1252: America's Wage Increase & Index Home Prices, New Mortgage Product by Home Diversification Corp Marc Biron

Trying to sell a House in 2010 and I just got a little frustrated with the potential buyers I was meeting and so I decided just to turn it into a rental. I currently own five properties. The one that I did originally live in, I own three in Little Rock as well as one in Mississippi. I am in those markets because I was super impressed with the turnkey operators that I met and super impressed with the renovations that they did, the property management that they had. And basically it was one stop shopping and everything was in place when I basically I showed up with my money. I kept on investing in real estate because I realized it was just an awesome way to build my wealth. Not a lot of effort on my part. Basically once again show up with the money and see my money make money for me. I found Jason through my friend Elizabeth and been super impressed. Love his passion, love his enthusiasm and not to mention seems extremely knowledgeable.

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, 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 multimillionaire 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.

Welcome and thanks for joining me. Episode 12521252 so it is amazing, amazing, amazing the way the lamestream media always bashes Trump. And listen, you know, I'm not exactly the biggest Trump supporter, but when it comes to the economy, it is raging. I mean at the deeper issue. Yes, the economy and all economies in the super symbolic currency, fiat currency world in which we live with derivatives and so forth, floating around the world into the trillions of doll, all built on a house of cards. Not just the US economy, all of them, but that's been structurally true for decades and decades and decades. This economy though under Trump is truly amazing. We recently marked the longest economic expansion in US history. You know, the history of the whole country, right? Like this is the longest one. But it is amazing to me how the news media has got to find ways to just undermine the President at every level. Every time they turn good news into bad news. It is Truly amazing. So I'm reading this article, this is a newser article, and it says America got a bigger raise than it knew. Seems US Wage growth was higher than realized. And it starts off feeling down about politics. Well, the Wall Street Journal's editorial board offers a shot in the arm. You know, half the country is not feeling down about politics. It's just incredible how they. They just, every way they can, they got to take shots at him. Good news turned into bad news. It's incredible. The updated economic data shows that American wages are rising more than we knew. Released from the Bureau of Economic Analysis earlier this week, the numbers reveal that worker compensation jumped 4.5% in 2017 and 5% in 2018. Now, this I don't understand. I think it's gotta be a misprint because it says, quote, some 4.4 billion and 87.1 billion more than previously reported. I don't get it. Was that 4.4 billion in 2017 and 87.1 billion in 2018? Not quite sure I understand that, but whatever the case is, think about it. 4.5% in 2017 and 5% in 2018. In terms of the raise the. That workers have been waiting for, the raise the typical American worker has not seen in 41 years. In 41 years, even under Reagan, we didn't see this kind of wage growth. Okay? So. And certainly not under Clinton or either of the Bushes or certainly not under Obama, right? So think about that. That's probably higher than the real inflation rate. Even someone like yours truly or many of the economists in the know, or John Williams, the founder of Shadow Stats, who we had on the show before, even any of those people would say, hey, look, this is higher than the real inflation rate. Of course, it's dramatically higher than the official inflation rate. So what it means is that people are actually getting ahead en masse. You know, this just hasn't happened in four plus decades. Okay. Seems the trend continued into 2019. The article goes on to say with salaries and wages actually rising 5.3%, not 3.6% in May, year over year. So even higher on the year over year number. And in June, wages and salaries grew at an annual rate of 5.5%, which is a rocking 4.1% after adjusting for inflation. Of course, that's the official inflation rate. So you talk about, you know, how much can you raise rents, right? Well, interest rates are still low, so you can't raise them as much as you want to. But rent increases are happening, the economy is growing, and this is Truly awesome news. It really is. Okay, the article goes on to say, but it's not all dry numbers. With Employee compensation rising 42% more in President Trump's first two years than in President Obama's last two years. So a 42% increase in the first two years of the Trump administration versus the last two years of the Obama administration. And look, Obama had the benefit of a hugely upsurging economy during his last two years. We all know that. Real estate market was. Was cranking. Wall street was doing well. The economy overall was doing well in the last two years of his presidency. Pretty darn well. Okay, but he didn't achieve the wage growth. Right? And then you look at it in all the minority sectors. Huge growth when you dice the economy up in that way. Okay, now they gotta say something bad about this. So here it comes. Okay. The board sees evidence that tax reform and deregulation have, quote, unleashed repressed animal spirits, especially in energy. That's a slight. Okay, the way they're saying it's Trump's reforms are, quote, continuing to pay economic dividends despite the damage, unquote, from his trade policies. They say, quote, this sure sounds like an economy benefiting the 99%, unquote. See, you gotta put the quotes in. So it's hard to slide on that. Right. However, a journal article the next day reported that U.S. wage and benefit gains had leveled off and the revised numbers were evidence that, quote, some workers receive bigger income gains than previously thought. So, yeah, the deregulation, they're going to talk about how that's hurting people and hurting the economy and, of course, the trade war, blah, blah, blah. I don't know. This stuff is just, you know, you just. The biggest thing in the media is not the fake news. It's what I always talk about, the. Compared to what issue. And the fact that you can't hear the dogs that don't bark. You can't hear the dogs that don't bark. It's what they don't say and what they don't report that is so significant. That's probably the most significant part of it. Anyway, today we've got a guest, Marc Byron, coming on right now who's going to talk about an interesting new mortgage product. And most of the reason I play this interview for you that I just recorded recently is because I think this will trickle over into the broader investment market. And it's just an interesting thing. It's new. It's kind of fascinating. So check out this interview with Mark Byron, our guest, and we're Going to talk about how people are basically indexing mortgages to the broader national home price index. It's a fascinating idea. Check it out. Here we go. It's my pleasure to welcome Mark Byron to the show. He is founder and CEO of Home Diversification Corp. This is an interesting product, maybe a totally new idea. We'll see what he says about that. That helps homeowners diversify their market risk, their market exposure in their own home investment. Mark, welcome. How are you?

Very good, thank you. Jason, how are you?

Good. Interesting product you have here. Where are you located?

Manchester, New Hampshire.

First question, is this strictly for homeowners or for homeowners and investors?

Well, we're taking investment right now, but the product is strictly for homeowners.

Okay, so what, the product does it. I know one sort of component of it, if you will, is basically a mortgage product. Not really, but sort of. It sits as a second mortgage and this second mortgage on a home or a first mortgage, I guess, if they own the property free and clear, can diversify market risk. Right. How does it do that?

Yes, what it does is we use home price index technology. We basically trans swap the local home price index, the changes in the local home price index for the homeowners to the national diversified home price index, which is 42% more stable. And so what that does is it improves the credit profile of the borrower where they can get substantially better terms on their first mortgage. And it also reduces their exposure to the local market risk, which reduces their foreclosure risk by on average 40% and protects their home equity. You know, home equity typically they use for many different things primarily for their primary retirement assets. So it protects that. And even, you know, during the life it, you know, protects the home equity for such things as paying for your daughter's wedding, for example.

There you go. This is a pretty interesting and unique product. Is there anything else like it or where do you get the idea, where did this come from?

There is nothing else like it. This is totally new. Nothing else like it. There are shared appreciation mortgage type products which transfer risk and there's a few new ones that are popping up the transfer risk. But our product really reduces risk through diversification. A little bit of a story as to how it came about. It's really, I guess you would, you would call us a 20 year old startup. I authored an article back then trying to solve the problem for a bank I was working at to diversify their exposure from local to national. But then I thought, well, boy, this would make sense for mortgages for homes especially, but the technologies wasn't well defined yet for the home price index technology, and now it is. And so for the last three years, we've been building this out and, you know, we intend to disrupt the nation's largest markets, housing and housing finance.

Fascinating. Now, right at the outset, you said that the national market was, I think, 42% more stable than a given homeowner's local market. Of course, I need to ask you, compared to what? I mean, if you're in. Now, we just so, you know, just for a little background, our listeners know this, but we divide markets into three major types. Linear markets, cyclical markets, and hybrid markets. And the. The cyclical markets are the ones that get most the attention. They're about 75% of the 20 markets in the case Shiller index. And I think that index is extremely misleading because of it. They're the markets that get all the news. They're the west coast of the US the expensive northeastern markets, and, you know, South Florida. Okay, all of these sort of hot markets. But those markets have bigger cycles, much more significant in downturns. They hurt the most in upturns in the market. They do the best in terms of the appreciation cycles versus the linear markets, which is the vast majority of the country. They just kind of chug along. They have small ups and downs, but they're not hugely significant. So when you say 42% more stable, you must be talking about the cyclical markets, I'm guessing.

No, I'm talking about average. So you make a good point, Jason. Some markets have historically been more cyclical. And yes, we've seen the same thing exactly with the markets, the west coast in the expensive markets, where they get hot, then they get cold. Now, who knows? But it happens in Vegas, it happens in the Sandstone.

But yeah, so they like Vegas and Phoenix, just so YouTubers. Yeah. Okay.

Pardon me.

Yeah, well, I was just going to say, just to point out, because I didn't give you an example of hybrid markets. Phoenix and Las Vegas, along with Denver, maybe Atlanta, maybe Dallas now, you know, a few others, Austin would be hybrid markets, kind of in between the two. So go ahead with what you're saying. Yeah.

Okay. So the 42% more stable is just looking at the average volatility of all the zip codes in the Zillow database, looking at the average volatility versus the volatility of the average volatility of the local home, the zip code, local home price indices, historical volatility versus the volatility of the national home price index to.

Compare it to the stock market, you'd be the vix. Right. When we talk about volatility, we're talking about the VIX index, right? Which is the volatility index. You're saying that any given local market is much riskier than the national market because through the law of large numbers, it just evens out statistically. Right.

So we'd like to use the example that this is like instead of owning all your investments in one stock, you know, whether it's Amazon or whatever stock.

You got the S&P 500.

You got the S&P 500. Got it, got it. So why can't you. So the question, question is, you know, why can't you diversify your largest asset? Right. Well. Well, now you can.

Very good point. Okay, so tell us how it works. A consumer gets a mortgage on a property and you probably have set up deals and relationships with banks and mortgage brokers and they offer this as sort of like an insurance policy, but it's not really insurance. Right. What is it?

It's like insurance. I mean, it gives peace of mind and it's very cheap insurance. For an average home, it's $18 a month. And you know what you get is peace of mind that, you know, your home equity is protected and your foreclosure risk is significantly reduced. Really a fantastic deal. Almost sounds too good to be true. But it's because of diversification benefit, which has been called the only free lunch in economics. But okay, that said, how it works is we're looking at the largest originator, but they will be advertising, hopefully this product a consumer goes in, applies for the product, it's a home diversified mortgage. And they execute the first mortgage along with the addendum second lien. And the first mortgage becomes. Because of the reduced risk that we've been talking about, the first mortgage becomes much less riskier to the creditor, allowing for better credit terms, higher loan of values, lower down payments. Without pmi. Kind of amazing.

Well, it's without PMI at a above 80% loan to value ratio. Is that what you're saying?

Yes.

Okay.

But that's, that's still to be done. That's at least 12. You know, just to be clear, that's.

That's a goal. It's, it's not today. Okay, got it?

Yeah, yeah, keep going. So that's it. The first mortgage gets funded in the ordinary way. Just Fannie Mae and Freddie Mac will buy the mortgage and do their thing, package it and securitize it and the consumer gets what they get for? Like I said, you know, $18 a month.

But what is it? We still don't know what it is. Like, I don't understand what this really is. It's a financial product. It's a second mortgage. Let's look at it. Real deal.

Okay.

I mean, I mean, I should say a hypothetical deal, but like, let's get down to the nitty gritty mechanics. So just for round numbers, someone buys $100,000 house. Now I know you can't do that very many places, but it's round numbers. So it's, let's make it easy. They buy $100,000 house, they want to get a 90% loan to value. So they're going to borrow 90,000, they're going to put down $10,000. And with your product, not yet, but in the near future, hopefully they can get that mortgage above 80% loan to value without having PMI or mortgage insurance.

Right. At the same interest rate.

Okay, fantastic.

Were 80%.

Sounds good to me. So then their property also has a second mortgage on it too. That's your product.

It's technically a second lien, but same thing, right? Really, as they will see it as one combined product. You know, it's really a first mortgage with an addendum.

Okay, but how much is that second lien for? If there's a second lien, it must have an amount of money on it, right?

It does not. It starts with a zero balance and the balance will fluctuate, positive or negative.

Okay, so they've got this second mortgage on their property, but it's for zero balance, right?

Yes.

Okay, and then what happens? They own the home and it's a year or two in the deal after they funded this mortgage. Then what happens?

What happens is at the sale of the home, their positive or negative balance will be settled at the sale of the home.

Okay, so let's say five years have gone by, they're selling the property. And so there's no index. Yeah, there's no payments on this second mortgage. That's there. Just. It's like a sleeping second. It has no balance, no payments. Right. But then that second mortgage, that second lien is tracking the index. I'm guessing all this time, the last.

Five years, the second lien is tracking the difference between the local zip code home price index changes versus the national home price index changes.

Okay, so let's take an example. So say that the local market, on average over five years did 3% appreciation, but the national market did 6% appreciation. What happens at the Sale of the property.

At the settlement table, we Home Diversification Corp. Will cut a check for 3%. So in this case, for $3,000.

Oh, that's.

Now the opposite is true.

Yeah, right, right, sure.

Yes.

Okay. So if they lost money, if, if the local market did 6% and the national market only did 3%, then the second mortgage is suddenly going to have a balance. I'm guessing that will require a payoff before closing, right?

Yes. So at the closing table, we will get a check from closing for that 3% for the 3,000. I mean, the good news to the homeowner is that they outperformed the national.

Okay.

You know what I mean? So that's the Good news. But 3% will come out at closing. It essentially locks them into the national.

Interesting. So you mentioned a lot early in the interview about the technology of home price indices. It wasn't really developed enough for you to do this in the past. Talk to us about the indexes. You say there's, I think, six major indices. Right?

Six major home price index data providers.

Okay.

And we have one locked in place. We've selected them. And it's the best. And I'll just say it, it's Zillow.

Okay.

And the reason Zillow is the best? Well, first they claim that they're the most accurate. And I've read their economic data and I believe it.

But a lot of real estate agents and buyers and sellers will argue with that. But go ahead.

Yeah, not necessarily at the home level.

Right. At the national level, they law large.

Numbers, but at the zip code in the national level.

Okay, fair enough.

You know, relative to their competitors. But what makes it, I think, the best for consumers is that it does have the brand name. So, you know, it is Zillow. And like you mentioned, you know, people can dispute their home valuation and. But it does have, you know, a strong consumer brand. And I think most importantly is that their data is published and it's updated monthly. It's just a very large data set going back, I think 15 years or something like that.

So consumers, I mean, we have to remember that Zillow is a pretty new company in relative terms. I mean, look, I've been in business longer than Zillow. Okay, but go ahead. Yeah, I mean, you know, it's not a hundred year old. It's not the Dow Jones Industrial Average. Okay, yeah, but go ahead.

But no, we have backups. If something ever were to happen to Zillow, we have backups. Like if Zillow were to ever disappear, we have backups. But what I think is an important point, what I should say is we think is an important point to the consumer as it takes our methodology out of the black box and that they could actually go to the Zillow website and see the home price changes and the actual values in their local zip code market. And so we think that's a compelling advantage that Zillow offers over their competitors.

Okay, so talk to us more about the index though. Like how was the technology not there before and it's there now, and the accuracy of it, how it's compiled, Just anything you want to say about that? Because I think that's going to be a big question people have.

Yes, I will say that when I first looked at this 20 years ago, the only thing that was available were, I think, 10 case Shiller indices of the top 10 metros. And so it really didn't solve the problem. And since then, I don't know exactly when, but since then they've gone down to the zip code level with. Fairly accurate, I could get into the statistics, but fairly accurate. But of course, your home price can do better or worse than the local zip code performance, and it will do better or worse. And a lot of that is up to the homeowner whether they over, maintain, under maintain, add additions, buy right, sell. Right. Because our methodology is not on the specific home, but is on the local zip code index. All of the, you know, pluses and minuses that belong to the homeowner, you know, additions or under maintenance, they own, you know, this is just strictly based on the performance of the local home price index.

Okay. I'm, you know, Mark, I'm really glad you mentioned that because that is a huge question mark here. Right. It's a, maybe a potential point of dispute. So let's take that example. That $100,000 house with a $90,000 first mortgage, when they bought it, they've got your product in place. There's. They're selling it five years later. But in the meantime, over that five years, they've installed, you know, beautiful wood shutters, they remodeled a bathroom, and that increased the value of the house. What do you do about that on either side?

That's the important point is they keep any benefit, you know, any value over the home price index they keep when they sell the house because the contract is only based on how well the local home price index performs relative to national. So in your case, if it's $100,000 home and local underperforms national by 3%, well, then, you know, they owe that money. But if they put in $20,000 worth of additions that they get value at on the sale of the home, that all goes to them.

How do you know? How do you attribute and allocate that value of those improvements, though?

Okay, so let's give the specific example. $100,000 home, the national increases by 3%, the local increases by 6%. All they owe us is at the closing, you know, from the closing table, it's $3,000 to us. But they've outperformed the national. Now if they sell their house for 120,000, that all goes to them, they will just have to pay us 3,000. And so if they sell their house for whatever they sell it for, either through a good sale or they've added all the nice improvements that you mentioned, they keep all that added value. They get it from the sale of the home. We don't take any of that. They just owe the 3,000.

Right. But it kind of depends which way that deal goes, right? If they outperform the national or if the national outperforms the local. Right. Doesn't it depend which way that goes as to how that would settle?

Same thing. If they outperform the local, all of that outperformance will go to them, either if they over perform or underperform. Now, of course, the opposite is true. If they don't maintain their property or if they sell wrong or something that's mostly in their control, then they will, you know, sell for less than their local zip code change and it'll cost them, you know, they'll lose money because of that.

Yeah, interesting. What else do you want people to know about this? What's kind of interesting in the broad picture is where this is going, right, where everybody's property is becoming like a financial asset that they'll actually watch the way people watch the stock market almost. Of course, it's not that volatile. The stock market's far more volatile. But they'll be watching the national home price index to see, hey, you know, we should feel good our. I mean, I guess they should feel good, right, because it's better than their local market. Or they'll be watching it compared to the local market and thinking it all. It really changes people's thinking.

Yes, I would say that that's exactly right. Of course, there are many. You know, the meltdown wasn't so long ago and, you know, people got hit hard. You know, we offer some protection, like I said, very, very inexpensively. But yes, they will be paying, you know, more attention. I agree. 100%. They'll be paying more attention to, you know, their local market performance and their national market performance.

All right, good stuff. Anything else you want to say before you go give out your website?

Oh, the website is www.Homediversification.com.

All right, Mark, thanks for joining us.

Thank you very much, Jason. I appreciate it.

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