1293: Jason's Real Life CPI vs Real Estate Story with Thomas

I always have had an interest in investing in general and educating myself about different types of investing. And I've always kind of come back to real estate in general because of all the things that we discuss on your podcast all the time. I've read a lot of real estate books and I think a lot of people probably talk about that rich dad, poor dad book, which opened up some new thoughts in my head, especially the 1031 exchange they mention in that book. And my medical partner is the one that actually turned me onto your network because he had invested with you and that's how I came specifically to your podcast. I spent a lot of time educating myself before diving in. The method that I had started my investing with you was through this 1031 exchange.

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. 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 to episode 1293. 1293. Thanks for joining me today. So today we're going to look at a very real life case study because it happened to yours truly. Yes, a property that I purchased. We're going to look at it, how it performed after I sold it over the course of decades. Sometimes, you know, you regret selling those properties, right? You go and you look online and you check out Zillow and you see those zestimates and you think to yourself, if only I would have kept that one. But that's not really telling the whole story by any means. It's really not telling the whole story because of course, those handy dandy inaccurate zestimates that you see, and yes, a.

Lot of times they are very inaccurate.

But hey, like I say, they're better than what we had before. They're better than nothing. You know, you see those, but they don't adjust for inflation. They don't adjust for the amount of cash flow you would have gained or lost over the years. They don't do any of that stuff. They just show You a non inflation adjusted. In other words, nominal dollars price versus the price that you remember that you paid for it and then the price that you remember when you sold it. And of course that price today will probably be a lot higher. But it's not all it's cracked up to be. It doesn't tell the whole picture. Anyway, I'm your guide here to help you with this learn from my experience and what a vast amount of experience.

It is, I must say.

You know, there's that old quote, and I can't remember it exactly, that talks about how experience is the best teacher. The problem is you have to learn the lesson to get the experience and most of the time, hey, that lesson.

Can be pretty darn expensive.

So I'm here to guide you and help you learn from my lessons. Both the profitable and most of them have been very profitable, but some of them have been unprofitable. So learn either way. And we're also here of course to share the experiences of literally thousands of the clients I've had over the years who have invested, who have purchased properties, sold properties and all the stuff they've done. And thank you all for sharing those so much. We've got another guest interview that I'm recording today, not to be played today with one of our clients who's going to talk about his challenges and how he overcame them. And the J curve. Yes, the J curve as it applies to real estate investing. If you're not familiar with the J curve, look it up on Bing. Don't use Google because they're evil. Okay. Anyway, do whatever you like, but more tracking or less tracking, right?

More invasion of privacy or less invasion of Privacy.

Actually use DuckDuckGo or some other better search engine. But yeah, we'll guide you through that stuff. I just wanted to make before we get to our in house economist Thomas, who's here with me today to talk about this property. First off, I want to mention sorry for the sound quality in one of our segments of yesterday's show. We've been having some technical sound problems over here. Do apologize for that. Hopefully it won't happen again. Well, actually it will happen again because hey, that's life. But we'll try to minimize the amount of time we have sound quality problems. Yeah, I'm interviewing one of our great clients today and I really can't wait to share that interview with you probably next week sometime as he talks about how he and his wife had been investing and had challenges, overcame them. And the J curve as it applies to investing and what Seth Godin calls the dip. We're going to talk about the dip if you've read that book. But I wanted to make another book recommendation to, to you today. Now I realize you're hearing this and you're going to hear this recommendation and you're going to think, Jason, you are way late to the game.

Late to the game.

Where were you years ago when this author was hot? Well, I admit I am late to the game, but lately I have been geeking out. As one of our Venture alliance members said at the last Venture Alliance Mastermind meeting in Savannah, Georgia. He said, I've been geeking out to George Gilder after seeing George Gilder speak at our Meet the Masters event. And he says he'd been reading all his books and really getting into it. And I appreciated that term. So what have I been doing? Well, when I was in New York City last week, I was geeking out to a brilliant, brilliant author and I want to recommend, I finished one of his books on audio and it's called Skin in the Game. You probably heard about this cemeteries in Daily Life. It's Nassim Nicholas Taleb. Of course, he became very famous. I think his most famous book was the Black Swan. And I am familiar with the Black Swan theory, but I have not read the book and we have not had Nassim Nicholas Taleb on the show. But I'm gonna go get him on the show because I'm just amazed by his brilliance. Really, really good. Skin in the Game.

Get that book today.

It's fantastic. Really helps you understand a lot of things. And now I am digging into one of his other books called Antifragile. Antifragile, which is fascinating too. I'm not finished with it yet, but I recommend that one also. So far, so good. And there's a couple book recommendations for you. Nassim Nicholas Taleb, really, really interesting author, fantastic books. Okay, without further ado, let's talk to our in house economist, Thomas. You've heard him on the show before. I asked him to do an analysis of this property that I bought and sold and how it has performed over the years and whether or not I should regret selling it or if I should be happy I sold it or maybe somewhere in the middle. Let's go ahead and dive in. But before we do that, be sure to get your tickets for our upcoming Profits in Paradise event at the end of the month in Orlando. One of the things I'm going to talk about at that event is the concept, which is really, really great in real estate investing. And that is the concept that we may not realize we're benefiting from all the time, the concept of optionality. And I was thinking about this as I'm diving into Nassim Nicholas Taleb's work in Anti Fragile. He talks about optionality and he doesn't talk about it in terms of income, property or real estate investing. He talks about it in terms of many other things. But I keep thinking, wow, it's one of the huge benefits we get as real estate investors, the optionality benefit. So we're going to talk a lot more about that at the upcoming Profits in Paradise event. So be sure to join us for that. And without further ado, if you Here is my interview with Thomas as we analyze this deal on a historical basis, I think it'll be very enlightening to you and your thoughts about buying and selling properties.

Hey, it's my pleasure to have our in house economist Thomas Young back on this episode. Today we want to talk to you and take a deeper dive into a realistic example. Not a comprehensive example, mind you, because frankly, we're still working on this, modeling a little bit of inflation induced debt destruction. But we're going to give you some parts of the example today and more will come on a future show. And then we want to talk about a guest that we've had on the show before and that is John Williams, the founder of Shadowstats.com look at the way he calculates real inflation versus the misleading and misaligned official or government numbers in the consumer price index. Thomas, welcome back.

Good to be with you.

So Thomas, looking at a real world.

Example, I've asked you to look at.

This property and the reason I've asked you to look at this property and we've talked about it on the show before is because I used to own it. In fact, it was my first house. When I moved out of Mom's house, I moved in to this house. I was never a renter for a long, long time. I always was a homeowner and I used to think that was just quite great. Now I have changed my view of that for reasons discussed on many episodes before. Although I do happen to be a homeowner again at the moment. I believe in owning lots of investment properties, not necessarily the one in which you live. But suffice it to say, I moved out. I moved into this brand new place in Irvine, California. When I moved out of Mom's home, I bought it for $102,000 and I was very happy because I made a Great return on it. I borrowed most of the down payment from my grandmother, bless her soul, and I did pay her back when I sold the house. It was a great deal. And when I moved into this property, I already owned one rental property. So the first property I bought was a rental, not a home to live in. The second one was a place to live. It's interesting to look back at the history of what this property has done over the years. It's particularly interesting because I sold this property exactly 30 years ago this year. Don't know what month exactly, but 30 years ago.

And I sold it to a couple.

Of friends of mine. Their names are Mike and Colleen, and they bought it for $158,000. Now, it's interesting to analyze what this property is worth today in nominal dollars, which means in name only. That's the definition of nominal. It's just what something is called. So a dollar is still called a dollar, but then you got to look at what's called real dollars. And you economists know this all too well, Thomas. And that's the real value or the buying power of that dollar today. So take us through a little bit of this if you would, Thomas. How much is the property worth today according to our friends at Zillow?

Yeah. The home is worth 635,000.

Oh my God.

The typical reality over 30 years, it's.

Yeah.

What would the gone from 102,000 to 635.

So, Thomas, the typical reaction would be.

Oh, I'm so mad at myself.

Why did I sell that property? I'm such a fool. I could have owned a $635,000 place that I only paid $102,000 for. And you know what? I probably would have just paid off the mortgage. It'd be free and clear. I'm such an idiot. I have seller's remorse. Hmm, I don't know about that. I'm not so sure I have seller's remorse. When we look at the real numbers, it's not what it seems, is it?

Yeah, if you convert that 635,000 into $1989, then it's worth 307,000 according to.

The official rate of inflation, which would be the Consumer Price Index. And by the way, listener dive into this one today. But There are multiple CPIs or consumer price indexes. We're just using the common one. Is that the CPI U, Thomas?

Yeah, CPI U for the Urban Consumer.

Okay, good. Across the U.S. now, I started off introducing you back today by talking a little bit about a prior guest on the show John Williams, the founder of Shadowstats.com which is a great website, what he does is he analyzes behind and beyond the government economic reporting. So at least in theory, if you believe Shadow Stats and John Williams and they're credible, and I think he is quite credible, then these numbers are pretty dramatically different. Okay. Now, according to shadow stats, the $635,000 house in today's nominal dollars, if you take that back to 1989, what would John Williams and Shadowstats say it's worth today? Thomas?

Inflation's been much higher according to shadow stats, so 635,000 is worth 143,000 today.

Okay, so are you really telling us that in real dollars the property has gone slightly down in value in three decades?

So if you get 5.4% annual inflation, which is what real Shadow Stats has, then yeah, it's gone down in value a little bit.

Okay, now, what does the Consumer Price Index say the inflation rate has been during all that time?

It's been between 3 and 4%.

Yeah, but we need to look at the cumulative inflation rate and we may not have those numbers. Maybe you have them on the other page of your spread, Thomas. Yeah, so give the cumulative inflation numbers. Just the average. Maybe I'm saying it wrong, not cumulative, but the average inflation rate over the three decades. Yeah.

From 1989 to 2019, inflation grew by 107%. That's a good deal less than what Shadow Stats has.

Yeah. If you divide that by 30, there's your average. Okay. By the way, that is pretty incredible.

Now, you know what's interesting to look.

At is the interest rates and the mortgage payments. Remember, listeners, I have stated this for you many, many times and this is what is so misleading in, well, among many things, in all of the stats that you read and hear out there in the lame stream media, AKA mainstream media, they tell you the price of houses as if to say that we're in a bubble or houses are cheap and you should buy as many as you can. They're saying one or the other thing because back at X year in time, houses were $100,000 and now they're $200,000. So they're overpriced, there's a bubble, the market's going to crash. But wait, there's more. That's so misleading to look at the price of the house, because no one buys the house on the price of the house, except for a relatively small number of cash buyers. And even I would submit to you that even if they're Cash buyers, they always know that real estate is the most debt friendly asset and it can be refinanced very easily. So most people buy with a mortgage. They buy based on a payment, not a price. And therein lies a very important distinction. So let me give you an example. When I bought the property, my nominal mortgage payment was $735 a month. When I sold the property at a higher price, the mortgage payment for my friends Mike and Colleen was $1,139. So they were paying a higher payment. Now if you bought that property today, remember the property has quadrupled approximately in nominal value, but the mortgage payment in nominal dollars has only doubled approximately to $2,443. But guess what? In 1989, the interest rate on that mortgage was 10.32%. And today it's only 4.06%.

So in real dollars, what is the payment today? Everybody thinks I'm gonna walk in and pay $635,000 for this 944 square foot, two bedroom, two bath condo in Irvine. Wow, that's a lot of money, huh, Thomas? But is it? What's the monthly payment? I don't care how much the sticker price is. I just want to know how much I'm paying every month. Yeah.

So the nominal payments, 2004, 43. You know, I, I looked at what that 1989 payment, the 1,039 bucks would be in today's dollars. And if the real shadow stats numbers are correct, then you're basically paying nothing today. The payment went from 1,139 to 256 bucks.

Yeah. And remember, at our live conferences, I have many times told the story of how when I was 11 years old, mom saved for her first house in West Los Angeles, still owns that house today. I remember overhearing her conversations as a kid and hearing her talk about how she just didn't know how she was possibly going to make the mortgage payment because the mortgage payment was a whopping $416 a month. 416amonth. But over time, even over just a few years, because the inflation rate was pretty high back then, that $416 payment felt like nothing. Just, you know, four or five years later, it felt like nothing. Felt very, very cheap. So the 1989 buyer, if they kept that mortgage, which of course they would have refinanced it probably many times, but if they kept it and they were still paying a Note Rate of 10.32% just after inflation, debasing the Monthly payment. They pay how much? 256amonth. In today's dollars? Yep. As they're making the last payment on that mortgage, paying it off. Wow. Incredible. Okay, but the question I actually was asking you was a different question. The buyer comes along Today, they pay 635,000 for that property, and they think, oh, my gosh, I'm gonna have to pay $2,443 per month. 2,443 per month. Almost 2,500 bucks a month today to buy it at a 4.06% interest rate. But compared to what? Compared to if that was the interest rate and the price in $1989, Thomas, how much would they really be paying today according to the official rate of inflation?

Yeah, they'd be paying $11.82.

So they think they're paying $24.43, which they are, because it's today. But what I want to illustrate to the listeners is that in 1989, three decades ago, the buyer was paying 1139. When my friends bought that property from me, they were paying 11:39. Mike and Colleen. And today, a buyer buys that property and thinks, oh, my God, it's quadrupled in value. Real estate is so overpriced. There must be a bubble. Everything's going to crash. This is the common thing you hear. Yet they're only paying 1182 in $1989. So the question is always compared to what? This is. The thing that the morons and the mainstream media never analyze or explain is that the house today is barely any more expensive than it was in 1989. Like, there's almost no difference in monthly payment. Isn't that amazing?

It's amazing, folks.

You should all be truly amazing. Now is the time you're clapping. Okay.

Yay.

Thank you, Thomas and Jason, for telling us the truth, the reality of things. Okay, let's talk a little bit about shadow stats. I'm on a bit of a rant. I'm very passionate about this stuff, Thomas. The three major ways that the government manipulates the inflation index, and it's very important to know how and why they're manipulating the index. They have a very vested interest. They're very much at stake for manipulating the index. They do it in three major ways. Weighting, substitution, and hedonics. These are the three ways. So weighting is you take this basket of goods, which is the consumer price index, and they'll say, well, this item in the index shouldn't get as much weight as this item. And we're going to change the weight we give each of those items in the basket of goods so that we can manipulate the index to look like there's less inflation than there really is. Or substitution. So if the price of beef goes up, then they'll say, well, everybody will just switch to chicken. But maybe you don't like chicken. Maybe you think chicken's a dirty bird and you'd rather eat beef. Okay, so substitution, that's another way. And then hedonics, where they index how much pleasure the consumer gets from a certain item in the basket of goods. And technological items have massive hedonic indexing because technology advances so quickly through, you know, Moore's Law and other things, you know, that the network effect of the network, the power of a network and, you know, all these different technological things. But Moore's Law would be the most prominent. Gord Moore, the founder of intel, said the speed of the processor doubles every 18 months. Right. So, Thomas, tell us more about John Williams and his analysis of these things and why he doesn't believe the official numbers.

Yeah, basically you go back 30 years. John Williams was part of the debate among politicians and economists about how inflation should be measured. And for 300 years, going back even further, but at least the past 300 years, economists have considered inflation just 300 years.

We want to give you a decent sample. Okay, go ahead.

Inflation was considered as the change in prices for a fixed basket of goods. So the idea was people were going to buy eggs at say 4% of their income. And we're going to go out and sample the price of eggs every month and see how that changes. The debate changed from that fixed basket of goods to being what are they going to spend their money on to keep a constant standard of living. So that's when hedonics and substitution effect came into play. What he does is he says, well, let's keep the weights of these different prices the same and see what happens to the overall inflation figure over time. And you know, he gets a higher number, obviously.

Yeah, a much higher number. It's, in fact, it's generally more than double the official or CPI government rate of inflation. Right?

Yeah. From 1989 to 2019, Shadow Stats has inflation up 345% and.

The CPI U is up 107%.

Wow. That's pretty significant, isn't it?

Yeah, it makes a difference, these tiny changes. Actually, I say tiny, but that depends on the reviewer. Right. What tiny is. But you know, you change the weight on housing from 19% to 24%. And you change the weight on, say, purchase of meat from 6% to 4%. And over 30 years, that makes a giant difference.

Yeah. I want to just play devil's advocate here for a moment, Thomas, and argue on the side of the powers that be. Okay. And that would be the folks at the government who compile these stats, the Bureau of Labor Statistics, et cetera, et cetera. Right. The same is true with unemployment. And, you know, it's all just totally misleading. Basically, you're being lied to. Okay, but here's the thing. There is a case to be made for substitution sometimes. For example, it's kind of like the old Henry Ford saying, you know, when he was asked about, you know, why don't you listen to your customer, hold a focus group, etc. Well, if I listen to my customer, they would have just told me they wanted a faster horse rather than a car. So there are some things in reality that people don't buy or need anymore that they used to buy and need. Right. Is that a fair statement?

Yeah. I mean, I don't have a giant TV that weighs 400 pounds in my front, you know, in my front room, and I never had one, but.

Right. Yeah, yeah. And the things that we come to expect is normal in modern life. Like, one of the things that totally puzzles and amazes me is how every tenant seems to just expect air conditioning as a totally normal thing. Like, there's no. You know, I remember when I started selling real estate, a lot of houses didn't have air conditioning. That was completely normal. I mean, when I went to school as a kid, I don't think I was in any classroom ever that was air conditioned. You know, now, oh, my God, the air conditioning doesn't work in the school. The kids are gonna die.

You know.

You know, we just have different expectations nowadays. Right?

Yeah, it's true.

So there's a case to be made for substitution, but the reality is the substitution that they're generally making is not a fair case. They're doing it just to truly manipulate the numbers. Now, there's another case to be made for Hedonics, isn't there? I mean, look, if your computer keeps getting faster and better, is it really deflating in price? You know, I use the example of every year or so, I'll buy a new Apple laptop. And it seems like the cost is always about $2,800, but the computer itself keeps getting so much better and so much faster, and the features are better and it's just always better. But the price is about the Same. So the inflation index wouldn't look at that as though I'm actually paying the $2,800 every time, would they?

No. In that case, the inflation index would say, because your computer became more useful or more powerful, you actually had deflation. So Instead of paying 2,800 bucks, you're maybe paying 2,500 bucks.

Oh, even more than that. If it doubled in speed, if the processor doubled in speed, wouldn't they say, I'm paying $1,400?

If speed was the only factor in determining the hedonically adjusted price for the computer, then, yeah, 1400 bucks.

Right. By the way, just a side comment on that. You know what the big fallacy of that is? The software always keeps becoming more robust, and the processor, even though it's getting faster, the actual user experience doesn't seem like it changes much because, you know, the software is just hogging more processing power. So it doesn't feel like your computer actually gets any faster.

Go ahead, Thomas.

That's the thing. I mean, do I really believe that a computer got cheaper over the years? Obviously, my pocketbook does not say that a computer is any cheaper, but hedonic adjustments say, yeah, your computer's cheaper. Same thing with, like, the iPhone, right? IPhone came out thousand bucks last year, right?

I think it's cheap. I think it's totally cheap. My first cell phone cost $3,200 and weighed 14 pounds. So I think all these phones are totally cheap, and everybody needs to totally stop complaining.

Okay? So anything else on the weighting substitution and hedonics and shadow stats, it matters, right?

That's my whole point, is that how you measure prices and inflation matters across a broad range of industries. And obviously in the mortgage payment, it matters a lot.

It sure does. It sure does. Okay, one final thought I want to leave you with. And Thomas here. I'm looking at the spreadsheet we've been working on. I'm looking at the interest rates. You know, this is something I've said over the years, but understand that these interest rates are so incredibly cheap. Okay? So if you apply. And Thomas on. And I'll just bring it right to you on row 46B. Okay, so cell 46B. I think what you did there is you took the shadow stats number and subtracted it right from the interest rate to get that effective interest rate. Okay? So what Thomas did here, folks, is he took the shadow stats inflation rate and deducted it from the interest rate at the time in 1987, 1989, and 2019. And guess what? The real interest rate. Based on this calculation of nominal interest rate, meaning that's what you think you're paying versus what Shadow Stats says inflation really is. You simply subtract that amount from the interest rate and then you get what I call your effective rate after inflation. So your effective rate in 1987 was 3.66%. In 1989 it was 4.83%. And today your effective rate is 1.74% less than 2%. Now, the tax benefits are more complex on rental properties, and they're better on rental properties. But for purposes of simplicity, let's just assume it's a home in which you lived, okay? Because then the tax benefits are, well, they're lesser, but they're also simpler to calculate. So what I'm just saying is that if you deduct your interest rate, then if you're in a combined tax bracket, I'll just throw out an estimated number. It depends what state you live in, of course, it depends how much your income is, etc. Etc. Okay, but say your tax rate is 40%. Now, if you live in a no income tax state, like I do in Florida, or if you live in Texas or one of the other great no income tax states, it'll probably be lower depending on what your income is, okay? But let's just say it's 40%. So all you do is you take 60% of that real or effective interest rate that I just quoted, and then you get your after inflation and after tax effective interest rate. And I want you to see how incredibly cheap it is to borrow money. Cheaper than it was in 1987, cheaper than it was in 1989. So the answer is, in 1987, your effective after tax and inflation interest rate was 2.2% a mortgage. In 1989, it was 2.9%. So it went up a little bit. And today it's right about 1%, 1%. So if you're listening to this and you're thinking, should I put more money down on the property? Should I pay cash for the property? And you look at the opportunity cost of tying the cash up in the property. Now, I have said before, and I've got a video on my YouTube channel about it where there are, you know, a few instances where you'll want to put more money down or pay cash, but they're relatively infrequent. Mostly you want to borrow the money when you can. If you can make more than 1% on your money elsewhere by like buying more properties with that money, for example, which you, I sure hope, can make dramatically more than 1%, maybe 20 times the 1%. Then you should conserve your cash and use the leverage. So that's just an example for you. All right, Thomas, we gotta wrap it up. As usual, we went much longer than expected. Any final thoughts before we go?

That number you just mentioned, after tax interest rate and after inflation, we may never see these type of conditions again. Based on interest rates that I've been looking at, rates are the lowest they've been in perhaps 5,000 years.

Well, if you look at the macro, you're right, but there have been little dips where they've been lower than this, but they're very low in the macro sense. You're absolutely right. Incredibly low. Hey, but there is some talk maybe they'll even go lower negative interest rates. So, you know, you can always renegotiate the deal, refinance. Okay. You're not stuck with the interest rate at which you borrow. That's one of the beautiful, beautiful things about income, property. You can refinance it. You can change the deal along the way. So very good, Thomas. Thanks for helping us kind of sort through these numbers and. And see the reality that the mainstream media just won't tell anybody. So it's good to have you on again.

Talk to you later.

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