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Show Notes

Carl Lewis:

Welcome to The Connected Enterprise podcast. I’m Carl Lewis, your host from Vision33, and my guest is Saied Omar. Saied is a finance and real estate expert and podcast host. Saied, tell us about yourself, your background, and how you got into podcasting.

Saied Omar:

It started when I entered the real estate space through commercial lending around 2011. It was the start of a prosperous economy, and all I've seen is a prosperous economy. I’ll talk about this later, but that's largely why people are spreading optimism. That's all they've seen, or that's what they've gotten accustomed to. I've become somewhat of a historian, looking back at previous recessionary economies and trying to understand that trouble might be on the horizon.

For the last 10ish years, I've built a good bond with a coworker and friend, Chris Naghibi. He's my co-host on the Higher Standard podcast, which we started about a year and a half ago. We dive into financial literacy, and our target demographic is 18-40-year-olds, but we have listeners older and younger than that. We break down reports in layman’s terms and help people understand what they mean and how it affects them on a broader scale. We try to have fun with it too, so that's why there's an explicit rating on the podcast.

Carl Lewis:

On the podcast and in your personal life, you're in touch with many businesspeople, and you talk about pressing business issues. What are the most pressing issues?

Saied Omar:

Inflation and what the Fed's doing. What the Fed has done during the last year and a half with raising interest rates to 5.5% at the cadence at which they did it—although it's a nice bell curve shape where they start at 25 basis points, increase to 50, then have four 75 basis point increases, and then back down the bell curve and although they have mentioned they like to be data dependent—it almost reeks of being predetermined.

So what business owners, commercial real estate people, and the economy are trying to figure out is when the Fed will see enough for them to stop the rate hikes.

Because this whole process has three phases. In the first phase, the Fed's trying to tame inflation with their tool of raising the funds rate—the rate at which they charge banks to borrow money. When they do that, a lot of things are supposed to happen. But because of the last 14 years, we've lost elasticity in this tool, so we’re starting to see lag effects. Things like home prices should have started coming down by now. Unemployment should have gone up; even though the recent jobs report said it increased from 3.5% to 3.8%, that’s only a step in the right direction. Unemployment is nowhere near where the Fed likely anticipated it would be.

And they're hoping to see when the Fed will see enough for them to stop the rate hikes. Because the second phase will be that the Fed reaches their terminal rate. Then the question will be, “Are they going to hold? How long will they hold?”

As Chris and I routinely cite, the pain for consumers isn’t the rate hikes—it’s how long the rates stay high. Look at the last three times the Fed had to raise interest rates. In June 2000, they plateaued rates at around 6.5% and stayed there for seven months. In 2006-2007, they raised it to 5.25% and stayed there for 14 months. Most recently, in 2018, they increased it to 2.5% and stayed there for eight months.

Chris and I joke on the show that you could get your wife pregnant now, and she'll have the baby before the Fed cuts rates again. We'll see where this all goes, but the fear is that they’ll hold that long. That's where the pain for consumers comes in.

The next step is cutting the rates, but people don't understand how slow and gradual that will be. And unless something in the financial market breaks, that will cause a lot of pain for businesses and consumers.

Consumers are thinking about restarting student loan repayments. It’s coming when interest rates are at an all-time high, meaning people's credit card payments are through the roof again. Household debts and auto loans are reaching all-time highs. I know the reported GDP figures are all positive and rosy, but if you look at these reports and what they're signaling, they're flashing red. There's not a lot of hope in sight.

Carl Lewis:

Family and commercial real estate continues to rise, and since I'm older than you, I remember when home interest rates were at 14% in the 1980s. I bought a home during that time. So, it's not impossible, but it’s tough. Plus, the cost of the house itself was much less than what it is today.

If these prices keep going up and up and up, and it's more difficult to purchase a house, how is life different for the middle class? It's not an option for them anymore. How do they build personal wealth? How do they change their expectations?

Saied Omar:

This is the crux of what frustrates Chris and me. The Fed has been communicative throughout this entire process, and the media outlets have spewed a lot of rosy optimism. Many people were projecting business growth for the second half of the year, and people probably thought they would see some relief by now. Recently, people had projected two to three rate cuts by the end of this year, but now the projections say the first rate cut likely won't come till June 2024.

What that ultimately means for people is that if rates don't come down and more homes don't come on the market, and 2008 isn’t happening again because of the Dodd-Frank Act, and people have been underwritten much more strictly to ensure they can repay their loans, we have stronger borrowers now. 92% of homeowners have a mortgage rate below 6%, and you can't get enough new construction online fast enough to fit the needs of everyone out there.

And this bothers me so much because my parents came to this country in the '80s. They're from Afghanistan, and they had to flee when Russia invaded. They came from wealthy backgrounds over there, but they had to start over here. My dad rolled his sleeves up and learned to be a mechanic and successfully grew a business on his own; he has several employees working under him. My mom worked two or three jobs and was even a makeup artist for CBS News at one point. They saved their money and bought a little condo. And they held it, the value went up, they sold it, and we moved to the suburbs.

And that process is largely where the middle class’s wealth gets developed. And if the next generation can’t invest in homes—which is the primary source of for most US citizens—it worries me. It worries me for kids because the gap between the wealthy and the middle class will widen further and further. That’s alarming for me.

Carl Lewis:

Yeah. The middle class is shrinking in our country. We've talked about one factor, real estate, but are there other factors?

Saied Omar:

You cited the '80s. The Fed is trying to preserve this as best they can before it gets out of control like back then. That's why they acted so quickly and tried to get it under control, even though they probably acted a year too late. They said inflation was transitory, but the fear is what it could do now. They're more afraid of doing too little than doing too much because of what happened in the '70s with inflation. That two- or three-year problem ultimately became a decade problem because they cut rates too early.

This will have a rippling effect. The middle class is about 50% of the population, and consumer spending makes up about 70% of GDP, so you can see how this can have a ripple effect on not only them but businesses too. And the scary part for everybody is it's driven from expectations. So how do people perceive the matter? I think that's why you're hearing all this rosy optimism—but someone like Warren Buffett came out earlier this week and sold off $8 billion in stocks and increased his cash position to over $147 billion. He's signaling what he sees ahead, and if a recession starts, it will be a much deeper recession unlike one we've ever seen because many people have this built-up equity still in their homes, so they can still technically tap into that if they need to.

But what if jobs come down? People aren't hiring as much. I don't believe the JOLTS (Job Opening Labor Turnover Survey), which is reporting that there are 9 million available jobs. That’s basically a job and a half per unemployed person, which can't be accurate. People must be leaving job postings online. The debt crisis people are in will hinder them for a long time, and it worries me how they will get out of that. I don't have the answer to that. I don't know what they can do, but it worries me for everybody in the long term.

Carl Lewis:

I have similar concerns that when interest rates go up, everybody—businesses in particular—will start holding onto their cash out of necessity. And when you look at the business-to-business community, businesses also stop buying from other businesses. They let their inventories dwindle, they don't make new strategies, they stop being aggressive, and they go into their shell. Then, they lay people off because business is slower. So, I agree the unemployment picture is not accurate right now.

Saied Omar:

And to your point, recessions start one of three ways, but all three things will happen in the recession. We're starting to see businesses become less profitable because consumers aren't spending. What happens when businesses aren't as profitable? They must shrink in size, right? Meaning they're going to eventually lay off workers.

What does that mean? It means people are unemployed, there's less consumer spending, and it's a vicious cycle where now people are out there spending less, and it's causing even more and more, and it takes a long time. The Fed won't be able to just turn on the switch/raise. People won’t just go back out there again. Expectations influence behavior, and behavior affects inflation.

Carl Lewis:

And I don't mean to overlook those below the middle class. It affects them the greatest and the most harmful. I’m going to try to conclude this sad conversation with something fun. But I appreciate your honesty and clarity and the historical reflection on what this business process and recession are like. A lot of food for thought.

Saied Omar:

One last food for thought that needs to be driven home is the tightening lending standards. As an underwriter, I know we haven't even begun to see the full effects of that. There's less lending going on, and not because there's a credit crunch. The credit crunch hasn't happened yet. Banks are holding back, waiting to see what the Fed does. If a bank makes a loan today and the Fed raises rates again, that loan isn't as good as the one they could have made next month. So, they will hold and wait for that.

Once the Fed decides we've reached our terminal rate, the banks will be picky with who they lend to, and that’s going to hurt businesses that use lines of credit. Those loans are generally one to two years, and they need to get renewed. Some of their loans are up for renewal now, and they use it as working capital to hold themselves over while their accounts receivable come in. What's going to happen when banks don't renew their loans? These things will accelerate the process. Although the Fed has increased their Fed funds rate and we're starting to feel a pinch, the pain will come in the holding process.

Carl Lewis:

Hopefully, people are preparing and educating themselves. Saied, you don’t participate in social media, right? Why not, and has it benefited you?

Saied Omar:

It started when my wife and I got married. We were the first of our friend group to get married. It was before Instagram et al., and we decided it wasn’t something we wanted to partake in. We see the drama among so many other people.

Carl Lewis:

You met without any of that stuff?

Saied Omar:

Yes. I married my best friend's sister, but that's another story. Let’s just say he gave me his blessing and thought I'd be the best man for the job. I wanted to start our journey off right, and we felt we didn't need outside distractions or opinions, so we skipped social media. I’ve never felt like I was missing out on anything because I would keep in contact with friends via text messages, phone calls, and in person. I like the personal interaction most.

My co-host likes to poke fun that since the podcast has been growing at a nice rate, we need to start a page to engage with listeners. So, over the last six months, I opened an account for the first time. It gave me a lot of anxiety. I said, "I don't even know. I feel like I'm 70 years old. I don't know what to do with this thing. I don't know what I can say. I don't know what I can't say," so I engage with listeners only occasionally.

It's helped me most by letting me still be present with my kids—because that’s the most important thing. I'm an underwriter by day and a podcast co-host by night, but my number one title is Dad. I want to be the best dad I can. And being present for my kids and not caught up in everything happening outside the house means the most.

Carl Lewis:

I’m still raising a child myself, and I feel the same way. It's harder for me to get him to engage. My wife gives me a hard time. She's a little younger, so I still struggle to use some of these.

Saied Omar:

I Google everything. “How do I post this message on that platform?” And the level of restraint my wife and I have shown over the last 12 years makes it easy to log in, do what I need to do, log off.

At dinnertime, phones are off to the side. We're all focused on each other. That’s important. But the few engagements I’ve had with listeners have been pleasant and insightful. I enjoy it, and I feel like I'm using it the right way.

Carl Lewis:

I agree. And one more question. There's a lot of empty office space because we went through the pandemic and everybody was working from home, and now it's been hard to get people back to the office. Some businesses even closed all their offices, which affected the commercial real estate market. Has there been a real impact on commercial real estate because of this, and is that hurting us?

Saied Omar:

Absolutely. Over $1 trillion of loans are coming due by 2025. And when these properties get underwritten, a certain level of vacancy is considered. Typically, what real estate investors like to do is get to a point where their debt service coverage ratio is somewhere between 1.20 to 1.25 to make sure they're still cash-flowing positively.

When your vacancy rate goes up, you're no longer cash-flow positive. Forget that they won't be able to refinance their current loan anywhere. They must bring liquidity back in and back again to why it's so important that we talk about the Fed and raising the interest rates. When the Fed raises interest rates, what do we know that does? That's quantitative tightening. It means they're pulling money out of the market. When they pull money out of the market, businesses with commercial real estate loans won’t have enough liquidity to pay down their loans to refinance. Maybe a few, but they have large real estate portfolios.

And there's a big push. I've seen a few commercial real estate properties in New York that have been converted or are being converted into housing. And in Minneapolis—I think—they’ve fixed their own inflation problem by creating some housing through some of this commercial real estate. But you must get the city on board, then get people on board, and it’s expensive. Who's going to lend to a business to convert a property like this? There needs to be a huge backing.

Long story short, there's a major problem there, and one of many reasons I think Warren Buffet decided, "This is it. The writing's on the wall." I can see commercial real estate's coming due. Student loan repayments are coming back. With what's going on in technology, do we have an AI bubble? It feels like tech companies just say the word AI and their valuations go through the roof. There are so many factors right now.

Carl Lewis:

But they’re all early in their impacts.

Saied Omar:

I agree.

Carl Lewis:

They're all tracking together because they're all experiencing the same things. And if they all affect the consumer marketplace simultaneously, we’ll know the real story.

Saied Omar:

It feels like it's all coming together at the same time for a recipe of disaster.

Carl Lewis:

It's kind of scary. I know we'll get through it because we always do, but it won't be comfortable until we get there.

Saied Omar:

Right, and that’s why it's important to understand your options for preparing for these situations. People are living paycheck to paycheck, and it's hard. And it's harder to start during a time like this, and you wish you’d started sooner, but the number one thing you can do is educate yourself. Even if it's step by step, just progressively improve and you'll be better prepared because these are cycles. This will happen again. Maybe not like this again, but some form or another will happen again, so it's never too late to start learning now.

Carl Lewis:

That’s good advice, my friend. Thanks so much for being with us today.

Saied Omar:

Thanks for having me on, Carl.

Carl Lewis:

And until next time, everyone out there stay connected.