1986 FBF: Ethics and Public Policy with John Stapleford - Senior Economist for Moody’s Economy.com

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Welcome to Creating wealth show number 125. This is your host, Jason Hartman. Thanks for joining me today and we have a great interview on today's show. A senior economist with Moody's economy.com John Stapleford will be joining us in just a moment here and the interview was long so we're going to split it up onto two shows and the second part will not be the subsequent show. We will actually skip a show before we play part two of this interview. I just wanted to let you know that for planning reasons we needed to do it that way. Anyway, I think you'll really enjoy the talk with him. Make sure you join us for our event on November 14th. We have the Creating wealth in Today's Economy boot camp and we have some guest speakers flying in for that. That's going to be fantastic event. We're going to talk about investing in real estate with your IR IRA. So if you have a qualified plan like an IRA, a 401k, a SEP IRA, you can convert that self directed and you can invest in real estate, you can finance properties within the plan, you can pay cash for them, you can produce a lot of income and there's a big thing coming up next year in 2010 that you are really going to want to know about. This is a sort of a seismic shift in the way that's working. So if you have a pension plan, you need to talk to one of our investment counselors and also join us on November 14th. 14th for our guest speaker who's going to be talking on that subject at creating wealth in today's economy here in Costa Mesa, California. Okay, I wanted to start off a little different today with a horror story. And I hear about these stories a couple of times every single week. Not a week goes by where I don't hear about some sort of problem, someone who went down the wrong path, someone who got themselves into trouble on a real estate deal. I hear about them all the time with stock deals and partnership type deals and we've talked about those, but this one's on a real estate deal and it's one of our clients, but they went and did something with someone else, another broker, and got themselves in a little bit of trouble. And Karam, you've heard him on the show before, one of our senior investment counselors here was telling me about it today and I said, you know, Karam, why don't we talk about this on the show so other people can avoid the same mistake. There's a famous old quote, experience is the best teacher. The problem is that you've got to have the experience before you get the lesson. And that experience is usually pretty expensive. So that's what we want to do through education here on the show and with our other programs is educate you so you can learn from other people's experiences and avoid mistakes. Karam, welcome.

Thank you, Jason.

Good to have you here today. It's been a while since you've been on.

Yes.

Good. Well, tell us what happened with this client.

Well, it's not pleasant news. This client of mine who had been with us for last three years and called me about a month ago and said, I have this problem that I don't know how to solve. And I went to a few people and nobody seems like they know how to solve it. So can you help me with this? So I said, okay, let's hear it. And he was referred. One of the brokers in the business, the thing nowadays is happening is there are so many crazy things happening in the market. Everybody is saying, you know, this is the best time to purchase. Yes, that is true.

It's true. Depending on where and how. Yes.

And what you do, and especially in real estate, once you make a mistake to correct that mistake, it takes few months and few thousand dollars out of your pocket to correct that. And this client of mine, the broker recommended that he buys in Flint, Michigan. I said, what make you think Flint, Michigan is a good deal? He says, well, I paid only $25,000. I said, well, I can get you for $2,000 for that matter.

You know, in Michigan, Karam, I just got a comment on that because I was networking with one of the groups that I'm involved in on the Internet and they put up a post and said, Michigan foreclosures, $25,000, 22 houses. And I said, was that the price each or for all of the houses? And she replied back, that's all of them.

That's like $1,000 a piece.

I know, you know, folks, sometimes no matter how cheap it is, it's still not a good deal. Some of these, in some of these really blighted areas, I mean, you can buy them for a dollar. They just want you to pay the property taxes and maintain them. So just because it's low price doesn't mean it's a good deal. Now, occasionally there's a low price deal that is a good deal. But you've really got to vet this stuff. There's just more to it than meets the eye. And that's why you have us here at Platinum Properties Investor Network to help you do that. I've been doing this for 24 years. And with our combined experience with Karam, myself, the other investment counselors here, and all the experts, we're always talking. We really bring you a wealth of knowledge that will help you avoid these mistakes. But go ahead with a story.

Remember, Jason, you had been, this is like three, four years ago. You had been saying, don't take the California brain to all these markets, right? So 100,000 is cheap, 25,000 is even cheaper. You know, how can you go wrong with the 25,000? Well, if the house is, you know, they purchase it for $2,000 and sell you for $25,000 in a not so good neighborhood, then you are in trouble. So this client purchased the property for $25,000. Then he had to pay property tax, some 14 or $1,800 property tax. And come to find out, the seller went out of business. And the seller had recommended a property management company who would find the tenant for his house. And they went out of business. Now he doesn't know what to do. He doesn't know anybody in Flint. And he calls around and nobody responds to him. And so I said, okay, let's do it this way. You know, I'll find you the property management company. He says, oh, I'll be so glad to pay you. I said, no, this is part of. You have been our client. And once you are our client, we help you in any which way we can. Even though you didn't purchase from us. Even if a client brings us a deal that they have not purchased and they want us to evaluate, they are going to purchase through somebody else. We are so glad to evaluate for you. You always want a second opinion, third opinion, third party. You always want to even platinum property investor network. You want to check us out by talking to other people. You know how credible we are, right? You can talk to our past clients who have purchased number of properties. How are we in dealing?

And I think Karam, you know, that's the comfort level people get when they come to our events. They see our office, we have a real office. We've been in business 12 years. I've been in the business for 24 years now. By the way, folks, I just renewed my real estate license. What a joke.

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.

Do you know how easy the questions are on that test? I couldn't believe it. I had to take the test, you know, every four years for your continuing education. And I just gotta mention this is why there's so many quacks out there in our business is one of the reasons. One of the questions, Karam, I don't know if I even told you this. One of the questions on the test, I had to take six little mini tests to renew my license. One of the questions, I kid you not, was true or false. The IRS has their own website. Can you imagine? That is a test question to pass to get your, to renew your real estate license.

You can ask the question if you kinda got it.

Yeah, I know, it's amazing. But anyway, back to the point because I do digress. But what I want to say about that is that when people come to our events, they meet a lot of our clients that are here. They're coming to an event again, they're in the process of purchasing properties. They may have purchased properties three years ago from us, four years ago from us. And you know, folks, we're the real deal. We're here for you. We stick with you. I think we don't toot our own horn enough about that because we hear it on an individual basis all the time from our clients. And so we're tooting our horn a little bit today, folks. So you know, really, you gotta understand, hey, today's Friday. Anyway, go ahead.

So I called around property management companies in Flint, Michigan and Started interviewing and I found this one property management company that sounds very professional. And they said we'll check it out. While I was on the phone they checked that particular address. And they said this address is red tagged. I said what do you mean by that? They said red tag, red tag.

Okay.

Either it has the property itself is in trouble or it is not maintained. So city come in and put the red tag. And so it shows on the Internet that it is. So she said I'll find out and I'll call you and let you know. So I called my client and client is aware of it. Now we have three way calls, three way emailing and found out that the property was not maintained. And that is the reason. And they went in, they checked it out. Property has to brought to rent ready, meaning 5 to $7,000 in repair work.

It's needed, which is not necessarily a big deal. Especially if the house has a market value, say the investor is buying it for 60,000 or $80,000. $7,000 worth of work is a little less than 10%. But that would push the real after what the ARV, the after repair value possibly up to 110, $120,000. So it's well worth it. But in this case these are just blighted areas. Nobody wants to live there. The population is declining. It's a lost cause.

Even we don't know. We will find a tenant who will pay you the rent. So two choices, fix it, find the tenant, put them in and live with it. Or sell the property. And selling the property, we don't know what he will get. Maybe he will have to put some from his pocket. He will take a loss and repair cost itself is uncertain. We are dealing with so many uncertainty here. But he has no choice but to move forward with the repair. So that's what we are doing at. This is the stage we are at. So folks, what we want to convey to you today is do your due diligence on anybody. Like I mentioned, even on us. Check before you buy the property. Once you buy the properties in certain markets, especially markets that is losing population, population is not increasing.

Those markets pretty much don't work. I mean, you know, there might be an exception someday, but I haven't found one of those markets that really works yet.

Our service is available to you if you're buying. If you are in the planning stage right now, buying through somebody check with us, we'll give you our honest opinion, then you can proceed. You can have a third party opinion before you purchase.

That's good. That's a good point. And you know, our coaching clients, they bring deals to us. We evaluate them. If you are not a client yet, you're welcome to just talk to one of our investment counselors, email over a deal you're working on and we'll give you an honest, objective opinion about it. It may be in one of our markets, it may be in another market. We like all of the markets we're recommending at any given time, otherwise we wouldn't recommend them. But you know, there are some other markets that we actually like that we're not in, because we can't be everywhere. And we want to be only in markets that we have the capacity to service. So take advantage of that. The other thing I should say, take advantage of our rental coordination service. If you are a cl. Amazing to me. We have clients that don't even use the service. It's free, free for life. So if you need assistance at any time with properties you purchase through us, you need help with rental coordination. Sarah here, who you've heard from on the show before, does our rental coordination and she will help you by doing backup advertising and promotion online, working a little bit with your property manager just to kind of back up the services that they offer. It doesn't hurt. There's no charge for it. When we put ads on the Internet, we pay for those ads. This is a free service. There's no reason you shouldn't take advantage of it anyway. Avoid the horror stories. Don't have a bad experience. Check with us first. Get an evaluation of the deal. And sometimes if it's really cheap, there's a reason for that. Thank you, Karam, for sharing that story.

Thank you. I want to say come meet with us one on one. Come and attend our seminar. You will know what we do, listen to our podcast and then go from there.

Yeah, we'll look forward to hopefully seeing you listen you listeners on the 14th of November here in Costa Mesa. And now let's go to part one of the interview with Moody's senior economist from Moody's economy dot com. I think you'll find this very interesting. It was a fascinating discussion that lasted 75 minutes. So we're going to cut this into two parts and part two will not be on the next show because we have another show we need to do first. The part two will be on a future show real soon here. Let's listen in.

Let's welcome John Stapleford to the show. He's a senior economist@moody's economy.com and comes to us from are you from Pennsylvania today?

Yes.

Fantastic. He is also a professor emeritus of economic development at Eastern University and former director of the University of Delaware's Bureau of Economic Research. John holds a PhD in Urban and regional economics from the University of Delaware and a master's degree from the University of Southern Illinois. John, welcome to the show.

Thank you, Jason. Glad to be here.

It's great to have you on. Talk to us a little bit. The outlook from Moody's economy.com if you would.

Well, I think we're if you look at the most recent scenario from the President's budget advisor and the Office of Management and Budget, we're tracking along pretty similarly. We see the turning point. Turning point in output will occur sometime before the end of this year, but the turning points in employment and income and some of the other areas of the economy won't occur until next year. And then as they're projecting, once you pass the turning point, because this has been such a long and steep recession, it's going to take a good long while to get back up to the levels of activity that you had before the recession.

So many are hailing that we're in a recovery mode now. If you turn on cnbc, they're cheering the new comeback in the Dow and so forth and the different markets. What are your thoughts?

Well, I'm glad the Dow's coming back because it means if I did want to retire, I could.

Yeah, there's some signs that little shoots of grass are breaking through the dry ground. I think it's going to take longer than some of the optimists might think. But when you look at things like the unemployment rate, we think the unemployment rate is still going to go up and hit over 10% at the peak level in the United States in any of these economic indicators for your listeners, just so they're absolutely clear on the all the things you read about the economy are based on sample data. That means that around any of these data points, whether it's an unemployment rate or the growth rate in GDP or consumer confidence, it's based on sample data and it has a confidence interval around it. So month to month changes really don't mean much. You really need to look at change over three or four months. And then in addition, if you're looking at something like, let's say the unemployment rate, you need to look at four or five other labor markets characteristics to really get the full picture, like what's happening with initial claims for unemployment insurance, what's happening to the number of discouraged workers, What's Happening to the number of people who are working part time for economic reasons. So it's an important thing to keep in mind. You know, the fact that the unemployment rate dropped from 9.5% to 9.4% between June and July in the United States. It really is insignificant. And in fact, what had happened was the labor force declined because as the discouraged workers, the population of discouraged workers increased. And so the total number of people who are unemployed fell, but not because they found jobs, it's because they just dropped out of the labor force.

Right. And I know that the discouraged worker part of that plan that fell off that was changed the way they count that statistic under Clinton, I believe, where if it's over one year, you're no longer counted. So someone could be very seriously unemployed becoming absolutely destitute and they're not counted as unemployed. Is that.

That's a really good observation. And I'd have to go back and look at the current definition, but I would be aghast to think that politicians would manipulate data to make themselves look better. This takes me aback, of course.

That's a sarcastic comment, for sure.

Oh, God, no. No. I mean, absolutely not. As you get older, you more and more realize how disposable politicians are.

Fair enough. I'm going to agree with you on that one for sure. So the other thing that I've always been very concerned about when you look at unemployment rates is the underemployed. And the joke in California, which is sort of the subprime mortgage capital of the country, is that the mortgage broker who used to be making $40,000 a month is now working at Starbucks and delivering your pizza. There's no real way to tally the underemployed, is there?

Well, there is, and the way I do it, but when I look at metropolitan areas or states, I look at wages and personal income. And wages, of course, are a part of personal income. And this whole thing is complicated not only by the underemployment that you refer to, but by these furloughs. There's many people who are getting two week furloughs, which amounts to like a 4% pay cut. So they're in the unemployment rate. They don't show up because they're still, quote, employed. But in fact, they show up in the wage bill. In other words, the wage component of personal income starts growing a lot more slowly than it had been in previous years, which affects disposable income, which affects consumption, which affects retail trade and automobile sales and so forth. So to me, a More accurate way of tracking things is wages. And the other part of it, Jason, that people don't realize is if you're working at Macy's or large retail store and you're working 15 hours a week in the unemployment data, you're counted as employed.

Right.

In other words, they don't adjust jobs to full time equivalent. And so that's another reason I tend to lean towards wages. Like retail typically is around 12% of employment, but it's only about 7% or 6% of total wages in any particular area.

Yeah, and just not to harp on the unemployment statistic here, but you know, the other one that's always concerned me is the fact that people are comparing today to the Great Depression and they're saying things like during the Great Depression, unemployment got up to 25% at the worst point and today it's much lower. So things really aren't that bad. I agree that in many ways they're not that bad. However, I'd also like to just take a look at the concept of the independent contractor, the sort of free agent, the freelancer, whether it be in the real estate or mortgage business, big industries like that. Or it'd be, you know, the graphic designer who works out of their house and is just doing contract work here and there. But they'd really much rather have a real corporate job and have what I would consider are full employment. Running a real estate business. Myself for the past 12 years, I've seen independent contractors that make very little or no money for long stretches of time on commission only, yet they're not counted as unemployed.

Sure. Now the proportion of employed folks in the United States who are self employed has actually been relatively stable over the last five years. It has shifted from agriculture over into lots of other things, you know, into the services area. But you're right. And then how much do you like paying the FICA for both yourself and for yourself as an employer?

Right.

Two times giving up 13% of your money just right off the bat. Well, that's pretty fair. Yeah, no, I know, you make a good point. And I guess I would say as well, we have built into our economy today things that didn't exist back in 1929, 1930, like the unemployment insurance that are. Countercyclical. Unemployment insurance is one. But there's food stamps. There's just a whole series of things that help to stabilize the economy that weren't around before. And one other aspect of this, you know, we had talked about wages and personal income transfer payments, which is Social Security, Medicare, and then Some other things, Medicaid too has gone from around 12% of personal income 15 years ago. It's up to close to 18% of personal income or a little bit over today across the United States. Well, one aspect of that is it smooths out the business cycle. That money, regardless whether people are unemployed or employed or whatever, that money is still flowing out and it's flowing out to all the states. The downside of it is I guess it's reasonable to question how long can you just transfer money from one group to another without killing the economy. But nevertheless, the whole transfer payment system wasn't around 60, 70 years ago.

Right. And the takeaway I'd like listeners to get from my comment in the comparison of unemployment to the Great Depression is that back then, which you alluded to, but I just want to make it clear we really didn't have all the independent contractors. People had more traditional industrial era jobs at that time.

Right, right. And I'm not an expert on the data, but I find it very hard to believe that the data that we have today is in any way comparable to what they had then. I'm sure they were just getting started on tracking all these things. And so. So now another factor in here, Jason, and there's lots of factors you could talk about, but is married women in the labor force, and married women in the labor force just started accelerating in the 1970s and hit an all time high a few years ago that really wasn't a major factor back in the 1930s. And so one of the questions is if somebody is unemployed, are they the primary wage earner in the household or are they a secondary wage earner? And if they're a secondary wage earner, it's still hurting, but it's not as serious as a primary wage earner losing both their income, you know, their earnings and their benefit package. So a lot of confounding factors that make it difficult to, in my mind, to make a comparison.

Sure, yeah, that's a very good point. I remember looking through William Bennett's book, the leading index of cultural educator, Cultural indicators. Sorry, not educators. And one of the interesting points in there, as I recall, and this was years ago I was looking at it, is that both the husband and wife had to be working to support the household as you got into the 70s and 80s because the tax burden increased so much, whereas before the tax burden was much lower and other costs were lower too. It's sort of hard to make sense of that. I mean, you're right. I don't know what to think of that or take away from that.

Well, I mean, one factor in there because the. I've looked in pretty close detail at the black family and the black family. The labor force participation rate for black males used to be equal to white males. And the black family up through 1950 was still mostly married couple families. And the black out of wedlock birth rate is now up. Around 70% of all births are out of wedlock. Which means, which doesn't bode well for the portion of black children are going to grow up in married coupled families. And you know, there's two factors they're driving that. One of is the Great Society programs, which, you know, really took the steam out of the role of the black male and the importance of being in the labor market. So the black male labor force participation rate has plummeted with that. And then in addition, over this last at least 30 years, as we talked about, black males have been competing against married white females coming into the labor market. So they've been hit from two sides. And there is a third factor which of course is that the pool of marriageable black males is very low compared to marriageable white males. In order to single employed full time because more black men have been killed, they have a higher mortality rate. In addition, they have a lower labor force participation rate. There's more discouraged workers that you had mentioned previously and there's more that are incarcerated. So you take all those things together and you end up with not a complete breakdown, but a really rapid loss of the proportion of black children in married coupled families. And all the research literature, whether it's liberals or conservatives doing the research, says growing up in a single parent family is not the greatest thing for children.

Thank you for listening to the Creating wealth show. This is Jason Hartman, your host and we appreciate you following the show. We have many, many episodes, hundreds of episodes, and some of the older episodes have been archived and placed in our members section and that applies to this one. So we include a sample that's about 25 minutes long. And then for the rest of the show you can go to our members section@jasonhartman.com Many of the other shows are still in their full length complete version. However, some of the shows like this one are in our members section where you can hear the show in its entirety. And again, you just need to go to jasonhartman.com and you can get the full show there in the members section plus a whole bunch of other great members benefits and resources, whether it be documents, forms, content tracks, articles, other video and audio content. Just a great resource, so be sure to join as a member@jasonhartman.com and thanks again for listening to the Creating Wealth Show.

This show is produced by the Hartman Media Company. All rights reserve. For distribution or publication rights and media interviews, please visit www.hartmanmedia.com or email mediaartmanmedia.com Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties, Investor Network and Ink exclusively.