1328: Interest Rates, Financial Repression, Housing Affordability & Maker City by Peter Hirshberg

Well, I like real estate just because I like the benefit of being able to have a mortgage pay off real estate over time so that when I retire I have something. I like the fact that it's boring. I want to be able to be entertained and travel and do a lot of things in my retirement. And that boring investment of real estate allows me to do that.

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 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 1328. 1328. And greetings from Puerto Rico.

I am in this beautiful Dorado beach residential area. I wanted to say resort. It's sort of a combo resort and residential area. And I'm with 13 real estate people masterminding today. So today we're having more formal meetings. Yesterday we had very casual meetings. There were just four of us yesterday. Well, I should say four and a half if you include my dog Coco. It's her first time in Puerto Rico.

That pooch, she's quite the jet setter. She's been to 18 countries and if Puerto Rico were still its own country.

This would be number 19. So anyway, yeah, we're masterminding, really sharing some good ideas today. We talked about a lot this morning about how some of these gurus are getting shut down thankfully by the ftc. And there are certainly times when the government can be obviously very unfair and ambitious in doing unjust things to people. But hey, since I know some of these people, I agree with government on this case. So it's been an interesting discussion to kind of hear about that and, and talk about that.

I'm reading two interesting articles today.

One of these articles I'm reading this.

Morning is in the Financial Times and we'll link to it in the show.

Notes and walking in.

Just to give you the exact title. I'm, I'm out by the pool in my friend's Beautiful. Well, I guess you'd call this a mansion you here in Dorado Beach.

It's, it's a really gorgeous home, close to mansion status. I don't know if it's quite. It's like a McMansion. It's not a mansion, but McMansion and beautiful home. So I'm walking into the gym that is outside of the pool area. It's a little standalone gym area, workout area.

Anyway, this Financial Times article we'll link.

To it in the show notes@jason hartman.com.

Is entitled their house is on Fire. Fire. The Pension Crisis Sweeping the World. Now, of course, the pension crisis has many reasons. There are many causes of the pension.

Crisis, not the least of which though.

Affects elderly people on an individual level, but it also affects the pension organizations. And what is that? It is financial repression.

We've talked about that many times on prior episodes. We've had Dan Ammerman talking about that.

On prior episodes extensively. And part of financial repression is low interest rates. And I know on the face of it, everybody thinks, well, low interest rates are great, we can borrow cheap and expand and get lots of leverage. And yes, it has some definite good benefits. But it also really hurts pensioners because.

They just cannot earn a yield on their money. So check this article out.

The subtitle is the Plunge in Interest.

Rates since the financial crisis is wreaking.

Havoc on these funds.

These pension funds.

And it is a problem worldwide.

So very interesting and scary article.

Scary for most people, but not for.

You as real estate investors. Because remember, and I almost hate to say this, but I'm just going to say it because it is true, even if it doesn't sound good. And it doesn't sound good to say this, but I'm going to say it anyway and won't be the first time I've said it.

Economics is a relative game. It is a relative game. And remember, prices and markets adjust based on that relativity. So in other words, if your net worth is $1 million and everybody else, all the other players, the market players.

In the economy, and when I say everybody else, of course that's a figure of speec.

But say many other people are struggling and they have less money to spend, well, what happens? Prices and markets have to adjust to accommodate, to get customers right. This is the old inflation deflation stagnation issue here. So since economics is a relative game, all you need to do is be ahead of the majority of the population.

Hopefully the vast majority of the population.

Interestingly, even though I'm in the 1%.

Or even a little better than the 1%.

Right.

We all heard that term come out in many political elections and the Occupy Wall street movement from several years ago.

I was in favor of the Occupy.

Wall street movement, even though there are many things I disagree with those idiots who were protesting many times.

But conceptually, I mean, Wall street is the modern version of organized crime.

They are ripping off the middle class. There's just no question about it. There are so many examples ad nauseam. We've talked about ad nauseam. We don't need to go into that now.

But the thing is, prices adjust as long as you are ahead. Right? It's like that old funny story. You've all heard it probably about two guys hiking in the woods and suddenly they see a bear. And yes, the bear comes charging toward them.

One is lacing up his tennis shoes.

Friend says to him, hey man, you don't have time to put on your shoes and tighten the laces. We gotta run, the bear's coming. What are you doing? You can't outrun a bear. And he says, I don't have to.

Outrun the bear, I just have to outrun you.

Right? And that's what economics is, okay? It's a relative game. And I know that doesn't sound good.

But it's a fact. It's a fact. Everybody likes to say, well, you know, the pie is big enough to go around.

Well, sure, properly implemented capitalism does expand the pie. The pie gets bigger and more people can get a piece of the pie. But that is a long game and it's a game over which we don't have any control. Hopefully we will elect politicians and have government that encourages capitalism, encourages making the.

Pie bigger, but we don't control that.

Right? So what we've got to do is.

We'Ve got to play the relative game.

We've got to go fast enough so.

We can outrun our friend, not the bear. Nobody's going to outrun the bear. Okay? Okay.

The other article, before we get to.

Part two of our guest today talking about the opportunity zones, is entitled Housing.

In these cities may become unaffordable to by 2028. And it even profiles some cities where housing will be considered unaffordable, quote unquote.

And there are several metrics for that.

Within just two years, or within just three or four years, or five years. And we'll post a link to this article in the show notes@jason hartman.com as well. Why is this one particularly interesting to.

Me and to you?

Well, because many of you that have been investing with me for years, if you started investing with me eight years ago, 10 years ago, even four years ago. You know, maybe you started investing with me 15 years ago. Well, you got some incredible deals on your properties, okay? And you look at these same cities that are now going to be considered, quote, unaffordable, unquote, in the near future. They are places that we have hundreds of clients who've purchased properties. There are the major Texas cities, Dallas, Houston, San Antonio, there, Charlotte, North Carolina, many of these cities. I mean, you guys have been investing in these cities for years with us. Okay? And congratulations, you are now in markets that arguably could be considered hybrid markets. Remember, three types of markets, linear, cyclical, and hybrid. And these have always been these linear, boring markets. And guess what happens? This starts to trickle. It starts to get more and more intense, and it even puts pressure on even more linear markets. So, I don't know, will we look for Memphis to be one of these cities after this round becomes unaffordable? Very, very possible and very, very likely. Because before we saw this trend, everybody thought, well, places like, you know, Los Angeles are unaffordable.

San Francisco, obviously unaffordable.

The expensive Northeastern markets, South Florida, definitely unaffordable markets. Right? But that keeps moving out. It keeps expanding that definition because money.

Remember my water theory of money, And I haven't talked about this one for many, many years, but the water theory.

Of money is this. You've all heard the old saying, water.

Seeks its own level, right?

Water seeks its own level. And what does that mean? Well, if you spill a glass of water on the ground, where will that water go? That water will always flow to the lowest point. It will always flow to the lowest point. And as it flows to the lowest point, it's just like money. Money does the same thing. I mean, maybe you could combine this with the statement I made yesterday and I've made before. Money always goes where it's treated best. The market is pretty efficient because it's a bunch of individual players who are always seeking the best deal. And they're always seeking the place where their money is treated best. So they're seeking the more affordable, affordable markets. And the money pushes out of those expensive cyclical markets. And then it goes to the linear markets. The linear markets become hybrid markets, and then it goes to the next tier of linear markets that was really, really linear, even more than the ones I've just mentioned.

And those start becoming hybrid markets, right?

And then you sort of look back at everything and you say, okay, well, these markets had a little cyclical bout or maybe you know, and you'd call them hybrid, but maybe they'll be linear.

For many years after that because they.

Reach sort of this point of homeostasis, right? The leveling where water seeks its own level. But this always happens, right? It always pushes out. That's the nature of real estate. You could even compare it to the concept of the path of progress real estate development. Right? So all these things are in play. And the markets that we sold cheap little 40 and 50 and 60 and 70 and $80,000 single family homes, even 110, 120, $150,000 single homes, we sold properties like that in these markets. Now the prices, you know, they're 170, 180, 220,000, $240,000. It's amazing. Look, don't wait to buy real estate. Buy real estate and then wait. Just make sure you follow my 10 commandments.

All 21 of them. Yes. You know, I started with 10 and now we're up to 21. So you can find out more about those all@jason hartman.com and in past episodes of the podcast.

Okay, let's get to part two. Continuing from yesterday, talking with the chief architect for the Obama administration of the Opportunity Zone legislation. Again, you know, I don't think there's really much opportunity, quote unquote for you listening here in the opportunity Zones. There are lots of scams. A lot of shysters out there promoting these Opportunity Zone funds.

This is not going to end well, folks. I'm just going to warn you, it's not going to end well.

Hey, see if I'm right in 10 years. See if I made another right prediction. We'll see.

Time will tell, right? Time will tell.

It's still interesting to know about it.

And to think about the big broad macro effects.

So go to jasonhartman.com, check out the properties, contact our investment counselors for help in getting some guidance on building an.

Awesome nationwide real estate portfolio for yourself.

And here is part two, continuing from yesterday. Peter, are you there?

I'm here and standing by. Can you hear me?

Yes, yes. Great to have you on. So when I read the book Makers by Chris Anderson, one of my favorite authors, a few years back, I was really impressed with the future. He talked mostly about the concept of, you know, 3D printing and how that would revolutionize artisan makers and bring a lot of that manufacturing, that sort of small or artisan or even one off manufacturing process back to the US and it would shift back from offshore to the US and how I was looking at all the extensions of that, like small industrial properties, even home based offices that are now just in the information business, maybe being in the manufacturing business in someone's garage or their den, you know, there's just a, you know, kind of almost the form of, of like Etsy where you can manufacture something custom one at a time or in very small batches. You talk in Maker City. Well, the subtitle is A Practical Guide for Reinventing American Cities. And this ties in with the Opportunity zone discussion, right?

It very much does. The concept really here in Maker City was that economic reinvention was probably going to be a bottom up thing. Ideas would flow up from cities as people found what they were good at, as innovators came into those cities, as kind of entrepreneurs, met up with real estate and economic development people, created innovation centers, created local opportunity and likely the future was going to be a bunch of connected ideas and experiments that would then lead to where we're going as opposed to some top down big idea that came from Lyndon Johnson or the New Deal or Washington. And so if you think about kind of big trends that are going on in the world, this trend towards decentralization and real time learning and networks is happening very quickly. As Steve Glitman talked to us in another episode that you did, the whole concept behind opportunity zones is decentralized, local, bottom up community development because that's where you can run lots of experiments where ideas can be prototyped. And this is also a very practical thing because we don't really have top down, huge HUD oriented programs anymore. You could argue that the right never really liked that. And the left is learning that it's actually a lot better to run a lot of these experiments. And by the way, decentralization, you see it in utilities, we want more resilience and local utilities because big grids have brittleness. You see it in the emergence of cryptocurrency because you want more local resilient mechanisms. Well, opportunity Zones as a program is like that. Of course to do a good job you need lots of good local ideas or else you'll get either gentrification or condos. And the concepts behind the Maker City really two big concepts. One from the maker world is this notion that manufacturing can be more customized, that you can actually do things more locally and that can train people and you can learn from it. So there's a whole kind of continuous learning component to it. And there's also this notion of maker that you are actually the maker of the city. You're involved. It doesn't just come from city hall, you have a role you can create, you can prototype, and that engages more people in planning. And some of the most interesting stuff we're seeing in opportunity zones are temporary structures that come up that create value, that local artisans are creating things, they're working with entrepreneurs, that creates value in a part of town that might have been a poor part of town or didn't attract people. And out of that economic development income. So this is a kind of a localist based concept that marries up both with making as a distributed way this economic program and some of the big trends going on.

Yeah, well, you know, I have to be very frank. I'm really quite on the shelf about opportunity zones. I'm not sure it's gonna work. And you know, I say that for many reasons. Number one, I think there are a lot of fraudsters and hype artists out there promoting funds and getting sucker real estate investors into their funds and their deals. But that's not the program's fault. Okay. There's always going to be shysters, right? That's just, you know, part of fallen human nature. Okay. So that's going to exist anywhere. But it seems to me like the way to fix a lot of these problems is really through skills and motivation of the actual people and the workers. And while the opportunity zone may well and probably will at least to an extent improve these areas and make the neighborhoods nicer, I don't know that it's going to improve people's brains or their motivation. You know, it's not just a matter of having the skills to work and be successful in the new economy. You also got to have the motivation. Right? And if they're on the dole and you know what, like, what's the incentive to get off of it? Right? You can probably tell where my politics are. So forgive me, but that's. Don't you think that's sort of the.

Core of the problem? You're absolutely correct. If this was a program that built nice things and didn't lift up communities, figure out a way to do workforce development and kind of build into the community some sense of lifelong learning. Progressive, enroll. All you have would be kind of the continually building of things for communities where people didn't care and they probably.

Couldn'T afford to live in them. So it'd be gentrification problem, Right?

Exactly. Because if you can't lift up incomes and make people part of the middle class, what do you get? More of the same. So this is the essential problem here. So if you get to the core of this, the good news is, oh, it's a lot of private capital, it's an opportunity, it's the possibility of building out the next American frontier that is to willfully think through at a time of technical and economic change, what do we need to do? And we could write that down. I'm going to get that in a moment. Now that's the good news. The bad news is if you build a program and you mostly bring in existing real estate investors that are used to particular kind of IRRs and then they go for kind of the adjacent.

That'S internal rate of return metric success.

On essentially if you go, if you get investors that are used to doing one thing and people putting funds together that want to go build the project with the highest return, you'll get hotels and condos near downtown areas and you'll leave this thing out. So the tantalizing thing here is how could you motivate capital or even put some rules around it, guideline some set of metrics so that you could define and envision and then fund things with significant change. And that's the tension right now. The articles that you read in the New York Times that say what's going on here? Are saying it's just more stuff for the rich on the other side of this and people who are urbanists and trying to bring about change. Our belief is if you can bring in impact capital that actually wants to make long term changes, perhaps augment that with certain philanthropic and charitable things that make some of this stuff more successful, a lot can happen. So for example, a number of foundations, Kresge foundation and Rockefeller Foundation, Milken has been part of this. The Omidyar foundation is part of this. Have looked at could we come up with a set of impact guidelines that people could self report on. And then could charitable foundations guarantee projects or be last money out in a mechanism that could swing things to profitability. And there are projects. For example, there's a project going on in the Midwest right now that's going to buy a big auto parts manufacturer and then also work on building affordable housing in that area. So it's workforce housing for people who are there. There's another project in the Intermountain west which is a large project that's actually, it's a space that attracts a lot of people for particular amusement participating purposes. The people who pay to go there tend to be from cities, but there's a whole community there that has to commute a lot. You can build housing around that. As we've looked at Projects. There's a very interesting thing going on in Fresno that brings all at once a community place where startups can come. Training of the kids of essentially agricultural workers in coding, together with investment in that. So what you're doing is you're bringing together people who understand, say, startup and business culture, the sons and daughters of agricultural workers who might never thought they'd have a good job, but now they're being trained for jobs which exist. And it's creating a culture of possibilities. So those are examples of things that work well. And one of the reasons we created Lighthouse, the project that Steve and I are working on, is how can we bring capital together to do this? And a lot of Bay Area think of tech capital. That's capital gains. It's not just interest in the real estate thing. It wants to build a platform that brings about systemic change. So that's where you'd actually start looking at things like training or apprenticeships or new forms of affordability. There are new economic products you can build where you trade off appreciation rights of housing for access rights. So it looks like rental, but the prices don't go up because you have some ownership in it. And you can do this with fractional ownership and blockchain. So there's a set of new ideas to be deployed. And here's the thing, if no one does these, it'll just be a lousy program. So what there is to do, I think is take people doing innovative stuff, work together, put some capital in it, and prove things we can do.

Okay, I want to, just as we wrap it up, sort of shout out on a couple of bullet points in your table of contents of your book and, you know, whatever strikes you here, just talk about it for a moment. So building a nation of makers, the maker movement and cities. So mostly urban areas here, right? The open ecosystem concept. We talked about workforce development already, but advanced manufacturing and supply chain, what's there? And most of our listeners very interested in real estate investing, so you have a chapter entitled Real Estate matters. Take what you want there.

So one of the first things to point out is, as we all know, economies fundamentally changing. You grow up in a world where you went, you had a job for life and you did that and you had a pension. Well, that's changing quickly and that's disruptive. So from the very earliest stage, training people that they can learn, that they can make, that they can kind of think leanly, that they have a sense for the full cycle of how you create a product, how you might bring it to market, that Sense of thinking prepares people for a more lean, kind of always changing workforce environment. It's a way of thinking that moves us away from 20th century into something that is faster paced and kind of reflects where the economy is going. And so it turns out making and producing and being able to create things completely stimulates that. There's also a component of being an author of your city as well, that is co creating. In San Francisco, when we were redesigning Market street, we turned it into 50 projects that had students and community developers, architects, all doing short term prototypes where you could measure and figure out what's going on that can get translated directly into Opportunity zones. Coplace in San Diego takes parts of town that are poor, such as Chula Vista, where it's basically an impoverished arena. Puts in temporary structures that can then put in local businesses tied in with entrepreneurs. But it creates kind of exciting environments. There's art, there's commerce. People come there that drives up the value which then allows them to go build permanent developments. But now you're bringing the community along and you can make it more affordable. So this is a form of participatory urbanism that's done by the community, not to the community. And that's essential because as you know, if you simply have developers come in doing something to a community with gentrification, there'll be resistance. By making everybody a part of this thing, which is this maker mentality, this place making mentality, it's much more likely to succeed.

Good stuff.

Give out your website, you can find out about our Opportunity Zone work and see how we're actually bringing capital together to bring about change at Lighthouse one. And if you want to read the book Maker City and see how the maker movement and place making can be transformational, take a look at us@makercity.com and on that site you'll see a bunch of videos and examples. You can also download the book and see how this can be transformative.

Fantastic. You know, I want to ask, I didn't ask you this before. Do you run an Opportunity Zone fund? Is that what Lighthouse does or part of what it does?

We built Lighthouse more as a matching mechanism. We kind of thought at the very beginning it would be unlikely to just get a pile of money and have your investors not know what they're investing in. Because our observation is people want to know what projects. So what we're doing is we're creating special purpose funds around each project and we're also trying to talk to a wider form of capital than just real estate capital because we're interested in starting businesses. Don't forget, if you start a business in an opportunity zone, the founders who invest in it and the investors, if it's there for 10 years, it can get huge and you'd never have to pay capital gains. So we're interested in a wider capital type and particular projects as opposed to a single big blind fund.

Right, Right. But the answer is you do run funds then? Multiple funds.

We run multiple funds and we basically create them on a case by case basis for each project. And that's partly because opportunity zones require a fund as an investment mechanism. So we have to synthesize a fund for each project.

Right. And so you're in the business of raising capital for these funds, right?

Yes.

Yeah. Okay. Good. Good stuff. All right, well, hey, thanks for joining us and we appreciate learning more on this from both you and your associate.

Thank you.

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