Home Prices & Mortgage Payments In Real Dollars

Jason Hartman begins the show today talking about compound interest and how it makes a huge difference in your portfolio and investing. He brings on in-house economist Thomas to talk about housing payments adjusted for inflation. They both look at Jason’s first property as an example then discuss negative yields and cyclical markets.

Investor 0:00
I really need to thank you and Sarah for being there for me, you guys could have easily said, This isn’t my problem. This is your problem. Your lack of due diligence is entirely your fault. And not done anything at all. But you guys have been there for me every step of the way. You responded on voxer at 342 in the morning, I know, it might have been 642 depending on where you were, but honestly, who works at that time. So just the fact that you guys were there for me. I appreciate it so much.

Announcer 0:31
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties. 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.

Jason Hartman 1:21
Welcome to Episode 1249 1249. Yes, that means 1250 is tomorrow and of course that is a 10th episode show where we talk about something of general interest that is not necessarily but sometimes is related to investing in the most historically proven asset class in the entire world and that is of course income property. We will have that for you tomorrow. But today, we have our in house economist back on to discuss a project I had him do a while ago. I asked him to do this last year. right before our profits in paradise event in Hawaii, and by the way, of course that event will be coming up again. We are going to post that this year in Orlando. We had to make a change from Fort Lauderdale. Still paradise nonetheless. Because we had a little change with our Cuba cruise and the feds shutting down cruise ships going to Cuba so now we are of course going on a cruise, fall foliage cruise something I’ve always wanted to do. I absolutely feel so, so inspired in the fall. You’ve got that cool crisp air the leaves changing Of course we don’t get that where I live in Florida. I didn’t get that in Arizona or California much either, but we certainly will have that on our October fall foliage cruise. Well, you know, it depends a little bit on nature, but I think the timing looks good. You know, they can actually chart the fall foliage. There are websites of course that do this. And so join us for that Jason hartman.com slash create But anyway, back to Thomas. That was a little tangent, wasn’t it? Back to Thomas and our in house economist on the project. So right before our profits in paradise event last year, I asked him to do a research project. And it’s quite fascinating. We’ll share that with you today. But first, I want to talk to you about home price appreciation for a moment. And, of course, you understand is, as a regular listener, as I’ve talked about, over the last 1415 years on this show, how income property is such a wonderful multi dimensional asset class, you don’t earn those returns from just appreciation, just cash flow. It’s multi dimensional. There are many ways in which you earn those returns. And one of them of course, is appreciation. And we look at this as kind of the icing on the cake. But hey, that icing can be pretty great sometimes. Einstein called compound interest, the Wonder of the World. And appreciation works just like compound interest. And this works against debtors and for creditors However, when you’re a debtor on an income property with a good long term fixed rate investment grade mortgage, of course, you know, there are huge benefits to that benefits that I, I use my trademark phrase inflation induce debt destruction to describe, but on the appreciation side, it compounds also. And so that can be very significant compounding, and I’m just going to go through a little example for you that I think will be interesting. On the opposite side of it. I purchased a mortgage note, I purchased a loan once and this was many years ago. And the borrowers after they took out the loan, got the money, I guess spent the money. They paid their lender for a little while, then their lender sold that loan to Me, they paid me for a little while. And then they just stopped paying for many, many years. And their interest rate compounded because they just didn’t pay your after year after year. And the great recession happened and the equity dissipated, and then the equity came back. And I remember I contacted them once and I said, Hey, are you gonna start paying on this loan again, you know, you can easily refinance now and take care of paying me off or just at least making the payments. And you know, as typical, they made a bunch of excuses and never paid. So then I started the foreclosure process. And then they sued to stop the foreclosure. And this is yet to be determined by and I’ll let you know of course what happens with it, but I sure hope I get paid, because they owe me about three times what they originally borrowed, because they haven’t made a payment in maybe I don’t know, what is it Now a decade, this is absolutely ridiculous. I could have made a lot more money with that money had they paid me or paid me off. But this is the way it goes. And thus the perils of being a lender, I do not like being a lender very much. Although I do it, it’s okay. It’s my second choice. Income property being my first choice owning the actual physical asset, because it has the multi dimensional characteristics is really the better deal. So here’s the example on appreciation. Let’s take a $400,000 portfolio. So say you buy for $100,000 properties at Jason Hartman. com, clicking on the properties section, of course, actually, nowadays, there’s so little available on our website, you really have to be working with one of our investment counselors to source a property. So just reach out through Jason Hartman calm, get one of our investment counselors working for you, and notifying You the moment a good property comes up. And also be sure to subscribe to our property cast. That is a podcast with just property performance. So check that out, can subscribe on all the podcast platforms, just type in Jason Hartman property cast, and you’ll find that that was a little invention of my own kind of a neat idea no one, no one had really ever done that before, at least not that I ever noticed. So check out the property cast as well to be informed of the latest and greatest income properties. Okay, so you’ve got this $400,000 portfolio. And let’s just taken example, say that it appreciates at a rate of 5% annually. Now, of course, there are ups and downs, that’s a projection could be better, could be worse. Who knows. But let’s just take 5% as the local appreciation rate on each of those four properties. That means it’ll appreciate $20,000 in the first year. So you take your $20,000 In appreciation 5% of 400,000, you add it to the base, which is 400,000, the portfolio value, and now your portfolio is worth 420,000 at the end of the first year, but then it compounds because now you’re taking that $420,000 number, and you’re compounding it in your two at 5%. So you get an extra thousand dollars, right? Instead of just getting $20,000 in appreciation, you get 21,000. Now your portfolio value is 441,000. You go into your three with 441,000 as your principal balance, if you will. 5%. And now you get another thousand and $50 in extra appreciation. So you get 22,050 bucks, plus your $441,000 base, and now you’re at 463,000 Hey, it’s all been three years, it’s only been three years. And remember, hopefully you’ve leveraged this portfolio. So these are leveraged returns. We’re not even talking about the beauty of that. We’re just talking about the base, the simplistic appreciation. So now you go into your four and instead of having $400,000, but you started out with three years earlier, you’re starting your four off with $463,050. Take that up 5% and instead of getting the $20,000 you got the first year and appreciation. You’re now getting $3,153 extra. Okay, for 23,001 53. Add that to your new base that you started your four with of $463,050 and you’re now up to $486,203. You start your five with that amount as your your base You’re sort of principal balance, if you will. I’m sort of saying that because it’s kind of I’m likening it to a loan balance, right, or a investment in, in a fund or the stock market or something, that’s your principal balance. So now you’re at 486,000. And portfolio value for 86 202. To be exact, goes up 5%. And this year, you’re going to make $24,310. Of course, we’re not including cash flow tax benefits, we’re not including inflation induced debt destruction or anything in this this just appreciation, one dimension, just one dimension of the portfolio. So you’ve got $4,310 extra this year from the starting right because instead of $20,000 in appreciation, you got 24,003 10. Add that to your new hire principal balance your portfolio value of 486 to a Three, and you’ve got $510,513 $510,513, you’re $110,513 above the original portfolio value in only five years. And this is only one dimension, one beautiful dimension of income properties at a 5% appreciation rate, which, you know, look at the historical numbers depends how you look what survey you look at, probably pretty darn achievable. Okay? So income property is the most historically proven asset class in the world. Go to Jason Hartman calm To find out more and But wait, there is more, because you’re going to hear another amazing thing in this segment with Thomas. So let’s jump over to that right Now

Jason Hartman 12:03
we wanted to do a little segment to help you understand the reality of home prices. And to help you see how you are constantly being misled. Yes, misled by the thought leaders, the media, the vast stock market conspiracy, whatever you want to call it. And this is a study in you know, a recession prediction, and home prices. So we’re going to dive into that today. I’ve got Thomas, our in house economist on board with us, Thomas, welcome back. Yeah, good to be with you. So you had picked out a video to tee up this discussion, and it’s a good one. I saw this video a few months ago. And interesting. You pick the same one. And in watching it again. I realized just how misleading The renowned Nobel Prize winning economist Robert Shiller, Case Shiller index, you’ve definitely heard his name. How misleading he is. Robert, come on the show. Let’s talk about this. Because I don’t know that you mean to mislead people. But, you know, there’s just a lot to this discussion you didn’t mention. So I’m gonna let you talk first, and then we’ll talk about it. Okay, here’s the video portion of it.

Thomas 13:32
The nominal home prices burn to the s&p corelogic Case Shiller index that I’ve been talking about is essentially at a record high if you don’t correct for inflation. And if you do for it for inflation, it’s not a record high, but it’s, it’s pretty high. It’s gone up since 2012. at a good pace. I counted as the third largest expansion of home prices. Since eight 90 late last year.

Jason Hartman 14:02
So you’ve got this graph that he’s showing. And basically, it’s just the chart with the prices going up. Right? You know, no surprise, I’m sure all of you know that. We all agree how that’s happened. But he’s using that to say that we are on the verge of a recession because of this. And that may be true anyway. But this isn’t the reason. That’s all I’m saying. Because in, we’re gonna, we’re gonna dive into that in a moment.

Thomas 14:33
We got a lot of attention in the news media, to the idea that we’re in the longest bull market ever. We’ve had the longest period of near zero interest rate, well, they’re not quite near zero. They’re still on the low side. According to the National Bureau of Economic Research, we will have set a record for the length of an expansion if there isn’t a recession by June of this year. So all those things together, say Yes to me that a lot a lot of people are

Jason Hartman 15:02
in it’s now almost August just for the record there

Thomas 15:06
are thinking that this is getting ready to the stages of of a boom. And in our history repeats, we’re in for a good chance of a another recession.

Thomas 15:22
recessions are hard to predict until they’re upon you. Remember, we’re trying to predict human behavior. And humans thrive on surprising surprising each other and things that have like the election of Donald Trump. Nobody thought that would happen back in 2015, but here it is, we’ve got him. And the same kinds of things can happen again, just like wildfires in California appeared. We had a really bad year on that. That that’s just another example of surprises and history. But the problem is that we tend to magnify them, we may read into the California wildfires, for example, more than is justified.

Jason Hartman 16:05
I don’t even know what he’s talking about with the wildfires. What does that have to do with the price of tea and China? Thomas, any thoughts on the wildfire connection?

Thomas 16:15
Yeah, that’s probably just the first thing that came to mind. Wildfires aren’t connected with a whole lot of economic impact stuff,

Jason Hartman 16:24
you know, I mean, is he getting a little senile? That just doesn’t have a connection that I can quite see. But whatever. Anyway, Thomas, when we first brought you on board, I had asked you to do a study. And you did it. And we still haven’t even talked about it. In fact, we were going to talk about this when you spoke at our profits in paradise event last November in Hawaii, and we didn’t get time. So let’s just talk about it. Now. What I asked you to do, is a little research Project and you’re great at this stuff. I asked you to look at the first home that I bought for myself. This was on at 147 Remington street in Irvine, California. Now, I had purchased a couple years before that my first rental property, I bought my first rental property when I was 20. And then I bought this condo for myself. And that’s when I moved out a mom’s house and you know, moved into a home that I owned, and I already own one rental property plus the home I own that I moved into, right. So that was pretty cool. Not not a common occurrence. And now, for the past six years or so. Or actually eight years, I’ve been telling people, hey, if you get a higher end home, it’s a better deal to rent it. So isn’t it interesting our views change, I never would have thought that background. So here’s the thing. When you Remember when I said Said often listeners, people don’t buy a house on the price. They buy it on the payment. So, when you look back and you look at that first property that I moved into, and you look at the price of that property, it’s appreciated very, very nicely over the many years. However, the mortgage payment, when you take the actual mortgage payment, the monthly payment, that’s really the price people are paying for a house. They buy on a payment, not the price. When you take the mortgage payment on that house, and you adjusted for the official rate of inflation. Thomas, we’re in for some big revelations here, aren’t we listeners? Are you ready? Are you listening? This is significant.

Thomas 18:55
Tell us about Oh, you set it up. I wish I had I wish I could Come in with a big thing at Remington. So 147 Remington 1987, the mortgage payment on that would have been around 100 bucks per month. If you look at the end of 2018, it was around 1200 bucks on an inflation adjusted basis. If you go back to 1989, it was around 1100. So 100 bucks more today than it was in 1989.

Jason Hartman 19:31
Now now Hang on a second. What if you look at the sales prices along the way. Now what we’ll see that properties changed hands many times. So it was first purchased for $102,000 and then it was sold for $160,000. I’m rounding slightly I don’t think it was exactly 160 but like 159 and change and then Today, how much is it worth about 460,000 or something like that?

Thomas 20:05
Yeah, almost 500,000 Okay.

Jason Hartman 20:07
All right. And keep in mind listeners, this is a little 944 square foot, two bedroom, two bath condo, okay. So amazingly, amazingly, today, the inflation adjusted mortgage payment on that property, or you may not have the today number Thomas but at the end of 2018, you tell us which number you have, and let’s compare it to what it would have been back when it was new, back when it was sold for 160,000. Just looking at this property, and trying to really determine if it’s overpriced or under priced, or reasonably priced today, I mean, we must look at the monthly cost, not just the overall cost because Very few people buy a house with cash, especially first time buyers,

Thomas 21:06
tell us those numbers 99 1100 bucks in today’s dollars and, you know, if you take the end of 2018, then we’re at 1200 bucks, the average 2018 mortgage rate was 4.5%. You take that down to today’s mortgage rate, it’s even lower. Yeah, so the actual monthly mortgage payment is lower than what it was in 1989.

Jason Hartman 21:31
Did you all really catch that? That is truly amazing. Now, let me tell you what’s even more amazing about it. That’s only based on the official inflation numbers. I’m sure everybody listening agrees with me and agrees with you, Thomas, that the official numbers are understated. So if you were to calculate and this is what we should do to get in the oven, More realistic view of it. So Thomas, that’s your homework. Your mission should you decide to accept it is to pick an unofficial but realistic rate of inflation and calculate these numbers based on that. And I bet you can do this with many houses across the country. And you will see that real estate prices in terms of a monthly payment really haven’t gone up at all. Isn’t that incredible? That’s incredible.

Thomas 22:35
Incredible. You know, the one thing I was thinking today is I talked to millennials. They keep telling me they’re waiting for home prices to drop before they get into home.

Jason Hartman 22:46
Well not my favorite millennial Lisa who’s probably listening she’s not waiting for them to drop she’s buying up properties left and right but go ahead.

Thomas 22:54
I think that’s the right way to go. I I think if they’re waiting for home prices to drop, they’re going to be waiting a long Time

Jason Hartman 23:01
now, the distinction now is that home prices already are dropping in the cyclical markets. And the property we’re talking about is of course, in a cyclical market. Those cyclical market prices are adjusting and I don’t know what you will say Thomas, but I’ll say they needed to adjust. They got over the top. Okay, so rightfully, they’re adjusting. But when you look, overall, if you’re not looking at the misleading Case Shiller index, which is weighted toward, you know, approximately 75% cyclical markets and only 25% linear markets. If you’re not looking at the Case Shiller index, which have totally mislead you, nationwide, home prices really aren’t as high as you think they are. Okay, they are just not nearly as high as you think they are, in inflation adjusted monthly payment terms in mortgage payment terms.

Thomas 23:57
Oh, yeah, I agree. And if I was a millennium waiting to get into the housing market I get in now when mortgage rates are still incredibly low and the housing market hasn’t had a you know it’s gone up it’s been a very good expansion but it hasn’t been the type of expansion where the housing prices are growing at 20% year over year you know it’s it’s a good priced home appreciate you know, the markets been has seen home prices appreciate and a good amount but not it not a, you know, exuberant levels.

Jason Hartman 24:30
Right, right. You’re taking the Robert Shiller who stole it from Alan Greenspan, but he wrote a couple books on it. irrational exuberance, right. And you’re absolutely right, because back before the Great Recession, we had absurd appreciation levels, where I remember in Orange County, California where I owned a traditional real estate company, you know, we saw 26% per your we saw a phoenix do 55% One year. I mean, that is completely unsustainable. Obviously, there’s going to be a correction when you see that kind of stuff. But in this cycle, you know, certainly things have appreciated, but it hasn’t gone. absolutely nuts like it did before. So that’s good. Now, here’s the fly in the ointment, though, folks. And here’s what really could lead to the next down housing market, the next significant recession in terms of real estate, I’m just talking about real estate here, but well, the broader economy in general. And that is because rates now are so low that the Fed and we’ve talked about this many times on other episodes, doesn’t have any bullets in the gun as the metaphor is right. The only way you can fix a faltering economy, well, not the only way but a significant way is to use the interest rate tool and to create Cut Cut rates into the recession, right when it comes and it will eventually come. And that will make it softer. It’ll make the landing softer. Or if you’re already in it, you can get out of it by just pumping up the money supply. And, you know, part of the significant way you do that is by reducing rates, you use the rates as a lever to stimulate economic growth. But if rates are already very, very low, you lose that tool. That tool is not available to the Fed and the powers that be. So that is a dangerous thing. Now, interestingly, and Thomas, I want to have you back on another show I just posted in our content group this morning, an interesting article, where Bernie Anki or former Fed chair Ben Bernanke, he gave a speech and he talked about how negative interest rates were okay. That’s a big one, too. But what do you think about what I just said, Thomas?

Thomas 27:03
Oh, I think it’s a sign of there’s something wrong. I saw the, I think it’s produced by Bloomberg, that 25% of investment grade bonds are now yielding negative rates. It’s, you know, they have negative yields on them. It’s

Jason Hartman 27:19
so so basically, what does that mean? Tell the listeners what that means. Does that mean that in order to store your money in a bond, you know, invest in a bond to park your money, you actually lose money.

Thomas 27:34
Now, so the bonds are still selling with positive coupons, you know, so,

Jason Hartman 27:39
if maturity, right,

Thomas 27:40
yeah, US Treasury goes out and says, you know, we’ll we’ll do a 10 year note for 2%. They’re still gonna pay that 2%. But when it’s sold on the market, because there’s so much demand for the treasuries the yield on that the yield is the earnings divided by price. So, you know, it turns negative because the price gets been up. Yeah,

Jason Hartman 28:07
right. Right. So that’s in the trading aspect of it, right. But if you’re that buyer, then what I said is absolutely true, right? Because if you pay that bit up price, then you’re basically in a negative interest rate environment.

Thomas 28:24
Right? Yeah, you if you buy it, now, you risk that interest rates turn flip positive, right. If inflation comes back, yeah, then there’s a giant amount of risk in there. Right?

Jason Hartman 28:35
Why do companies and people buy these bonds? They must see that risk, right?

Thomas 28:42
Yeah. I just think money managers are almost over concerned of a recession to where they think you know, we’ll put it somewhere safe right now. Right. You know, it’s better to basically or nothing and have the risk of maybe losing some if interest rates rise versus Money, an equity market situation to where there’s there’s real you could really get slammed. I agree.

Jason Hartman 29:05
Yeah, right. Right. All right. So they’re, they’re doing the compared to what game. So you see why income property is so attractive and why the institutional players are getting into it. So interesting stuff, interesting stuff. So Thomas, please do that homework for us. And let’s look at the unofficial inflation rate, the more realistic one, and let’s do the math on that. And, you know, maybe we ought to pick a couple other sample properties in some different types of market like a linear cyclical and hybrid market, or something like that. And just look at this because I think it’s, it’s fascinating and it’s so amazing how the talking heads including Nobel Prize winner Robert Shiller, they go on the news, they go on CNBC and they say this stuff and it’s just everybody just accepts that as the gospel without thinking about It and really understanding the true dynamics. But hey, those are all the dumb people. The smart people are listening to the show right now. So, you know, you’re not going to be left out in the cold like, like, like the masses. So that’s good. All right, Thomas closing thought,

Thomas 30:16
oh, now’s a perfect time to, you know, look at the housing market. Interest rates are still low, and they they can go lower, but not much.

Jason Hartman 30:26
Not much. Not much. And I want to qualify what you said, though. It’s the linear housing market. Because we do think I think you agree with me that the cyclical markets have still got further to fall. At least that’s what I think. I don’t know. Do you agree with me on that? I’m curious.

Thomas 30:44
Yeah. And places like San Francisco they they’ve got a good amount of downside risk. Yeah.

Jason Hartman 30:50
And New York and LA and Miami and yeah, all of those types of markets and globally to do you. Do you agree about the other ones that I mentioned the other markets

Thomas 30:59
new For sure, yeah, I might have to check Miami. Yeah, it wouldn’t surprise me. You know, yeah, there’s a lot of downside risk. They’re all the same

Jason Hartman 31:07
good stuff. Good stuff. Okay. Hey, thanks for coming on and talking about this today and we’ll talk to you next time.

Thomas 31:13
Good being with you.

Jason Hartman 31:16
Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website heart and Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are their own. And if you require specific legal or tax advice, or advice and any other specialized area, please consult an appropriate professional and we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on The next episode

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