turning down the filter on the noise, right? When people are panicking, I look at the unemployment insurance claims and say, “Where are they at versus norms?”
Willy Walker: No, just as an aside on that, they were at $ 6.2 million this week five years ago, $ 6.1 million on insurance claims five years ago this week.
Dr. Peter Linneman: It'll be $222,000 or so this week. So I don't want to create the impression that everything is wonderful. You mentioned the one interesting thing, the really interesting thing, which is even though the data is showing pretty good sentiment, and I include the stock market, I include the bond market as sentiment indicators, right? Nobody knows what NPV to really calculate; they are sentiment indicators. You mentioned consumer sentiment; you mentioned the Small Business Optimism Center. So what we've got is a situation where, in the last month or two, the data on reality is not so bad, but the data on sentiment is quite dour.
Willy Walker: Isn't that the time to go? Isn't it time to be contrarian and put your money to it?
Dr. Peter Linneman: Does sentiment adjust to reality, or does reality adjust to sentiment? Historically, sentiment adjusts to reality. And so, for example, since COVID, there have been four times people have said, we are now going to have a recession. And I kept saying, no, no, no. All right. The reason was simply that I was looking at reality, and reality wasn't suggesting it, but sentiment was. And I'm not saying that is always the case, but generally, sentiment adjusts to reality. Think of the Kansas City Chiefs fans watching the Eagles pummel them. And that a die-hard fan was sitting there saying, “I knew you were going to do that.”
Willy Walker: Knew you were going to do that, you raised football before and I didn't jump in purposefully. It'll give you the opportunity to gloat in your Eagles victory. But I will say on the forward markets, hang on, I got to take this out on the forward markets. They say that the Washington Commanders are going to win the Super Bowl three times in five, six, and seven years out. So as a commander's fan, I was really on those forward markets, but anyway, go ahead.
Dr. Peter Linneman: He's a very talented guy. But, in the sentiment versus reality, I watched the game with a former NFL player. He basically said, the game's over with two minutes to go in the first half because of, I don't know, the sentiment of every Kansas City Chiefs fan and a lot of Eagles fans that Mahomes was gonna come back. And eventually, reality became sentiment. Eventually, that is generally true in life. Reality eventually becomes sentiment. Right now, people are kind of believing sentiment becomes reality, and I don't think that it’s going to happen.
Willy Walker: I've got to close this out before we go to Q&A in here, just real quick across other asset classes. We focus a lot on housing and multifamily and that's the group that's here and what they're really focused on. I was surprised by 17 of your 44 office markets being back in line. That is a major change in your data as it relates to the office.
Dr. Peter Linneman: They're improving; they're improving really slowly in the rent and occupancy sense and they're improving really slow in the capital market sense. You had John Gray on, what? Two weeks ago?
Willy Walker: Yeah.
Dr. Peter Linneman: Think about it. John, and I'm not trying to quote him, John said, “Yep, we're tiptoeing into office.” I'm involved in Equity Commonwealth. We sold a building to Lone Star. Those guys weren't there buying offices a year ago. And I said, those guys with institutional money are starting to tiptoe back in, but it's slow and there's still a lot of uncertainty there.
Willy Walker: And then on retail, your number is, what was it, the number, $620 billion of retail sales in the month of March?
Dr. Peter Linneman: Yeah, roughly.
Willy Walker: I think that's right, $620 billion. That's a very healthy retail sales number. Do you still like retail?
Dr. Peter Linneman: I like retail. I like good retail. Never have liked bad retail. I like retail. What is it? No, but what's good? Nobody likes bad things? But, one of the first lessons I learned from Al back in ‘86 when I was learning stuff from him was, you cannot buy retail cheaply enough to fill it if people don't wanna shop there because you cannot, by lowering your rent, change the price of Cheerios, right? That's different than an apartment, that's different than a warehouse, that's different than an office building, right, where you directly affect the decision maker. But with retail, you don't directly affect the decision-maker. So I like retail, wherever people want to shop because I think the economy will grow. Stay tuned for how big the tariff impact will be, which would slow it.
Willy Walker: I'm gonna close us out on the webcast and go to Q&A here with the YPO group in Chicago. To all of you who joined us, and I see the thousands that are on the number down below, thank you for being patient as we streamed in at the beginning of this, and thank you for sticking around a little bit beyond the bottom of the hour. We're usually pretty good at starting and stopping at the bottom of the hour. We'll see you again next week. My guest next week is Christopher Cassidy. I already did this interview, and it was one of the most engaging interviews I've ever done. Captain Chris Cassidy is a graduate of the Naval Academy, Navy SEAL, commander of SEAL Team 3, turned US astronaut, and chief astronaut of the United States of America, who has done three space flights. He's one of three people who have been a Navy SEAL turned into an astronaut. And the things that Chris and I talked about, as it relates to leadership and the experiences he's had in his life in both defending the United States of America and then also exploring space for the United States of America, is really a phenomenal conversation. To anyone who wants to join us next week, come listen to Chris and me. Peter, I'm gonna take this down. You're gonna stay on, but we're gonna go off the webcast. Thank you, everyone, for joining us this week. And Peter, thank you for all you put in.
Dr. Peter Linneman: Thank you.
