October 11, 2023 • 52 mins
Real Estate expert Jason Hartman discusses the real data about the housing market and what investors should expect going forward. See more of Jason Hartman at https://www.jasonhartman.com and on his YouTube channel, Jason Hartman.
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Speaker 1 (00:00):
What's up, everybody.
Speaker 2 (00:00):
Welcome to another episode of financial Heresy, where we talk
about how many works so that you can make more,
keep more, and give more. Today, I've got my good
friend Jason Hartman. He is a real estate expert. He's
been an investor in real estate for countless years here
all over the globe, traveled research spend, an expert voice
(00:24):
on investing in real estate for decades now and a
good friend of mine. Fantastic insights, and especially today when
there is so much fear, more people today than ever
in terms of the how long back, how far back
the survey goes are now saying that now is a
(00:44):
bad time to invest in real estate. And so with
that outlook, so much fear in the real estate markets
right now, we need to take a look at the
data see if that is unfounded, if that is you know,
if there's legitimate reason to be running away, to be selling,
if people should be buying staying on the sidelines. And
so I've invited my friend Jason Hartman on the show
(01:07):
today and we're going to go through all the real
data and give you the information you need to make
an educated decision about investing for yourself.
Speaker 1 (01:17):
For the future. All right, Jason, Well, thank you so
much for joining me.
Speaker 2 (01:20):
I'm really excited to talk here about real estate today,
so thanks for coming on.
Speaker 3 (01:25):
Joe.
Speaker 4 (01:26):
It's good to be here with all the heretics.
Speaker 2 (01:30):
Well, we're discussing something that is one of the most
heretical or controversial topics today and for some background, for
the last couple of years, but increasingly recently, I've had
so many people telling me that they're waiting for the
crash to buy real estate, waiting for They're sitting on
the sidelines, waiting to buy until you know, they're sitting
(01:53):
in cash. And now people are starting to get scared
because they're like, hey, I could have afforded a twenty
five percent down payment a couple of years ago, and
now I don't even know if I can afford to
buy anything. So i'd like to I'd like to get
an insider's perspective on the real estate market, what you're
seeing in uh, you know, in the different areas. So
(02:13):
there's two different things I'd like to talk about. Number
one is personal residents and number two is investment properties
because those are going to be you know, a little
bit a little bit different. So in general, before we
dive into specifics. What is your outlook on nationwide averages
single family homes, personal residences for individuals?
Speaker 1 (02:33):
Right now?
Speaker 2 (02:33):
Should we be selling, should we be buying? Should we
be sitting on the sidelines.
Speaker 4 (02:37):
Yeah, that's a it's a it's the million dollar question,
and it is a bit of a complex question. So
let's let's peel back the layers of the young and
do legitimate analysis rather than clickbait and purveying, fear porn
and all of that stuff that you know, Look, it's
it's unfortunate, but that's the stuff that gets attention in
(02:58):
the media, right, all of the sensationalism that works, right,
you know, they've learned how to appeal to our psychology
and bait us into it. But you know they arrange
the environment to get people to lose money, okay, and
social media platforms that are designed to be addictive. Right,
(03:19):
So this is all unfortunate, but we've got to overcome
this stuff and not fall for the tricks.
Speaker 3 (03:25):
Okay.
Speaker 4 (03:26):
So the reality is that in a country is large
and diversus the United States, there are many real estate markets.
There are over thirty one hundred counties in the US.
There are over nine thousand cities in the US. There
are over or about four hundred metropolitan statistical areas in
(03:51):
the US, so it's a huge country, very diverse, and
the old saying in real estate is definitely still true.
All real estate is local. But it's wise to break
this down into three types of real estate markets, linear markets,
cyclical markets, and hybrid markets. So if you're looking at
a chart of appreciation over time, a cyclical market, which
(04:15):
is the market almost everybody is paying attention to. This
is like the West coast of the United States, the
expense of Northeastern markets, and South Florida where I live. Okay,
those are cyclical markets. And if you look at a
chart of appreciation or depreciation, the chart looks like a
roller coaster. It's got glorious highs, it's got really ugly lows,
(04:37):
and it goes up and down, up and down. These
are the La Phoenix, yep, La where I grew up.
Phoenix is now a cyclical market where you've got booms
and bus Okay, these markets get all the attention because
there's a lot to talk about, there's a lot to
report on. They're sensational. But we like to invest in
linear markets that are kind of boring, honestly, you know,
(05:00):
just sort of chug along. They have minor ups and
downs over time, but they're not significant, and they have
very good cash flow. These are the conservative markets that
are really most of the country and most of the world,
but they don't get much attention because there's not much
to talk about. Hybrid markets, as the name would imply,
(05:20):
is in between the two. Those would be like Denver
and Austin. Austin might almost be considered a cyclical market now,
it was historically a hybrid market, and so that's what
we need to understand first. But secondly, let's talk about
the lack in effect. So, as you've reported, and as
(05:41):
I've been reporting for a long time, you know, we've
got all of these cheap mortgages out here, and this
is something that all of the people that tried to
forecast the housing market just didn't understand and didn't account for.
Most people think that when interest rates go up as
they have, you know historically, I mean, we're all blown
(06:04):
away by how quickly interest rates have increased, and most
people think myopically that that is going to destroy the
housing market. But I want to give everybody listening a
new perception of that, and it would be like this,
maybe comparing it more to the bond market, because the
(06:26):
bond market, you know, when interest rates go up, the
value of bonds goes down, and when bond values go up,
it tends to push interest rates down. Right, your listeners
understand that. Of course you understand that. And so what
happens with higher mortgage rates is, yes, that pushes housing
affordability down. And right now it's terrible. It's a four
(06:48):
decade low. So housing affordability has not been this bad
in forty years. It's terrible. So it's made it very
difficult for people to buy a house. But when and
when the cost of money goes up, it makes cheap
money more scarce and more special. So why is a
(07:08):
diamond more valuable than some sand? Right, Well, it's more
valuable because it's more rare. And so when money gets expensive,
the cheap money that's now scarce is very valuable. So
the holders of all the cheap mortgages, their asset literally
(07:30):
went up in value relative to them. Okay, so you know,
if I ask you, you know, do you own something
that is more valuable to you, Joe than it is
to other people? Like if you put whatever the thing is,
maybe it's a sentimental item, right, if you put it
on the market, say you put it on eBay and
(07:52):
tried to sell it, right, it would sell for its
market value, but you're probably not selling it because it's
more valuable to you and it is to anybody in the.
Speaker 1 (08:01):
Market, right, right, Yeah, exactly.
Speaker 4 (08:04):
It's a concept everybody can relate to. So the same
is true of houses with these cheap mortgages. That house
might sell for five hundred thousand dollars on the open market,
but to the people who own it, because it has
a cheap mortgage attached to it, it's worth six or
seven or eight hundred thousand dollars. And that's the comparison
(08:27):
people have failed to understand, okay, And it's a really,
really important comparison. It is the reason that we have
very high mortgage rates, which would normally cause all sorts
of economic distress, and it would cause people to be
motivated to put their houses on the market thinking the
value of their houses will go down.
Speaker 3 (08:50):
When the opposite has happened.
Speaker 4 (08:52):
All of the experts, virtually every expert, Fanny ma Freddiemac
Case Shiller, all of them predicted how values to decline
this year, and the opposite happened. Housing actually went up
in value even though the cost of money literally tripled.
So it's a it's an interesting time.
Speaker 2 (09:15):
Very interesting, especially, like you said, it goes against the
the kind of the mainstream what would seem logical. It's like, hey,
if it costs more than it ever has to buy
a home, then you know, that's that seems like a bubble,
So prices should come down, and people can't afford new mortgages,
so house prices have to have to come down to
(09:36):
compensate for the increase in rates. I mean, last time
rates were this high, it was like two thousand. The
median home price was like what one hundred eighty nine
thousand dollars or something like that.
Speaker 1 (09:46):
Crazy.
Speaker 2 (09:48):
But to your point, basically, when since people can't afford
to buy a new house right now, that just means
they can't afford to sell their current house.
Speaker 4 (09:58):
That's the point, okay, Because if they were to sell
their current house, anything they could buy or rent would
cost them more money for probably a lesser house. So
they're staying put. They're hanging on no matter what they
are going to beg borrow and steal to keep these
(10:21):
cheap mortgages and the houses that happened to be attached
to them. So, Joe, you talked about prices and interest rates, right,
and obviously the cost of housing is a blend of
both of those things.
Speaker 3 (10:32):
But it's also a.
Speaker 4 (10:33):
Blend of inflation and incomes, right, and those ideally track
each other, not perfectly, but a little bit. So let's
go back to twenty eleven, when the median mortgage payment
in twenty eleven was one and nineteen dollars per month
and the median price house was two hundred and twenty
five thousand dollars a month. Well in twenty twenty one,
(10:57):
ten years later, and you alluded to a very important
point that a lot of the experts are missing. It's
not that important what's happening today when sales activity is
down so much. What's important is what happened two years ago,
when sales activity was through the roof, when tens of
millions of people in the COVID era either purchased a
(11:20):
home or refinanced their existing home because they've got a
very comfortable mortgage that they're not giving up. So ten
years after twenty eleven, you moved to twenty twenty one,
and the median mortgage payment was actually eighteen dollars a
month lower in nominal dollars, meaning not adjusted for inflation
(11:41):
the name of the dollars. That's what nominal means, okay,
And so the payment was only one thousand and one
dollars versus ten years earlier, it was one thousand and
nineteen dollars, but adjusted for the official rate of inflation,
not the real rate of inflation, that payment only feed
bills like seven hundred and thirty dollars a month. So
(12:05):
the people ten years later, they literally stepped into a
dolore in a time machine like in Back to the Future. Okay,
they traveled back in time. They got the same nominal
payment essentially that people got ten years earlier, but inflation
still affected them and debased the value of that monthly
(12:26):
payment and made it feel cheaper. So their payment in
real dollars is literally two hundred and seventy dollars a month,
or two hundred and eighty dollars a month less expensive
than it was ten years earlier. Now, let's also take
a look at the price of the house. Okay, the
median house price in twenty twenty one was just about
(12:48):
four hundred thousand dollars, but adjusted for the official rate
of inflation, which is highly understated due to waiting substitution
and donic indexing, which we I'm sure you've taught you listeners,
the real price of that house, according to the official
CPI or the cp lies I like to call it,
(13:09):
is two hundred and ninety thousand dollars. So yes, it
was cheaper ten years earlier at two hundred and twenty
five thousand dollars, but the gap wasn't nearly as large
as most people would think when you adjust for inflation. Now,
if you adjust for the real rate of inflation, it's
much much cheaper because inflation is understated by the CPI.
Speaker 3 (13:32):
So you know, this.
Speaker 4 (13:33):
Real payment per month and the real price of that
house would be considerably less. I don't have you know,
I don't have numbers for that, because it depends what
your opinion of the real rate of inflation is. But
I would argue that generally it's pretty much double whatever
they're going to tell you. Okay, so we're almost double yeah.
Speaker 2 (13:52):
Right, yeah, absolutely, well that's that's insane. Didn't I did
not realize that that ten year gap from twenty eleven
to twenty twenty one in real terms, that it actually
went down like that. And it's important because you know,
somebody may look at that and say, Okay, well that
was two years ago. Things are much different now, so
(14:13):
things are going to crash, But it's like, no, remember,
it's important what happened then because you had a good
amount of future purchases brought forward into the present as
a result of that. And so yes, it's extremely predictable
that right now sales volume is at basically zero because
(14:34):
everybody who is going to buy in the next five
to ten years looking at twenty twenty forward, bought in
twenty twenty or twenty twenty one. It was like all
of that demand got brought forward into the presence. So
you would expect that there would be no more purchases
for the next couple of years, especially with prices doing
what they're doing.
Speaker 4 (14:53):
Yeah, if you listen to realtors, anybody who profits from
a real estate transaction or a mortgage transaction, they are
singing the blues. It's really tough for them right now
because you know, there's about one point five million realtors,
meaning member of the National Association of Realtors, right, which
is the biggest trade organization in the world. There's about
(15:14):
one point five million of them, which already that market
was highly overstaffed. But then you take and you reduce
the volume by fifteen to thirty percent, depending on the market,
and wow, that is a contraction, and that is really
really causing a lot of desperation. So a lot of
(15:35):
the bad news about the real estate market is coming
from the realtor industry and the mortgage volume. When you
triple the cost of money, I mean, virtually no one
is refinancing, right when we have this giant boom where
the whole mortgage industry expanded dramatically during the COVID era
to try and meet the needs of the incredibly low rates.
(15:56):
So when you have a centrally managed economy, you have
too many whipsaw effects right where it really rather than
letting market forces dictate the cost of money, which I
think is the way it should work. But you know,
we have what we have. We have a centrally planned
economy and Jerome Powell manages it right, and so you
(16:22):
know you're going to get these distortions and dysfunctions because
of that.
Speaker 2 (16:26):
Yeah, absolutely, that's where the boom bust effect comes from.
Speaker 1 (16:30):
That's the source.
Speaker 4 (16:31):
So all which, by the way, is interesting because back
in nineteen thirteen when the FED was created, that was
one of the things they claimed they would solve right
Yet and years later we had a huge recession in
the twenties. Then we had a great depression in night
starting in nineteen twenty nine.
Speaker 3 (16:48):
So they have not done their mandate right.
Speaker 2 (16:51):
Well, they fixed the panics and the bank runs, which
were local boom bust cycles, but they did that by
centralizing it and scaling it up to the entire nations.
Speaker 1 (17:00):
So not exactly a better situation now.
Speaker 2 (17:03):
All right, So a couple of things. One thing happened
over the last couple of years that has really never
happened before, and that was massive institutions stepped into single
family home buying. So you had hedge funds. You had
institutions coming in and buying up entire neighborhoods, like a
developer would develop a neighborhood and hedge fund would just
buy up the whole thing. And that that wasn't happening
(17:26):
in two thousand and four, thousand and five thousand and six.
That's something that's relatively new. And so number one, are
those institutions about to you know, go, were they just
buying out of FOMO and they're about to They're about
to implode and all that real estate is going to
hit them, hit the markets or are they still buying
(17:48):
or did they see something a little bit longer term,
you know, on the horizon that they were that they
were investing for.
Speaker 1 (17:54):
Here. What's your take on institutional buying of single family homes.
Speaker 4 (17:58):
Yeah, it's a great question, and presidential candidate RFK has
had a lot to say about that, but you know,
this is largely a false, you know, false comparison that
he's making, right, because yes, there's this fear that all
the institutional buyers are buying up all the single family
(18:19):
homes in America. And you're right, they are a bigger
player than they've ever been. I mean, you mentioned in
the two thousands, but go back in the nineties the eighties,
I mean, you just didn't have this right. Institutional investors
were buying office buildings, shopping centers, shopping malls, and big
(18:39):
apartment complexes. They weren't buying single family homes. But they
got really interested in single family homes. Coming out of
the Great Recession, rightfully, so they made a lot of
money in that business and I think are going to
continue to do well in it. But there's nearly twenty
million single family homes owned by mom and pop investors
(19:02):
that are rental properties, and the institutional players are becoming
a bigger force in that market. But in the overall
scheme of things, with one hundred and forty million housing
units in the United States total, right, they're really just
not a real force yet. Okay, this is a you know,
(19:23):
really a drop in the bucket. Okay, Yes, they're bigger
than they've ever been, but they've got an awfully long
way to go before they own one hundred and forty
million units. Okay, so this is just not a big number.
It's not a big force. But there are some interesting
effects that are happening because of this number one. And
if anybody's rented an apartment from the big institutional landlord,
(19:46):
they know this. Institutional landlords are far now I'm looking
at it from an investor perspective, not a renter perspective here, Okay,
they are far better at raising rents and optimizing their
portfolio because use all sorts of rent adjustments software to
do this, and they just constantly want to push the yield,
(20:08):
push the yield, so they are causing rents to go up. Okay,
and that's actually going to benefit the mom and pop
single family home investors because they're setting higher comps for
rents single family home. Mom and pop investors in single
family homes are not very good at raising rents at all.
They tend to get kind of lazy and say, eh,
(20:28):
you know, they've been a good tenant, I'm not going
to raise their rent when you know, we tell our investors, sorry, renters,
you're not going to like me for this, but you know,
we work with investors so and I'm an investor, so
you know we tell them to try and raise the
rents about four percent annually, right, And you know, if
you look at the past couple of years, that would
have been a cheap rent increase. You should have raised
(20:51):
it much more than that. But you know, over time,
on average four percent per year, right, That's that's about
you know, the going target, and institutional investors are are
far better at optimizing higher rents.
Speaker 1 (21:04):
Well.
Speaker 2 (21:05):
I think one other overlooked factor in why they are
so much better is because number one they're they're they're
going to be doing that. But number two, you have
to you have to do it in a sustainable way
to be able to keep on doing it in the
long term, which means you have to add value. So
when you look at the big properties that are owned
by the big institutions, they're much better places to live
(21:28):
in as a renter. Then you know, your your duplex
or your your quad plex that's owned by you know, uh,
somebody living down the street. You've got the amenities, you've
got better uh you know, payment methods, you've got better
response to issues. Bet like there, It's it's as a renter,
it's uh, if if you're going to be living in
(21:49):
a place that is going to be in be able
to increase the rent like that consistently, then typically they're
going to be doing things that will also bring demand
in for that higher rent.
Speaker 1 (22:00):
And so you know it's well, I name.
Speaker 4 (22:02):
The economy of marketing. You know, hundreds of units at
the price of one, so you know, they've got scale
and systems and all kinds of things. I'm just kind
of pointing out that the the mom and pop investors
actually benefit by writing on their coattails.
Speaker 1 (22:18):
Hm that makes sense. Okay.
Speaker 2 (22:20):
So so basically you're saying that institutions are, you know,
coming into the market.
Speaker 1 (22:25):
It's bigger than it's ever been. It's a but it's
not big in terms of uh.
Speaker 4 (22:29):
In terms of compared to the overall market. It's a
drop in.
Speaker 2 (22:32):
The bucket, and there are some influences that it has
on the rest of the real estate market. Do you
think that the properties that institutions are buying are for
the most part, they're they're off the market forever or
do you see like a Zillo apocalypse or something like
that where giant numbers of properties just get dumped all
at once.
Speaker 4 (22:52):
No, I think, you know, I think you know, they'll
of course, uh not be loyal to an asset class.
They're going to go where the money is right. That's
their mandate. But I don't think that they would ever
want to dump properties on the market because they'll be
shooting themselves in the foot, right, So you know that's
(23:12):
not I mean, you know, if you saw the movie
Margin Call, which by the way, is an excellent movie.
It's better than the Big Short, you know, you see
how and you know if you watch the show Billions,
for example, which also is very good.
Speaker 3 (23:24):
Except for season six it was terrible, but the others
were good.
Speaker 4 (23:28):
You see, how you know people who trade equities, you know,
in stocks and bonds, how they you know, sell things slowly.
They sell things from offshore accounts, or they buy them.
You know, they don't. They want to kind of keep
things quiet and on the down low. So you know,
they understand this. I mean, they're not going to dump
properties on the market because it would not be good
(23:48):
for them, right.
Speaker 1 (23:50):
Yeah, yeah, that makes sense.
Speaker 2 (23:52):
What about let's go to the opposite extreme unsophisticated new investors.
I'm specifically referring to airbnb properties. This is something that
has been circulating online a lot recently, people saying, hey,
we're going to have an airbnb apocalypse. I've seen maps
that are just ridiculous that show dots. You know, it's
(24:15):
a state, it's a picture of a state. I've got
a dot everywhere there's an Airbnb property, and it makes
it look like there's so many of them. But it's
like a dot is like the size of an entire
city on that side of the map. So what is
your view of the airbnb apocalypse? Is that overblown? Is
that going to happen. What's your viewpoint there.
Speaker 4 (24:34):
Well, this is a lot of fake news, and I'll
tell you why. You know, there is a well known
YouTuber who's doing a great job at marketing himself. I've
invited him on my show many times. He has accepted
a couple of times, but somehow the interview never happens. Okay,
and you know, he he does have some good data.
(24:54):
I'm going to give him credit for that, but he
does he makes some big leaps in logic. Okay, And
let me talk about inventory for a moment before I
answer that, because I've got to kind of tee it
up with some context. So right now, we have about
five hundred and thirty thousand homes on the market in
the United States. Keep in mind, we have one hundred
(25:15):
and forty million housing units, so there's no inventory to
speak of. Okay, inventory is extremely low because everybody's hanging
on to their very cheap mortgages.
Speaker 3 (25:28):
A normal market.
Speaker 4 (25:30):
Would be about one point two million homes for sale,
so that represents the shortage of about seven hundred thousand homes. Now,
keep in mind, it depends where you get your statistics
on this, because different groups do this differently. For example,
the National Association of Realtors. In their stats, they include
(25:52):
pending and contingent sales as active inventory. I don't like that,
so I don't use their stats. But it's okay if
you use their stats as long as you keep making
apples to apples comparisons. So if you want to compare
NAR's number today to seven years ago, NAR's same number,
that's fine. Okay, The percentages and the ratios will be
(26:15):
about the same. Okay, that's the importance. Yeah, right, But
basically for actual active listings where you can go buy
the house today, it's not contingent, it's not pending, it's
actually for sale. You've got a shortage of about seven
hundred thousand homes.
Speaker 3 (26:32):
Okay. So if you took all of.
Speaker 4 (26:35):
The one million or so Airbnb properties and they started
to come on the market, and they have started to
come on the market, by the way, Okay, over the
past year they have come on the market and they've
sold and or they've re rented on is to normal
long term rentals, right number one. These are properties that
don't make sense as long term rental properties. I help
(26:57):
people buy properties nationwide, help people invest and build portfolios
of single family homes in many different markets that we
like and recommend, but we only like cheap entry level
properties in linear markets. We don't recommend you know, six hundred,
eight hundred thousand or a million plus homes. A lot
of the Airbnb properties are those types of homes. So
(27:20):
first of all, you've got a segment by market, you've
got a segment by product type, you've got a segment
by price. Before you can really understand what's going on here.
But we're just talking raw numbers, so this is a
very broad conversation. So if we've got a shortage of
seven hundred thousand homes right now, to just be at
a normal market, not a bad market, just a normal market,
(27:42):
one point two million homes for sale, right, that would
represent you know, somewhere around six months of supply of inventory,
give or take. Well if every one of those. Now,
by the way, those stats are questionable also, okay, but
let's just assume there are a million Airbnb properties that
are struggling, right because we do have an Airbnb bust,
(28:05):
no question about it.
Speaker 3 (28:06):
And I can address more on that in a moment.
Speaker 4 (28:09):
Say they all came on the market at once today,
So now we'd have one point five million homes for sale,
we would definitely have a housing glut. So here's a
good metaphor. Everybody just pause for a moment, and I
want you to visualize your kitchen sink in your house,
right your kitchen sink. Everybody's got a kitchen sink, So
(28:30):
visualize it for a minute. Mine stainless steel. Okay, so
I'm visualizing my kitchen sink. The faucet represents new inventory
coming onto the market right now, and for a few
years now, it's been a trickle just you know, some
listings coming onto the market, not very many at all.
And the water in the sink represents the existing inventory
(28:56):
if it were full. If the sink were full, that
would be a normal mark at one point two million homes. Okay,
right now, it's about forty percent, So there's some water
in the sink, about forty percent full. The drain represents
the demand side, or the absorption rate the buyer's buying homes.
So right now the drain is a little bit clogged
(29:20):
because demand is down. Housing affordability is the lowest it's
been in four decades. It's very tough for people to
buy a new house right now. So the drain is
about twenty percent clogged. During the COVID era, when money
was one third the cost it is today, you know,
give or take. You know, the drain was like open
(29:43):
and they drilled another drain in the sink. There were
two drains.
Speaker 1 (29:46):
Okay.
Speaker 4 (29:47):
Everything was selling with multiple offers above list price. So
the situation we've got now is far from even a
normal market.
Speaker 3 (29:57):
Now.
Speaker 4 (29:57):
A bad market, by contrast, would be the is overflowing.
The water is overflowing. The drain is plugged and the
faucet is running full blast and the water is just
overflowing onto the counter and onto the floor. So that's
a bad market. So we are far from that now.
No one million airbnbs, if there are even that many,
(30:19):
because like some of the numbers I have are like
six hundred and fifty thousand, whatever, let's just go with
a million, give them that, Okay. They never decide to
come on the market the same day. They're all in
different areas, they're all in different price ranges. Some are condos,
some are single family homes, and all of these owners
of those properties have totally different situations. In fact, usually
(30:42):
a large percentage of the housing stock is a second
home stock anyway. Right, these are people that were wealthy
enough and not really wealthy, just you know, middle class.
A lot of people have a second home. Okay, they're
not selling their second home. They just stuck it on
Airbnb because when that was a thing and it was
(31:02):
going really well, they could make some extra income.
Speaker 3 (31:05):
They're not dependent on it.
Speaker 4 (31:06):
They kept their second home for years before that and
never put it on Airbnb, right, and just had a
second home. So you know, there are many different situations.
Some will sell them, some will rent them, some will
just keep them. Right. You know, there's a whole bunch
of complex things that go on in real market dynamics
(31:27):
that in a sensationalized, you know, fear porn purveying video
that gets a lot of clicks on YouTube.
Speaker 3 (31:35):
He doesn't want to talk about.
Speaker 1 (31:37):
The airbnb thing.
Speaker 2 (31:38):
Is so funny to me because well, first of all,
this is on the ground kind of anecdotal information, so
it's not.
Speaker 1 (31:47):
It's not statistical.
Speaker 2 (31:48):
But the airbnb investors that I know are always trying
to make sure that if the worst case scenario happens,
they could still rent the place out long term.
Speaker 3 (31:59):
So they're trying to get can't it won't make sense usually.
Speaker 1 (32:01):
Yeah, well, I mean that's probably the case them.
Speaker 4 (32:06):
It's just not going to be very good compared to
an investment something would buy through my network, right right exactly.
Speaker 2 (32:13):
Yes, this is, like I said, like anecdotal information of
like like they're saying, Okay, I'm gonna my plan is
rented out on Airbnb, but if the economy crashes, then
I'll at least be able to break even if I
if I rent it out, So they're not. My point
is I don't think those people are not going to
get forced out. Number one, and then number two, A
lot of the Airbnb listings are casidas or open bedrooms.
(32:35):
It's like that's that's not going to become a distressed sale.
Speaker 3 (32:39):
Exactly, good point. Good point.
Speaker 4 (32:41):
You know they're an accessory dwelling unit, a casida, or
just an extra bedroom. I mean, I know a lady
who loves to have Airbnb guests, right and she rents
out her extra bedrooms.
Speaker 2 (32:53):
Or or a big property that's got three walls put up,
and so it's three Airbnb listings, but it's actually one house.
Speaker 4 (33:00):
Right exactly, very good point.
Speaker 1 (33:02):
You know, well that's uh, dude, Joe.
Speaker 4 (33:06):
Though, before we move on, let me just say one
thing about Airbnb though, Okay, and I have been saying
this since twenty twelve, so I've been saying this for
eleven years. I've been beating this drum. We were never
recommending airbnb properties in any significant way. We had one
little market in Florida that we dabbled in them, and
(33:26):
you know, a few of our clients bought them, but
it was never a thing for us. We always recommended people,
by long term buy and hold rental properties that made sense,
entry level housing that just had super high demand. Economy
going good people are moving up, that's their first home,
they rent it from you. Economy bad, people moving down,
(33:47):
that's their home. That's going to be their safety net.
They're going to rent it from you. Right, This entry
level home is always in demand, the bread and butter housing. Okay,
But I always said for the last eleven or even
twelve years that Airbnb has never been through a real recession.
And if you look at the number of what I
call non primary beds in the world that has expanded
(34:11):
so dramatically. I mean, at the same time we had
the rise of Airbnb, hotels were still building, they were
adding rooms. New hotels were opening lots of them, and
so around the world we had this massive growth in
non primary beds. I mean, my primary bed is here
in my house, right, but sometimes I sleep in hotels
(34:33):
or airbnbs or whatever. And what's funny about it is,
did anybody happen to notice the rise of all these
new mattress companies?
Speaker 3 (34:42):
Right?
Speaker 1 (34:42):
You know where they come from?
Speaker 4 (34:44):
Where did Casper tough to needle Purple? All these mattress
companies came out of the blue like that, you know, right? Yeah,
so that went with the airbnb trend.
Speaker 2 (34:55):
Interesting, I'm going to have to think about that for
a while. That's that's good with the airbnb thing too.
This is something that I've experienced for about two years.
It was exciting and since like maybe twenty fifteen, I
would say that my experiences with hotels, I've had probably
(35:19):
one bad experience for every thirty good experiences. My experiences
with airbnbs and vrbos, I've had probably one good experience
for every twenty bad experiences.
Speaker 1 (35:35):
And they cost more, and so I don't.
Speaker 3 (35:38):
Really rent them. Yeah, I just stay at hotels mostly.
Speaker 2 (35:41):
Yeah, just like anything, I think that when problems arise,
situations get tough. Economic times get hard. The best players,
the people who do it the best will will win.
They'll survive, and they'll come out the other side even stronger.
They'll take more market share. But for the most part,
it's like I think there was a wave here where
there were a lot of people doing it, and now, like,
(36:03):
at least personally in almost everybody I know would rather
stay at a nice hotel for less than a bad airbnb, right,
you know.
Speaker 4 (36:12):
It just depends on circumstances. I mean, they certainly have
a place in the market for big families, for group events, whatever,
but you know, buy and large hotels just know how
to do it better.
Speaker 1 (36:23):
Yeah, yeah, that makes sense. Okay.
Speaker 2 (36:26):
Now, one of the other like you were talking about
fear porn things that just blow up, is people talking
about like the main argument that I guess you and
I've been talking about a lot here is that you've
got a fixed payment for the next thirty years and
it's way cheaper than anything else that you have the
option for today. But there are some people saying, well,
(36:49):
that's not true because taxes and PMI adjustments, and I've
seen some people say, hey, my mortgage payment increased by
you know, six hundred and seven hundred dollars a month
this year because of you know, tax and PMI.
Speaker 4 (37:06):
Is that is that another you don't mean PMI, you
mean just regular insurance, homeowners insurance, right.
Speaker 2 (37:12):
Yeah, yes, sorry, yeah, insurance adjustments upwards. So what is
that another thing that's just overblown or is that something
that could you know, spill over and snowball out of
control and these people who think they have low fixed
payment in the future are going to have a much
(37:33):
higher payment.
Speaker 4 (37:34):
Yeah, well, no, that is a real thing. And you know,
people are under pressure. And you know, one of the
other real things that we really didn't talk about, but
it is a real thing, is that the home is
actually quite affordable, but people are still getting squeezed in
all kinds of directions with credit card debt, student loan debt,
(37:55):
you know, auto loans, et cetera, et cetera. So I
I am not wearing a colored glasses. I know that
our economy is built on a house of cards, but
compared to what compared to every other economy is worse
off than we are.
Speaker 3 (38:09):
Like look around the world. I mean, what show me
where it's.
Speaker 4 (38:13):
Better, Like any major player in the world that you know,
you'd want to move to right, show me where it's better.
But so, yes, the answer to your question is definitely.
I mean, people are going to be pressured. But what
the economists don't really evaluate, and the housing forecasters don't
evaluate very well, is that people simply make adjustments, right.
(38:38):
They They sort of have this idea, Joe that like
the home buyer or the homeowner or the consumer is
like this fixed thing, and you know, housing affordability goes down, well,
then the housing market's going to crash because nobody's going
to buy a house. Well, that's not the way it works.
(38:59):
The way a market works is people adjust their expectations downward.
This is what inflation and bad fiscal and monetary policy
do to people. They lower the standard of living. Get
with it. That's just reality, right, And so I predicted
when interest rates were still very low. I remember doing
(39:19):
a speech. I had about eleven hundred people in the
room in Las Vegas. I was speaking at a conference
and I got up on stage and you know, I
got to get this recording out and show it on
my YouTube channel and played on my podcast because I
said that there would be a whole bunch of builder
cancelations that contracts would be canceled because people who bought home.
(39:43):
I said, interest rates are going to go up, and
people who bought homes and you know, had had to
wait six, seven, eight months or even longer for them
to be built. They qualified when they bought the house,
but then when rates went up, they didn't qualify, so
they had to cancel the contract because they couldn't afford
the house anymore and the lender wouldn't qualify them. But
(40:06):
that was not the That was not a real estate crash.
It was misinterpreted because what I also said at that
same speech is that these people would then adjust their
expectations downward and they would just buy a cheaper house
or continue to rent. It's still the same person occupying
(40:26):
a housing unit. Like, how do people not see this?
I mean, I don't even have a degree in economics
and I understand this.
Speaker 2 (40:35):
But it's not people just leaving the housing market. It's
occupying a different housing unit.
Speaker 4 (40:41):
Yeah, I know, it's just you know, look what I
said on your show is you know, I was born
in Europe, Okay, and I go back there often, and
you look at the standard of living in European countries
and people live in little crappy apartments. Okay, they've just
accepted that that is their standard of living in the
United States. We've expected this higher standard of living and
(41:05):
you know what, we've had it. But guess what it's
going down? You know, play the violin. I know it's terrible.
I agree, we're not moving in the right direction. But
compared to what I mean, who's better off? We're going
to be the best off in this whole economic storm,
(41:25):
all the geopolitical problems we've got, you know, I mean,
the US is way better off than most countries. We
get to export our inflation more than anybody else does
because we have the reserve currency. And yes, I think
we're going to maintain that status for a very long time.
You know, there's nibbling at the edges, sure, the bricks,
(41:47):
this and that, but you know, these are all pretty
much dying countries. Okay, Like I mean, does anybody think
the future is in Russia, South Africa or Brazil?
Speaker 3 (41:58):
Are you kidding? I mean some people do. They're out
of their mind.
Speaker 2 (42:04):
Well, I also think that it's important to take a
look at these things and instead of feeling sorry for ourselves, say, okay, well,
let's say there are problems that are going to make
things economically challenging. The question is for who for savers?
Absolutely for lenders? No, okay, So how do I get
(42:24):
on the right side of the fence. I've talked about
how we're entering into a at least ten, probably twenty
or thirty year inflationary cycle here, where inflation and rates
will be moving up for the next two to three decades.
You you have spoken about how to use that to
(42:45):
your advantage. So let's talk about that as the last
section here to focus on. There are things that are
benefited by inflation and things that are destroyed by inflation.
Speaker 4 (42:56):
Absolutely. You know, many years ago I trade more to
strategy that I call inflation induced debt destruction. I know
that's a mouthful, inflation induced debt destruction. Say it three
times fast.
Speaker 3 (43:11):
Anyway.
Speaker 4 (43:12):
Basically, the idea here is that you know you want
to another strategy I have is called the ultimate investing equation. Okay,
So I like income property because you're buying a hard
asset that is really a group of packaged commodities. It's concrete, lumber, glass, steel, copper, wire,
(43:36):
petroleum products, energy, labor, okay, and other things too. Okay,
and these things are indexed really well to inflation. So
if you believe the future is inflationary, you know, real
estate has always been a great hedge against inflation. Everybody
will tell you that. Okay, it's not hard to see that,
(43:57):
but that's sort of the first level thinking view. There's
a whole nother thing under the surface that is even
better than that. So, you know, we are all familiar
with the metaphor of the iceberg, right. You know, you
see a little bit of above the water, most of
it's below the surface. And what's below the surface is
(44:19):
if you leverage your real estate, you get to take
advantage of what's called self liquidating debt. In other words,
when I buy properties, or when our clients buy properties,
they don't pay their own debts. They outsource the obligation
to people called tenants. The tenants pay the debt, and
(44:40):
ideally they give us a little extra every month called
positive cash flow. So essentially you have the tenant paying
the debt, but you also have another big, powerful force
paying the debt inflation, and so that's the inflation induced
debt destruction. Picture it this way. Say everybody listening goes
(45:02):
to their favorite website after years. Their second favorite website.
They go to Jasonhartman dot com and they click on
the properties page and they buy three properties. And to
buy those three properties, maybe the value is one point
two million dollars, maybe they buy four properties, whatever, and
they borrow one million dollars to buy those four properties,
(45:25):
and they get their mortgage statements when they close, and
it says, hey, add it all up on those four properties,
you owe one million dollars.
Speaker 3 (45:34):
Well, let's just assume.
Speaker 4 (45:35):
For argument's sake, they were interest only loans. They're not
going to be they're going to be anortized loans, but
just for simplicity, let's call them interest only. Well, in
five years, because they pay no principle, they would still
owe one million dollars. But if inflation happens over the
course of that five years, say there's in five years,
(45:58):
there's you know, probably pretty conservative, there's twenty to thirty
percent inflation in that time period, Okay, maybe even more. Well,
inflation essentially just literally paid off two hundred to three
hundred thousand dollars of that million. So on paper, the
(46:18):
statement still says you owe a million dollars. But because
inflation has debased the value of the million dollars you
really only owe in that example, seven hundred thousand dollars
because inflation paid off three hundred thousand dollars of the debt. Now,
if you think this is some far flung strategy, it's not.
(46:38):
It's the exact same strategy our US government uses with
the countries it owes money to take. Look at the
sovereign debt, right, Look at China. For example, we owe
about a trillion dollars to China. We have the reserve
currency of the world. We inflate the value of it
so it's worth less. Right, And that means if we
(47:03):
have ten percent inflation in the course of a year
or two years or whatever, we just got one hundred
billion dollars of our debt essentially paid off. Now everybody
listening is going to say, well, Jason, of course the
Chinese they have economists too, They understand this. Of course
they do what can they do, right, they want to
(47:26):
sell their products, We're going to buy them in dollars. Okay,
they can use their dollars to come back here and
buy something we have, right, they can buy.
Speaker 3 (47:35):
Our real estate.
Speaker 4 (47:36):
Hey, guess what they seem to be doing a lot
of that, so you know they understand the game right,
or they can buy oil with it because you know,
we do other reserve currency.
Speaker 3 (47:45):
Even though the.
Speaker 4 (47:45):
Bricks are you know, nibbling at that. That's inflation induced
debt destruction, and it is an incredibly powerful strategy. Remember,
inflation transfers wealth from lenders to borrowers, and that is
an incredibly powerful thing. It's the hidden wealth creator with
(48:06):
income property. Now, look, if there was another asset like
precious metals or stocks or bonds, and a bond does
the complete opposite of that. By the way, it impoverishes
you because you are the lender when you own a bond. Okay,
if there was another vehicle, I would recommend that vehicle.
But real estate has such special characteristics that you just
(48:29):
can't do it with other things. There's one that's pretty good, though,
and I got to mention it because that plan I
outlined is essentially mimicking what became popular in the nineteen eighties.
And you heard this phrase a lot. It was called
the LBO or the leveraged buyout, and so all these
Wall Street tycoons were doing leveraged buyouts. They still do
(48:52):
them today. Okay, private equity groups they're It's used all
the time the LBO. It's a very common strategy. And
here's what it is. You find a company that you
want to buy. You identify this company, and you make
an offer to buy it, and you saddle it with
massive amounts of debt, and then you delegate the responsibility
(49:14):
of the debt repayment to the company you just acquired,
so your debt becomes self liquidating debt.
Speaker 3 (49:21):
Right.
Speaker 4 (49:22):
You know, I would hate debt if I had to
pay it myself. But when I can have debt and
get someone else to pay it, if I can delegate
that responsibility to a renter, that's a fantastic strategy.
Speaker 2 (49:37):
It's another example of that is what Apple is doing
right now, which is they're leveraged buying out themselves, taking
on a bunch of debt, doing share buybacks with that debt,
which is another example you know of the same exact thing,
which is using debt to purchase something that will produce
(50:01):
the income to pay the debt. And what you're talking
about with real estate and how money today Since nineteen thirteen,
money today is worth more than it is in the future.
Money in the future will always be worth less than
it is today over a long I.
Speaker 4 (50:21):
Think we can pretty much count on that. Now, Look,
if we have deflation, then it goes the opposite way. Okay,
but the likelihood of deflation considering that we have thirty
three trillion dollars in debt, and debt is inflationary, and
we have all of these unfunded mandates and unfunded entitlements
coming in the next ten years, which some have estimated
(50:42):
as much as two hundred and twenty trillion dollars. There's Look,
the federal government only takes in about four trillion a year.
How will we ever pay that. The only way to
pay that is to print fake money, fiot money out
of thin air.
Speaker 2 (50:58):
Yeah, there may be short time horizons, which is you
know something that I think is coming soon where prices dip,
so we get very short term maybe even intense deflation,
But the economic pain that that causes for the people
who are in control is so severe that they will
opt to stop that pain through printing, and the long
(51:22):
term the long term result of that is inflation. So
that makes that makes a lot of sense. Well, I
could talk to you forever. I want to be respectful
of your time here, and so you have a great
YouTube channel, you're everywhere. Your YouTube channel and your website
are linked in the show notes below for anybody listening.
(51:46):
Can you list those out?
Speaker 4 (51:47):
Yeah, my website, my main website is Jasonhartman dot com.
My podcast is on all the podcast platforms. Just type
Jason Hartman and that's h A R T M A N.
And on YouTube tube you can find me. Jason Hartman
real Estate is the channel there. So just take advantage
of our free content, and you know we'd love to
(52:08):
get you involved. Get on our mailing list. We have
great newsletters we send out with lots of charts and
graphs and you know, very information content heavy stuff, so
check it all out.
Speaker 2 (52:19):
Fantastic. Well, thank you so much for joining us today, Jason.
That was a lot of fantastic information and we'll talk
to you and soon.
Speaker 3 (52:27):
Happy investing.
What's up, everybody.
Speaker 2 (00:00):
Welcome to another episode of financial Heresy, where we talk
about how many works so that you can make more,
keep more, and give more. Today, I've got my good
friend Jason Hartman. He is a real estate expert. He's
been an investor in real estate for countless years here
all over the globe, traveled research spend, an expert voice
(00:24):
on investing in real estate for decades now and a
good friend of mine. Fantastic insights, and especially today when
there is so much fear, more people today than ever
in terms of the how long back, how far back
the survey goes are now saying that now is a
(00:44):
bad time to invest in real estate. And so with
that outlook, so much fear in the real estate markets
right now, we need to take a look at the
data see if that is unfounded, if that is you know,
if there's legitimate reason to be running away, to be selling,
if people should be buying staying on the sidelines. And
so I've invited my friend Jason Hartman on the show
(01:07):
today and we're going to go through all the real
data and give you the information you need to make
an educated decision about investing for yourself.
Speaker 1 (01:17):
For the future. All right, Jason, Well, thank you so
much for joining me.
Speaker 2 (01:20):
I'm really excited to talk here about real estate today,
so thanks for coming on.
Speaker 3 (01:25):
Joe.
Speaker 4 (01:26):
It's good to be here with all the heretics.
Speaker 2 (01:30):
Well, we're discussing something that is one of the most
heretical or controversial topics today and for some background, for
the last couple of years, but increasingly recently, I've had
so many people telling me that they're waiting for the
crash to buy real estate, waiting for They're sitting on
the sidelines, waiting to buy until you know, they're sitting
(01:53):
in cash. And now people are starting to get scared
because they're like, hey, I could have afforded a twenty
five percent down payment a couple of years ago, and
now I don't even know if I can afford to
buy anything. So i'd like to I'd like to get
an insider's perspective on the real estate market, what you're
seeing in uh, you know, in the different areas. So
(02:13):
there's two different things I'd like to talk about. Number
one is personal residents and number two is investment properties
because those are going to be you know, a little
bit a little bit different. So in general, before we
dive into specifics. What is your outlook on nationwide averages
single family homes, personal residences for individuals?
Speaker 1 (02:33):
Right now?
Speaker 2 (02:33):
Should we be selling, should we be buying? Should we
be sitting on the sidelines.
Speaker 4 (02:37):
Yeah, that's a it's a it's the million dollar question,
and it is a bit of a complex question. So
let's let's peel back the layers of the young and
do legitimate analysis rather than clickbait and purveying, fear porn
and all of that stuff that you know, Look, it's
it's unfortunate, but that's the stuff that gets attention in
(02:58):
the media, right, all of the sensationalism that works, right,
you know, they've learned how to appeal to our psychology
and bait us into it. But you know they arrange
the environment to get people to lose money, okay, and
social media platforms that are designed to be addictive. Right,
(03:19):
So this is all unfortunate, but we've got to overcome
this stuff and not fall for the tricks.
Speaker 3 (03:25):
Okay.
Speaker 4 (03:26):
So the reality is that in a country is large
and diversus the United States, there are many real estate markets.
There are over thirty one hundred counties in the US.
There are over nine thousand cities in the US. There
are over or about four hundred metropolitan statistical areas in
(03:51):
the US, so it's a huge country, very diverse, and
the old saying in real estate is definitely still true.
All real estate is local. But it's wise to break
this down into three types of real estate markets, linear markets,
cyclical markets, and hybrid markets. So if you're looking at
a chart of appreciation over time, a cyclical market, which
(04:15):
is the market almost everybody is paying attention to. This
is like the West coast of the United States, the
expense of Northeastern markets, and South Florida where I live. Okay,
those are cyclical markets. And if you look at a
chart of appreciation or depreciation, the chart looks like a
roller coaster. It's got glorious highs, it's got really ugly lows,
(04:37):
and it goes up and down, up and down. These
are the La Phoenix, yep, La where I grew up.
Phoenix is now a cyclical market where you've got booms
and bus Okay, these markets get all the attention because
there's a lot to talk about, there's a lot to
report on. They're sensational. But we like to invest in
linear markets that are kind of boring, honestly, you know,
(05:00):
just sort of chug along. They have minor ups and
downs over time, but they're not significant, and they have
very good cash flow. These are the conservative markets that
are really most of the country and most of the world,
but they don't get much attention because there's not much
to talk about. Hybrid markets, as the name would imply,
(05:20):
is in between the two. Those would be like Denver
and Austin. Austin might almost be considered a cyclical market now,
it was historically a hybrid market, and so that's what
we need to understand first. But secondly, let's talk about
the lack in effect. So, as you've reported, and as
(05:41):
I've been reporting for a long time, you know, we've
got all of these cheap mortgages out here, and this
is something that all of the people that tried to
forecast the housing market just didn't understand and didn't account for.
Most people think that when interest rates go up as
they have, you know historically, I mean, we're all blown
(06:04):
away by how quickly interest rates have increased, and most
people think myopically that that is going to destroy the
housing market. But I want to give everybody listening a
new perception of that, and it would be like this,
maybe comparing it more to the bond market, because the
(06:26):
bond market, you know, when interest rates go up, the
value of bonds goes down, and when bond values go up,
it tends to push interest rates down. Right, your listeners
understand that. Of course you understand that. And so what
happens with higher mortgage rates is, yes, that pushes housing
affordability down. And right now it's terrible. It's a four
(06:48):
decade low. So housing affordability has not been this bad
in forty years. It's terrible. So it's made it very
difficult for people to buy a house. But when and
when the cost of money goes up, it makes cheap
money more scarce and more special. So why is a
(07:08):
diamond more valuable than some sand? Right, Well, it's more
valuable because it's more rare. And so when money gets expensive,
the cheap money that's now scarce is very valuable. So
the holders of all the cheap mortgages, their asset literally
(07:30):
went up in value relative to them. Okay, so you know,
if I ask you, you know, do you own something
that is more valuable to you, Joe than it is
to other people? Like if you put whatever the thing is,
maybe it's a sentimental item, right, if you put it
on the market, say you put it on eBay and
(07:52):
tried to sell it, right, it would sell for its
market value, but you're probably not selling it because it's
more valuable to you and it is to anybody in the.
Speaker 1 (08:01):
Market, right, right, Yeah, exactly.
Speaker 4 (08:04):
It's a concept everybody can relate to. So the same
is true of houses with these cheap mortgages. That house
might sell for five hundred thousand dollars on the open market,
but to the people who own it, because it has
a cheap mortgage attached to it, it's worth six or
seven or eight hundred thousand dollars. And that's the comparison
(08:27):
people have failed to understand, okay, And it's a really,
really important comparison. It is the reason that we have
very high mortgage rates, which would normally cause all sorts
of economic distress, and it would cause people to be
motivated to put their houses on the market thinking the
value of their houses will go down.
Speaker 3 (08:50):
When the opposite has happened.
Speaker 4 (08:52):
All of the experts, virtually every expert, Fanny ma Freddiemac
Case Shiller, all of them predicted how values to decline
this year, and the opposite happened. Housing actually went up
in value even though the cost of money literally tripled.
So it's a it's an interesting time.
Speaker 2 (09:15):
Very interesting, especially, like you said, it goes against the
the kind of the mainstream what would seem logical. It's like, hey,
if it costs more than it ever has to buy
a home, then you know, that's that seems like a bubble,
So prices should come down, and people can't afford new mortgages,
so house prices have to have to come down to
(09:36):
compensate for the increase in rates. I mean, last time
rates were this high, it was like two thousand. The
median home price was like what one hundred eighty nine
thousand dollars or something like that.
Speaker 1 (09:46):
Crazy.
Speaker 2 (09:48):
But to your point, basically, when since people can't afford
to buy a new house right now, that just means
they can't afford to sell their current house.
Speaker 4 (09:58):
That's the point, okay, Because if they were to sell
their current house, anything they could buy or rent would
cost them more money for probably a lesser house. So
they're staying put. They're hanging on no matter what they
are going to beg borrow and steal to keep these
(10:21):
cheap mortgages and the houses that happened to be attached
to them. So, Joe, you talked about prices and interest rates, right,
and obviously the cost of housing is a blend of
both of those things.
Speaker 3 (10:32):
But it's also a.
Speaker 4 (10:33):
Blend of inflation and incomes, right, and those ideally track
each other, not perfectly, but a little bit. So let's
go back to twenty eleven, when the median mortgage payment
in twenty eleven was one and nineteen dollars per month
and the median price house was two hundred and twenty
five thousand dollars a month. Well in twenty twenty one,
(10:57):
ten years later, and you alluded to a very important
point that a lot of the experts are missing. It's
not that important what's happening today when sales activity is
down so much. What's important is what happened two years ago,
when sales activity was through the roof, when tens of
millions of people in the COVID era either purchased a
(11:20):
home or refinanced their existing home because they've got a
very comfortable mortgage that they're not giving up. So ten
years after twenty eleven, you moved to twenty twenty one,
and the median mortgage payment was actually eighteen dollars a
month lower in nominal dollars, meaning not adjusted for inflation
(11:41):
the name of the dollars. That's what nominal means, okay,
And so the payment was only one thousand and one
dollars versus ten years earlier, it was one thousand and
nineteen dollars, but adjusted for the official rate of inflation,
not the real rate of inflation, that payment only feed
bills like seven hundred and thirty dollars a month. So
(12:05):
the people ten years later, they literally stepped into a
dolore in a time machine like in Back to the Future. Okay,
they traveled back in time. They got the same nominal
payment essentially that people got ten years earlier, but inflation
still affected them and debased the value of that monthly
(12:26):
payment and made it feel cheaper. So their payment in
real dollars is literally two hundred and seventy dollars a month,
or two hundred and eighty dollars a month less expensive
than it was ten years earlier. Now, let's also take
a look at the price of the house. Okay, the
median house price in twenty twenty one was just about
(12:48):
four hundred thousand dollars, but adjusted for the official rate
of inflation, which is highly understated due to waiting substitution
and donic indexing, which we I'm sure you've taught you listeners,
the real price of that house, according to the official
CPI or the cp lies I like to call it,
(13:09):
is two hundred and ninety thousand dollars. So yes, it
was cheaper ten years earlier at two hundred and twenty
five thousand dollars, but the gap wasn't nearly as large
as most people would think when you adjust for inflation. Now,
if you adjust for the real rate of inflation, it's
much much cheaper because inflation is understated by the CPI.
Speaker 3 (13:32):
So you know, this.
Speaker 4 (13:33):
Real payment per month and the real price of that
house would be considerably less. I don't have you know,
I don't have numbers for that, because it depends what
your opinion of the real rate of inflation is. But
I would argue that generally it's pretty much double whatever
they're going to tell you. Okay, so we're almost double yeah.
Speaker 2 (13:52):
Right, yeah, absolutely, well that's that's insane. Didn't I did
not realize that that ten year gap from twenty eleven
to twenty twenty one in real terms, that it actually
went down like that. And it's important because you know,
somebody may look at that and say, Okay, well that
was two years ago. Things are much different now, so
(14:13):
things are going to crash, But it's like, no, remember,
it's important what happened then because you had a good
amount of future purchases brought forward into the present as
a result of that. And so yes, it's extremely predictable
that right now sales volume is at basically zero because
(14:34):
everybody who is going to buy in the next five
to ten years looking at twenty twenty forward, bought in
twenty twenty or twenty twenty one. It was like all
of that demand got brought forward into the presence. So
you would expect that there would be no more purchases
for the next couple of years, especially with prices doing
what they're doing.
Speaker 4 (14:53):
Yeah, if you listen to realtors, anybody who profits from
a real estate transaction or a mortgage transaction, they are
singing the blues. It's really tough for them right now
because you know, there's about one point five million realtors,
meaning member of the National Association of Realtors, right, which
is the biggest trade organization in the world. There's about
(15:14):
one point five million of them, which already that market
was highly overstaffed. But then you take and you reduce
the volume by fifteen to thirty percent, depending on the market,
and wow, that is a contraction, and that is really
really causing a lot of desperation. So a lot of
(15:35):
the bad news about the real estate market is coming
from the realtor industry and the mortgage volume. When you
triple the cost of money, I mean, virtually no one
is refinancing, right when we have this giant boom where
the whole mortgage industry expanded dramatically during the COVID era
to try and meet the needs of the incredibly low rates.
(15:56):
So when you have a centrally managed economy, you have
too many whipsaw effects right where it really rather than
letting market forces dictate the cost of money, which I
think is the way it should work. But you know,
we have what we have. We have a centrally planned
economy and Jerome Powell manages it right, and so you
(16:22):
know you're going to get these distortions and dysfunctions because
of that.
Speaker 2 (16:26):
Yeah, absolutely, that's where the boom bust effect comes from.
Speaker 1 (16:30):
That's the source.
Speaker 4 (16:31):
So all which, by the way, is interesting because back
in nineteen thirteen when the FED was created, that was
one of the things they claimed they would solve right
Yet and years later we had a huge recession in
the twenties. Then we had a great depression in night
starting in nineteen twenty nine.
Speaker 3 (16:48):
So they have not done their mandate right.
Speaker 2 (16:51):
Well, they fixed the panics and the bank runs, which
were local boom bust cycles, but they did that by
centralizing it and scaling it up to the entire nations.
Speaker 1 (17:00):
So not exactly a better situation now.
Speaker 2 (17:03):
All right, So a couple of things. One thing happened
over the last couple of years that has really never
happened before, and that was massive institutions stepped into single
family home buying. So you had hedge funds. You had
institutions coming in and buying up entire neighborhoods, like a
developer would develop a neighborhood and hedge fund would just
buy up the whole thing. And that that wasn't happening
(17:26):
in two thousand and four, thousand and five thousand and six.
That's something that's relatively new. And so number one, are
those institutions about to you know, go, were they just
buying out of FOMO and they're about to They're about
to implode and all that real estate is going to
hit them, hit the markets or are they still buying
(17:48):
or did they see something a little bit longer term,
you know, on the horizon that they were that they
were investing for.
Speaker 1 (17:54):
Here. What's your take on institutional buying of single family homes.
Speaker 4 (17:58):
Yeah, it's a great question, and presidential candidate RFK has
had a lot to say about that, but you know,
this is largely a false, you know, false comparison that
he's making, right, because yes, there's this fear that all
the institutional buyers are buying up all the single family
(18:19):
homes in America. And you're right, they are a bigger
player than they've ever been. I mean, you mentioned in
the two thousands, but go back in the nineties the eighties,
I mean, you just didn't have this right. Institutional investors
were buying office buildings, shopping centers, shopping malls, and big
(18:39):
apartment complexes. They weren't buying single family homes. But they
got really interested in single family homes. Coming out of
the Great Recession, rightfully, so they made a lot of
money in that business and I think are going to
continue to do well in it. But there's nearly twenty
million single family homes owned by mom and pop investors
(19:02):
that are rental properties, and the institutional players are becoming
a bigger force in that market. But in the overall
scheme of things, with one hundred and forty million housing
units in the United States total, right, they're really just
not a real force yet. Okay, this is a you know,
(19:23):
really a drop in the bucket. Okay, Yes, they're bigger
than they've ever been, but they've got an awfully long
way to go before they own one hundred and forty
million units. Okay, so this is just not a big number.
It's not a big force. But there are some interesting
effects that are happening because of this number one. And
if anybody's rented an apartment from the big institutional landlord,
(19:46):
they know this. Institutional landlords are far now I'm looking
at it from an investor perspective, not a renter perspective here, Okay,
they are far better at raising rents and optimizing their
portfolio because use all sorts of rent adjustments software to
do this, and they just constantly want to push the yield,
(20:08):
push the yield, so they are causing rents to go up. Okay,
and that's actually going to benefit the mom and pop
single family home investors because they're setting higher comps for
rents single family home. Mom and pop investors in single
family homes are not very good at raising rents at all.
They tend to get kind of lazy and say, eh,
(20:28):
you know, they've been a good tenant, I'm not going
to raise their rent when you know, we tell our investors, sorry, renters,
you're not going to like me for this, but you know,
we work with investors so and I'm an investor, so
you know we tell them to try and raise the
rents about four percent annually, right, And you know, if
you look at the past couple of years, that would
have been a cheap rent increase. You should have raised
(20:51):
it much more than that. But you know, over time,
on average four percent per year, right, That's that's about
you know, the going target, and institutional investors are are
far better at optimizing higher rents.
Speaker 1 (21:04):
Well.
Speaker 2 (21:05):
I think one other overlooked factor in why they are
so much better is because number one they're they're they're
going to be doing that. But number two, you have
to you have to do it in a sustainable way
to be able to keep on doing it in the
long term, which means you have to add value. So
when you look at the big properties that are owned
by the big institutions, they're much better places to live
(21:28):
in as a renter. Then you know, your your duplex
or your your quad plex that's owned by you know, uh,
somebody living down the street. You've got the amenities, you've
got better uh you know, payment methods, you've got better
response to issues. Bet like there, It's it's as a renter,
it's uh, if if you're going to be living in
(21:49):
a place that is going to be in be able
to increase the rent like that consistently, then typically they're
going to be doing things that will also bring demand
in for that higher rent.
Speaker 1 (22:00):
And so you know it's well, I name.
Speaker 4 (22:02):
The economy of marketing. You know, hundreds of units at
the price of one, so you know, they've got scale
and systems and all kinds of things. I'm just kind
of pointing out that the the mom and pop investors
actually benefit by writing on their coattails.
Speaker 1 (22:18):
Hm that makes sense. Okay.
Speaker 2 (22:20):
So so basically you're saying that institutions are, you know,
coming into the market.
Speaker 1 (22:25):
It's bigger than it's ever been. It's a but it's
not big in terms of uh.
Speaker 4 (22:29):
In terms of compared to the overall market. It's a
drop in.
Speaker 2 (22:32):
The bucket, and there are some influences that it has
on the rest of the real estate market. Do you
think that the properties that institutions are buying are for
the most part, they're they're off the market forever or
do you see like a Zillo apocalypse or something like
that where giant numbers of properties just get dumped all
at once.
Speaker 4 (22:52):
No, I think, you know, I think you know, they'll
of course, uh not be loyal to an asset class.
They're going to go where the money is right. That's
their mandate. But I don't think that they would ever
want to dump properties on the market because they'll be
shooting themselves in the foot, right, So you know that's
(23:12):
not I mean, you know, if you saw the movie
Margin Call, which by the way, is an excellent movie.
It's better than the Big Short, you know, you see
how and you know if you watch the show Billions,
for example, which also is very good.
Speaker 3 (23:24):
Except for season six it was terrible, but the others
were good.
Speaker 4 (23:28):
You see, how you know people who trade equities, you know,
in stocks and bonds, how they you know, sell things slowly.
They sell things from offshore accounts, or they buy them.
You know, they don't. They want to kind of keep
things quiet and on the down low. So you know,
they understand this. I mean, they're not going to dump
properties on the market because it would not be good
(23:48):
for them, right.
Speaker 1 (23:50):
Yeah, yeah, that makes sense.
Speaker 2 (23:52):
What about let's go to the opposite extreme unsophisticated new investors.
I'm specifically referring to airbnb properties. This is something that
has been circulating online a lot recently, people saying, hey,
we're going to have an airbnb apocalypse. I've seen maps
that are just ridiculous that show dots. You know, it's
(24:15):
a state, it's a picture of a state. I've got
a dot everywhere there's an Airbnb property, and it makes
it look like there's so many of them. But it's
like a dot is like the size of an entire
city on that side of the map. So what is
your view of the airbnb apocalypse? Is that overblown? Is
that going to happen. What's your viewpoint there.
Speaker 4 (24:34):
Well, this is a lot of fake news, and I'll
tell you why. You know, there is a well known
YouTuber who's doing a great job at marketing himself. I've
invited him on my show many times. He has accepted
a couple of times, but somehow the interview never happens. Okay,
and you know, he he does have some good data.
(24:54):
I'm going to give him credit for that, but he
does he makes some big leaps in logic. Okay, And
let me talk about inventory for a moment before I
answer that, because I've got to kind of tee it
up with some context. So right now, we have about
five hundred and thirty thousand homes on the market in
the United States. Keep in mind, we have one hundred
(25:15):
and forty million housing units, so there's no inventory to
speak of. Okay, inventory is extremely low because everybody's hanging
on to their very cheap mortgages.
Speaker 3 (25:28):
A normal market.
Speaker 4 (25:30):
Would be about one point two million homes for sale,
so that represents the shortage of about seven hundred thousand homes. Now,
keep in mind, it depends where you get your statistics
on this, because different groups do this differently. For example,
the National Association of Realtors. In their stats, they include
(25:52):
pending and contingent sales as active inventory. I don't like that,
so I don't use their stats. But it's okay if
you use their stats as long as you keep making
apples to apples comparisons. So if you want to compare
NAR's number today to seven years ago, NAR's same number,
that's fine. Okay, The percentages and the ratios will be
(26:15):
about the same. Okay, that's the importance. Yeah, right, But
basically for actual active listings where you can go buy
the house today, it's not contingent, it's not pending, it's
actually for sale. You've got a shortage of about seven
hundred thousand homes.
Speaker 3 (26:32):
Okay. So if you took all of.
Speaker 4 (26:35):
The one million or so Airbnb properties and they started
to come on the market, and they have started to
come on the market, by the way, Okay, over the
past year they have come on the market and they've
sold and or they've re rented on is to normal
long term rentals, right number one. These are properties that
don't make sense as long term rental properties. I help
(26:57):
people buy properties nationwide, help people invest and build portfolios
of single family homes in many different markets that we
like and recommend, but we only like cheap entry level
properties in linear markets. We don't recommend you know, six hundred,
eight hundred thousand or a million plus homes. A lot
of the Airbnb properties are those types of homes. So
(27:20):
first of all, you've got a segment by market, you've
got a segment by product type, you've got a segment
by price. Before you can really understand what's going on here.
But we're just talking raw numbers, so this is a
very broad conversation. So if we've got a shortage of
seven hundred thousand homes right now, to just be at
a normal market, not a bad market, just a normal market,
(27:42):
one point two million homes for sale, right, that would
represent you know, somewhere around six months of supply of inventory,
give or take. Well if every one of those. Now,
by the way, those stats are questionable also, okay, but
let's just assume there are a million Airbnb properties that
are struggling, right because we do have an Airbnb bust,
(28:05):
no question about it.
Speaker 3 (28:06):
And I can address more on that in a moment.
Speaker 4 (28:09):
Say they all came on the market at once today,
So now we'd have one point five million homes for sale,
we would definitely have a housing glut. So here's a
good metaphor. Everybody just pause for a moment, and I
want you to visualize your kitchen sink in your house,
right your kitchen sink. Everybody's got a kitchen sink, So
(28:30):
visualize it for a minute. Mine stainless steel. Okay, so
I'm visualizing my kitchen sink. The faucet represents new inventory
coming onto the market right now, and for a few
years now, it's been a trickle just you know, some
listings coming onto the market, not very many at all.
And the water in the sink represents the existing inventory
(28:56):
if it were full. If the sink were full, that
would be a normal mark at one point two million homes. Okay,
right now, it's about forty percent, So there's some water
in the sink, about forty percent full. The drain represents
the demand side, or the absorption rate the buyer's buying homes.
So right now the drain is a little bit clogged
(29:20):
because demand is down. Housing affordability is the lowest it's
been in four decades. It's very tough for people to
buy a new house right now. So the drain is
about twenty percent clogged. During the COVID era, when money
was one third the cost it is today, you know,
give or take. You know, the drain was like open
(29:43):
and they drilled another drain in the sink. There were
two drains.
Speaker 1 (29:46):
Okay.
Speaker 4 (29:47):
Everything was selling with multiple offers above list price. So
the situation we've got now is far from even a
normal market.
Speaker 3 (29:57):
Now.
Speaker 4 (29:57):
A bad market, by contrast, would be the is overflowing.
The water is overflowing. The drain is plugged and the
faucet is running full blast and the water is just
overflowing onto the counter and onto the floor. So that's
a bad market. So we are far from that now.
No one million airbnbs, if there are even that many,
(30:19):
because like some of the numbers I have are like
six hundred and fifty thousand, whatever, let's just go with
a million, give them that, Okay. They never decide to
come on the market the same day. They're all in
different areas, they're all in different price ranges. Some are condos,
some are single family homes, and all of these owners
of those properties have totally different situations. In fact, usually
(30:42):
a large percentage of the housing stock is a second
home stock anyway. Right, these are people that were wealthy
enough and not really wealthy, just you know, middle class.
A lot of people have a second home. Okay, they're
not selling their second home. They just stuck it on
Airbnb because when that was a thing and it was
(31:02):
going really well, they could make some extra income.
Speaker 3 (31:05):
They're not dependent on it.
Speaker 4 (31:06):
They kept their second home for years before that and
never put it on Airbnb, right, and just had a
second home. So you know, there are many different situations.
Some will sell them, some will rent them, some will
just keep them. Right. You know, there's a whole bunch
of complex things that go on in real market dynamics
(31:27):
that in a sensationalized, you know, fear porn purveying video
that gets a lot of clicks on YouTube.
Speaker 3 (31:35):
He doesn't want to talk about.
Speaker 1 (31:37):
The airbnb thing.
Speaker 2 (31:38):
Is so funny to me because well, first of all,
this is on the ground kind of anecdotal information, so
it's not.
Speaker 1 (31:47):
It's not statistical.
Speaker 2 (31:48):
But the airbnb investors that I know are always trying
to make sure that if the worst case scenario happens,
they could still rent the place out long term.
Speaker 3 (31:59):
So they're trying to get can't it won't make sense usually.
Speaker 1 (32:01):
Yeah, well, I mean that's probably the case them.
Speaker 4 (32:06):
It's just not going to be very good compared to
an investment something would buy through my network, right right exactly.
Speaker 2 (32:13):
Yes, this is, like I said, like anecdotal information of
like like they're saying, Okay, I'm gonna my plan is
rented out on Airbnb, but if the economy crashes, then
I'll at least be able to break even if I
if I rent it out, So they're not. My point
is I don't think those people are not going to
get forced out. Number one, and then number two, A
lot of the Airbnb listings are casidas or open bedrooms.
(32:35):
It's like that's that's not going to become a distressed sale.
Speaker 3 (32:39):
Exactly, good point. Good point.
Speaker 4 (32:41):
You know they're an accessory dwelling unit, a casida, or
just an extra bedroom. I mean, I know a lady
who loves to have Airbnb guests, right and she rents
out her extra bedrooms.
Speaker 2 (32:53):
Or or a big property that's got three walls put up,
and so it's three Airbnb listings, but it's actually one house.
Speaker 4 (33:00):
Right exactly, very good point.
Speaker 1 (33:02):
You know, well that's uh, dude, Joe.
Speaker 4 (33:06):
Though, before we move on, let me just say one
thing about Airbnb though, Okay, and I have been saying
this since twenty twelve, so I've been saying this for
eleven years. I've been beating this drum. We were never
recommending airbnb properties in any significant way. We had one
little market in Florida that we dabbled in them, and
(33:26):
you know, a few of our clients bought them, but
it was never a thing for us. We always recommended people,
by long term buy and hold rental properties that made sense,
entry level housing that just had super high demand. Economy
going good people are moving up, that's their first home,
they rent it from you. Economy bad, people moving down,
(33:47):
that's their home. That's going to be their safety net.
They're going to rent it from you. Right, This entry
level home is always in demand, the bread and butter housing. Okay,
But I always said for the last eleven or even
twelve years that Airbnb has never been through a real recession.
And if you look at the number of what I
call non primary beds in the world that has expanded
(34:11):
so dramatically. I mean, at the same time we had
the rise of Airbnb, hotels were still building, they were
adding rooms. New hotels were opening lots of them, and
so around the world we had this massive growth in
non primary beds. I mean, my primary bed is here
in my house, right, but sometimes I sleep in hotels
(34:33):
or airbnbs or whatever. And what's funny about it is,
did anybody happen to notice the rise of all these
new mattress companies?
Speaker 3 (34:42):
Right?
Speaker 1 (34:42):
You know where they come from?
Speaker 4 (34:44):
Where did Casper tough to needle Purple? All these mattress
companies came out of the blue like that, you know, right? Yeah,
so that went with the airbnb trend.
Speaker 2 (34:55):
Interesting, I'm going to have to think about that for
a while. That's that's good with the airbnb thing too.
This is something that I've experienced for about two years.
It was exciting and since like maybe twenty fifteen, I
would say that my experiences with hotels, I've had probably
(35:19):
one bad experience for every thirty good experiences. My experiences
with airbnbs and vrbos, I've had probably one good experience
for every twenty bad experiences.
Speaker 1 (35:35):
And they cost more, and so I don't.
Speaker 3 (35:38):
Really rent them. Yeah, I just stay at hotels mostly.
Speaker 2 (35:41):
Yeah, just like anything, I think that when problems arise,
situations get tough. Economic times get hard. The best players,
the people who do it the best will will win.
They'll survive, and they'll come out the other side even stronger.
They'll take more market share. But for the most part,
it's like I think there was a wave here where
there were a lot of people doing it, and now, like,
(36:03):
at least personally in almost everybody I know would rather
stay at a nice hotel for less than a bad airbnb, right,
you know.
Speaker 4 (36:12):
It just depends on circumstances. I mean, they certainly have
a place in the market for big families, for group events, whatever,
but you know, buy and large hotels just know how
to do it better.
Speaker 1 (36:23):
Yeah, yeah, that makes sense. Okay.
Speaker 2 (36:26):
Now, one of the other like you were talking about
fear porn things that just blow up, is people talking
about like the main argument that I guess you and
I've been talking about a lot here is that you've
got a fixed payment for the next thirty years and
it's way cheaper than anything else that you have the
option for today. But there are some people saying, well,
(36:49):
that's not true because taxes and PMI adjustments, and I've
seen some people say, hey, my mortgage payment increased by
you know, six hundred and seven hundred dollars a month
this year because of you know, tax and PMI.
Speaker 4 (37:06):
Is that is that another you don't mean PMI, you
mean just regular insurance, homeowners insurance, right.
Speaker 2 (37:12):
Yeah, yes, sorry, yeah, insurance adjustments upwards. So what is
that another thing that's just overblown or is that something
that could you know, spill over and snowball out of
control and these people who think they have low fixed
payment in the future are going to have a much
(37:33):
higher payment.
Speaker 4 (37:34):
Yeah, well, no, that is a real thing. And you know,
people are under pressure. And you know, one of the
other real things that we really didn't talk about, but
it is a real thing, is that the home is
actually quite affordable, but people are still getting squeezed in
all kinds of directions with credit card debt, student loan debt,
(37:55):
you know, auto loans, et cetera, et cetera. So I
I am not wearing a colored glasses. I know that
our economy is built on a house of cards, but
compared to what compared to every other economy is worse
off than we are.
Speaker 3 (38:09):
Like look around the world. I mean, what show me
where it's.
Speaker 4 (38:13):
Better, Like any major player in the world that you know,
you'd want to move to right, show me where it's better.
But so, yes, the answer to your question is definitely.
I mean, people are going to be pressured. But what
the economists don't really evaluate, and the housing forecasters don't
evaluate very well, is that people simply make adjustments, right.
(38:38):
They They sort of have this idea, Joe that like
the home buyer or the homeowner or the consumer is
like this fixed thing, and you know, housing affordability goes down, well,
then the housing market's going to crash because nobody's going
to buy a house. Well, that's not the way it works.
(38:59):
The way a market works is people adjust their expectations downward.
This is what inflation and bad fiscal and monetary policy
do to people. They lower the standard of living. Get
with it. That's just reality, right, And so I predicted
when interest rates were still very low. I remember doing
(39:19):
a speech. I had about eleven hundred people in the
room in Las Vegas. I was speaking at a conference
and I got up on stage and you know, I
got to get this recording out and show it on
my YouTube channel and played on my podcast because I
said that there would be a whole bunch of builder
cancelations that contracts would be canceled because people who bought home.
(39:43):
I said, interest rates are going to go up, and
people who bought homes and you know, had had to
wait six, seven, eight months or even longer for them
to be built. They qualified when they bought the house,
but then when rates went up, they didn't qualify, so
they had to cancel the contract because they couldn't afford
the house anymore and the lender wouldn't qualify them. But
(40:06):
that was not the That was not a real estate crash.
It was misinterpreted because what I also said at that
same speech is that these people would then adjust their
expectations downward and they would just buy a cheaper house
or continue to rent. It's still the same person occupying
(40:26):
a housing unit. Like, how do people not see this?
I mean, I don't even have a degree in economics
and I understand this.
Speaker 2 (40:35):
But it's not people just leaving the housing market. It's
occupying a different housing unit.
Speaker 4 (40:41):
Yeah, I know, it's just you know, look what I
said on your show is you know, I was born
in Europe, Okay, and I go back there often, and
you look at the standard of living in European countries
and people live in little crappy apartments. Okay, they've just
accepted that that is their standard of living in the
United States. We've expected this higher standard of living and
(41:05):
you know what, we've had it. But guess what it's
going down? You know, play the violin. I know it's terrible.
I agree, we're not moving in the right direction. But
compared to what I mean, who's better off? We're going
to be the best off in this whole economic storm,
(41:25):
all the geopolitical problems we've got, you know, I mean,
the US is way better off than most countries. We
get to export our inflation more than anybody else does
because we have the reserve currency. And yes, I think
we're going to maintain that status for a very long time.
You know, there's nibbling at the edges, sure, the bricks,
(41:47):
this and that, but you know, these are all pretty
much dying countries. Okay, Like I mean, does anybody think
the future is in Russia, South Africa or Brazil?
Speaker 3 (41:58):
Are you kidding? I mean some people do. They're out
of their mind.
Speaker 2 (42:04):
Well, I also think that it's important to take a
look at these things and instead of feeling sorry for ourselves, say, okay, well,
let's say there are problems that are going to make
things economically challenging. The question is for who for savers?
Absolutely for lenders? No, okay, So how do I get
(42:24):
on the right side of the fence. I've talked about
how we're entering into a at least ten, probably twenty
or thirty year inflationary cycle here, where inflation and rates
will be moving up for the next two to three decades.
You you have spoken about how to use that to
(42:45):
your advantage. So let's talk about that as the last
section here to focus on. There are things that are
benefited by inflation and things that are destroyed by inflation.
Speaker 4 (42:56):
Absolutely. You know, many years ago I trade more to
strategy that I call inflation induced debt destruction. I know
that's a mouthful, inflation induced debt destruction. Say it three
times fast.
Speaker 3 (43:11):
Anyway.
Speaker 4 (43:12):
Basically, the idea here is that you know you want
to another strategy I have is called the ultimate investing equation. Okay,
So I like income property because you're buying a hard
asset that is really a group of packaged commodities. It's concrete, lumber, glass, steel, copper, wire,
(43:36):
petroleum products, energy, labor, okay, and other things too. Okay,
and these things are indexed really well to inflation. So
if you believe the future is inflationary, you know, real
estate has always been a great hedge against inflation. Everybody
will tell you that. Okay, it's not hard to see that,
(43:57):
but that's sort of the first level thinking view. There's
a whole nother thing under the surface that is even
better than that. So, you know, we are all familiar
with the metaphor of the iceberg, right. You know, you
see a little bit of above the water, most of
it's below the surface. And what's below the surface is
(44:19):
if you leverage your real estate, you get to take
advantage of what's called self liquidating debt. In other words,
when I buy properties, or when our clients buy properties,
they don't pay their own debts. They outsource the obligation
to people called tenants. The tenants pay the debt, and
(44:40):
ideally they give us a little extra every month called
positive cash flow. So essentially you have the tenant paying
the debt, but you also have another big, powerful force
paying the debt inflation, and so that's the inflation induced
debt destruction. Picture it this way. Say everybody listening goes
(45:02):
to their favorite website after years. Their second favorite website.
They go to Jasonhartman dot com and they click on
the properties page and they buy three properties. And to
buy those three properties, maybe the value is one point
two million dollars, maybe they buy four properties, whatever, and
they borrow one million dollars to buy those four properties,
(45:25):
and they get their mortgage statements when they close, and
it says, hey, add it all up on those four properties,
you owe one million dollars.
Speaker 3 (45:34):
Well, let's just assume.
Speaker 4 (45:35):
For argument's sake, they were interest only loans. They're not
going to be they're going to be anortized loans, but
just for simplicity, let's call them interest only. Well, in
five years, because they pay no principle, they would still
owe one million dollars. But if inflation happens over the
course of that five years, say there's in five years,
(45:58):
there's you know, probably pretty conservative, there's twenty to thirty
percent inflation in that time period, Okay, maybe even more. Well,
inflation essentially just literally paid off two hundred to three
hundred thousand dollars of that million. So on paper, the
(46:18):
statement still says you owe a million dollars. But because
inflation has debased the value of the million dollars you
really only owe in that example, seven hundred thousand dollars
because inflation paid off three hundred thousand dollars of the debt. Now,
if you think this is some far flung strategy, it's not.
(46:38):
It's the exact same strategy our US government uses with
the countries it owes money to take. Look at the
sovereign debt, right, Look at China. For example, we owe
about a trillion dollars to China. We have the reserve
currency of the world. We inflate the value of it
so it's worth less. Right, And that means if we
(47:03):
have ten percent inflation in the course of a year
or two years or whatever, we just got one hundred
billion dollars of our debt essentially paid off. Now everybody
listening is going to say, well, Jason, of course the
Chinese they have economists too, They understand this. Of course
they do what can they do, right, they want to
(47:26):
sell their products, We're going to buy them in dollars. Okay,
they can use their dollars to come back here and
buy something we have, right, they can buy.
Speaker 3 (47:35):
Our real estate.
Speaker 4 (47:36):
Hey, guess what they seem to be doing a lot
of that, so you know they understand the game right,
or they can buy oil with it because you know,
we do other reserve currency.
Speaker 3 (47:45):
Even though the.
Speaker 4 (47:45):
Bricks are you know, nibbling at that. That's inflation induced
debt destruction, and it is an incredibly powerful strategy. Remember,
inflation transfers wealth from lenders to borrowers, and that is
an incredibly powerful thing. It's the hidden wealth creator with
(48:06):
income property. Now, look, if there was another asset like
precious metals or stocks or bonds, and a bond does
the complete opposite of that. By the way, it impoverishes
you because you are the lender when you own a bond. Okay,
if there was another vehicle, I would recommend that vehicle.
But real estate has such special characteristics that you just
(48:29):
can't do it with other things. There's one that's pretty good, though,
and I got to mention it because that plan I
outlined is essentially mimicking what became popular in the nineteen eighties.
And you heard this phrase a lot. It was called
the LBO or the leveraged buyout, and so all these
Wall Street tycoons were doing leveraged buyouts. They still do
(48:52):
them today. Okay, private equity groups they're It's used all
the time the LBO. It's a very common strategy. And
here's what it is. You find a company that you
want to buy. You identify this company, and you make
an offer to buy it, and you saddle it with
massive amounts of debt, and then you delegate the responsibility
(49:14):
of the debt repayment to the company you just acquired,
so your debt becomes self liquidating debt.
Speaker 3 (49:21):
Right.
Speaker 4 (49:22):
You know, I would hate debt if I had to
pay it myself. But when I can have debt and
get someone else to pay it, if I can delegate
that responsibility to a renter, that's a fantastic strategy.
Speaker 2 (49:37):
It's another example of that is what Apple is doing
right now, which is they're leveraged buying out themselves, taking
on a bunch of debt, doing share buybacks with that debt,
which is another example you know of the same exact thing,
which is using debt to purchase something that will produce
(50:01):
the income to pay the debt. And what you're talking
about with real estate and how money today Since nineteen thirteen,
money today is worth more than it is in the future.
Money in the future will always be worth less than
it is today over a long I.
Speaker 4 (50:21):
Think we can pretty much count on that. Now, Look,
if we have deflation, then it goes the opposite way. Okay,
but the likelihood of deflation considering that we have thirty
three trillion dollars in debt, and debt is inflationary, and
we have all of these unfunded mandates and unfunded entitlements
coming in the next ten years, which some have estimated
(50:42):
as much as two hundred and twenty trillion dollars. There's Look,
the federal government only takes in about four trillion a year.
How will we ever pay that. The only way to
pay that is to print fake money, fiot money out
of thin air.
Speaker 2 (50:58):
Yeah, there may be short time horizons, which is you
know something that I think is coming soon where prices dip,
so we get very short term maybe even intense deflation,
But the economic pain that that causes for the people
who are in control is so severe that they will
opt to stop that pain through printing, and the long
(51:22):
term the long term result of that is inflation. So
that makes that makes a lot of sense. Well, I
could talk to you forever. I want to be respectful
of your time here, and so you have a great
YouTube channel, you're everywhere. Your YouTube channel and your website
are linked in the show notes below for anybody listening.
(51:46):
Can you list those out?
Speaker 4 (51:47):
Yeah, my website, my main website is Jasonhartman dot com.
My podcast is on all the podcast platforms. Just type
Jason Hartman and that's h A R T M A N.
And on YouTube tube you can find me. Jason Hartman
real Estate is the channel there. So just take advantage
of our free content, and you know we'd love to
(52:08):
get you involved. Get on our mailing list. We have
great newsletters we send out with lots of charts and
graphs and you know, very information content heavy stuff, so
check it all out.
Speaker 2 (52:19):
Fantastic. Well, thank you so much for joining us today, Jason.
That was a lot of fantastic information and we'll talk
to you and soon.
Speaker 3 (52:27):
Happy investing.
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