1313: Mortgage Payments, Buying Power & Generational Differences Between Gen Y & Z with Millennial Marketing Guy Jeff Fromm

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Welcome to episode 13. 13. 13, 13 13. Kind of a cool show number, isn't it? We've got our guest today that's going to be talking about a big demographic cohort and what it means to us in the broader economy and what it means to us as real estate investors. And one insight, a question that I asked our guest on this topic I think is pretty interesting for the McMansion housing market. Well, actually, I don't think it's interesting. I think it's somewhat devastating. And I got to tell you, I struggle with this myself because I'm always looking at houses and I've been looking at houses for myself. I get the alerts every day in my email and gosh, I am not a good home buyer. I'm not a good home buyer. I would not want to have me as a client. Why is that? Well, it's not because I can't afford it. I can't afford it. And that's kind of the problem. When you have money, you have more, more options. And, you know, I'm just kind of always sort of indecisive about what I should do. Now, of course, my favorite thing to do is to find a good high end rental property and I want to rent a big home for myself. And recently, well, not, not even recently, but yesterday, yesterday as I was driving back from our event in Orlando, I was driving back to Palm beach and I was listening to the John Burns book that I gave all of you who attended our Meet the Masters of Income Property event in 2018, when he spoke there, I gave you that book. And it talks all about these different demographic trends and so forth. And I think it was in that book, if I'm not mistaken, in the audiobook where they talked about how people just don't really much care about homeownership anymore in terms of owner occupied homeownership. Owner occupied homeownership. And I thought, wow, that's me. I pretty much always, as an adult, with just two exceptions, owned my house from the time I was. When did I move out? About 22 years old. I bought a condo, moved into it. Ever since then, really with. With just a couple of exceptions while I was like building a house in Newport Coast, California, and I had to wait for the construction. I was a homeowner and I always believed that you want to own your own home, of course, and I was also an investor as well. But, you know, I always own my own home and moved around Irvine in Newport beach for many years as a homeowner. And then in 2011, I became a renter. And then, you know, last year in 2018, I became an owner again, reluctantly. I didn't want to buy a house, but I did. You know, it's just interesting how these thoughts about, you know, owning your own home have changed. Well, when I look around, I think, you know, should I buy a big spread and have a big yard and a big house? And, you know, I was looking at one this morning. This house is 7,200 square feet. And I'm thinking, you know, I could buy this. I can easily afford it. And, you know, I've never really had a big house like that, a big McMansion, a big spread on a couple of acres of land and a circular driveway and all that stuff. I thought that'd be kind of cool. You know, maybe I could host the Venture alliance mastermind group there and we could have our mastermind retreats right in my home. That'd be kind of fun. But then, you know, the next property I look at on my Alerts is a 2200 square foot, not little tiny, but, you know, I'll call it comparatively a little single family home. And I go in price from 2.5 million down to 450,000. You know, what do I do? It's just really kind of difficult to decide. So that's the McMansion subject. We talk about that a little bit with the guest today. And I think these McMansions are going to fare very poorly with the demographic cohorts coming up. Just don't think they want them. So we're going to have a glut of those types of properties. We already have a glut of them on the market, and that's why they're kind of a bargain. And I'm thinking maybe I should just buy one. But the hassle of maintaining a house like that is much more involved than it looks on the surface. You know, you think, well, I'll just hire a gardener. They'll come mow the lawn and do the landscaping and, and, you know, maintain that. I'll get a pool company to maintain the pool. But, you know, there's just always something in a big property like that. So I don't know. I don't know. But another interesting thing that relates to that and our discussion with our guest today is First American, Right? They're out with a new report that talks about how two factors have reshaped us housing affordability. And I'm looking at this Housing Wire article that talks about their report, and it says, First American attributes August. And remember, look at these are little micro samples. A month does not a market make. A month does not a market make. But it is a trend. And in my newsletter, my Financial Freedom Report newsletter, the last issue, I just chronicled this and I gave out a copy to all of our attendees at the Profits in Paradise event. And I remember during one of my talks over the weekend, I asked everybody to pull the newsletter out of their. Their goodie bag and look at one of my high five metrics. And one of those metrics was not the housing affordability directly, but the median mortgage payment. So month over month, in my report, in my newsletter, month over month, the median mortgage payment, don't have it in front of me, but I think I reported that it declined by, I think, $26. So in other words, if you got a mortgage the month before I published the newsletter, or you got it the following month, the month I reported the data, your mortgage payment declined by $26. So do you see how significant the interest rate is in housing affordability? It's hugely significant. Remember, 1% in interest rate equals about 10% in price. 1% equals 10%, 10% equals 1%. Look at it either way. But that's kind of a metric that you can hang your hat on. Okay, so this article says in August, home prices fell. Now, remember, these have the cyclical markets that are falling, but the linear markets are doing the opposite. But anyway, the Index is always weighted more toward the cyclical markets. That's about 75% of the case Shiller index. Totally misleading. When you have 400 markets and you look at only 20 in the case Shiller and 75% of those are cyclical, they're the high flying markets that we don't care about. We don't really want to invest in those markets. Obviously they fell by 1.3%, declining 5.9% year over year. So these big markets are really suffering right now. New York, Louisiana, you know, even the Seattle market is softening. I mean, Vancouver, although it's not part of the stats because it's not in the country, but it's a, it's a good barometer. Absolute epic disaster. You know, you see these high end markets are just fallen apart. Okay, they are, but the little bread and butter markets that we like to invest in, those things are really strong. They have significant inventory shortages. And you know, it's kind of the tail of two markets. Right. But here's what the article says, which is interesting, right? According to First Americans data, unadjusted home prices. Now, they don't say unadjusted what I think they mean not adjusted for inflation. Okay. Unadjusted home prices sit 8.3% above the housing boom peak. So we know when the peak was, right? Right before the Great Recession, we had the peak. So we're talking over 10 years ago. Right. Whereas consumer buying power rose by 2.5% between July and August. So we saw rates decline, meaning buying power increases obviously increasing 14.8% year over year. Wow. So these interest rates and the slight decline in housing prices when you look at the overall national market, which is meaningless because if you want to look at the average temperature that the weather, you know. Do you want to know the average temperature of the United States between Anchorage, Alaska and Miami, Florida?

Right.

Who cares what the average is? It doesn't even matter because it's just too much of a span. And I remember as I mentioned on the podcast, several months ago when we had that massive cold streak and Chicago was literally minus 50, I woke up in Florida and I thought of one of our staff in Chicago, Brittany, who's worked with us for the past 12 years or so. You've heard Brittany on the podcast over the years, I thought the temperature where Brittany is and where I am is exactly 100 degrees. 100 degrees Fahrenheit difference in temperature. Whoa. Can you imagine? That's what they're trying to tell us with home prices. What a farce. Just meaningless stats when you look at the national market. But whatever, whatever, whatever. Okay, let's move on. Do you like my impersonation there? Yada yada yada. This means when consumer house buying power is factored in, home prices are actually 42% below their 2006 peak. Did you hear me?

Whoa.

Listen to that again. Let me repeat. I shall read it again. This means when consumer house buying power is factored in, home prices are actually 42% below. That means less than under. Yes, 42% below their 2006 peak and 18.6% below the prices from January 2000. That's a year before 911 during the dot com bubble as it was bursting prior to 911 and before the huge, huge run up that was caused by the Fed massively reducing interest rates post 9 11. That led to. Well, it wasn't the only thing that led to it, but that led to the Great Recession ultimately and the mortgage meltdown throughout the year. The dynamic duel of low mortgage rates and rising household income have transformed the nation's housing affordability, said First American chief economist Mark Fleming in 2019. Falling mortgage rates helped create a housing market that behaved very different than the housing market in the second half of 2018. Mortgage rates began their descent in December of 2018 and have continued to fall through August. Okay. Which is just a couple months ago. Significantly influencing affordability, said Fleming. According to RHPI, the 0.85% drop in mortgage rates from January 2019 to August 2019 increased affordability by. You ready for this, people? I think you can tell when I'm reading and when I'm just adding my own thoughts, right? I hope you can tell. Okay, the ready for this is me. Okay?

The more.

The more boring stuff is the article. Now you know the difference. Okay? From January 2019 through August 2019, increased affordability by. Here goes. Drumroll. 9.7%. Wow. Wow, wow. So in eight months, housing affordability increased by 9.7%. Yowza. That is significant. Obviously it did not say yowza in the article. Fleming said this translates to a $40,200 improvement in house buying power in just eight months. That means people can afford 40,000 bucks more in home price in eight months, folks. This is unbelievable. Are you listening to me? Are you listening to me? Are you ready to buy more properties? Are you listening? I hope you're listening and I hope you're buying more properties. Go to jason hartman.com click on the properties tab. Call your investment counselor, find. Fill out any of the web forms on Our website. If you were on the property tour last Friday, buy some properties. I know you already did, and you're thinking, jason, I already bought some properties on that tour. Well, buy some more. Okay. Because you just got a $40,000 discount. Congratulations. Well, depends on the property price, obviously, but you get the idea. You get the idea. As rates have fallen in 2019, the economy has continued to perform well, also resulting in a tight labor market and wage growth. Wage growth pushes household incomes upward, which were 1.5% higher in August compared with January, said Fleming. The growth in household income increased consumer buying power by 1.5%, pushing house buying power up an additional $5,600. So wait a second, Mark Fleming, are you telling us that the interest rate component and the price, the slight price decline component of those crazy linear markets mostly gave us an extra $40,200, but our incomes also went up, giving us another $5,600? So all told, we can buy, like $46,000 more in house now? That's what you're telling us? Is that what you're telling us? Okay. I think so. According to Fleming, this has combated the impact of rising house prices or rising house price appreciation on housing affordability throughout 2019. Indeed, affordability reached its highest point since January 2018, says Fleming, focusing on nominal house price changes alone as an indication of. Of changing affordability. Even though the relationship. This is key. The relationship between nominal house price growth and income growth overlooks what matters more to potential buyers. Surging home buying power driven by the dynamic duel of mortgage rates and income growth. And we all know from experience, you buy what you can afford to pay per month. How many times have I told you that, folks? People don't buy houses on a price. They buy them on a payment. Go to Jason hartman.com, click on the Properties tab. Make sure you are subscribing to our Property Cast podcast, where we will email you. Performas on Properties will not email you. They will come in your podcast feed printed Performas on a regular basis. My great idea. Watch my competitors steal that Great idea. Okay, so go to whatever podcast platform you use, type Jason Hartman Property Cast, and make sure you're subscribing to that as well. Without further ado, let's get to our guest. We're running late. We might have to split this into two parts. That'll be up to our producer, Adam. If we do, then we'll have part two tomorrow.

It's my pleasure to welcome Jeff Flom. He is president of futurecast, a marketing consultancy that specializes in millennial trends. He's dubbed as the millennial marketing guy. But don't worry, folks, we're going to talk about Gen Z. I know we talked a lot about millennials over the years, but Gen Z is the new up and coming generation. What are they like, what impact will they have on the economy? That all remains to be seen. The Oldest Gen Z' er is about 23 years old today, so let's dive into this topic. Also, Jeff's newest book is the Purpose how to Unlock New Ways of Doing Business. Jeff, welcome. How are you?

I'm doing terrific. Thanks for having me.

Where are you located?

I live in Kansas City and sometimes at 38,000ft, since I travel frequently.

Frequent flyer. Yeah, like that's how I feel too. So Gen Z, the youngest are about 10 years old and the oldest is about 23. Would that be correct?

Yeah, I think that's close.

Okay, so that would make the youngest millennial now about 24, and I believe the oldest millennial somewhere around 39. Would that be about right? I mean, these are fuzzy numbers because everybody, demographers sort of give them different breakpoints, but is that, yeah, this millennial.

Could be anywhere from 39 to about 42, depending on birth year cut off yet.

Damn, those millennials are getting old. They're not kids anymore. Right. So tell us a little bit about Generation Z, and I guess maybe after Gen Z, we're going to go back to Generation A or something. And by the way, for interest of disclosure, I'm a Gen Xer. Okay, so what is Gen Z like? Do we even know yet? They're the first generation to be completely 100% immersed in technology their entire life. Now, Millennial was mostly immersed in it, but not completely, right?

Oh, probably Millennial was half and half, depending on whether they're the younger part of the cohort or the older part of the cohort who still grew up with access to rotary dial phones. Online technology. Gen Z, you know, is a cohort of, depending on the birth year cutoffs you use, between about 72 and 90 million individuals. And I think the important thing to understand is they are not millennials to the second power. And I wrote about this in my book Marketing to Gen Z. They are fairly different from Millennials in some substantive ways. For example, they are much more like Gen X and baby Boomers in terms of work hard for your money, and what you might call old school values. But their digital, social and mobile behavior is way more advanced even than Millennials because they had it their Whole life, as you pointed out. So there's sort of a fork in the road where you might say they're old souls in very young bodies.

Okay, so that was interesting what you just said before you go on. And I know there's more, but you said that they have like an old fashioned work ethic.

Did I hear you right?

Yeah, they're old souls in young bodies. They're, you know, they're digital, social, mobile to the bone. But they believe in hard work, they believe in making money and saving for the future.

And yeah, contrast that with millennials then.

Millennials have been criticized as being, you know, flaky over entitled. Would that be the contrast? Is this generation has the pendulum swung the other way?

Or maybe it's an unfair characterization of millennials. Fire away.

First of all, I wouldn't believe all the myths I've heard about millennials. They're not all broke, unemployed, living in their parents basements among a collection of trophies that they've never earned. The fastest growing cohort making $100,000 or more in the United States is millennials, often who have children at this point. Right. I mean, there are 10,000 babies being born every day and they're almost all millennial moms. So I do think it's important that we move past the myths we heard about millennials. And what I would say also is the important thing to understand about Gen Z is they're not just absolute buying power and all that, but their influence on trends. So I might be a Gen Xer, just like you, but if I'm going to buy technology, I might get input from a 20 year old son or daughter or a co worker. I might get my fashion cues from someone who's younger. Or food trends and health trends. It's important to understand that they have about a two and a half times more likely to be the early adopter of all of the new trends we're looking at. And so the things that we see with people who are 45 and 55 year old, you know, who are mobile, pay and all these other things that starts with a younger person, that kind of transfers with a younger person. And so paying attention to the clues that we get from young people can be important even if they're not the center of the bullseye of who we think about right this moment.

Okay, But I'd really like to contrast the millennial versus the Gen Z as much as possible, in every way possible, because I think that helps people understand. Look, we understand things by comparison. So when you said that they had this sort of old fashioned work ethic. I asked for the contrast to millennials. What do millennials have? And I know certainly you know, millennials are growing up and et cetera, et cetera, and there's myths and unfair criticisms, I get it.

But just give us that contrast if you would like.

If we were looking at a table and on one side you had Millennial and on the other column you had Gen Z. Gen Y, Gen Z. And you know, what would those differences be?

Take us through some of those.

So there are a number of differences that are important. For example, millennials grew up sharing everything in social media, perhaps a bit naively thinking it was okay to put anything and everything out there. Gen Z is not naive about social media. They will not share information with brands unless they think the quid pro quo for their data is, is to their advantage in terms of what they might receive from the brand and an important and they have to trust the brand. So the truth of the matter is millennials were less cautious for whatever reasons. Perhaps again because this was the first generation exposed to it. Gen Z, very different. Millennials had huge amount of angst around the environment, and the environment still a major topic today. Gen Z's biggest topic is probably around equality. So it's not that they don't care about the environment, it's just not their number one topic, at least when we've done research studies to look at it. Millennials were given a bit of a bad rap about being lazy. And look, there were some millennials who came of age during a recession and had trouble finding work. So they were all living in their parents basements and lazy. Gen Z's coming of age, the economy is robust, unemployment is very low, and Gen Z is future focused and they're going to work hard for their money and they're competitive. Millennials were known for being collaborative. Gen Z will be known for being competitive. I don't want to say being cutthroat, but competition is part of their DNA.

Right? So millennials more competitive than Gen Z. Yeah. Okay. Okay. Interesting, interesting. Okay, good. So if we want to rent a house or sell a house to a millennial versus a Gen Z, er, what are we going to do as the landlord or the seller of that property? I mean, are we going to appeal to them differently?

Probably you would. I mean a Gen Z, we're talking about someone who's 21, 22, 23. So by and large at this point they probably haven't formed families. And what we found in our research is behavior change does not change typically based on marital status, but rather on presence of child in the household. So they're largely going to not have children in the household. So at this point they're going to be interested in things like what's around me and the type of, quote, neighborhood they're buying into, which might need to have restaurants, amenities, public transportation, bike lanes and things of that nature to be high appeal to them. I think if I were looking at someone a little older, that might be different because they might have a child in the household and then the things that would be of high appeal would be different.

Right? Yeah, yeah.

You know, you know what?

That wasn't a good question. Let me rephrase that question. If they're at the same life stage, like, you know, when, when the millennial or when the gen Z hits 30 years old now, you know, most millennials have passed that 30 year old mark already or they're about to.

What are they going to be like?

And I know you have to make a little bit of a prediction to answer that question, but say they're apples to apples. Life stage, but different belief systems, they come from a different context. Right. Maybe that's a better way to ask that question. Would you agree?

Yeah, yeah, for sure. And I think the thing to understand is the fractional ownership trend. Housing is probably of modest interest after I have kids, but high interest before. And so if I am young and don't have kids, I think that I want to try to minimize my expense associated with housing because as a gen zer, I'm focused on my financial future and I want to save and invest. If I don't have college debt, and if I have college debt, I want to eliminate it. And college debt's definitely a major angst point for Gen Z. So I'm trying to get the amenities I want at the most reasonable cost. Amenities could include everything from a place to live that has not just wi fi, but the ability to be the sort of well connected home to how I want to be able to entertain myself with things that are in proximity. The average Gen Zer doesn't really give a ton of thought right now to ownership because even if they don't have college debt, they're likely more focused on starting to build assets. And historically that might have meant owning a home and building equity in a home. That is not something that's part of the story for most Gen zers.

Yeah, yeah. So that's really interesting.

And millennials, I mean, there's such, there's such a big cohort. So of course they're moving into the home buying market, but on a, like a per capita basis in comparison to, you know, previous generations, I would say that that dream doesn't live for them as much as it did to prior generations, that American dream of home ownership. And of course, they saw their parents get burned in the housing market during their very formative years, a lot of them. So, you know, that has something to say about it. What do you say to that? And then in terms of levels of frugality and planning for the future versus live for today ethic, which generation goes either way? But first, the first question. I know, it's a double question. So homeownership, American dream. Yeah.

It's not only a great question, it's an insight. And whether you intended or not, a lot of what is learned is when I come of age, what I see. And so if I came of age during a housing crisis, then that is part of what I take with me into the future. And so I think when we talk about generations, they're not monolithic cohorts. It's rather very specific. If millennials came of age in 2009 and had trouble finding a job, that's very different than a millennial coming age in 2012 and having no trouble finding a job. So even within that same cohort, that coming of age is an important. So whether you intend it or not, I think it's important for people to pay close attention to that. As I move sort of further, I think it's important to understand that Gen Z is future focused, and their markers in the generation suggest that they're more about trying to balance saving for the future and enjoying today versus sort of the rap that was on Millennials is sort of, they're all about today. And so I think we'll see a more balanced approach and a more disciplined approach and a more quote, conservative approach to fiscal matters from this code from Gen Z.

Yes, more so. But, you know, millennials, I found them to be pretty frugal, haven't you? I mean, they're not like big spenders. You know, it's not like the 80s.

Yeah, yeah. So here's the other thing to note, and I think this is important for both, and this is a commonality versus a divergent thing, and that is millennials. And are the ultimate day traders. And many people think they're disloyal, and that's a mistake. They're discerning. They trade up and they trade down. If they want to pay a premium for a coffee, they pay a Premium. If they don't think your brand is very strong, they trade down to private label. And so you can go to any grocery store in this country and find a cart filled with brands and private label because they trade up for the brands they care about. They trade down in categories where the brands are weak or they don't care about the category.

Okay, so there you.

You talked about. Well, I wanted to get back to the, like, the cause marketing angle, you know, the companies they believe in. But go ahead, finish the answer to the other question.

Yeah, so the point of the matter is they're very discerning consumer. And why? In part because they've had a tremendous access to so much information from the palm of their hand, and they're more easily able to aggregate that information than you or I because they grew up doing it. And so they check brands out and check products out, and they can literally be in an Uber figuring out which restaurant would be best as they're entering a new city for the first time and feel confident about their choice.

Okay, okay, good. Good.

Because they know how to tap into that network. Right. Whereas I'm like, yeah, whatever.

Thanks for listening today. We will have part two on tomorrow's episode. Until tomorrow. 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, hartmanmedia.com 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 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.