1785 FBF: Rising Labor Costs, Oversupply in Apartments & Economic Stats to Know

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Welcome to this week's edition of Flashback Friday. Your opportunity to get some good review by listening to episodes from the past that Jason has hand picked to help you today in the present and propel you into the future. Enjoy.

I started investing in real estate to supplement our retirement for the cash flow process. I currently own 10 properties and an additional 10 with my husband. So 20 total. We found the Creating Wealth Show Jason's Hartman through my husband going on the Internet and looking around for something like this.

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 1089. 1089. This is your host, Jason Hartman. Thank you so much for joining me today. I am very grateful to have you listening to the show. Got a lot of nice feedback on our Wednesday show just before Thanksgiving that episode about grateful. So I hope you enjoyed that. Thanks for your nice comments, appreciate that. So as our predicted, you know, as I talk about the value of real estate investing, when you buy an income property, you're not really buying what you think, right? You're buying multiple components, at least two major components. One the land and the other the structure, the house or the apartment complex sitting on that land. And as I've said, I like to invest in packaged commodities. But when they're put into the real estate wrapper, they take on very special characteristics, don't they? They take on all those ideal, remember that acronym, IDEAL I D, E, A, L components that make an income property investment. And that just becomes a beautiful thing. But one of the commodities, not just the glass, the steel, the lumber, the concrete, the petroleum products, the copper wire, et cetera, not just that. One of the very important commodities of is what? It's labor. The most expensive commodity of them all. The most expensive commodity of them all. And by the way, when I was at lunch today in Sacramento with my aunt and my cousin, my real estate mogul aunt, we were at a restaurant for lunch today. The food was excellent and we're at this nice little restaurant and once again, I was reminded of the real inflation rate, the one that isn't measured, right? So a little tangent here for a moment, but I think you'll be with me on this. So do you notice how almost everything nowadays is self service? Or at least a large part of it is self service, right? This is not measured in the inflation rate. All of these new restaurants, you basically serve yourself, right? Here's what we did at this very nice cafe. We waited in line to order our food. No one came to our table, no one waited on us. We waited in line to order our food, then we paid for the food at the register. And then of course, they expect a tip. And have you noticed how these tips are changing, by the way? It used to be, you know, if service was bad, you'd give 10, maybe 12% tip. If it was good, acceptable, you'd give 15%. And if it was great, you'd give 18, 20 or maybe even 22%. But now the suggested tip on all these iPads that you check out on, right, it starts at 18% and goes to 25%. I mean, that's another sign of inflation, right? But here you don't even get any service yet you're expected to leave a tip, right? And this is an example. And by the way, I'm not picking on servers because I think many of them are in the working poor category, sadly. So I'm just pointing out the overall impact on our lives and economy. And inflation, real inflation, that is not measured. So you put a number on your table and they do one thing, there is one service provided. They do bring the food to the table. Of course, when they bring it to the table, you don't have any silverware, you don't have any salt and pepper. There's nothing on the table at all. So you're expected to get up and get that yourself. If the person who brings it to the table is nice, they'll get it for you. But completely self service, I mean, look at Carl's Jr they deliver your food to the table also. At least they used to. I haven't been there in a while, thankfully. And so this is not measured, right? The food prices go up, but the do it yourself component, the fact that you're not getting served, I mean, have you noticed that you go into these stores anymore. And they're like ghost towns. You can't find anybody to direct you or answer a question in a store anymore. There's no people. We stayed at a hotel in San Diego a couple of weeks ago, and I got up a little early. I'm an early riser. Hey, early to bed, early to rise makes a man healthy, wealthy and wise, right? So I try to follow that quote, be in harmony with nature. I'm up a little early and literally I'm walking through this hotel. There is not a single employee. There is nobody. There's nobody at the front desk, there's nobody at the coffee shop, there's nobody at the restaurant. There's nobody there. These stores, these businesses, they don't have any labor. The labor is so expensive. And of course, with these higher minimum wage laws, it's making it even tougher for the businesses. So this is not measured. You're getting a lot less service than you used to get. And if you don't believe me, like I say, you've got to watch old movies and old TV shows. And by the way, my aunt and cousin, we went to one of those last night. We went and saw Maria by Callis. Now, I didn't know who that was. I'm not the most cultured person, I will be the first to admit. My mom, my aunt love opera and they love all the, you know, the fine arts and stuff, right? So anyway, we go to this movie. It's about this famous opera singer, Maria Callas, right. Probably a lot of you know who that is. It was kind of a biography of her life. And as the cameras were rolling and they kind of retouched a lot of these, this old film and so forth. She was very famous in the, what, the 50s, 60s and 70s. And you can see in the scenes of any old TV show, of any old movie, there's people, there's staff, there's help. You're being waited on. Nowadays everything's self service. Yet no one has calculated that in to the real price of something. Look, to adjust for the inflation rate, they make the bag of potato chips smaller. Maybe they raised the price too, but you're getting less. You know, you don't have a travel agent anymore, you're managing your own travel, right? So on and so forth. Everything is self service, not considered. Okay, so let's look at multifamily development apartment buildings.

Welcome to this week's edition of Flashback Friday. Your opportunity to get some good review by listening to episodes from the past that Jason has hand picked to help you today in the present and propel you into the future. Enjoy.

I've got an article here on Trep T R E P P saying increasing labor cost is squeezing the multifamily development pipeline. Now as you know, the rental market has become somewhat saturated in the multifamily apartment area. However, this is not true in the lower end rental properties. Rental demand is still quite high, but very healthy market for landlords, tough market with constrained supply for tenants in the vast majority of cases. And then in the overall for sale market of properties, the higher end properties in the higher end markets, you know, that compose about 75% of the case Shiller index, those are really showing signs of weakness. I mean times, they are a changing. Okay, there's no question about it. But you've got to peel back the onion, you've got to do segmentation of markets, of property types and so forth to really know what's going on. Because these macro statements of course are just way too generic and way too general. But in this article about labor, I mean just look at what is going on here. And this is a very important commodity and as part of the cost of a property. So this impacts single family homeowners, multifamily homeowners or apartment owners, anybody in the field. And it's good for you if you already own, but it shows how this will drive up cost and continue to drive up cost. So check this out. Okay. The sector here, which includes building, construction, heavy engineering, civil engineering and specialty trades. You know, all of the people that build a house or an apartment complex, right. Had 7.3 million workers as of October. 7.3 million people working in that field. That number was up about 30,000 from the month before. Right. And it's near the pre recession peak of 7.5 million. A lot of people in these trades, right? No question about it, A lot of people. And by the way, just have to point out that who's doing those dirty difficult jobs? I mean listen, I would say doing construction, picking up trash, working on oil drilling platforms, those are pretty dirty jobs. I would not want to do those jobs. Guess who's doing them? Men. Yes, males. Okay, so a little appreciation because there is obviously a huge war on men and you know, they get paid fairly well for doing this stuff. These are, you know, mostly low education requirement jobs and the average construction workers wages is just over $29 per hour. Okay, just over 29 bucks an hour. Right. So compare this to an office job where you know, someone can go in and have coffee in the morning and Socialize with co workers and so forth, and do administrative work that pays 15 or $20 an hour. And you see why you got to pay people more to do these dirty, crappy, lonely jobs. And that's just the way it works, right? That's the way the market works. Supply and demand, okay? Although the low unemployment rate and increasing wage growth are indicators of a healthy and growing economy, apartment developers, now here's what I was alluding to earlier. Apartment developers are getting pinched as strong demand for workers continues to outpace the supply of workers. But look at this. They're starting to see a real oversupply in this marketplace. Thankfully, we, most of us listening. Now listen, I own two apartment buildings. Well, one's a big complex and one's a little building, right? And the rest of my portfolio, single family homes and a mobile home park, that's what I own. And most of you listening are pretty much single family home investors. And I was just a single family home investor for many, many years. The vast majority of my investing career from age 20 until what, maybe six, seven years ago. Right now we're seeing an oversupply in this market, right, because you've seen all of these apartments constructed. They've added about 260,000 units, okay, apartment units to the country's inventory last year, right? And about another 255,000 units, almost the same number will be added by the end of 2018. Okay? So this supply is getting dangerous and it's going to move in favor of tenants. It's not going to be good for apartment owners. Now the vast majority of this, when they talk about these statistics are, are institutional apartment buildings, right? They're big institutional apartment owners. You know, they might be a high rise, they might be a garden style apartment building with, you know, two, three, four stories, a stick built type of thing. So the point is oversupply definitely upon us in the apartment community. Thankfully, this doesn't really matter too much to us in the single family home world. Yeah, around the margins. You know, we might lose a tenant or two occasionally, but it's pretty rare. You know, if you've got someone with kids and so forth, they want to live in a single family home. So that's the vast majority of what we do as investors and what most of you are listening for. But if you're in the apartment world, be careful. Now most people listening are, you know, not in the institutional class a type apartment stuff that has been just overbuilt or is on the verge of being very overbuilt. You're in the class B and C stuff, the stuff that you can buy, get good prices on and get good rates of return, good cap rates and so forth. Okay, now let's talk about banking for just a moment and I want to play for you a short article from the Wall Street Journal. It's an op ed just a few minutes long because it's got some pretty interesting insights into banking. And of course you will have my commentary in just a moment.

Bed section of the Wall Street Journal Trump's Obama Style Bank Heist by the Editorial Board bank robbers in the movies routinely wear masks to hide their identities. So maybe Justice Department lawyers should have worn Barack Obama and former Attorney General Loretta lynch masks this month when they announced their latest bank stick up.

So they're obviously being critical here. But that just reminded me of a funny quote that I must share with you again. And the quote is have a gun, you can rob a bank. Have a bank, you can rob the world. Just that's a pretty good quote and it's pretty darn accurate too. Anyway, continuing would have been fitting given.

The 202 page lawsuit filed in New York federal court that accuses the Swiss bank UBS of misleading investors about the risks of mortgage backed securities before the financial panic of 2008. The case rests on an avant garde legal interpretation from the Obama administration and ubs, to its credit, has decided to fight. The lawsuit says UBS knew that many of the mortgages it securitized didn't meet lending criteria and that the bank didn't perform the due diligence it promised investors. The Government quotes a 2006 instant message from a UBS trader who said, our crack due diligence effort is a joke. Other bank employees characterized two pools of loans originated by Countrywide and WMC Mortgage Corp. As a bag of blank and better than little besides leprosy spores. Hardly a good look. But the securities and Exchange Commission closed its investigation of UBS's mortgage backed activities in 2013 without taking action.

So of course when you want to issue mortgages nowadays, you create securities and securitize them. And of course, during the, well, not during, but before the Great Recession leading up to it, we saw a whole bunch of fraud in that field. We saw these institutions selling the same mortgage many, many times over. There were no mortgages, there were no trustees. It was just air. It was fake. The whole thing was fake. And the quality of these loans was absolutely appalling. It was absolutely disgusting. So what happened? Inevitably they defaulted, of course. And the janitor who was making $45,000 a year that was able to qualify for that $900,000 home somehow couldn't make the payments when the rates finally adjusted. So that's what happened of course. The investors got burned and what happened? The banks got bailed out. Isn't that just dandy?

Now the Justice Department wants a second bite under an expansive reading of the 1989 Financial Institutions Reform, Recovery and Enforcement Act FIRIA passed after the savings and loan crisis. FIRIA penalizes those who harm a federally insured financial institution. But the Obama administration decided to use FIRIA against financial institutions. This has resulted in farcical claims. Barclays was accused of defrauding those financial naifs at Citibank, even while justice claimed that Citibank perpetrated the same scheme. Wells Fargo was accused of committing fraud that harmed Wells Fargo under a self affecting interpretation of firia. If that's true, then does Wells deserve compensation from Wells? The danger is that if the Obama administration's broad reading of FIRIA prevails, the Justice Department could act as a shadow securities regulator. Prosecutors are enamored with FIRIA because it has a low burden of proof and 10 year statute of limitations as opposed to the five year stricture on the SEC.

So in other words, that gives the government a massive amount of latitude to come after people or companies a decade later. I mean, I mean can you imagine if the statute of limitations is that long on any business deal? You know, usually it's maybe four years or so depending on the state, maybe five years in some or even longer in others. But you know, 10 years is pretty long. And this of course affects builders a lot too because a lot of these construction defects, they're liable for them for 10 years, 10 whole years. So there's a lot of risk. There is.

Limits haven't been fully tested in court. Since most banks have preferred to sign billion dollar settlements to make these cases go away. The Swiss appear to be made of stronger stuff. Similar to its FIRIA claims against other banks. Justice accuses UBS of misleading the institutions that bought its securities, such as the hayseeds at Merrill Lynch. The government also says UBS hurt liar loan factories like IndyMac because the bank's securitization machine primed the pump for these loans, creating demand.

So they basically created these securities, sold them off and then there was pressure because everybody was buying the securities, the mortgage backed securities, right, the MBSs. And then it says go through the system. There was no one putting any brakes on this. Everything was the accelerator. Everything was the accelerator. No One checking, no one putting on the brakes, hey, we can sell more of these. So make more stupid liars loans, who cares? You know, investors want to buy these, these mortgage backed securities, so it's just going to create more and more supply of liars loans. Remember, two types of marketing, there's the push or the pull marketing, right? You can work on the supply side or the demand side. You can push something through the system and, and get people to buy it. Or you can pull it through the system by saying, hey, people want to buy this stuff, so give me some more of these crappy fake loans.

These liars loans is a strange claim and not merely because we're supposed to feel bad for IndyMac. Everywhere else in the case files, the government paints UBS as a victim of shops like IndyMac. Sloppy mortgage originators, the lawsuit says, frequently pressured UBS to accept poor diligence results and defective loans under the threat of ending their business relationships. So who was really harming who? UBS hasn't yet filed a formal legal response, but in a statement last week, it argued that it lost billions during the mortgage crash, including nearly $900 on the specific deals cited by the government's complaint. This fact alone negates any inference that UBS engaged in and intentional fraud that was flatly against its own economic interest. The bank adds that for the Justice Department to win under Firia, the Feds must prove that the alleged fraud is what caused investors losses. This theory flies in the face of the history of the housing crisis. UBS says the historic market wide downturn is commonly understood to be the result of a range of factors that created a housing bubble, including low interest rates and government policy. A deeper question is why the Trump.

Administration is continuing, of course, with government policy. They're talking about, you know, the Community Reinvestment act, right? The CRA that started, I believe, way back under Carter in the late 70s. But Clinton really expanded it dramatically, continuing.

Mr. Obama's blame the banks campaign. Maybe it's inattention, given that the Justice Department's top personnel have lately been, well, distracted. In any case, political appointees should now take notice. Having the Justice Department oversee banks isn't on President Trump's agenda. Bernie Sanders may think the business model of Wall street is fraud, but Republican administrations are supposed to know better.

Well, there you go. I just thought that was a little interesting snippet to share. And in life, things are so much more complicated than they might appear on the surface. I mean, litigation, regulation, it makes for very strange bedfellows, doesn't it? It just. There's all sorts of untended consequences, unintended consequences that come out of this stuff. Definitely, definitely. Okay, a couple updates on the economy. Concerns over the turmoil with Brexit. Right. You know about Brexit, right. Britain leaving the eu, which I think is fantastic, by the way. There's lots of problems with the eu, but it caused investors to seek safe haven in bonds. And what did that do? Remember, when someone buys a bond, it creates more supply of money, so that pushes mortgage rates down because the other end of a loan is just a bond. Right. So there you go. So that helped mortgage rates improve this last week. Existing home sales rose slightly in October. That meant home sales were up from a six month streak of declines. Now, of course, that's. Remember, 75% of that market, of course, is Case Shiller. Well, all of its Case Shiller. Right. But 75 of the market is the cyclical markets, right. That are overpriced. And it's about time those markets calm down. They are way beyond fundamental value. And there we need a correction. We definitely need a correction in those markets. Okay. The median house price rose 3.8% to $255,400. Home building, however, actually rose in October with a strong rebound in multi family housing projects. We just talked about that a moment ago. And single family home construction fell a little bit for the last two months. So, you know, again, very small sample, but a sample nonetheless. Home builder sentiment posted the biggest drop, the biggest drop in four and a half years. Rates are increasing, inventory is tight and increased cost of construction are of great concerns to home builders. Jobless claims rose to a four month high last week. So again, you know, it's too early to tell with all of this stuff, but there are some little chinks going on. You're seeing these little sort of chinks in the economy. Right. We don't know what they'll add up to. We don't know if they'll make a trend yet. But they're out there and they need to be watched. Okay. Underlying trend remained consistent with a very tight labor market. And of course, you know what the stock market is doing. Suffered losses last week. Both saw their 2018 gains erased. Okay. There's some speculation that the economy could be cooling, of course, and we have talked about that, definitely. Okay, so let me close with a couple of quick thoughts. Well, they won't be that quick. Couple of quick thoughts on gratitude. My aunt and I went to church this morning and it was just this nice little church right around the corner. From her home here in Sacramento. And of course, as would be fitting with Thanksgiving, this is the one time of year when we have a holiday built around the concept of being thankful, of being grateful, of gratitude, which I think is a fundamental component required, literally required for success in life. Many years ago, I told you, of course, that I, at age 17, discovered these four great mentors. But a few years later, after I discovered Earl Nightingale, Dennis Whateley, Jim Rohn, and Zig Ziglar, who changed my life completely, I discovered another one, and that was the late Og Mandino. All of these guys have passed on, except for one. Dennis Whateley is the only one living still, and I had him on the show, episode number 150. OG Mandino wrote this great book that is probably out of print. I've checked it a couple times. If you can find it, I would recommend that you buy it because it's a very short little book called Mission Success. It is excellent. It's just a great story. And in it he has this poem called the Seeds of Success. And I just thought I would share it with you. I did this several years ago, but I thought I would share it with you today, and I will just end with that rather than reading it to you myself. You can hear the professional version, and it's from the late, great Augmandino. Get his books, get his materials. They are just fantastic. And so here is Mission Success. And we will close with this, and I'll see you on the next episode.

God, I thank you for this day. I know I have not accomplished as yet all you expect of me. And if that is your reason for bathing me in the fresh dew of another dawn, I am most grateful. I am prepared, prepared at last to make you proud of me. I will forget yesterday with all its trials and tribulations, aggravations and setbacks, angers and frustrations. The past is already a dream from which I can neither retrieve a single word nor erase any foolish deeds. I will resolve, however, that if I have injured anyone yesterday through my thoughtlessness, I will not let the this day sunset before I make amends. And nothing I do today will be of greater importance. I will not fret the future. My success and happiness does not depend on straining to see what lurks dimly on the horizon, but to do this day what lies clearly at hand. I will treasure this day, for it is all I have. I know that its rushing hours cannot be accumulated or stored like precious grain for future use. I will live as all good actors do when they are on Stage only in the moment. I cannot perform at my best today by regretting my previous acts, mistakes, or worrying about the scene to come.

I will embrace today's difficult tasks, take off my coat and make dust in the world. I will remember that the busier I am, the less harm I am apt to suffer. The tastier will be my food, the sweeter my sleep, and the better satisfied I will be with my place in the world. I will free myself today from slavery to the clock and calendar. Although I will plan this day in order to conserve my steps and energy, I will begin to measure my life in deeds, not years, in thoughts, not seasons, in feelings, not figures on a dial. I will remain aware of how little it takes to make this a happy day. Never will I pursue happiness because it is not a goal, just a byproduct. And there is no happiness in having or getting, only in giving. I will run from no danger I might encounter today because I am certain that nothing will happen to me that I am not equipped to handle with your help. Just as any gem is polished by friction, I am certain to become more valuable through this day's adversities. And if you close one door, you always open another for me. I will live this day as if it were Christmas. I will be a giver of gifts and deliver to my enemies the gift of forgiveness, my opponents, tolerance, my friends, a smile, my children, a good example. And every, every gift will be wrapped with unconditional love. I will waste not even a precious second today in anger or hate or jealousy or selfishness. I know that the seeds I sow I will harvest because every action, good or bad, is always followed by an equal reaction. I will plant only good seeds this day. I will treat today as a priceless violin. One may draw harmony from it and another discord, yet no one will blame the instrument. Life is the same, and if I play it correctly, it will give forth beauty. But if I play it ignorantly, it will produce ugliness. I will condition myself to look on every problem I encounter today as no more than a pebble in my shoe. I remember the pain so harsh I could hardly walk and recall my surprise when I removed my shoe and found only a grain of sand.

I will work, convinced that nothing great was ever achieved, without enthusiasm to do anything today that is truly worth doing. I must not stand back, shivering and thinking of the cold and danger, but jump in with gusto and scramble through as well as I can. I will face the world with goals set for this day, but they will be attainable ones, not the vague impossible variety declared by those who make a career of failure. I realize that you always try me with a little first to see what I would do with a lot. I will never hide my talents. If I am silent, I am forgotten. If I do not advance, I will fall back. If I walk away from any challenge today, my self esteem will be forever scarred and if I cease to grow even a little, I will become smaller. I reject the stationary position because it is always the beginning of the end. I will keep a smile on my face and in my heart even when it hurts. Today I know that the world is a looking glass and gives back to me the reflection of my own soul. Now I understand the secret of correcting the attitude of others and that is to correct my own. I will turn away from any temptation today that might cause me to break my word or lose my self respect. I am positive that the only thing I possess more valuable than my life is my honor. I will work this day with all my strength, content in the knowledge that life does not consist of wallowing in the past, appearing anxiously at the future. It is a palm willing to contemplate the great number of painful steps by which one arrives at a truth so old, so obvious, and so frequently expressed, whatever it offers. Little or much, my life is now. I will pause whenever I am feeling sorry for myself today and remember that this is the only day I have and I must play it to the fullest. What my pat may signify in the the great hole I may not recognize, but I am here to play it and now is the time I will count this day a separate life. I will remember that those who have fewest regrets are those who take each moment as it comes. For all that it is worth, this is my day. These are my seeds. Thank you God for this precious garden of time.

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