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How Fannie Mae & Freddie Mac Influence on the US Housing Market

Jason Hartman and Adam play a clip from a video on Fannie Mae and Freddie Mac’s influence on the housing market. The institution’s publicly stated goal is to make housing in the country more affordable, but are they really doing that?

Investor 0:00
Hey Jason, it’s mark, living here in Europe, the Czech Republic. I’m down at my Airbnb in Austria right now. And I just wanted to congratulate you on 1000. Show. Congratulations on all the shows, you probably don’t hear from only a fraction probably don’t hear from most people. Just how much the shows have helped, how much we listened to them, how much we appreciate them, and just all the best Congrats.

Announcer 0:25
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 in 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 1:15
Welcome to Episode 1238. Thanks for joining us today. I’ve got Adam here with me to discuss a couple of very important things that could have some wide ranging effects on all of us as investors. Adam, welcome back. Thanks. Good to be back. We talked a long time ago at meet the Masters in maybe 2011 ish about the possibility of Fannie Mae going away. And this has huge impact to any owner or buyer of real estate, and all sorts of ancillary industries. I mean, the impact is profound. If this ever happens now, we don’t know that will happen. We don’t know what will happen. Obviously, nobody knows for sure. But there’s talk about ending the conservatorship we talked about that recently on an episode, various forms of privatization. You know, who knows, one of the beautiful things about real estate in America is it has essentially been subsidized by the government since the Great Depression over seven decades ago. So there could be some pretty big changes, by the way. It’s almost 2020. I should be saying almost. Well, I don’t know depends when during the Great Depression you’re talking about, but I should say eight or nine decades ago. Yeah. Yeah, it has been a little while. But yeah, what do you take from the whole Fannie Mae discussion? What are your thoughts?

Adam 2:49
I think we need to look back in history like you were discussing and I pulled up. I went to the census website because it’s just a phenomenal place for stats. And I was looking at the time before For Fannie and Freddie, and if we look at that the average home ownership rate in 1900 was only 46%, nationwide average. And if our homeownership rate of Fannie and Freddie go away, and it starts trending back in that direction, that’s going to have huge implications for the US housing market.

Jason Hartman 3:21
Yeah. And so give that percentage number again,

Adam 3:24
well, in 2000, it was 66.2. But back in 1900, it was only 46.5%. Okay, so a lot more renters back then.

Jason Hartman 3:33
Yes. I sort of question though, how accurate the statistics were, that was an awfully long time ago. I

Adam 3:40
mean, even if you look at if you bump it up to 1950, it was still only 55%.

Jason Hartman 3:45
Right? And by the way, that is the number it should be according to Jason Hartman. I think that’s where the homeownership should be. I’ve said that for many years, that the homeownership rate is too high. Here’s why some people in my profession don’t like me, because it’s nonsensical that we need a high homeownership rate. That is a false idea. It just isn’t a good premise with which to operate. There are these sort of simplistic notions that, oh, it’s good for society to have this, you know, as George Bush called it the ownership society, right? But it’s simply not true. The homeownership rate is too high, and it should go down. homeownership creates a lot of I’ll call it stuck ness, meaning that people are stuck, the economy becomes paralyzed, it becomes immobile. People can’t move easily to where the jobs are. This is not new. You’ve been hearing me say this for years, the homeownership rate really should go down. But if it does, that means the rental market is larger. You know, at the peak homeownership rate. It was about 69%, I believe, and then we have the Great Recession. Then it declined. And right now I think it’s hovering somewhere around 62%. I could be wrong about that. But it’s close to that number, right. So if Fannie Mae goes away, now, the stated goal of Fannie Mae is to promote homeownership. So it creates this false market with artificially cheap financing, that increases homeownership, and ultimately reduces rents because it puts people into the ownership pool and takes them out of the renter pool. And maybe they would be much better off in the renter pool, right?

Adam 5:33
Yeah. And especially when you’re talking about the homeownership and if it goes down, how it’s going to impact the economy I look at and the stuckness. It’s also going to impact your other markets because if you think about like all the trips that homeowners make to Home Depot, just update their lighting on their bathroom or the ceiling fans that they want. Those are just the little impulse buys kind of for the house. That’s going to go down as well.

Jason Hartman 5:58
Right? That is true. a homeowner costs a lot more than you think it does. It’s just dramatically more expensive than anybody thinks. But you are absolutely right. It has a huge ripple effect on the broader economy. But I say that if the homeownership rate was down, you know, nobody says, compared to what? Yes, when people buy a home, they certainly spend more money. They go out and buy new appliances, they buy new paint, they buy all sorts of stuff. They spend more money than when they rent, but say they didn’t own and say they rented and they were perfectly happy renting as we see all these baby boomers, renting now, you know, getting out of their big family homes, empty nesters, and they’re just renting and they seem perfectly happy to be renters. I think that’s a fine thing that, you know, it’s nothing wrong with that at all. They’ll spend their money somewhere else. It’s not like they won’t.

Adam 6:54
So I agree. I’m just saying it’s going to shift part of where the money is going in the economy and The stigma in renting I completely agree has gone away. I remember when Aaron and I first got married, she really wanted she was gung ho, like, I want to buy a house right now. And I just looked at her and I said, there is nothing wrong with renting. We’re gonna we’re going to rent a house right now and figure out what our life is going to be like before we buy a house. And I mean, it was we were one of the first of my friends and I mean, I’m in my mid 30s. Now, we’re one of the first whenever we purchased our house of all my friends, and we were 30.

Jason Hartman 7:28
Yeah, yeah, that’s what you do. You get married and you buy a house.

Adam 7:32
I’m just saying we’ve been Yeah, we’ve been married for at that point, probably seven years or so before we purchased our first house. And, you know, like I said, my friends who’ve been married about the same amount of time hadn’t and a lot of them still haven’t. And, you know, there is no stigma to renting at all in our society.

Jason Hartman 7:48
Yeah, it has gone away. There used to be a stigma though I definitely remember even my own arrogance, frankly, where I would talk to people who were homeowners and not homeowners and Being a realtor, a traditional realtor back in the old days, I will say judge them to a little bit of an extent, not if they were younger, but if they were older I thought, you know, I kind of thought in the back of my mind, shouldn’t you be owning a house by now? But, you know, that I became a renter for? Well, what? 667 years I was a renter and I loved it. I actually wish I was renting now. I own lots of rental properties, folks, I don’t need to own the house I live in anyway, I do. I’ve already told that story. Okay, let’s take a deeper look at them at the way Fannie Mae props up the housing market. And there’s a little video here I want to play and then we will have some comments on it. This is from the Wall Street Journal channel on YouTube, which is a great channel check it out. Let’s take a listen here.

Adam 8:50
Owning a home has long been a staple of the American dream. And at the center of that are two big companies, Fannie Mae and Freddie Mac. Sound familiar? Maybe you haven’t thought that much about them since the 2008 financial crisis,

Jason Hartman 9:05
the federal government is stepping into it to stabilize Fannie

Adam 9:08
Mae and Freddie Mac, the two companies almost collapsed under the weight of,

Jason Hartman 9:12
by the way, I should mention, of course, we only mentioned Fannie Mae, the bigger of the two, but both of them obviously, are involved in the promotion of housing, which simply means when you promote something, what happens? The price goes up naturally. That’s exactly what they do. They artificially pump up the prices, and they artificially, as a result suppress rental prices, because those two are non correlating indicators,

Adam 9:39
unprecedented housing bust, then the government stepped in to bail them out. Now, the Trump administration has asked for plans to reshape Fannie and Freddie, but a housing finance overhaul could mean privatizing or shrinking the two companies a process that some believe couldn’t be mortgages will become more expensive and less affordable for millions of Americans.

Jason Hartman 10:01
That’s okay with me. I know I may sound ridiculous but if you think of the big picture that’s actually good for society.

Adam 10:10
That includes the most popular hormone in the US the 30 year fixed rate mortgage, homeowners like this mortgage because of the low monthly payments and the interest rate that doesn’t fluctuate. will explain, but first, you have to understand how Fannie and Freddie fit into the US housing system. First, homeowners borrow money from banks or other lenders. Then Fannie and Freddie buy these mortgages and package them into securities. Then they sell those securities to investors. investors buy them because they’re considered safe. Because Fanny

Jason Hartman 10:48
don’t make that bet. Again, investors. They, apparently that didn’t work out so well. You know, just over 10 years ago, did it. Safe is a relative term I guess, and this one they used To have this saying, I guess it’s out of Vogue. Now, the saying was literally, it’s as safe as houses, as safe as houses. Well, houses ain’t always so safe as we saw during the Great Recession. Now, of course, our angle on investing our philosophy of investing, we believe it’s very safe because you’re going to follow the 10 commandments, especially commandment number five, the property must make sense a day you buy it or you don’t buy it. The people that were not safe, did not follow the 10 commandments at all.

Adam 11:37
Do you take on much of the risk lenders and banks benefit to since the government takes on much of the default risk, lenders can make more loans to more people. Together, Fannie and Freddie now back about half of new US mortgages. So why do some want to change the two companies some in Washington, one to shrink or even get rid of Fannie and Freddie, and President Trump himself has indicated that he wants to roll back the government’s involvement in the two companies, which have been under government control since the financial crisis. But housing finance overhaul couldn’t mean privatizing or shrinking the two companies. Those looking to shrink. Fannie and Freddie argue that the government shouldn’t be involved in the housing market to the extent that is now.

Jason Hartman 12:23
Absolutely true. Any comments yet? Oh, yeah. You probably think they should being being a socialist, like you are. What do you think about that? Do you think they should be involved in the housing market? I don’t think so. But

Adam 12:36
I’m not 100% sure they shouldn’t. But whenever I think about it, I’m kind of like, Why? Why are they there are a lot of things that I believe the government should be involved in. But this is not one of them, for the most part,

Jason Hartman 12:47
good. Now they need to get out of the way because the other compared to what question is, well, what would happen if they weren’t involved if these things weren’t subsidized? Well, that would free up government resources to Do something else, or maybe just put more money back in our pockets. Right? There’s a lot of government resources other than just direct money involved in supporting and regulating and not to say that they wouldn’t be doing some regulation in the private market if it were privatized. But yeah, the government has no business in this. They have no business and a lot of stuff he asked me, but anyway, let’s continue.

Adam 13:26
They say that the private sector, not the government should be filling this role. Yes. Those who support Fannie and Freddie and say that homeownership is a path to prosperity for the middle class, and that the government has a responsibility to keep housing affordable.

Jason Hartman 13:39
They do the exact opposite. They make housing more expensive. I mean, look, if it was the way it was, in many other countries where your mortgage looked something like this, instead of you know, what are the rates today you’re going to pay on a mortgage about four for a homeowner that’s around 4% 4% Maybe four and a quarter, right? And you can get that mortgage for a ridiculously long, three decades. Now, if you had to pay the market rate for that mortgage, it would probably be at least six and a half percent. And it would maybe only be a seven, maybe five or a seven or a 10 year long, fixed rate loan. It might go longer than that, but it might become adjustable after that initial five, seven or 10 year period. So you wouldn’t know what your payments are in the future. If you had to buy a house based on those criteria, the house would be less expensive. The reason we have this insanity in the housing market is because we’ve got all of this government money or government insured money, whatever you want to call it, you know the government’s in there, okay. Coming out the housing market, anything new sub dies is going to get more expensive and more widespread. Anything you tax and regulate? Well, regulate is probably the wrong word. Because those get more expensive too, because the cost of regulation and the anti competitive nature that ensues when you over regulate something, but if you tax something, you’re going to get less of it. If you subsidize something, you’re going to get more of it. Okay. So if you want housing to be affordable, stop frickin subsidizing it. Yeah, I mean, you would,

Adam 15:32
you would think with the way that this is sounding is that before Fannie and Freddie came in, everybody was homeless.

Jason Hartman 15:38
Yeah, I know. It’s absolutely stupid, right? Yeah. Yeah, I know. Good point. Good point, and it’s not that way at all. So let the free market make the mortgages. Let people buy them in a real economy. Of course, probably the best comparison here. And many of you listening know it all too. Well. The student loan and college tuition problem. The reason college got so expensive is because of Sallie Mae. And these government backed or government insured student loans. This tidal wave of money came at these universities. They all got super greedy. They raised the cost of tuition. They hired branding agencies and marketing firms and architects to design really cool campuses and beautiful gymnasiums. I calling it a gymnasium, right? But it really helps spas to attract students, okay. They got out of the business of education. They started buying up all the real estate in every city they’re in. And what does this have to do with college education that’s supposed to be their job right to provide college education. So they used all of this tidal wave of money to become these insanely wealthy entities and the cost of College has increased at, you know, two, three, even four times the rate of inflation over the past couple of decades. Since they’ve been well, the past few decades, since they’ve been ensuring and backing student

Adam 17:13
loans. Yeah. And it also goes with, you know, we talked about how in the past, everybody should own a home, it’s also come into vogue, that everybody needs a college education. So it becomes as it becomes more of a, you know, societal norm, then you have more people rushing in, and then you also, you know, then you get that problem as well.

Jason Hartman 17:30
Yeah, absolutely. Good point. Okay. Let’s continue here.

Adam 17:35
And now some are wondering, what would the US housing market look like without Fannie and Freddie? Well, to start with, many non bank lenders might find it harder to operate. Unlike banks, these firms don’t have deposits, which means it will be more expensive for them to lend money a Fannie and Freddie go away. these so called non bank lenders make up about half of new US mortgages today. They’re often the only path that first time borrowers or middle income families have for getting a mortgage. That’s because in the last decade, many banks have focused largely on wealthy borrowers when making mortgages, and the non banks have moved in to fill the space they lived.

Adam 18:15
Beyond that, no one’s really sure what the market would look like without Fannie and Freddie,

Jason Hartman 18:20
I’ll tell you what it would look like. Housing would get less expensive and rents would increase.

Adam 18:25
Well, that’s why I started at the beginning of the episode talking about the homeownership rate back in 1900, is because when I watched this video, I thought well, Fannie Mae and Freddie Mac haven’t always been around. So let’s look at the housing market before this. So that was one of the reasons why I looked at it that way. Now, I will say one of the things when she talks about the non bank lenders is whenever the mortgage is changed, and the 30 year mortgage goes away, potentially, and what you were talking about how it becomes a, you know, 10 or 15 year adjustable rate mortgage. If you look at how long people actually own their homes in general in the United States, it’s only about Seven to 10 years. So a lot of these people are going to be selling their homes before it becomes adjustable. So it’s not right. It’s not as big of a concern for people, you’re going to have a higher interest rate to begin with. But they’re still going to say, you know, instead of basing my decision on a 4% interest rate, I’m going to base it on a seven and not worry about 15 years down the road, because I probably won’t be living here.

Jason Hartman 19:21
Right, exactly. It’s typically about seven years that someone is in their home. And of course, depends on the economic cycle, the style of home, they buy, whether they outgrow it, or it’s they’re an empty nester and they gotta move down demographics. There’s a zillion factors that impact that, obviously. But you’re right, most of them won’t finish out the 30 year mortgage, the three decade mortgage, which, by the way, investors, this is one of the reasons I say you should buy every property you can get your hands on and get a 30 year mortgage because it’s such a great deal. Okay. So make sure you’re hearing both things here the subtext of what I’m saying, as I complain about Fannie and Freddie are the These are great deals so go and gobble them up and get as much government subsidy as you can as an investor. You don’t have to like it take advantage of it. Yeah, right. Exactly. Listen, I and it’s it’s not talking out of two sides of your mouth As the old saying goes to say you hate the philosophy, but hey, that’s what we have in society. It’s not like I’m gonna ignore it, I’m gonna take advantage of it. I’m not an idiot. I’m not

Adam 20:21
gonna go to my bank and say, Well, I understand you could give me a 4% interest rate, but come on, let’s give me a five or 6%

Jason Hartman 20:27
Yeah, I want to pay the market rate. If there were a free market and Fannie Mae didn’t exist, that’s the rate I want to pay because I just want to donate extra money. Come like Warren Buffett, who complains that taxes are too low for the rich but he never pays more himself. Hashtag hypocrite. Okay, let’s keep going.

Adam 20:45
But let’s consider other countries which don’t operate their housing markets like the US does. In many countries. Long term fixed rate home loans, including the 30 year fixed rate mortgage aren’t largely available. Instead, mortgage rates reset Depending on the market, and even a one point increase in your mortgages interest rate can add hundreds of dollars to your monthly payment. We can also look at the US before Fannie was created in 1938. Back then, borrowers had to come up with much larger down payments, often 50% or more. mortgages also tended to last for just five or 10 years, with a big balloon payment that came due at the end. So future mortgages could look like this or not at all. Much of it depends on how the government plans to reshape Fannie and Freddie. But reshaping them won’t be easy. People like the benefits they create, including the 30 year fixed rate mortgage. And right now there isn’t much agreement on either side of the aisle on how to get rid of the government’s involvement in housing, at least not without completely overhauling the way the housing system works. So for now, Fannie and Freddie’s future as still up in the air.

Jason Hartman 21:59
Yeah, that’s pretty interesting. thing, but the thing they never say is, of course, compared to what? Well, yes, it would be more expensive if the prices were the same. But if the prices just like the student tuition, the college tuition prices fell to meet the market without this ridiculously subsidized financing. You know, if the house was 20 or 30%, less expensive, then it would be affordable, it will eventually fall to meet the market. So that we have the process of what we call price discovery, price discovery will will occur. Now, here’s the thing that happens, folks, you might be thinking, if you are a new listener, or you know, maybe you’re a semi new listener, and you weren’t listening to me talk about this eight years ago or nine years ago. Look at this is good for investors, okay, if you already own a bunch of properties, your rents are going to increase and since you’re investing for yield rather than capital gain, who cares that much about the price A house. Okay, now it will ultimately adjust back. But in the initial stages of an event like this, you would see price declines almost almost be for sure. But you would see rent increases, because think about it. It looks like on a recent episode, we talked about how the annualized number of home sales was 5.2 million per year. Imagine if that number went from 5 million to 1 million. Okay? It went down by 80%. For example, if that number went down, all those people would be either number one staying put, or they’d be renting. And you would see upward pressure on rents Because ultimately, people have to move Okay, they can’t stay put forever usually because they have life changes, job opportunities, relatives who are ill and need care and they got to go live in Our city, family gets bigger family gets smaller, whatever there are reasons people need to move, obviously. And so they will eventually move. And they probably wouldn’t be buyers on that move. They would be renters. And so you would see a huge upward pressure on rents. I think this is actually would be good for investors, and initially will not be good, but overall it will be good for the economy.

Adam 24:28
Yeah, I was looking at the homeownership rates in 2000. They don’t the census hasn’t put out their 2010 numbers. And thinking about you mentioned that the homeownership rate natural rate is probably around 55%. And the average homeownership rate in 2000 was 66.2%. But most of the states that we are currently offering properties in are actually higher than that, like around 6970 72%. I believe in some so you would See prices I know in Tennessee it’s higher than normal. Memphis is more like 5050 renter owner, but in general, if we’re seeing those come down even more percent wise, then your price is going to go down even more than the national average. It couldn’t be everybody’s cheaper to purchase in in areas that are already good

Jason Hartman 25:18
right. So there be a buying opportunity to hear is always the issue. Don’t worry, everything will equalize. But the time during that equalization that move back toward remember your biology class homeostasis, right, your body always tries to have homeostasis. It tries to equalize right? I think that’s what that all meant. It was a few years back, okay. But during that equalization process, that’s the time people they go into financial ruin, because they can’t withstand the adjustment period. And that’s why I talk so much about sustainable investing. Sustainable investing. When you talk about sustainability, it’s not about the environment, it’s about financial sustainability. You’ve got to be able to make it through times of change, so that you can stay in the game or you are prepared to take advantage of opportunities that come your way. So yeah, why don’t you interesting things there. And Adam, this is going to tie into another discussion we’re going to have on a future episode about a potential giant, mega shift mega, huge, ginormous change in the real estate industry. Do you want to give our listeners a little

Adam 26:40
clue about that? Well, I would say if you own your personal residence, you’ve probably looked at it. It has three initials that most people know is M L. S sub multiple listing service, the MLS

Jason Hartman 26:53
Yeah, there may be a huge huge change coming to the way the Entire real estate industry operates. And it may also become more like the way it operates in foreign countries. And this will present some problems and big opportunities at the same time. So we’re going to talk about that on a future episode. And Adam, I think we gotta wrap it up for today. Thank you for joining me. Oh, one more thing I want to say though, we have listeners in 165 countries. And this, interestingly, doesn’t really impact you that much, because you’re probably not able to get Fannie Mae or Freddie Mac loans if you’re investing in the US real estate market, but I think you can see, we’ve talked about it in the past, but you can see it more clearly after this episode of how the United States is such a special housing market. It is really, really special. And for you, American listeners, and you’re thinking well, I should buy property abroad. You know, we have looked at that. I’ve been to 83 countries and many of them I’ve looked at real estate and we just haven’t been able to find even one of those that is attractive enough, we could certainly recommend foreign properties to you. We’ve been pitched by many people offering them and you know, Costa Rica, in Australia, in Europe, all over in China all just all over the world. It has just never made sense. Otherwise, we would have we would have brought that to you. Now. I’m not you know, who knows what the future will hold. But at this time, and for the past 15 years, we have never found any of those opportunities that we would want to bring to you. Although they’ve dangled a lot of money in front of us, especially those I remember those Costa Rican promoters in the in the boilies promoters to a lot of people wanting to sell property in those places, but we’ve just never found it to be very attractive. So we’ve we’ve never recommended it. I think for foreign buyers. This is even better news. Oh yes. Because then it You’re fighting on an even playing surface. Right? Right. Yeah, the playing field is much more even. And you’re in a position where you’re getting better values. And so yeah, it’s a much it’s much more level playing field. It’s absolutely, prices don’t change at all. Yeah. So what that means is that there the other effect of this would be more foreign investment. There’s already a lot. I mean, the US is a hotbed of foreign investment. But there be even more incentive for foreign buyers to buy up us real estate, which would have upward pressure on prices. So see, there are all these factors that come into play that, you know, the simpleton says, Oh, well, like it wasn’t the video. Well, Fannie Mae goes away that housing won’t be affordable to all these people. Where’s the violin, but you know, they never realized the price will adjust. There will be more foreign buyers, you know, there’s all these and the free market will come in and fill the financing void to Okay, now granted, it might be a little more expensive. But it won’t be as much as it is now. Because with these two agencies out of the way or privatized or having a smaller impact, however, it ends up happening, there would be more interest in investors filling in the void. They would see opportunities here. So there’s always equalizing forces, you know, don’t worry about this stuff. But anyway, that’s enough for today. Thanks for joining us, everybody. Check out Jason Hartman calm for upcoming events. For properties of course talk to one of our investment counselors like Adam, or our other investment counselors, they can help you and we look forward to talking to you on the next episode. Happy investing. 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 Hartman 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 can 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.

The Machinery Of Freedom & Laws Order By Dr. David Friedman

Jason Hartman chats with guest Dr. David D Friedman, son of Milton Friedman, and former professor at Santa Clara University in the Law School. He is also the author of books such as The Machinery of Freedom: Guide to a Radical Capitalism and Laws Order: What Economics Has to Do with Law and Why It Matters. The two dissect government’s role in society and its capability.

Investor 0:00
Those who have understood that the paradigm has changed. And that’s perhaps we need to do something that’s counterintuitive. Like being in debt, which obviously we have all been taught is a horrible thing. You know, maybe it’s those few early people who understand that and witness that. So perhaps some people who are more sensitive to risk or more risk averse, or I don’t know what the perfection is, but the canary in the coal mine, if you want, and this is perhaps what you are in like you have been. I am surprised, Jason right. Now, that’s basically what we are saying is not yet more mainstream. I’m not saying that this should be or that this should already be what everybody’s thinking that but so few people are thinking that or at least that so few people are vocal about it. So perhaps it’s just a well kept secrets and those who know we don’t want to talk about it, but I’m very surprised because this is so much against the mainstream of what you’re reading in the paper.
Announcer 1:04
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 in 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 1:54
Welcome to Episode 1218 1218 Thanks for Joining us today, it’s my pleasure to welcome Dr. David D. Friedman to the show. He is the son of Milton and Rose Friedman. You’ve certainly heard of Milton Friedman before. And I hope you have read his books. He’s a professor of law at Santa Clara University, and contributing editor to Liberty magazine. He’s the best selling author of the machinery of freedom, a guide to radical capitalism, and several other books, including his latest, which is entitled legal systems very different from ours. David, welcome. How are you? I’m fine. I am currently However, an emeritus professor, I retired a year and a half ago. Well, congratulations, congratulations. So hey, I’m looking forward to diving into really both of these topics and simply kind of a split show. But the legal system is so important to maintain a free market and have capitalism exist, obviously. So let’s talk about the machinery of freedom first. Now, this was an older book, but you revised it recently, right?
Dr. David Friedman 2:57
Yes, the machinery was published. In the early 1970s, so it’s now something like 45 years old. And a few years ago, I brought out a third edition with about 100 pages of additional material, which was a lot of fun. What
Jason Hartman 3:13
is the basic premise? Does it follow your father’s line of thinking or, you know, it doesn’t diverge in a different way. Tell us a little bit about
Dr. David Friedman 3:21
that depends on what part of it parts of it are arguing for libertarian views in general. But part which is, I suppose most original is sketching out what a society might look like in which all government functions and replaced by private institutions. So in that sense, it’s more extreme than the positions that my father was arguing for. He was basically asking how within the framework of our present society, can we make things better by making them free or asking the question, What would a society look like in which you carry that program all of the way to entirely abolishing government You plausibly imagine institutions working, which provided private substitutes for police courts in the light, right? And what would the result be? I try to use economics to answer the question, what would the market for law produce? Think of law not is produced by a political mechanism, but it’s produced by a market mechanism. Part of the connection between that and my most recent book is that I concluded when studying a whole bunch of past societies that in a certain sense, I’ve been reinventing the wheel. That is that there had been much more primitive societies, which had a sort of a much simpler version of what I was describing, in which law enforcement wasn’t fact private, and decentralized. So I have a chapter in the new book, discussing that kind of society what it needs to work and historical examples of those. Okay, so when I talked to libertarians, including when I look in the mirror and talk to myself, I always think it’s a great idea. privatized this that and the other thing until it comes down to about maybe three things I sort of can’t see private enterprise doing. I don’t think government does much well, but I do think they do a few things. Well, I don’t know. Can you prioritize everything? For example, let’s just be specific on a couple things if we can you talk about the legal system. And we’ll dive into that a little bit more. But what about just building permits, and food safety, and, you know, some of these sort of basic things people consider to be infrastructure. I don’t think any of those things require government activity. When you buy a house, you care whether it’s going to fall down, and there’s no reason you can’t have and in fact, you do have private institutions, which set up rules for how you’re supposed to build a building and if you conform to those you can claim to have conform to those. Similarly, with regard to food, a grocery store chain that sells food that makes people drop dead is likely to go out of business and they haven’t A strong incentive to try to make sure that the food is safe. So I think those are the easy problems. Right? I would say that the three fundamental functions are police courts and national defense.
Jason Hartman 6:10
Okay, before you get into that, though, let me just ask you a question about that. See, I think that part of the problem and and listen, philosophically, I agree with you. I’m just wondering how it works in practice, is all part of the problem is there’s this big lag time in a lot of circumstances in life, right. Let’s say it’s a drug. And I know your father had a lot, wrote a lot about the FDA, and I agree with his thinking, by the way, but it takes a long time before you see the consequence of something. So if someone you know, in the private world if they want to cut corners to save expenses or be more expedient, you know, it might take a long time to figure out that they’ve damaged somebody, right? It might indeed,
Dr. David Friedman 6:49
it might equally take a long time for a government regulator to figure out that something is safe. And while they were figuring that out, people died because they’re not allowed to use The new drug we happen to have
Jason Hartman 7:01
for service the FDA,
Dr. David Friedman 7:03
the FDA, as you may know, many years ago, the FDA put out a press release in which they admitted to killing 100,000 people. That isn’t how they put it.
Jason Hartman 7:11
Fair enough. Yeah,
Dr. David Friedman 7:12
what they did was this had to do with the issue of beta blockers. Beta blockers are drugs used to prevent a second heart attack, right, and been widely used outside of the US for a decade or more before the FDA decided to approve them. And when it approved them, it estimated that approving them would save eight to 10,000 lives a year. So if they were, say, 10 to 12 years, they kept them off the market. I don’t remember the exact timing eight to 10,000 lives a year. That means that their particular caution it killed about 100,000 people by their estimates, there isn’t a way of playing safe,
Jason Hartman 7:47
isn’t it? It seems to me that the way you solve this problem in the private enterprise world, is you do it with insurance policies. And you know if a builder wants to build a home or someone wants to make a drug or someone wants to sell your food or whatever they want to do if they want to be your local police department, that’s a capitalist operated police department, whatever it is, right? They have to buy an insurance policy. And there’s a private insurance company taking the risk that’s going to examine them to make sure they’re playing. Right.
Dr. David Friedman 8:18
That is that’s certainly one way but there are lots of different ways things happening in the market. I don’t think you can easily predict which one will turn out to be optimal. Okay, that’s one way. Another way is that you have a large firm with a big reputation at stake. And it says, Take the historical example of Sears Sears did not make stuff. Sears sold stuff other people made mostly under their own brand name. And what were they doing part of what they were doing was saying to their customers, this company that made this particular shovel you never heard heard of, they could be making the junky shovel and you would waste your money and only discover when it broke down. But you know that if the shovel you buys from Sears turns out to be junk, you’ll be left likely to buy stuff from Sears. So it’s in our interest to do the work. So that’s one way of doing it. Ensuring is another way of doing it. There are a variety of different possible so so
Jason Hartman 9:10
the one way you mentioned with Sears is just have a clearing house have a retailer essential reputation. Yeah, that’s right. So they have the reputation and they are in charge of vetting the homebuilder. Okay, so you’d have another party in there another layer someone another middleman. That’s one
Dr. David Friedman 9:26
way of doing it. Another way if you look at how EA works, EA it is the base reputation EA is not saying this product is any good. Right. eBay is merely saying we will report to you yeah, the information we have from other people essentially
Jason Hartman 9:44
the same as Amazon and repayments. Thankfully, reviews are getting much more popular. But of course they have their problems too, but maybe they’re less problem than government.
Dr. David Friedman 9:52
Okay, I don’t think you should assume there were perfect solutions to these things. I think one of the mistakes that defenders of the free market often make Is to imply that with the free market, nothing wrong will ever happen. And that isn’t true that both people make mistakes and their ways economists have analyzed in some detail which we refer to under the general term of market failure, in which even if nobody makes a mistake, you get the wrong answer. Those are things like public good problems and externalities, those all the implication of those things, is that a perfect free market system, there will sometimes people will sometimes do things they shouldn’t do or fail to do things they should. And the response to that is we have no better mechanism than if you think about the reasons why the market sometimes doesn’t work. Those are also reasons why the political market sometimes doesn’t work. And the difference is that those reasons are the exception on the private market and the rule on the public market. If you think about the basic logic of market failure, which isn’t just about free markets, is that is the situation or individual rationality doesn’t produce group rationality. And the reason is that the decision that I make has its costs or benefits largely to other people. So if you think about why in a free market, I might pollute, even though I shouldn’t, even though the damage that people downwind is larger than the benefit to me, the reason is that I’m getting the benefit of making steel and putting stuff out the chimney, and other people are getting the cost. If you think about the reason why some basic research might not be done that’s worth doing. It’s because that research produces benefits for lots of other people I can collect on all of that could happen to the free market. But you then think about the political system. And on the political system, it’s normally the case that when somebody takes an action, he there is neither the cost nor gets the benefit.
Jason Hartman 11:44
Tell us more about that. Be sure,
Dr. David Friedman 11:47
take the question of why democracy works as badly as it does. There’s this famous quote from Churchill it offers us the worst form of government except for all the I love that quote. People normally treat that as though it’s an argument for democracy is actually a guard against government saying the best way we have running government works very badly. And there’s a reason that sort of what I think of as the civics class model of democracy is that the government has to do the right thing or will vote them out. for that to work, the voters have to be well informed both about what the right thing is and about what the individual politicians have done in the political process together not getting that information is costly information that requires a lot of time and effort to figure out, there is no benefit to the individual voter from getting that information. If you are in a country, the size to the US, the chance that your vote will flip the result of a presidential election is something well under one in a million, maybe one in 10 million or so you’re not going to make an investment of hundreds of hours of effort for a one in a million chance of making the world better. If you are an individual judge in our system, and you set a precedent that happens to be a mistake, a precedent that results in the system working less well. You’ll never We’re find out, you could have imposed cost. If you imagine a precedent that makes GNP lower by a hundredth of a percent. If you work that out, that’s an enormous amount of damage for one human being to make. But he’ll never know it did Oh for the legislature did Oh, for the lobbyists, all of those people in the political system are taking actions, most of whose costs are born. And often most of these benefits are received by other people. Therefore, they have no incentive, the way a decentralized system has to work is you have a system where if it’s something is worth taking, it’s worth my doing it. If it’s not worth worth doing for all of us, it’s not worth my doing it. The free market gets that result most of the time, because if I produce something, I got to pay for the inputs. So I’m bearing the cost of the things I’m using. I get paid for the output, so I’m getting most of the benefit. So benefit is larger than cost for me. It’s probably larger than cost per US. political system. That’s not true. So you have ways in which the market doesn’t work, but they are ways that are much less common on the market than on the only alternative we have, which is the political system. So that I think is the basic argument for for the free market. And I have a chapter in the new edition of machinery, where I think the title is market failure considered as an argument both for and against government. It’s an argument for government because it shows that the market is not perfect. It is an are stronger argument against government, because it shows that the political market is more imperfect than the private market. So that’s one of the things I discuss in the book.
Jason Hartman 14:32
You know what happens a lot, at least to me in these debates I have with my leftist friends, and you must have quite a few of them in your environment at Santa Clara is that it comes down to this thing of you know, really the Sherlock Holmes, you can’t hear the dogs that don’t bark, right. You know, like the thing you mentioned about the beta blockers and the FDA, right, you know, no one’s paying attention to the hundred thousand people that died, right? They’re only paying attention to the few things that work or don’t work, you know where, oh, hey, a beta blocker killed someone. Right? Yeah, they don’t pay attention to what the profound impact of the things that are really unseen. That’s the problem with these, it makes me wonder if there will ever be any change, even if your proposal is dramatically better. And your father’s proposals are dramatically better. I mean, I really liked his argument about the FDA, the way he talked about that how, you know, especially rare diseases where there, you know, drugs have a small upside but a big downside, right to the bureaucrat. I remember that argument very well. And it’s very sensible. But I don’t know will there ever be any change,
Dr. David Friedman 15:44
some things do change. We don’t have a draft anymore. We don’t have a military draft. We’re still signing people up for the military draft that we don’t have. And we may stop doing that. If the courts decide as they seem to be deciding that we have to sign up women to that big Make it sufficiently politically unpopular, right? We have floating exchange rates, which we didn’t have when my father started writing. We have, I think, more sentiment in favor of free trade, although that’s been beginning to reverse a little bit recently. But as a result, partly of the fact that economists for about the last 200 years has been arguing that tariffs usually make the country that impose them worse off, not better off. So things do sometimes change. What’s interesting in a way is, there’s a bit I don’t know if you’ve read Lord of the Rings, but there’s a little bit near the end, where Gandalf, I think, is saying, we’ve solved this problem. That doesn’t mean that problems are over. You can’t look forward to sort of heaven. That means that there will be other things will arise in the future, just as we thought, two ages ago, that the good guys had solved the problem when they destroyed Morgoth. But then, Sauron came up. And similarly, one of the things that strikes me looking at political arguments in my life, Time is that we largely defeat a socialist dogma intellectually. And that’s partly due to the collapse of the Soviet Union. And yes, people talk about socialism now, but mostly what they’re really talking about is a welfare state. Sweden and Denmark and Norway are not socialist countries, their capitalist countries with a good deal of income redistribution, and that almost nobody is willing to seriously argue for a centrally planned economy, which was after all, the basic socialist idea. On the other hand, environmentalism has replaced it so that the arguments now against laissez faire are often environmentalist documents.
Jason Hartman 17:36
Like the old saying goes, green trees have red roots
Dr. David Friedman 17:40
doesn’t even have to be the root. Part of it’s true in the sense that one reason some people like environmentalism is because it gives them arguments for things they wanted to do. Anyway. There’s a wonderful cartoon, which I like because what it betrays of the peep about the people who drew it and admire it and the cartoon is Somebody’s saying, What if global warming is really false, and we do all of these good things, and it doesn’t stop global warming, the obvious implication being there, obviously all good things, I don’t remember the whole list, but it’s basically a checklist of people left of center want to do. But of course, the mirror image of that is that implies those people would be in favor of doing those things, even if they didn’t believe in global warming, which is a reason to be a little more skeptical about their environmentalist. But what I was gonna say is that environmentalism in one sense is an improvement on socialism, because it’s actually a better argument. But on the other hand, in practice, since the conclusions that leads to or mostly conclude is like giving government power to make decisions, and there’s no particular reason to expect government to make better decisions for the environment than anybody else. It has bad consequences.
Jason Hartman 18:49
let’s shift gears a little bit and talk about the legal system your your latest book, I’ve always found this fascinating, especially since reading iron Rand years ago. And to her writing about how, you know, that’s really the one of the real roles of government. Now, you may disagree with that it sounds like you might, but she at least said, hey, look at the government’s just got to keep violence from happening and like, that’s their job. And other than that, don’t do anything else. Tell us what you learned about looking at these ancient legal systems and so forth.
Dr. David Friedman 19:20
They aren’t all ancient. The legal systems I cover include modern Amish, they include modern, Romany, they include Islamic and Jewish law which still exist, although Jewish law doesn’t have very much bite to it anymore. Islamic law, I don’t think there really any societies that really follow Islamic law even though they talk about it, but those are both interesting systems. So I guess you learn a lot through different things. The thing that’s most relevant to the issue of whether government has to do it is a set of systems that I refer to as feud law, of which the first one I encountered a long time ago that got me interested in other legal systems was saga period, Iceland, Iceland with thousand years ago, which is where we get the saga because they were the people who wrote the original sagas. And that was a legal system where if you killed somebody whose relatives sued you, and if they won the case, and you didn’t pay the damages, and you didn’t settle out of court, they killed you. And it was legal for them to kill you. And it was illegal for people to defend you once you had lost the case and gotten outlawed. So that was the case where you had a sort of a centralized mechanism for stamping with approval who is or isn’t guilty, but there was no centralized enforcing. There are other systems that go farther in that direction. The remedy to some extent, the modern Romany, even right under refute system, and the basic logic of a feud system is that if you wronged me, I threatened to harm you unless you compensate me. Hmm. And in order for that to work, there are about four different problems it has to solve. The first problem is making sure that I don’t use it as an excuse for extortion. You have to have some way in which might threat to harm you believable if you really did run me and not believable if you didn’t. So in the Icelandic case, that’s what the court mechanism is doing. Because if I win my court case, then all the neighbors know that when I come after you, I’m the good guy, and you’re the bad guy. And if I don’t win the court case and try to threaten you, then the neighbors will support you instead. That would be sort of a simple version. But there are a variety of other ways in which that problem gets solved. But you need some way in which is I like to put it in which right makes might some reason why the threats are believable when you’ve really been wronged and not when they aren’t. second problem you need is a commitment strategy. You need some reason why when I threaten to harm you, if you don’t compensate me, and you reply will I’ll fight back, I actually carry out my threat instead of backing down and there are no a variety of different ways in which societies have done that. And I would like to claim it even goes back before the human species because you get territorial behavior among some animals when the animal is actually committed the fight to the death against a trespasser of his own species. And that explains some animal behavior. Third, probably we need is how do you protect the weak, you need some way in which people who don’t have access to much physical force can still get their rights protected. And my favorite example of that is, again, the Icelandic system, because in the Icelandic system, Tort Claims were marketable. They were transferable. So I’m an
Jason Hartman 22:24
Oh, wow. So you can transfer it to a big strong guy.
Dr. David Friedman 22:27
Yeah, I’m an elderly man who has one son and the son is killed by someone. And I know that if I try to go to court to sue them, I’ll get beaten up on the way to the court. But my neighbor, he’s got four big sons when a Viking in their youth and lots of relatives and allies. So I transferred the case to him. He prosecuted collect the very sizable damages for killing. If it’s an easy case, maybe he agrees to give me part of the money if it’s a hard case, maybe he doesn’t, but either way, the person who did the killing gets punished. Either pays damages or gets killed. So Therefore, even though I have no force, I can do it. And I’ve argued that this is one respect in which the American legal system is a mere thousand years behind the cutting edge of legal technology. Because if you think about it, making Tort Claims transferable would have substantial benefits in our legal system. If you think about the person, somebody smashes your car, and you aren’t a lawyer, maybe you can afford a lawyer, maybe you can’t. But even if you can afford a lawyer, how do you figure out for this one time in your life and you need a lawyer who’s the lawyer will do a good job. You have marketable Tort Claims. You don’t have to do any of that you just asked who’s willing to bid the most above vote to buy my claim. And then the law firm that can do the best job of collecting damages for your car is the one that is going to make the highest offer. You are now still entered as a witness but you no longer are a party, you’ve you’ve been paid. And I’ve discussed a number of other ways in which that would be useful. So part of the fun of this is seeing that some of the ideas I have a different case where I discovered that a really nice and weird institution empirically in Athens was paralleled by the way they run horse races today in America, let’s call it a claiming race use the same basic logic is the way in which people empirically and Athens arranged to get public goods produced. If you read the book, you can you can see the description of that, but that’s part of the fun of it. So anyway, so the the fourth problem you have to solve in a few system is how you prevent what people imagine and if you’d system namely, I think you’ve wronged me, I claim it you refuse to pay cuz you think you haven’t, I harm you. You then say, well, then now I’ve got to get revenge and it goes back and forth, right? That actually is pretty uncommon in real food systems. And there are various mechanisms by which you prevent that the one standard mechanism you see in the Icelandic sagas, is you find some powerful high reputation person and both sides will arbitrate the dispute. And now If he ever rules against me, I don’t look like a wimp for giving in. And if he rules against me and I don’t get in, he’s just been added to the other side.
Jason Hartman 25:08
So I’m going to lose people listening probably have visions of all kinds of violence in the streets with this type of thing. Yeah, well, I think
Dr. David Friedman 25:16
such evidence we got for Iceland, the way I like to put it. The Icelandic system lasted for about a third of the millennium, 330 years, so quite a lot longer than ours has. The last 50 years were pretty bad. You were getting essentially what was turning into a civil sort of a civil war over who would run things. But as best I can tell, the number of people killed in that per capita was somewhere around the US Highway death rate. And the number of people killed in 50 years what they regard was unacceptable violence was almost certainly smaller than the number of people killed in three weeks of the year 1066 in wars between governments the the battles, Stamford Bridge and Hastings
Jason Hartman 26:03
but the wars are that’s a different concept. This is
Dr. David Friedman 26:07
the breakdown was really becoming a civil war. And of course the US Civil War killed quite a lot of people too. So again, there’s there are no perfect systems.
Jason Hartman 26:15
Right? You know, I agree with you there are no perfect systems. But you know, as we wrap it up here, you just keep making me think of privatized prisons. Right which is an idea when I first heard about that maybe in the mid 90s. I was very much in favor of that I thought of course the private sector I’ll do a much better job than the government. But then you see these corrupt judges putting kids in jail and there’s like in this incentivize, you know, it’s when you incentivize war with the central banking system, you’ve incentivize war because it’s profitable. When you make taking people’s freedom away profitable. You know, that doesn’t make any pie good.
Dr. David Friedman 26:51
I in fact, have a journal. Okay, which is on the question of why you don’t always want the most efficient punishment that if you think Think about different punishments, that fines are the most efficient punishment. Because what the criminal loses someone else gets. execution is more efficient the punishment than imprisonment. The criminal loses one life, which nobody gets. So it’s worse than fine. But within prison, but the criminal loses its freedom, and you have to run the prison. So it looks like you should always have the most efficient system. You say, wait a minute. The problem with that, is that that means that somebody else is benefiting by the conviction. And that gives people an incentive to convict people, whether or not they’re innocent.
Jason Hartman 27:34
Yeah. And we’ve seen that,
Dr. David Friedman 27:36
yes, that I had an argument along sorts of lines you’re describing that was more elaborate than yours, a long time ago, and somebody online said, Yeah, the the colonial powers in Africa did that. When they needed a road built, they would find an excuse to arrest a bunch of people, and then their sentence would be to work on the road. And I then realized that HL Mencken, a writer I’m fond of actually has an anecdote about the city. things happening in a less unpleasant form in America now where you’ve got a jail Warden who likes to have his jail fixed up. So every year,
Jason Hartman 28:08
license plates made or whatever, whatever cheap labor
Dr. David Friedman 28:11
every year, it makes a list of he needs one plumber to painters a list of the workers he needs. He gives them to the relevant police officer. The police officer goes around the bars and finds an excuse to arrest that set of people. They spend a few days in jail fixing up the jail, and then they get turned loose. So that’s a problem you have to worry about.
Jason Hartman 28:32
And that’s certainly true. And it’s much more sophisticated than that, sadly, you have these private prison companies that have an army of lobbyists that are lobbying for more draconian laws so they can fill their prisoners that
Dr. David Friedman 28:45
just the private prisons, the lobbyists for keeping up the number of prisoners, at least in California are primarily the prison guard union. So you don’t solve that problem by having government do it either. No, I agree. It’s a different set of problems and will take longer than we have here. Discuss. But what I try to sketch and machinery of freedom is a system in which the laws are coming out of the market, which is considering the costs and benefits on everybody affected. Because, well, I can’t really explain it this amount of time I want to read people interested in machinery of freedom. The second edition is a free download from my webpage, which is David d. friedman.com. The third edition is a fairly inexpensive Kindle on Amazon. And legal systems very different is also both a print version and a Kindle on Amazon and the Kindle. It’s very cheap. Yeah, I try to take my stuff cheap because I’m mostly trying to spread ideas.
Jason Hartman 29:41
Yeah, good stuff. Good stuff. David, thank you so much really fascinating. Do you have a website you want to give out or a Twitter handle or anything?
Dr. David Friedman 29:48
My website is David d. friedman.com. And it’s got links to a lot of my published work that you can read for free. It has a link to my blog. Which is not very active at the moment because I’ve gotten active on someone else’s very interesting blog. But my blog has a lot of stuff from the past. And I occasionally still make posts on it. The blog is called ideas and it covers whatever I feel like talking about. And that includes global warming includes status. It includes a whole lot of different things.
Jason Hartman 30:21
Fantastic. Well, David, thank you so much for joining us today.
Dr. David Friedman 30:24
Thank you.
Jason Hartman 30:25
So we did something very interesting. A long time ago on the show, one of our clients was an expert in guided visualizations and the law of attraction. And she was kind enough to come on the show and do a guided visualization for us and she actually did this for us at a live event. I believe it was actually at one of our meet the Masters conferences many years ago. What I wanted to do is offer you a little gift, and that is an extra bonus episode every week. This will come out on Saturday, a little bonus episode. And it’s nothing like a regular episode. It’s totally different. It’s going to be a guided visualization. I’ve hired an expert for this. And she does a great job of guided visualizations. And you know, the power of visualization, anything the mind can conceive and believe it can achieve. That’s what Napoleon Hill, one of the early success authors of thinking Grow Rich told us. And if you can get your mind your subconscious mind to conceive and believe things with multi sensory detail, that is a very powerful tool. So why don’t we take this tool and make it specific to the principles of real estate investing that I teach, and we will do that we are customizing guided visualizations. We hired this expert and Every Saturday, we will release a very short guided visualization as a sixth episode per week on the podcast. And you can take the weekend and listen to this and relax and they’re just a few minutes long. They’re very short. And it will help you in your visualization of your bright future your abundant future as an income property investor. So I hope you like it. It’s just a little bonus for you. Look for this every Saturday. 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 in any other specialized area, please consult an appropriate professional and we are 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.

The Entitlement Society With Author Dr David Kelley, Part 2

Jason Hartman and Adam begin today’s episode with a discussion on interest rates allowing more people to refinance. They also talk about how federal mandates are allowing them to pull less money from their homes. Naturally this effects the economy and keeps it safer than the period before the Great Recession.
On the second segment of the show, Jason finishes the second half of a two-part conversation with Dr. David Kelley, founder of The Atlas Society and current Chief Intellectual Officer for the society. They continue discussing the degradation of our society and the creation of a more entitled society.

Investor 0:00
Thanks for your support. Jason, I appreciate your support and your whole network. It’s really been very beneficial to me and, and a whole lot of others. I encourage everyone to use your resources that you have. But thanks. Thank you.

Announcer 0:12
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 in 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 1:01
Welcome to Episode 1255 1255. Thanks for joining us today. We’ve got the second half of yesterday’s interview, talking about the Atlas society and the value of labor versus capital and what that means in the economy. today. We got a few things to talk about before we get to part two of that. I’ve got Adam back with me, Adam, welcome. Good to be back. So we’re going to talk about refinance eligibility, cash out refinance, what that means to the overall market. But first, I want to talk about microscopic creatures. very real estate

Adam 1:40
specific stuff here is

Jason Hartman 1:42
this has very little to do with real estate. But I was fascinated by this. And I just have to share it with our listeners. So did you know dear listeners before we get to the new refi rules and refi eligibility And we talked about money that there are these microscopic creatures. And I believe they’re called tardigrades, What a weird name. And they can live almost anywhere. In fact, in Israeli probe that landed on the moon took a bunch of these with them, and left them on the moon. And apparently, these things, these creatures, they think they’re still alive living on the moon. I think they’re the only creature that can live on the moon. Adam, this is crazy.

Adam 2:39
Yeah, but they say they can’t colonize because they need atmosphere and liquid waters. They’re just gonna kind of hang out.

Jason Hartman 2:46
Yeah, they can. They can hang out and live, but they cannot procreate.

Adam 2:52
So I love this quote, it said, but it could be possible to bring them back to earth and then add water.

Jason Hartman 2:58
I know. This is like Suddenly This is the craziest creature ever right? Okay, this microscopic creature kit so the article says when humans returned to the moon they may find other living creatures waiting for them the cargo on an Israeli private lunar lander private By the way, not a government lunar lander. It’s called bearish sheet I guess that crashed into the moon surface in April okay included a box full of a few thousand dehydrated party grades. The microscopic creatures considered one of the toughest animals on the planet well, and now on the moon, okay, are the only known living things thought to be able to survive in outer space per Newsweek point Newsweek still around I thought they went out of business. I guess they’re still around

Adam 3:53
anymore. It’s just website. Yeah.

Jason Hartman 3:55
Okay. And they may be doing that now. It says quote, our payload Maybe the only surviving thing from that mission, the founder of the US based organization that put the lunar library on, bearish sheet, including the tardigrades told Wired Magazine, right, okay, so they could live there for years party grades can survive pressures comparable to the ones created when asteroid strike Earth and expert tells the guardian. So a small crash, like this has nothing to them. Okay, Adam, what else does it say?

Adam 4:31
I mean, they can go up to 304 degrees Fahrenheit,

Jason Hartman 4:35
so they can live in 304 degrees Fahrenheit. That’s totally amazing.

Adam 4:41
Okay, they just get rid of all their water and hang out apparently. I mean, that’s, yeah. So if you can survive an asteroid strike, I think you’re, you’re gonna be just fine.

Jason Hartman 4:50
You’re pretty good. So you know, we’ve all heard about cryogenics. Right. And I actually on my longevity and biohacking show, I interviewed two companies, two different companies on two different episodes that actually freeze people and they think one day they may be able to bring them back to life. Right? We can’t do this yet. And the reason why is because our bodies have so much water in the cells, right? And once the water is frozen, now I I’m no scientist, okay, I’m just a layperson. But the basic idea is, once the water is frozen, including the water in ourselves of our bodies, right? It changes its whole nature and cannot be brought back. It’s a different it’s a whole different ballgame then. Right? But these little creatures can be frozen. It says one survived being frozen for 30 years. Okay, for 30 years it was frozen. That’s because they can expel all of the water in their cells and continue living in a dormant what’s called a ton to us. state with their metabolic processes switched off until rehydrated like you said just add water like a chip that right? The hydrated inactive tardigrades have been rehydrated and revive up to a decade later possibly even longer. Still, they won’t be able to multiply on the lunar surface. They cannot colonize the moon because there is no atmosphere and no liquid water. The expert says that just means

Adam 6:29
we haven’t been up there long enough yet. Yeah,

Jason Hartman 6:32
it could be a chance. But listen to this could be possible to bring them back to earth and then add water and they should resurrect.

Adam 6:40
Wow.

Jason Hartman 6:42
I just had to share that because I thought it was quite fascinating.

Adam 6:44
And it’s okay. They’re likely to see the Sunday so they’re going to be around a while.

Jason Hartman 6:48
Yeah, yeah, that’s they they’re the only creature that will live long enough to see our son eventually. Die. Wow. crazy story. Okay, Adam in other News.

Adam 7:01
In real estate news.

Jason Hartman 7:02
Yeah, this is a real estate show, right? What’s that have to do with creating wealth? I don’t know that had to share?

Adam 7:08
Well, let me guess it could have something to do with creating wealth. Because if you get to travel to the moon with Elon Musk or anything like that, you can go hang out and go surfing and find any of them.

Jason Hartman 7:16
That’s right. And will that be before after the Tesla bankruptcy, the upcoming Tesla bankruptcy

Adam 7:22
will save the money.

Jason Hartman 7:23
Yeah, he’ll have the money. That’s true. And he’s got his other companies. But yeah. Okay. So let’s talk about refinancing the lower interest rates, hugely significant, the lower rates have already made another 8.2 million eligible for refinance. And if if the rates drop another eighth of a percentage point, it would push that total to 9.7 million. This is according to housing wire.

Adam 7:53
Tell us a little more Adam. So essentially, as the rates continue to go down, people become more and more incentivized to actually read Finance because, you know, with rates where they were before, you know, as they were going up people who had 4% rates three and a half percent rates, it didn’t make any sense for them financially to do it. But as the rates continue to going down, at some point, you get to the, the rate where even if it’s not the exact same rate, it still makes sense financially because you can pull your money out and use it somewhere else. And so, as it gets down as more and more people are becoming eligible for it, and taking advantage of it,

Jason Hartman 8:26
so here’s the thing, I always talk about my trademark idea of refi till you die refi till you die slaying in the refi till you die plan I was illustrating back in 2004 2005 2006 a 12 year plan for refi till you die. So, it’s now 2019. So, if you bought a property from me back in 2007, you went to my creating wealth seminar and you thought that reef it Die plan looks good. It’s 2007, you’ve stuck with your properties in your portfolio. And now it’s 12 years later, just like I talked about on the plan. Okay. And you know, what would be interesting is to do a real history of that and look at the rates then. And the rates now, the prices then and the prices now, and see if that plan really came true. I think it did, it probably came through much better than I thought, actually. And so you now refi those properties, you do cash out, and we’re going to get to talk about cash out and just a quick moment, because the rules have changed on that, which I think are actually quite good. You can follow that exact plan that I outlined starting way back in 2004. Okay, 15 years ago, and take advantage of this. And I mean, these low rates are nothing but incredible. It’s amazing,

Adam 9:56
and they’re expecting total originations to rise 700 percent year over year in 2019. And that means loan origination right. And they’re expecting refinances to account for 32% of that this year, which is up from 29% in 2018. So you’re looking at a 10% increase in loan originations, just due to the fact that more people can refinance.

Jason Hartman 10:20
Now, don’t underestimate dear listeners, the impact of that on the overall economy that pumps a lot of money into the mortgage market. So all those mortgage reps, all those people connected with the mortgage industry, the appraisers, the closing agents, the title companies, etc, etc, etc. They’re making money off those refinances. That is hugely significant. That money flows into the economy, and a lot of stuff happens and then if the owner of the property took cash out, that money has a hugely stimulative effect as well. They might remodel, they’ll spend it somewhere, okay, or invested somewhere. So that’s really incredible. But it’s not back to the crazy point that it was before the Great Recession, where people are using their houses like ATM machines, because the rules are considerably tighter than they were before. So this is much more prudent refinancing activity than we saw the last time around. With that, Adam, I know you wanted to talk about how FHA change the rules on cash out refinances, right.

Adam 11:34
Yeah. So before I think back in the Great Recession time, I believe the loan devalue had you can pull out up to 95% of your money that was in your you know, if your equity, but now, it’s currently 85% and they’re changing it to 80%. So more people are eligible for reifies at this point, thanks to the economy, but people are going to be able to take out less money which hopefully provide a more stable housing market as people have more skin still in the game and hopefully don’t walk away from their mortgages as much.

Jason Hartman 12:08
I think that’s absolutely right. You know, that’s good. It’s prudent in the refi t di plan, we only discuss going to an 80% loan to value for cash out refinance. That’s exactly the way we’ve illustrated that plan. You know, I was showing that way back in 2004 15 years ago, and the interest rates are considerably Well, they’re much lower than they were then. And just super desirable mortgage climate. So hey, longtime clients and listeners refi till you die. It’s a great plan. Now when you refi you don’t get to take advantage of the big boring idea which we presented at the last meet the Masters in Newport Beach, California. It’s one or the other. You are getting the advantage of that up until the time you refi till you die. But only up until then. So if you don’t do the refi, if for some reason your situation doesn’t make sense to do the refi to die plan, at least not at this juncture, then you’re automatically taking advantage of what we call the big boring idea. Another one of our trademark terms, the big boring idea, which is amortization, something that really becomes quite significant later in the game, certainly 12 years in, it’s very significant. And I illustrated that from stage at meet the masters. And by the way, we’re about to announce dates for our profits and paradise event in Orlando, Florida. So if you want to take a trip to Disney World, or Epcot Center, and learn how to make profits in Paradise, it’ll be our very our only our second profits in paradise event. We launched that event last year in Hawaii. It was just a beautiful event little far away for sure. This one’s a lot easier. A lots of direct flights to Orlando. Very easy destination. And we’ve got just such a great hotel venue. I think we haven’t signed the deal yet with the hotel, but I really liked this venue quite well. So look for more info on that real soon. We’re very close to making an announcement and offering some early bird tickets. And of course, before that, we have our cruise, our beautiful New England and Canadian cruise coming up in October. So go to Jason Hartman, calm it’s right on the front page. Or if you want the direct link, it’s Jason Hartman. com slash cruise. So join us for that. Adam, are we ready to go to the second half of yesterday’s interview?

Adam 14:41
finish it up?

Jason Hartman 14:42
All right, let’s do it. Here we go.

Adam 14:46
How much should capital be rewarded? versus how much should labor be rewarded? It does seem to me that capital was rewarded pretty highly nowadays in at least in the US and You know, those on the left would say labor doesn’t get enough reward. You know, why are people at Walmart only making minimum wage versus the, you know, I heard Bernie Sanders yesterday yelling about the Walmart family is, you know, they had a company worth $180 billion, and people are making $11 an hour, blah, blah, you know, where do you how do you rationalize that? If we were talking about a genuinely free economy, people who invest and have the insight and risk tolerance to create a business in the first place, they are creating the opportunity for other people to work and earn money by in the form of salary or a wage. And that’s something that didn’t exist before the business created and the investors behind it created the organ company in the first place. So, you know, people get used to saying, Well, you know, there ought to be a job for everybody. Well, wait a minute, who creates those jobs. So the people who are working at Walmart, they chose to work there. They could leave. The Walmart family is not going to their house with guns and dragging them in right making them work at gunpoint. sure they’re choosing to do. Right now, the way an economy works is it’s competitive. There’s the competition among businesses, to get survival businesses, right consumers. But there also is competition for workers. Absolutely. And it ends up being supply and demand.

Jason Hartman 16:23
The funny thing that’s happened in today’s world is somehow this country has degraded to the point where people think these what should be transients, minimum wage jobs are like permanent careers. Since when did that then it wasn’t that way. When I was a kid, no one thought that, hey, I’m going to go to work at Walmart or McDonald’s for the rest of my life or being food service. These were transitional things that, you know, young people did to get their life going, you know, somehow it’s considered a career. I don’t get it. What happened?

Adam 16:58
Well, the more people Adopt an entitlement mentality, the more they think they’re entitled to the status. The other thing. I mean, we have entitlement programs like Social Security, Medicare, Medicaid, welfare, etc. But the entitlement mentality is broader than that. It’s the idea that it’s somebody else’s responsibility to create a job that will give me a salary, I’m comfortable that no, you’re not entitled to that. People will offer it because it’s a good deal. If you are willing and able to work, I can tell you as as having created and run the Atlas society for almost 30 years, I was desperate for good people. When I found someone who could do almost anything for them within the realm of financial possibility. And I think I mean, especially today, a lot of people in business are saying, you know, they’re scrambling to find workers any way they can. So, you know, going back to the entitlement mentality, people are, we’ve partly created that entitlement mentality through government programs that offer a lot of integrity.

Jason Hartman 18:01
Things like the minimum wage right now, and also a really awful aspect of the mixed economy today is the kind of mostly municipal licensing that makes it extremely difficult for very poor people, especially, you know, minorities, blacks in New York, Hispanics elsewhere. They can’t just start a business on the delegate is that life? Yeah, absolutely. Absolutely. You see, in developing countries, you see people selling stuff on the street. Now, granted, those countries have a capital formation problem. And that’s why they’re selling stuff on the street rather than buying a franchise and opening a real store, but at least they can be entrepreneurs. The regulation here prohibits people from doing that you get arrested if you open a lemonade stand, you know, the minimum wage causes unemployment, because when the government gets in the middle of a transaction that two parties want to do, but the government says no, you can’t do this because we’re making it illegal. Then you have no meritocracy, right? If they’re really low skilled people want a job, and you want to pay them five bucks an hour versus 10 bucks an hour. What this is the government to get in the middle of that? Yeah. Where does that come from?

Adam 19:18
labor. I mean, in purely economic terms, labor is like any other commodity, there’s supply, there’s demand. And the demand for labor on the part of those who have jobs to water is a demand that’s based on what can this person produce? That person has to be able to produce? You know, enough to cover the wage that is the Pam. I’m the owner. So the minimum wage people that’s even if you have to start at a regular salary, like your $5 an hour, if you’re any good, you’re not gonna stand you’re gonna go on? Yeah, you’re gonna rise? Yeah, yeah, absolutely. I know. I mean, I started working at 16. You know, picking up trash in the city parks dollar, I think was about 15 hours. Right? Right. Right. I didn’t do that for very long. Right, exactly. Not just because I mean, I had lots of advantages. So I’m not comparing myself. Sure. Yeah. Who are much worse situations, but that’s the universal trait. Well, I wasn’t I didn’t, I didn’t have

Jason Hartman 20:15
some advantages. And I somehow figured it out. And you know, everybody starts off with, you know, rich parents, poor parents, tragedies, some people rise above them, others don’t. We’ve all heard this stories, Horatio Alger rags to riches stories, look at there’s more socio economic mobility in the US than probably any other country on Earth. So the point is, if we have this embedded mentality in our culture of entitlement

Adam 20:43
that is toxic, because everybody is just going to act like they have a chip on their shoulder, and they’re never going to do anything. It’s so disempowering, isn’t it? It is. It’s really appalling today, because the depolarization that everyone talks about is it’s partly political, and that’s one domain but there’s Also just kind of much wider sense and that tagging ism among people that I’m seeing everywhere I’m seeing on campuses and seeing workers in to some extent in the metoo movement. Although there are many cases there are many valid points of the feminists made there. But still, I would say there are two things that people are just not getting. One is that when you make a trade, it’s when when, if you’re free to make that great or not, you’re not going to make it unless you think what you’re getting is better than what you have to give up. And that includes saving for the future, which is also brings in the second point. You know, that’s an exercise of rationality. That’s one of the reasons you know, I’m so big on Iran, because that’s one of our core virtues is being rational. And the whole idea that you can just not even think about the future is irrational. Yep, absolutely. Okay. We’ll wrap this up for us if you would, and just answer one more question, what is the difference between closed objectivism and open objectivism. I’d never heard that before. There’s some distinction there, right? Yeah, this was back to the conflict that was having back ladies 90, which led me to found the my organization, a conflict with the Iran Institute. The idea of closed objectivism as I understand it is that objectivism as a philosophy is all but only what Iran said or wrote or endorsed, while she was alive. That is, it’s a fixed closed systems, nothing will be added to the philosophy. It is complete. And all we can do is expound what ran said to me as an intellectual, as a philosopher, that struck me as crazy when I began to realize that that was part of the operating policy. I think of objectivism as a body of knowledge like any other body of knowledge. I mean, I use Darwin as as an example of Darwin, you know, was a genius who created the theory of evolution but the theory of evolution didn’t stopped with Darwin Darwinism, you know, we could say keeps expanding by people who biologists or adding to his insights standing on his shoulders and say the same thing. But, you know, physics in Isaac Newton, or Einstein. So I think there’s a lot of questions in philosophy that Iran did not address. I’m it’s amazing the number that she did, um, she was a genius. But there’s still lots of questions that we’d like to develop good and solid answers to. And so that means, the idea of open objectivism is that the philosophy is open to expansion to possible revision, I doubt that the things have to be revised, not the core principles, it does have a core set of ideas. If I believe that those were false, I would certainly not call myself an objectivist. But I think there are lots of things that are not at the surface. And that’s what I do as a philosopher is explore and write about those issues. And I think I’ve advanced the philosophy in various ways. Good, good. Wrap up the discussion. We were having And give out your website for us. So just go back to the discussion and just give us a closing thought on that and give out your website, if you would. Our website is Atlas society dot orgy. We have a huge library of articles going back over 30 years about the philosophy. We also have lots and lots of videos, audio courses. And we also have now a very active Facebook page. So you can just search for Atlas society. On Facebook, we have one of our things that we do a lot of is the graphic memes, you know, just a picture and a saying and to make a quick point, you know, a quick point yeah. But they’re they’re very effective. I urge your listeners who might be interested or who are already familiar with nine ran to take a look at the site. And I think what you’ll find there, among many other things is much more discussion, other kinds of issues that Jason you and I’ve been talking about. Especially you know the difference between crony capital realism and real capitalism, the role of the effects of government intervention on the economy in all the different ways it does everything from Social Security to minimum wage to excellent additional licensure right down the board. These are very important topics. So go check out Atlas society.org and Dr. David Kelly, thanks again for joining us

Dr. David Kelley 25:22
back at my pleasure.

Dr. David Kelley 25:25
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 Hartman. 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 right 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.

Real Estate Stats From National Association Of Realtors 2019

Jason Hartman and investment counselor Adam have a discussion on the recent economic statistics from the National Association of Realtors. They relate it to investors and then go into mortgage rates and listener questions. More specifically the tackle a listener’s concern about real estate investing during a deflationary period.

Investor 0:00
You don’t have any investment real estate investments, you will not have the opportunity to learn to make mistakes and learn from it. And then you will not be able to tell which one is a better investment. I think you just have to get it started somewhere and with the help of your investment counselor, and then move forward.

Announcer 0:19
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 in 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 1:09
Welcome to Episode 1222 1200 and 22. Thank you for joining us today, we want to talk to you about some statistics from the National Association of Realtors, otherwise known as NAR. So we got to go over some of those. We’ve got to go over a in depth listener question. We were late in getting you your mortgage update. And hey, it’s the first time we’re ever laid on this folks. So cut us some slack. So we’re going to give you your mortgage update today, and I’m here with Adam to go over some of these things. Adam, welcome back. Thanks. Good to be back. By the time you hear this, dear listeners, I will be in Europe. But we’ve got some statistics from the National Association of Realtors. They are quite good at stats, although we do need to understand their motivation, their goal, Michael Fannie Mae, Freddie Mac, and just a giant industry, they are promoting housing. So let’s understand that. But hey, the stats are the stats, and I don’t think they’re making those up cash buyers. Now, this is interesting. Cash purchases of properties are down a little bit, right?

Adam 2:18
Yeah. So the all of these stats are from April, because that’s the most recent stats that they have available. And you say that they’re promoting buying but a lot of these stats aren’t making people want to buy it says cash sales are down. They were 21%. Now they’re down to 20%, which doesn’t sound like a huge thing until you think that’s actually a 4% drop.

Jason Hartman 2:38
I’m glad you look at it the right way, Adam, that is that is definitely true. And one thing I want to say to you is that almost all real estate statistics have a pretty big lag time in them. Because as we’ve told you over the years, you got to wait for the thing to happen. Then you’ve got to wait for a The data to be cold in with real estate is really quite slow. Because some of the data is MLS data, it depends on the stats, right? Which statistic you’re talking about some as MLS data, but some is data from the county recorders office in a given municipality, right. And so that happens, and you know, there’s like a month lag there. Well, actually, let me go back a little bit. The deal has to happen, someone has to sign the deal, like, I’m gonna buy the house, I’m going to sell the house meeting of the minds between buyer and seller. And then they have to close the transaction that might take 3045 6090 days, who knows, right? It might even take longer than that. And then the transactions recorded, and then they get the data from the county recorders office. So it’s quite a lag time and this is one of the things about real estate statistics. In most cases, you are looking in the rearview mirror by a few months.

Adam 3:59
Go ahead One of the good news is foreclosures and short sales are down 4% year over year, which is the lowest they’ve actually seen since they began tracking in May 2011. Now for us, that is both good and bad, because you have to remember a lot of the local market specialists are buying these foreclosures and short sales to fix up for us to purchase.

Jason Hartman 4:18
Yeah, that means tighter inventory if they can’t get more foreclosures and short sales to buy from those distressed sellers and then do rehabs on them and sell them to our turnkey investors. Right.

Adam 4:30
Yeah. And there’s the big thing to me was the April sales, the April sales were 5.2 million, which was down point 4% from March, but they were actually expecting an increase of, I believe, around 2%. So this was actually a huge drop off from the expected sales. And it was also down 4% year over year. And that is one of the things that when people are talking about the housing market and consumer confidence, it’s gonna drop it and that might actually have its effect. packed in regards to the Fed, and what they’re deciding to do later in the year.

Jason Hartman 5:03
Okay. And I just want to say, That’s not the number of transactions per month. That’s the annualized number. 5.2 million. Okay, so median sales price is up 3.6%, year over year to $267,300. Right?

Adam 5:20
Yep. That’s up 3.6%. And but listings are also up almost 8% year over year. So more people are trying to sell their house

Jason Hartman 5:28
right and fewer people are buying those houses. So here’s the thing, we’ve got to look, you’ve really got to consider what those statistics mean. And here’s what they mean, in my humble opinion. So help me Oh, so humble, very humble, super humble, who’s incredibly humble opinion. I’m bragging about how humble My opinion is. So we see that and what’s really happening out there is the higher price cyclical markets are declining. If Not almost crashing in some cases. And that’s bad news for them. And the inventory is increasing pretty dramatically in those markets. So $750,000 and above, in housing price, you’re seeing a significant softness in those markets. This does not apply to $100,000 and $200,000 houses, those are still flying off the shelves. And inventory is pretty scarce. So again, it’s the tale of two markets, right? The cyclical markets versus the linear markets, the low priced bread and butter sensible markets versus the high priced speculative markets where everybody’s a gambler and the gamblers have kind of left the table they’ve you know, as Kenny Rogers says, You got to know when to hold them and know when to fold them know when to walk away and no one to run. largely the buyers have at least walked away from those markets. Yeah, good. It says slow jog. Maybe they’re not running but they’re jogging away. So they are rejecting the seller’s greed in those high end cyclical markets 24 days on market, is that an average or a median number? I wonder I don’t think we know that we had

Adam 7:16
though they just said 24 days on market. Now, they did say that April signed contracts. I mean, this, these are obviously not all going to close. But the signed contracts in April were down one and a half percent from last month and 2% from last April. So there is fewer people saying they’re going to buy in this April as opposed to last April,

Jason Hartman 7:35
right. And they have two real ways of looking at that. One way is to look at the multiple listing service, the MLS. And when the status of a property goes from for sale, to under contract or in escrow, call it what you like, depending on what market you’re in, that is the signed deal and that’ll play into what they call the tending index, right? The pending index, that gives you a quicker indication of what’s going on the market, you don’t have to look in the back in the rearview mirror very far for that one. But some of those deals won’t close, they’ll fall through. So it’s not as solid as the actual sales index. And that’s something to note, the 24 days on the market is not bad at all. I mean, that’s pretty much a booming market if you ask me.

Adam 8:26
Now, one of the things that intrigued me because of things that I’ve heard from various news sources lately was their chief economist came out and said that job creation is improving, causing wage growth to align with home price growth, which helps affordability and will help spur more sales. But the interesting thing to me is I just read an article the other day, I believe you posted it in the Facebook content group, saying there’s actually the car industry is laying off 38,000 people in the near future. And then there’s also a company called challenger gray and Christmas who is a global outplacement and career. Transitioning firm. And they’ve come out and said that the number of layoffs announcements from April to May, Rose 46%. And the current trend is slowing payroll growth.

Jason Hartman 9:11
Yeah, that’s it, see, see how these things conflict? You know, they really, they really do. And it’s hard to make sense of this stuff sometimes. You know, one of the reasons the economics is called the dismal science maybe. But Adam, I just wanted to rewind for a second. And when I was talking about the pending index, there is another important metric that the powers that be used to determine what’s going on without looking too far back in the rearview mirror. And in addition to the status change in the multiple listing service I just described, they also look at mortgage applications, how many people are applying to get a mortgage, and I don’t know that they’re that great it dividing the purchase mortgage applications versus the refinance applications. And another thing that may or may not, and I don’t really know the answer, be faulty about that index. It’s still a good indicator, I’m just poking a few holes in it, because I want you to understand is that people will many times apply for a mortgage to go shopping for a home, it doesn’t mean they bought a home, okay? It just means they got pre qualified. The mortgage officer ran their credit, and they filled out a mortgage application. But it doesn’t mean they’re actually getting a mortgage for sure. But most of them probably will, they’ll find a home, they’ll get a mortgage and do the deal, but

Adam 10:36
not all of them. And one of the things looking at the home prices and the sales prices, is we’ve talked about how the listings were up and the median sales price is up, but the number of first time buyers was flat, so you’re actually seeing more listings for the same number of people. So when you look at the fact the median sales price is up, that to me says it’s probably not going to stay that way,

Jason Hartman 11:00
I would agree, I think, Well, you know, again, you gotta you gotta segment the market. Yeah, you just have to do it market by market. But okay, anything else on this? And let’s move to a listener question if you’re ready.

Adam 11:15
Now if you want to throw in the mortgage update, I mean, you just mentioned a number of pending sales and kind of mortgage applications. That is one of the things we just talked about with one of our mortgage providers.

Jason Hartman 11:25
Excellent. Let’s go to our mortgage update, and then we’ll be back with an in depth listener question. Here we go.

Adam 11:35
So welcome to the June edition of the mortgage minutes. We’re joined today by one of the lenders from Jason Hartman’s network. How are you today? Good, how are you doing? We’re doing well. So what are investors looking at in terms of rates and how have they changed over the past month? I know they’re two different kind of loan sizes that are going to get your different rates. So can you go over kind of people with good credit, probably putting down about 25% and what they’re going to be Looking at rate wise for those two different levels of loans.

Adam 12:02
So let’s look at maybe, say, an $80,000, loan 70,000 to $80,000 price range with a cycle score about 740. Plus, with 25%. down, you’re gonna be looking at about five and a quarter 20%. Down, you’d be looking at about 5.75% today, okay? And what about when we get into the bigger ones. So if you go into a little bit of a higher price point, let’s say like $100,000, with a 25%, down payment, you’re looking at about 4.875. And then if you want to put down 20%, you’re looking at about five and a half percent. So you’ll see about a quarter of a point in difference between the two scale phones. You know, that price point now we’ve been hearing about how personal residence rates have been dropping pretty significantly recently. Have you been seeing the same thing in the investment grade, we have been going the media does play a big role in kind of emphasizing that so as many investors know you’re going to see a different rate a more favorable reflect, plan apart. or stopping home, purchase or refinance. The good news is that we’ve seen you know, in the last few weeks, we’ve had kind of some market updates from the different economists that kind of specify what predictions might be ahead. So there’s not going to be another rate hike, I should say, there’s going to be a rate cut the anticipate, most likely by September and possibly even a second one by December.

Adam 13:24
No, as we look at that, how has as the rates have gone down? Have you seen more applications for loans? Or has it kind of remained constant?

Adam 13:33
We certainly have. So even with the different market specialists, you know, have, you know, much more inventory available. So, in spring, we’ve seen, you know, much more of a push with purchase application. We’ve even seen investors questioning whether they should move forward with a cash out refinance on some of their properties that they have either a mortgage on or that they own free and clear. So volume has certainly increased. As you mentioned, there’s been talk of potentially a rate cut what kind of Are you seeing that are playing a big role in the people’s confidence that are then impacting the bond rates as they go up and down? Like, what are the things that are currently going on, and things that are potentially coming up that might impact that. So one of the biggest thing that has impacted the US and China, you know, trade talks, and more so recently with Mexico as well. So we see that that’s a big dynamic for pushing, you know, possibly are ready to go down. You know, with that being said, you know, most investors will follow different market updates, and, you know, question that whether or not that might have an impact in our rate, and it certainly does. So we always say to follow that 10 year Treasury note, and you’ll be able to see the difference in even just the last 30 days, how that has decreased from where it was that you know, in May, and now we’ve seen the yield curve invert several times recently has that been causing any distress in your market, none in ours, really. Know that you know, outside of that it might kind of sense that they might be ready for a recession, we tend not to really kind of look at that we’re more looking at, you know, global things that might be happening to kind of push Rachel further down. So like I said before, you know, the US and China trade talks, has been a big impact. If they do cut, do you think you’ll just be maybe a quarter percent or kind of what impact do you think I might have on? That would be only about a quarter of a point with the feds cutting the rate for the first time that they would probably do that in September? All right, is there anything else investors should know is they look at whether or not they should be buying or if they should be holding off for a better rate? You know, what we always say that, you know, might as well do it now and get pre approved. And once you do go under contract with us, if you’d be any improvements with the market, we can certainly renegotiate the rate for the investor. But, you know, with the spring market upon us, you know, I wouldn’t I wouldn’t hesitate to hold off.

Adam 15:52
Well, thank you very much for your time. I appreciate it.

Adam 15:54
Thanks, Adam. I appreciate it, too.

Jason Hartman 16:01
Alright, coming back here and the next mortgage update will be pretty close to that one, because we got to get back on track with our timing here. Let’s talk about a listener question. And this is, this is kind of in depth here. Adam, do you want to share that with us?

Adam 16:18
Yes. Robert went to Jason hartman.com. Slash ask, which everybody should do because everybody has questions. He said, he’s a longtime listener of your podcast and a big fan. He listens to about 20 podcasts regularly. And you are number one. And one question he’d like to hear discussed is the risk of deflation. He said, You’ve talked about inflation induced debt destruction for years as a big reason to own single family rentals. And he agrees, but just to play devil’s advocate from 1929 to the early 50s, rents and a lot of America actually fell and took 25 years to get back to where they were at the peak. That would be bad for owning rentals in as an aside, the answer is maybe and he said would be great if this topic could be discussed on the podcast. I know the theory is that central banks will just print money to stop deflation and thus cause inflation. But what if this stops working? What if they can’t stop deflationary forces? Japan has seen the deflation and real estate prices and rents for 30 years, and possibly a lot of Europe recently to also been periods recently where rents can be very flat in certain cities for 10 to 15 years. Phoenix comes to mind from say the late 1990s to 2012

Jason Hartman 17:28
Hmm, yeah. Okay. Well, first off, Robert, I have to compliment you, you have done your homework. So that’s good, folks. This is what I love about our listeners. You know, we have listeners who are sophisticated, they have deep understanding of this stuff. And our clients and listeners are just wonderful. I love all of you people. You’re, you’re the greatest. So thanks for the very thoughtful question. And hey, if you think my podcast is number one, or if I know it’s number one with you, please go write a review on a few of the pages. Gas platforms and tell the world what you think we’d appreciate that. But Robert to answer your question, first off, you got to look at before we even get into it too deeply. You got to look at the timeframe you picked. I mean, 1929 to 1950. Think about what happened. We had the great depression that began in 1929. We had 1933, where people had to turn in their gold, the gold confiscation, the Great Depression lasted pretty much all through the 30s until the greatest public works project of all time, arguably ended the Great Depression. What was the largest public works project of all time? It was known as World War Two. Okay. And, you know, World War Two, I mean, you can’t even talk about the economy. During a World War. It’s just too big half of the country’s men, women Maybe more. I don’t know, you know, at least of age, we’re off on aircraft carriers and in foreign lands fighting a war they were supporting the military machine here. We had Rosie the Riveter. You know, my grandma would tell me stories about how things were during the war and how they would conserve everything. In fact, I watched an interesting documentary a few months back about the guy who invented the TV, but never got credit for it. It was such a sad story, and RCA basically stole it from him. And it was just because of the way events played out talk about bad luck. when World War Two happened. Basically, the development of the TV kind of stopped, and all of the factories were dedicated to the war effort. I remember my ex girlfriend telling me about what her grandmother told her about World War Two and how they didn’t have any nylon. So All the ladies would paint a scene up the back of their legs to look sexy. Like the seam in the nylon stockings, you know, so this is a crazy time period. It’s just not a good statistical sample, first of all, okay. I mean, the worst economy and arguably, I don’t know, I don’t know how long but I don’t know if anything in the 1800s was that bad? I’m not sure. Maybe it was. I just haven’t studied that far back. But the Great Depression and World War Two, the largest war in human history is it’s just hard to talk about that. Analyze real estate during that time, but we’re going to do it anyway. Have faith. Robert, we’re still going to tackle your question, but I just have to give that a huge disclaimer,

Adam 20:46
Adam? Well, one of the things that popped into my head right away, was you have to remember, Thou shalt not gamble. So if your property makes sense the day you buy it, rents going down and 1927 right. So if you’re purchasing a property in right into the Great Depression, the

Jason Hartman 21:06
20s, the roaring 20s. You know, you got the girls wearing the flapper dresses and you know, that was an economic boom time the roaring 20s. Yeah, yeah. So if you buy Oh, don’t forget prohibition. I didn’t even mention prohibition, but go ahead.

Adam 21:19
So if you buy it, and it makes sense that day, as it goes down, and I actually went to the census website and look this up, Robert, in some parts of the country, rent went down in the 1940s was the only decade since the census has been keeping track. The 1940 says the only decade that saw drop, and not even every state, saw a drop in Alabama. The rent assessment went up in Arkansas, the rents went up in California, the rents went down. And now these are all inflation adjusted numbers. In California, it only went down $30. So it wasn’t a huge drop, adjusted for inflation across the United States. went down $27 from 1940 to 1950. And since then,

Jason Hartman 22:05
will but wait a sec, Adam. Just to be fair, though, you’re you’re talking about that in dollars, but compared to what right? I mean, how much was the rent the average rent back then it had to be super cheap. So that might have been a significant person. This

Adam 22:19
is adjusted to 2000

Jason Hartman 22:21
Oh, okay. Okay. So it’s, it’s it’s constant dollars that yes,

Adam 22:23
they’re just a 2009. And so it went down $27. But then from the 1950 to 1960, it went up almost $100. So it’s gone up pretty steadily. And so I looked across this and the numbers are pretty good. I mean, you don’t see any drops there. And then I said, Well, you know, let’s see how it’s been in apartments just out of curiosity. So I went and found a chart that has from 1960 to 2010.

Jason Hartman 22:52
Is it isn’t Hey, listeners, isn’t an Adam a great investment counselor. Look at all this research he’s doing you know, this is awesome. Good job, Adam.

Adam 23:00
Thanks and I showed this to you and this was the depressing one. So since 1960 rents

Jason Hartman 23:06
have gone up if you could see this chart wow this is shocking

Adam 23:12
put this in put them all link this to the in the show notes. Definitely the number of cost burden renters from 1962 2014 doubled. It doubled because your rent went up. I believe it was 70 right around 65% or so. And your wage went up right about 20% Yeah, four years

Jason Hartman 23:36
when you see this chart go to Jason Hartman calm click on this episode number see get the link to the show notes because this chart, in fact that maybe you can just paste the actual chart but you know, you need the link to with the article into the show notes because this is honestly I’m going to say this is sad. Oh yeah. You really see how the standard of living has declined. In terms of the hard assets, you know, being the home in which you live, right? If you’re a renter in 19 $60, the dollars are constant. Okay? And this chart, it’s amazing, the way they’ve just departed the two lines from each other income, much lower than rental rates. And so that just means people have to accept less and less and less in the standard of living living well, and the standard of living, maybe both gets worse and worse, and it deteriorates. Now. Technology improved, certainly during those times, especially from 1990 on, but wow, you know, you hear these faulty stats. I mean, I’ve talked about it before, but they say, Well, people are living so much better. Now. You know, the average baby boomer home that was built after world war two was 900 square feet or 1000 square feet and two De it’s, you know, 2200 square feet or something like that faulty statistic that is bogus. And the reason is, of course, because now people are packed in like crowded rats. Okay, back then they had a half acre lot in a better location. So it’s not the same. You can’t use those kind of metrics to try and determine standard of living. They’re just not accurate.

Adam 25:25
Yeah, and one of the things that killed me about this apartment pricing one article is it says the rent is still too damn high. That to me is the wrong way to look at it. It’s the wages are still today. Oh, yeah, that’s good. That’s good.

Jason Hartman 25:41
Yeah. Yeah. Yeah, absolutely. Very good. Very good. Okay. So check the show notes. Go to Jason Hartman calm and click on this episode number and you’ll get all this because this is something you actually do need to see listeners. And you know what, Adam, we should take that chart and let’s put it in the property. Cast feed. We haven’t mentioned the property cast in a while, but we have a podcast that will podcast you in a very convenient RSS feed format PDF files, I thought of this myself and I was met with opposition galore everybody saying it could not be done I’m sure my competitors will copy me because, hey, they don’t have any original ideas. Sorry competitors, you just don’t have any original ideas. So copy cat and you will get the actual performance of the property in a feed you can look at them on your mobile device, your phone, computer, whatever, very, very convenient and over the years, I really hope this becomes a nice historical record for us and for our clients so that they can look back and sometimes they are going to have regrets and they’re going to say shoulda coulda woulda I wish I would have purchased this house and that house I wish we’d been doing this for longer. And you know once in a while on my Facebook memories, which is the best feature of evil Facebook. I see these properties I posted years ago come up on my memories. And I you know, here is this 2800 square foot house in Atlanta, Georgia. And it was so cheap and the numbers were so good and you know, we sold that property to one of our clients of course, but Gosh, there were so many deals like that back in the day. It’s shoulda coulda woulda that’s what you always have in real estate, The Reluctant investors lament, like the poem I read sometimes so

Adam 27:35
so I’ve just been sitting here looking at the census chart that I was talking about, with the rents decade by decade from 1940 to 1950. Just because I wanted to segment out the states that we’re currently selling properties in just looking at linear versus cyclical markets, looking at where we’re selling properties right now. There’s some I believe in Alabama, maybe not too many that went up from 1940 to 1951. And most other stuff Going down Tennessee where there’s a whole lot of properties that went up as well. You look at Pennsylvania, that went down, but Mississippi, had a huge jump. Mississippi went from 117 to $149, whenever the rest of the country was dropping off, and then I looked at Ohio, Ohio dropped off about $40. So more than half of our states were increasing in value whenever nationwide, it was decreasing. So that’s a good sign for linear markets. I mean, even if you have the terrible, terrible economic conditions that happened, it still was better than the rest of the country, if you look at it that way compared to what better than the rest of the country.

Jason Hartman 28:43
Right, right. Yeah. Very good point. Okay, so we got to circle back to the real question here. And we certainly covered some of it. But deflation is the question. deflation is certainly possible. We saw some aspects of it during the Great Recession. We certainly saw during the Great Depression that you brought up in your question. And by the way, many of you listening won’t know what I’m about what I’m saying what I’m about to say this, but do you recognize the phrase? Good night, john boy? Well, that’s from The Waltons. Okay, a TV show. Yes, it’s an old TV show. And it’s set in the Great Depression. You know, it’s interesting to watch, like, I was saying, watch old movies, watch old TV shows, and just go and find an episode of The Waltons on YouTube or whatever and, and watch it and just helps you gain an understanding. And of course, we had amedy slays on the show before and, and she wrote the famous book called The Forgotten man, and that Chronicles a lot of stuff that happened during the Great Depression. So definitely some some interesting works on that. But yeah, deflation can happen, no question about it. It is not very likely because we want to align our interests with the powers that be always in the powers that be do not want deflation. It’s a very bad deal for them, both in terms of political popularity, but also in terms of paying off through inflation induced death, destruction, their own debt. But look, say it happens, right, Adam, say we have this massive bout of deflation. I mean, we certainly saw some of that during the Great Recession just 1010 ish years ago, give or take, what did people do? What is the option they have? If they bought a bunch of property and say that property deflated in value? Number one, the question is, did the value of the property deflate or just the rental income or both, they’re not always together. Many times they’re the complete opposite. When the value deflates. As long as the population hasn’t declined, then the rents actually stabilize or they even go up because you have people getting for closed on kicked out of their house. And you don’t have anybody moving into the buying market with any great degree of volume. So they’ve got to live somewhere. And that puts upward pressure on rents. So that’s great for investors when that happens, because, hey, we don’t need to sell, we just get the yield, we milk, the rental income, it’s wonderful. But if it does go badly, just do what millions of people did during the Great Recession, and certainly during the Great Depression, just give the property back. I mean, that’s the choice. The contract says, pay the mortgage, or give us the collateral, here, you can have the collateral, and that’s not without some implications in terms of your credit report. But during those times, financing just contracts anyway. So really think about it, do you really need your credit that much during those economic times? Because even if you had an 800 FICO score, what loans are available that’s the IRS. of those situation, you know,

Adam 32:01
and I would have to say, if you think about if another Great Depression hit tomorrow, if you wake up, and the Great Depression to his hit, what’s the first thing that’s going to happen is our stock market is going to get cut in half. I mean, that’s, you know what happened. Basically, you wake up in the morning and, you know, stock market’s gone, your rent is most likely not going to be cut in half day one, you’re still going to have your contract, your tenant is still likely to have their job for a while.

Jason Hartman 32:32
And for a while,

Adam 32:33
yeah, for a while, at least.

Jason Hartman 32:36
For a while you’ll be on welfare.

Adam 32:38
Yes. And eventually, like you were just saying, if your property value gets cut in half, don’t sell Yeah, right. If you can still afford it, don’t sell, you’ll still get the cash flow. So I mean, it’s going to take a lot longer in my view, for the stock market to get cut in half and make its way back up and for you to come back to zero. Then it will be for your rental property to lose half in value and you to lose so much money that you’ve lost as much as you did in the stock

Jason Hartman 33:03
market. And Adam, maybe the biggest question we should all be asking here and we can wrap it up with this is compared to what? Compared to what? Because what else are you going to do? So say for example, like you said, say you instead of buying income property, you bought stocks. Well, how are they going to do during that time? It’s going to be terrible. Say you bought precious metals? Well, some would argue that those are a hedge against inflation, but they’re certainly not a hedge against deflation. Some would try to argue that, Oh, well, they work either way. Well, they don’t. They’re not multi dimensional. They don’t produce income. They have terrible tax treatment. And as we saw during the Great Depression, they were confiscated. Well, the gold was okay for $20 an ounce I think and then, instantly once the government got all the gold They raised the price to $33 arbitrarily. So, you know, whatever.

Adam 34:05
And you have to find a company that’s willing to purchase the gold from you at a price that you want.

Jason Hartman 34:10
Right? Absolutely. Yeah, to find a market for it. So compared to what is the question, I mean, oh, I can hear a few people out there saying, well, I got cryptocurrency may and I got my Bitcoin. Oh, gosh, let’s not talk about that. We’ve, we’ve discussed that ad nauseum. And by the way, if you’re into that, you can listen to my other podcast called the crypto cast, which sometimes Adam I think we should change the name of that to the anti crypto cast, but I don’t know depends which way the wind blowing I’m not really anti again, I’d love to be wrong about it. I just think the powers that be are too darn powerful. And, and they’re not gonna let that win. So anything else on this or shall we wrap it up for tonight? I think it’s about time to wrap it up. But

Adam 34:54
Robert, thank you very, very much for your question that made me do some research that was fun to do. And like I mentioned before everybody who has any form of question, there’s no question to dumb because it’s not such a thing as a dumb question. As we learn growing up, there might be some questions that are too highfalutin for us to understand. But then we can just find an expert for Jason to interview for the show,

Jason Hartman 35:14
or we can just fake it. You know, we can fake it till we make it.

Adam 35:18
But go to Jason hartman.com slash ask and please ask us your questions. Good stuff. Yeah. And,

Jason Hartman 35:23
Robert, thank you for the question. That was a great question really spurred some good discussion. So we appreciate the questions Jason hartman.com, slash ask and go to Jason hartman.com. Check out the properties, our upcoming events all that good stuff. And Adam, thanks for joining me Until the next episode. Happy investing. 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 Hartman 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

Jason Hartman  36:17
using

Jason Hartman 36:18
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

Jason Hartman  36:27
next episode.

Inflation Induced Debt Destruction in Low Inflation Environments

Jason Hartman plays a clip from the 2019 Meet the Masters of Income Property event. Jason talks about Inflation Induced Debt Destruction and gives examples from the high interest rate period he originally used and the lower interest rate environment that people who purchased in the late 1980s have experienced.

Investor 0:00
You’re gonna laugh, but because of your podcast, we’re positioned. Well, I don’t know how else to thank you. But thank you, your podcast and your services are amazing. And I wish I could do more as far as working with you guys, but I haven’t really but maybe in the future, obviously. But once again, our family is grateful to you and your services. And your information is priceless. Thank you so much.

Announcer 0:27
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 in 11 states had hundreds of tenants and been involved in thousands of real estate Stay 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 1:17
Welcome to Episode 1257 1257. I hope everybody had an awesome weekend. It is Monday, one of my favorite days of the week. I know that sounds strange. But when you were on your mission, you look forward to Mondays. I hope that Monday’s are good for all of you. I know some of you are dying to leave the rat race and get out of your job. And that’s what we’re here to help you with. So you can be on your mission. If you love real estate and you love income property, and you have an interest in it as more than just the road to financial freedom as more than just vehicle to get you there, then hey, you look forward to Monday’s as you build your wealth by following our plan, the plan that we have outlined on this show over the past 14 years or so, if you don’t love income property, but you simply look at it as the vehicle to financial freedom, then hey, you will be doing whatever your passion is, and your income property will be working mostly in the background, requiring just a little bit of attention. Well, your tenants toil away and give you and your portfolio 33 to 40% of their hard earned income every month. What other company gathers that much of someone’s income? What other business gathers 33 to 40% of someone’s income every single month. Only income property can Say that right only income property. You know, it’s it’s almost like you have a bunch of indentured servants working for you 33 to 40% of the time. Every month, your tenants work somewhere between 10. And about 14 days they work for you. Congratulations. That’s quite a wealth builder, isn’t it? Anyway, today, we will have a little live clip from our meet our recent meet the masters of income property event that we held in Newport Beach, California a couple of months ago. And the reason I’m playing this is even for those of you who attended that event, here’s what happens. It happens every time you meet the masters. And I kind of love it. And I kind of hate it at the same time. I’ll just tell you, it’s something I do not want to discourage. But as a presenter, it bugs me Just a little. So here’s what happens by Sunday afternoon. A lot of you are out of the room, you’re outside, you’re in the exhibit area, and you’re talking with our local market specialists, and our financing providers. And you are buying properties. Now, I love that because that’s business and we always welcome business. We’re capitalists over here, but you’re not in the room to hear what I’m talking about. There. The room literally sometimes 40% of you are outside, making deals and buying properties. And hey, I don’t want to discourage that. But as a presenter, it gets a little lonely when you see some empty seats in the room Saturday, and Sunday morning, the room is full. And so we are going to play some clips here over the next several episodes from Sunday afternoon when some of you had bugged out and you were out buying properties. So we’ll do that here in just a moment and I’m happy to announce that of course, we We have our cruise event coming up. And you all know about that already. Jason Hartman, calm slash cruise. We got a few more people that just signed up and are joining us. And I do want to mention that I have heard a couple of people express reservations. Now I have been on 10 cruises in my life. And I’ve been on a couple that I didn’t like very much. And the ones I didn’t like very much. Were those short I think I went on two of these, or those short, Mexico cruises leaving out of Southern California and going to Mexico for like three or four days. Those have the tacky cruise ships. And honestly, they have the tacky crowd. Yeah, I think that crowd is a bit tacky, because they’re these super low budget. crappy cruises. This is not one of those. This is a princess cruise. It’s a seven day cruise. It’s a high class cruise. You’ll like it. But here’s the other thing. I hurt. A couple of people asked me. What about the internet? And hey, I’ll tell you, that’s a big deal for me. I like to be connected. In fact, I like to be connected all the time. Some people say, don’t you just want to unplug? No, I don’t, I don’t like unplugging at all. I want to be connected to this universal mind of humanity, where I’ve got billions of people contributing knowledge. And when I want to look something up quickly, or I want to learn about something, or I want to visit a website someone tells me about I want to go right then. Well, thankfully, I selected this cruise our Canada and New England cruise coming up in October, because it has the fastest internet at sea. And it’s not expensive either. It’s called medallion class Internet, and it rivals high speed landline connections, or at least that’s what they do. TELUS Princess Cruises. And it says so right on the website. And I kind of doubt a big company like princesses false advertising. They retrofitted certain medallion class cruise ships in their fleet to this new high speed internet. And it’s inexpensive and it’s fast, and it’s all over the ship. So you can get it anywhere. And they’ve retrofitted several of their ships. Just about a year or a year and a half ago, I think they said to this medallion class, and that is very special. It’s the fastest internet at sea, they say, and I think you’ll really like that. So if you’re thinking, I gotta take time off, I gotta be disconnected. No, you’ll be connected on the ship, you can get stuff done. That’s what I love. And of course, we’ll be spending time at some ports and you’ll have the opportunity for coffee shops or whatever there as well. So don’t worry about that you will be connected and that is one of the big features That I personally look for the cruise. But what’s the other event? We got something else coming up? Well, we are doing profits in paradise in beautiful Orlando, Florida. Yes, the home of Epcot Center and Disney World. And that is coming up. We are waiting for the contract back for our October dates, right after our cruise going in and out of New York, for the cruise, then you can just jet right down to Orlando and come to profits in paradise. Or if you’re not going on the cruise, you can just come to profits in paradise. And it is going to be a great one this year. I’m about to announce a big famous speaker who will be giving two presentations at the event. And I think you’ll really like that. So that’s all coming up. But without further ado, let’s go to a live clip from Sunday afternoon at meet the masters.

Jason Hartman 8:57
I want to talk to you about sort of More main subjects as we wrap up the day. So, you know, in my investing strategy, if you could put the PowerPoints on the screen, I talked a lot about inflation, of course, and how significant that is, as an investing strategy. And you’ve heard me many times referred to inflation induced death destruction. You know, I, I give this example where I show you the inflation that really happened that affected millions of homeowners, and exactly what it did for them from the period of 1971 to 2001, or 1972 to 2001. Okay, so I thought, you know, we really need to update this example. And the example doesn’t work as well, because the inflation rate, I mean, it’s certainly been more manipulated. But I think it’s hard to say that it hasn’t been lower. I do believe inflation has been lower than it was during that 30 year period, but You know, if you count asset inflation, I think it’s actually probably been higher. And you know, it’s weird that in our world, inflation is only measured by consumer prices, the consumer price index, the CPI, right? Because there’s another very significant form of inflation, and that’s asset price inflation. But that’s not measured at all, except to the extent that it affects your housing costs of your personal house. But that asset inflation and you know, this is a theory I’ve talked about over the years, I think it really has a giant impact on the course of someone’s life. And in life, a lot of things can be related to the metaphor of the telescope. So if you have a telescope and you know, all of you have looked through a telescope at some time in your life, probably at the moon, right? If we all done this, you know, at least when you were a kid, you do this right? Pay attention. Come on, I know it’s late. Help the speaker out participate a little. Okay, so, so when you look at the moon through the telescope, what happens when you just accidentally bump the telescope, just a tiny little couple of millimeters or a centimeter, right? You know, half an inch, a half an inch pumping, that telescope will throw you way out into interstellar space, right? You won’t see the moon anymore. Now the moon is only 250,000 miles away only. And you know, the Earth is 25,000 miles around. So there’s how far the moon is just for point of reference. But you know, you’re not that telescope off just a

Jason Hartman 11:37
tiny

Jason Hartman 11:38
bit. And it changes a whole course. And the same is true of our life. You know, a lot of people that are sort of the want to be successful people. They like to think that successful people had a lucky break, or they had some big event happened, some miraculous thing you know, happen and it changed. The course of their life. It was like one of them. One big event, you know, winning the lottery, getting the promotion, some lucky break, right? And all of us real people know that this just isn’t the way it works, right? probably seen that thing past or evidence, social media. That is a little pencil drawing with a graph with, you know, the axis here and the axis here. And it’s this graph, and it says the path to success. You see this on social media, and it’s the line starts going like this, and then it goes, you know, like that. And then oh, success, you know, it’s a lot of twists and turns. And it’s a lot of really just hard work. That’s the reality of it. It’s not glamorous at all. And that’s what makes for success in real life. But a few key decisions can really set you on the course especially when you have something else that isn’t really directly dependent on you are your own efforts. Okay, now, you’ve heard me say many times, I believe that the idea of power income is complete bull. Okay. I don’t think it exists. cussing, right? Have you heard of Gary Vaynerchuk? Right? You’ve probably heard of him, he causes a lot. Okay? He’s He’s a famous motivational guy, right? And you know, he did this video, just this rant on all these people and he’s sort of in the internet marketing world. And in this internet marketing world, you know, there’s a lot of people who talk about passive income and sell passive income. Oh, just create this website and you will have passive income. Oh, Bs, you know, I mean, Tim Ferriss, right, the four hour workweek. Yeah, the book up there, although we didn’t talk about it. You know, an impactful book. I had dinner with Tim Ferriss just a little over a year ago, in Austin. It was a four hour dinner. I could you know, we had a four hour dinner. And Pat Donahoe went with me, spoke yesterday, and I don’t know Pat’s here still, and then Ryan Moran went as well. And so we have this for our dinner with Tim Ferriss. I bought it at a charity auction. And so he and his girlfriend took us out to dinner as a four hour dinner and a one hour dessert. So it was a five hour dinner. So we went to dessert a different place. But you know, Tim Ferriss doesn’t work four hours a week, okay? It’s just looking at, there’s marketing and there’s reality, right? But when the thing sort of works without us and without our own efforts, you know, Earl Nightingale many years ago, likened it to a cruise ship. And he said, look at, you know, a cruise ship and you’re all going on a couple of cruises coming up in the next year. So, you know, because we’re going with me, so we’re all going together. So you know, the cruise ship only goes maybe 20 knots, you know, give or take 20 miles an hour, right? And it goes very slowly. In an airplane, you get on an airplane and it goes 550 miles an hour, but the cruise ship just keeps going. It’s so persistent. It just those 24 hours a day. You sleep on the cruise ship, you party on the cruise ship you eat you sit out on the deck and get a suntan. And you know, it’s just moving all the time it’s moving. And there’s this progression that is always happening in a positive direction. And before you know it, you’re in a new port. Right before you know it, you’re in Cuba with us, okay, or you’re in, you know, Mazatlan or whatever, right. And so it’s a very consistent thing. And the reality is successful people are just very, very consistent, okay? And they don’t let setbacks. Take them out of the game, because life is really a game of staying power. And the beautiful thing about income property is it has all these multi dimensional characteristics that we all know and love, because we’ve been talking about it for years. And it’s just always working. It’s like that cruise ship. You know, when I started yesterday, and I talked to you about our Oh, a return on amortization. We talked about how that’s just working and working in Working in it doesn’t do much in the beginning. And but you get five years in does more, you get 10 years in it a lot more and 15 years, it’s doing a whole lot for you. Okay, it’s making a big difference, in addition to all of the other ways in which you earn a great return on your investment. And it’s all happening kind of like, just automatically like the cruise ship, it’s just moving all the time, right. And inflation is working in our favor all the time. Yet, it’s hurting everybody else who gets in playing our game all the time. So, you know, for better or worse, you know, it’s nice to say, well, the pie is big enough for everybody, right? You know, AOC would say, Oh, we just tax the rich. Elizabeth Warren would say the same thing. And the pie is big enough. The reality is, you know, yes, capitalism is a great concept and does make the pie bigger. There’s no question about it. The pie gets bigger. I mean, George guilders concept of knowledge and how it creates wealth and he says, Look, I mean, I don’t know if you really caught it what he said yesterday, right? And maybe he said it today again. But he said, every resource we have today on this earth was available to people living in caves. They all have the same resources. Arguably, they had more resources than we do now, because the environment hadn’t been destroyed yet. Right? Okay, so the same resources were there. But what made the difference? Well, this consistent progression forward of humans to learn and impact and change their environment and make it better. Every decision we make, I would argue, every decision we make is a decision to improve our condition.

Jason Hartman 17:42
That’s the nature of humanity to improve our condition, every decision. So growing the pie, so economics is a relative thing. Okay. And you know, during the Great Recession, when things look really bleak and really bad, and everybody was worried that well, you know, Everybody’s going to end up broke the world is coming to an end. And I don’t know, you know, try and remember how really devastating and bad The news was in 2008 you know, 11 years ago. It really did seem like the world was ending. I mean, if you think of it, the country of Iceland went bankrupt. A country, okay, literally became insolvent. Okay. It was a giant thing. So the economic pie is relative. And regardless of how wealthy any of us become, it is a relative game. So all we have to do is be ahead of most others. You know, like that old story of the bear in the woods. bearers coming at the two hikers and one stops to put on his tennis shoes. And, you know, the other one says, You can’t outrun a bear man, a bear can run 30 miles an hour. He says, I don’t have to outrun the bear. I just have to outrun You, you know, and then I know you forgot his trade story, right? But it’s true, that is true. So even if nothing on the performer comes true, and it’s never as good as we expect, all we have to really know is that we are outperforming how most people invest. And we’re getting ahead. Okay. You know, even I mean, you’ve heard me say many times that Bernie made offs big promise was I can make you eight to 12% consistently in my Ponzi scheme, or you didn’t say that came out later. But you know, that was considered phenomenal performance. Okay. And, you know, you look at any of the performance on our website, because income property is so multi dimensional, it has these great characteristics. You look at any property on that website, when I doubt there’s any property there that has a perfect a return of less than 25% annually. So even if it only works out half as well, okay, you’re going to make 12 and a half percent, because it’s got so many advantages that other investments don’t have the multi dimensional characteristics. And remember, on that first year performance, it only counts the first years are oae or return on amortization. It’s not showing you your five or your seven or your 10 or your 15 when it really starts to chunk away like I showed you on the graph yesterday. So it’s not showing that and it’s also not showing, I need the what is IDD most of you know, right, what is it? inflation induced debt destruction, the Holy Grail, the thing that’s hidden under the iceberg. So when we look at the last 30 years 2018 back to 1989. Let’s just take a look at this. And this is waiting less impressive than the other example. I’ve given for many years. And that other example coming from Dan Ammerman. So during the 1989 World Series. I don’t know if you remember, there was an earthquake, remember, and a damaged stadium and that was kind of like a really big deal. Okay. In 1999 they released this movie with the Worst Actor in history, Keanu Reeves. Okay. I mean, that guy sucks. He’s worse than Oprah. Oh my god. I don’t know why this movie ever became a big deal. I never got into it. But, you know, I could stand up here and say, Did you take the blue pill or the red pill? Or Isn’t that how it works or whatever the differences anyway? So you know, that movie was like a big deal. Why is that such a big deal? why he’s Why is the matrix a good movie? Please tell me because I don’t get it. Okay, go use a new technology to kind of circumvent the acronym. Okay, a brand new

Jason Hartman 22:05
idea that there could be something else bigger than what we see in our. Yeah. And that’s definitely true. Yeah. You know, now that you mentioned that that’s another good point. How much time do we have? We have time. Okay, so. So that’s another good point. Because, you know, we don’t see so much that is going on in the world. And think about it. You know, I always say watch old movies and watch old TV shows. To gain a perspective, you must gain a perspective. And this is like, you know, you’re you’ve all dealt with and maybe you were this person, I probably was too young. No at all. Okay, you know, who knows everything, but has like no experience and no points of reference, but they know everything. They’re usually a teenager. They just don’t see it. You gotta watch old stuff, to just remind yourself of how it used to because it’s so easy to forget that perspective. But think about it. You know, Carmen will tell you. I have a crush on Audrey Hepburn Yeah, I usually have a crush on dead women. So yeah, there, she got a look at her. I say you gotta see Breakfast at Tiffany’s. It’s such a good movie, right? And so, think about it back in 1964 whenever that movie was made, what 60 apparently you’re a fan too.

Jason Hartman 23:23
But you know, if you said, Hey, in the future, we’re going to have this little computer in our pocket that does all these things this does, right. And this little computer will be hundred times more powerful than all the computers. NASA would have. Nine years later, when we landed on the moon, if we really did, it might be a conspiracy, but who knows? That would have seemed like magic to them. Right? That would have been magic. I mean, it’s, it’s like and think about all the things that we think we know now that in the future in 10 years and 20 years. We’re going to think you know what? The future brings, it’s going to be like magic. We can’t even imagine what we’re going to see yet, right? We can’t even imagine. We don’t know. So we go forward 10 years at a time over this 30 year example, right? 1989 1999 the movies aren’t getting any better. 2009 Michael Jackson passes away. And you know, you can’t see anything on the news except that. And so, you know, that just gives you a point of reference over the last 30 years, and most of you are there. And if we look at inflation and do stead of destruction, how did that play out over the last 30 years? Now, again, this is not a theory. It’s a fact. And it happened to 10s of millions of people. This is not some esoteric concept, you know, that you hear about from some liberal left wing professor in an ivory tower, okay. This actually happened to people, okay. And here’s what happened. Okay. Here’s the old example I’ll just go through real quickly, you’ve all seen this probably, you buy the average house in 1972. For $18,000, I’m looking up in the green part at the top, you get an 80% mortgage for 14,000. And change the interest rate back then in 1972 was 7.37%. You borrow that money for 30 years. First row there, you know, unfortunately, with these bright, awesome, beautiful screens that are magic, the laser pointers don’t work because they’re so bright, you can’t see it on there. But, you know, just going over here to this first row 1972. That’s the inflation rate $1 is worth $1. And these are the annual payments on this $18,000 house or $14,000 mortgage. These are the inflation adjusted real payments, what you’re really paying in real dollars, and that’s the monthly payment. And let’s not worry about this. Okay. So you go forward 12 years to 1980 And now this 19 $72 only worth 40 cents, okay? It’s only 40 cents in real value, you’re still writing a check all along for the same amount every year, which is, you know, basically one on one per month, okay? times 12 months of the year, close enough for government work, okay? But the value of that dollar keeps declining because of inflation. Okay, so you are now paying less, both in monthly payment and the mortgage balance is being decreased by inflation, that’s inflation and do step destruction. Okay. So then if we just go to the end of that term, and we see that by the time that mortgage is paid off, the average inflation rate is 5.1% over that 30 year period, okay? The 19 $72 now worth 24 cents, because has diminished the value of the dollar, you’re still writing that last set of checks for 1200 and $11 per year. Okay, the monthly amount used, you’re still writing the check for one on one per month, but the real value of it’s only $24. Okay, because inflation has diminished the value of it, right? Coco get away from that food. That’s right. Okay, but what really happened to these people to millions of people not a theory at all, is they thought they borrowed $14,614 by the time you added interest, they actually paid back in nominal dollars in name only 36,003 18. And in real dollars after inflation, diminish the value of their debt, right? They paid back 16,003 93 and after tax benefits, they paid back 12,006 55. Okay, so that means that they thought they were borrowing the money at seven Point three 7%. And after inflation, they were really only paying an effective interest rate of 1.06%. And after tax benefits, they got paid 1.16% to borrow the money. And they also live there for three decades for free.

Jason Hartman 28:19
Minus maintenance and gardener and home improvements. Okay, so they got paid to borrow the money. So we all know that example. But you know, you’re gonna say, Well, during the 70s, the late 70s, because Jimmy Carter was a disaster as president and probably not well, but he sucked as a leader is about as overrated as Oprah. So, so there was a lot of inflation during the late 70s, right in the early 80s. Till, you know, it got under control a little bit. So, what if the inflation rate is lower? Well, let’s look at 1989 to 2018. The inflation rate was only 2.6%. So what did that Due to the payment, well, on a typical house that you might buy through our network, your mortgage payments might be around $10,400 per year. That’s that top blue line, okay? But adjusted for inflation, those payments more reduced to $5,143 per year in real dollars. See, you write the checks for nominal dollars nominal, it just means a name only. That’s what the word means in name only. The name of it right is the same, but the value of it is different than the name, the value keeps changing. That’s a moving target. So that’s what happens when the inflation rate is only 2.6%. Remember the other example inflation rate was 5.1%. So it’s just about half. So a lot lower, but it still makes you pretty rich. Okay, so take a look at this one. So this shows you the rent the projected wind versus the mortgage payment. Okay. So at the beginning now, this is a property that isn’t that good. It’s not terrible, I might still buy it. But it’s not that great either. It’s got a point seven, rent to value ratio. And what I mean by that, of course, is that, you know, instead of renting from the ideal point, or 1%, rent to value ratio, meaning if the house is $100,000, it would rent for $1,000 per month, it rents for only $700 per month. Now, if you bought a property anywhere on the west coast of the United States, you know, you can only get point three 2.5%. Okay, so this is not that good property, right? It doesn’t perform that well. And that’s why I use it as an example because even if it isn’t that great, it still does okay. In the first What’s at four or five years, right? You’ve got a mortgage $10,400, and you’ve got negative cash flow. But as your rents increase at only 3% per year, and you all know, I tell you that the ideal is trying to get 4% per year rent increases, but you can’t always do it. Why not? Because it depends on the overall marketplace depends on how much rental competition there is in the marketplace. It depends on the overall inflation rate. It depends on how low the interest rates are. Because when interest rates are low, you can’t jack up the rents very much. when interest rates are high, you can really push up the rents because tenants don’t have an option of buying, okay? They’re going to be forced to stay in the renter pool, right? So over the course of that 30 years, look what happens, your mortgage stays consistent, assuming you don’t refinance it, which you may well do, but it’s consistent. So that’s that middle line. Where the green looks different, right? It’s just straight across. And then the rent is $21,844 per year at the end of that 30 year period, but you’ve locked in that cost of borrowing the cost of that debt. So, and then the cost of debt is, of course, being diminished by inflation as you as you saw, right? So So you think, in 2018, in this example, at the end of the chart, right, where the two greens intersect, right, straight across, you think you’re paying $10,400 per year in your mortgage, but you’re really only paying $5,143 because inflation diminishes the value of the debt. So look at the Delta, what’s the Delta, right? It’s 5900. real dollars, versus 21,008 44 in rental income. And this isn’t all the characteristics that’s Just a couple of them. So income property is the greatest thing ever. And here’s what happens with the house price. Okay, hang on a second, the house price in 1989 is the median price according to the Fred website hundred and 20,000 and change, you put $24,000 down, and now you’re controlling an asset at the end of that 30 years of $321,000. Okay, because the value of leverage. Now, on that last example, we didn’t adjust the rent for inflation. So what if you adjust the rent for inflation, right? But you sort of can’t. And here’s why. Because you didn’t get that rent in the beginning. You only got it over time as the rent went up. But if you wanted to, I guess you could easily do the same thing to the rent that you did the mortgage payment. So the mortgage payment is in dollars 5143. So it’s about half right? That about the number about half almost exactly. So now just take the rent and cut it in half. Okay, so it’s, you know, $11,000 give or take, right? But that doesn’t include tax benefits. And this chart appreciation does include a whole bunch of things does include the positive cash flow you got throughout the years, or anything like that. So that is why income property is the most historically proven asset class in the entire world that among many other things.

Jason Hartman 34:37
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