1994: Real Estate Market Crash Imminent? What You Need to Know Before You Invest!

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My name is Brandon Cook.

This is my fourth Meet the Masters seminar.

All these markets that Jason and his network endorses are great markets. We're getting better.

Higher rents, prices are going up right now.

But with financing terms as good as.

They are, they're still real great deals.

And all have been through Jason's network.

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 whose own property 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.

Greetings from the beautiful Galapagos Islands in Ecuador. As you know, if you've been listening to the last few episodes, I've been here for just over a week now. I'm hanging out with a bunch of young startup founders from the Thiel Fellowship. That's the Peter Thiel Fellowship where he pays these kids $100,000 to drop out of college and start their business. So it's been an interesting time masterminding with all of these young folks and seeing what they're doing and, and some of the stuff they're doing with their companies and their businesses are truly, truly amazing. But if you would like to follow my trip and see some great videos and photo, follow me on Instagram. Jason Hartman1 that's Jason Hartmann N1, the number not spelled out. Jason Hartman1 on Instagram. Beware of fake accounts. There are many. And look at this. Yesterday I posted these videos of the sea lions that come right up to us on the beach. It's totally amazing. You can literally touch them, but you're not supposed to. So I did not touch them because apparently what happens is the human smell rubs off on them and then their fellow sea lions don't want to hang out with them because they smell like humans. So there you go. So they say not to touch them anyway. Super cool. So do follow me on Instagram Jason Hartman1 and you can see a lot of these cool stuff from my adventures. This is my 89th country. Country number 89, Ecuador. So anyway, you'll see a lot more on Instagram. Check that out when you have a chance. Okay, so today we've got a great show for you. First off, I want to start by talking about where you live. As I predicted very early in the pandemic, literally mid February of the start of COVID I predicted that there would be this mass migration away from cities to suburbia and also to rural areas. But not to, not to as much of an extent. But let's talk about that. You know, I noticed that when I left California just over 10 years ago, my wealth started to grow a lot faster because I wasn't spending so much on housing and I certainly wasn't spending so much on taxes and all of the other very high expenses that go with living in a high priced state, a left leaning state. So this map, if you're watching on video and watching the beautiful scenery I have here in the Galapagos on video, if you're just listening on the podcast, do check out the YouTube channel. By the way, we are making a big effort to get these videos up a lot faster on YouTube. So you can see my graphs and my charts that you hear about on the podcast. But this map shows you the different tax rates in each state. California is number 49. It is, it is one of the worst states to live in as far as taxation. New York is number 50. And you can see around the country all of these different ones. But guess what's number one? Florida. Number seven is Texas. Texas used to be really, really super desirable. It still is, very desirable, relatively speaking. But Florida ranks numeral uno. Okay, numero uno is Florida. Now it's just really amazing when you stop paying the government so much darn money, how much more quickly your wealth can grow without the taxation. And remember, we love the most historically proven asset class in the entire world, income property. And we love the most tax favored asset class in America, income, property. So there's a lot of great strategies if you do live in these expensive states. Check out our prior episodes. Join our Empowered Investor Pro group to really learn more about how you can optimize your tax strategy and save on life's single largest expense taxation. That's the single largest expense for most people. All right, the Wall Street Journal, the Doomsayers talking about how the market is crashing. Just not happening, folks. At least not yet. You know, there will be more changes some days, but the latest news from the Crash bros, if you will, is that new home building is going to crash and there's an oversupply of new homes and that new home builder stocks, builder stock are going to be way, way down. And the complete opposite has happened. Look at this. This is the Wall Street Journal. Today, new home builders are doing great, right in terms of the residential market stock index up 17% so far this year. The complete opposite of what all the doomsayers said would happen with the new home builders and the resale market extremely strong in most good areas because there's just such a complete shortage of supply. Just over 400,000 homes for sale in the country. That's literally about half of what it was in 2019. Pre Covid. It's about one third of what it needs to be to be considered a normal market. That's just normal. Not a bad market. That's just a normal market. We have one third of the inventory. We need to have a normal supply demand ratio in the marketplace. But office space, the complete opposite. It's really, really startling what's going on. Around 30% of the office space in downtown Los Angeles was available for lease at the end of last year. That is the highest figure in any major US Office market. It's bad news for Los Angeles. Owner operator Brookfield Asset Management just talks about how that company shares are down more than 80%. So again, as I said, dating back to 2004, invest in housing. Housing is the thing they can't outsource. They can't open a call center in India or the Philippines, right? Lessening the need for office space. They can't outsource the manufacturing to China or Sri Lanka, any of these big manufacturing countries, because everybody in the US still needs a place to live, right? And that's why housing is the most important thing. And here you see that 9.6% is the number for seasonally adjusted increase in single family home sales in March from the prior month, according to the Commerce Department. Now, just before we get to the episode today, which is going to be an interview I did recently where I'm being interviewed and I think you'll like this. I just wanted to show you these two performas. Now, if you've been to Jason hartman.com and you probably have, and you've looked at our property performers, I wanted to bring you this one first. And this came up on my Facebook memories. Such a good way to keep you honest, right? Facebook memories. This was March 4th of 2014, 2014, almost 10 years ago. And we see here that I was Talking about a property in Georgia that was $86,000. I know, amazing. Only $86,000. Fully rehabbed, fully remodeled, rent ready property. And this property had a projected total return on investment of 5, 0%, 50% annually. Well, guess what? It did better than this. This property performed better than expected, or I should say all of these properties in that general area. Because none of us had any idea that the market would just become so good and that all of these people that got those higher rate mortgages nine years ago, just over nine years ago, would be able to refinance those mortgages and renegotiate the deal many times over. Especially refinancing them in the lowest rates of the COVID era. So unbelievable, right? Now here's a property from today. This is a brand new one we just got. Now this one, of course, it's much more expensive. This is in Florida. This is Citrus Springs, Florida. This is a brand new property, new construction. But guess what? We have a zoom meeting coming up on this. We have a special deal where you can get 4.75% mortgages. Yes, I know. Doesn't that sound unbelievable? We've got some really special financing opportunities, whether it be our 100% financing or our 10 year interest only financing or 4.75% 30 years fixed. Unbelievable, right, that you can pull that off in this market. We've worked out a special deal for you, so check that out. Now this property in Florida has a projected return on investment before tax savings of 25% annually. As I always say, even if it goes only half as well as expected, that's 12.5% annually. 12.5% annually. If it goes half as well as projected, what else are you going to do? What else are you going to do with your money? You think you're going to outperform that in stocks, precious metals, cryptocurrency? What is going to beat income? Property, the most historically proven asset class in the entire world. Even if the property value goes down, you're not selling because you're a yield oriented investor. You invest for yield, not appreciation. If appreciation comes, hey, icing on the cake, fantastic. But look at the projected yield here. It's just nothing short of awesome. Okay, so let's get to the main part of the show today. But before we do that, you know, I'll just take my camera here and I will show you a little bit of the Galapagos Islands. So here is, I'm at a hotel recording this and we've got a little beach down there. And of Course, the ocean and just beautiful scenery here. So more of that? Lots more better than this on my Instagram. Jason Hartman one really got to see the sea lions. That's super cool. Anyway, let's get to the main part of the show today, an interview with me and Jasper Rivers where he's questioning me about the market. And I think you'll enjoy this. So here we go.

So what's happening right now? Let's start with the real estate market. What are you seeing in terms of prices, in terms of sales and everything else?

Yeah, so sales activity is way down in some markets by almost 40%. So realtors, title companies, lenders, escrow companies, you know, all of these related industries to sales volume are definitely feeling the pinch. They are suffering because of that. And there are knock on effects because when people buy properties they also tend to buy furniture and appliances and paint and home improvement and you know, hire contractors and landscaping and all sorts of things. And that's why real estate is such a big, incredibly important part of the economy. And the government will do anything they can, Jasper, to stimulate the real estate market. However, more recently our central bank, the Federal Reserve and other central banks around the world have been trying to cool inflation and they have jacked up interest rates at a historic pace. And that has been a pretty painful prescription for the market. But one of the things that is incredibly important to understand, and this is super important that everybody understand this, there is a huge difference between sales volume and sales prices. I have addressed sales volume so far and that has caused some people to predict that there's going to be some big crash in prices. And these two are sometimes related, but they are not necessarily related. And we can dive in and really look into that today. There's a lot of sort of layers to peel off on that onion, if you will. And I'm happy to go down that path and do that. But we must understand they are not necessarily connected. Sometimes they are, this time they're not so far very connected.

Right, well let's talk about this. Like the interest rate has gone up from zero to what is it, four and a half ish percent.

Yeah, that's not the mortgage rate. But yes, you know, when we, when we look at the, the, the rates that sort of determine mortgage rates. But I think it's more important to talk about mortgage rates because that's what you know, everybody really feels. And so, you know, we saw mortgage rates that were literally at a 5,000 year low. I kid you not. There is data on interest rates going back 5,000 years. Okay. Great book recommendation. The book is called the first 5,000 years by the late David Graeber. It's an excellent read. I would highly recommend it. So during the COVID era, we saw incredible efforts by the Federal Reserve and other central banks around the world to stimulate the economy by basically making money free. And the cost of money went to zero for all intents and purposes. Why do I say that? Because when you look at the inflation rate versus the cost of money rate, the cost to borrow it, you have to take those two things into account. And so if the inflation rate Is, for example, 5% and the interest rate on a mortgage is 3%, then you're getting paid 2% to borrow the money because you're borrowing below the rate of inflation. So that's a negative interest rate you're getting paid to borrow, essentially. That's an incredible deal. It made a lot of people, including myself, very rich during the COVID era. Now that time is actually still with us. I know a lot of people might think, are you kidding me, Jason? No, it's not still with us because now rates are much higher. No, it is still with us, actually, because the stated inflation rate is, you know, it keeps moving around. So I'll just use a sort of a reasonable estimation of the consumer price index at 8%. Okay, let's go with 8%. As the CPI, you know, bumps up and down each month, there's a new report, but let's go with 8%. You can borrow on a mortgage at a little less than 6%. Okay, so you're still getting paid to borrow money. We still have negative interest rates. And there is a school of thought that as long as we have negative interest rates, it will be impossible to tame inflation. And the Federal Reserve, their target inflation rate is 2%. Now, Powell, Jerome Powell during the COVID era, said he didn't care about 2% anymore. It was out the window. Okay? And what the Fed is trying to do, because we live in a managed economy, unfortunately, I don't like this. I think it's. I don't really think there should be a central bank. I think the market forces should set the cost of money and the cost of borrowing. But we have what we have, and it's not likely to change anytime soon. So these central planners that run the economy at the Federal Reserve and the European Central bank and the bank of Japan and all of the central banks around the world, they coordinate, or you could say collude, because they do. And they're basically trying to manage what's called the Phillips curve. And the Phillips Curve is this economic indicator that balances inflation with unemployment. And they want to get to a 2% inflation rate but keep unemployment reasonable as well so that people can get a job. And what they're literally trying to do now they have stated this and you know, this is the problem maybe with central planning, one of many is they are trying to make people unemployed. You know, they keep saying the unemployment rate is too low. We've got to put you out of a job, okay, We've got to make you unemployed to fix the economy. Because when you have very low unemployment and you have wage inflation where salaries keep going up, it is almost impossible to tame the inflation beam when you have that. Because you know, the classic example of inflation is a increased supply of currency units, in our case dollars chasing a limited supply of goods and services. And with the supply chain constraints that we had over the past few years and you know, it caused Chairman Powell to constantly use the word transitory to say inflation is transitory. It's just a result of supply chain issues. And as soon as those bottlene loosen up and the supply chain is healthy again, where goods and services can move through the economy more quickly and around the world more efficiently again, then inflation will go down. Now look, to be fair to Powell, some of that was certainly true. He was not wrong about that completely. But anybody with any degree of common sense would just have to know that when you pump trillions and trillions and trillions of new dollars into any system and you have a limited supply of goods and services, you're going to have inflation because you have more dollars chasing that limited supply. And so all the suppliers are going to raise their prices, obviously. And that's just the way supply and demand works. It's the most fundamental law of economics. So the Fed is in a very difficult spot right now. They have completely fucked this up. I'm just going to use the word okay, because it's punctuation. They have messed up so badly by letting the economy run hot for way too long. They should have raised rates much sooner. They should have tightened the money supplies much sooner, but they didn't. And so now we are all paying for it with increased inflation. Now listen, philosophically, I hate inflation. But from my own personal standpoint and my own personal greed, I love inflation. And for our investors, I love inflation because I teach a strategy called inflation induced debt destruction, which I trademarked many, many years ago. And it is the hidden wealth creator that helps people with their real estate investments create wealth by Basically letting inflation pay off their debt. Debt. And very few people actually understand it or pay attention to it, but it is really an incredibly powerful tool. In addition to all of the other benefits of income, property inflation induced debt destruction is a real bonus for that.

So you mentioned as long as there's a negative interest rate, you're essentially, let's say, let's just take an example. Let's say you get a mortgage at 6% and inflation is 8%. Right?

Right.

You're paying the 6% here, but then your debt shrinks essentially by 8%. Right. So that's why you're saying like we're making money. If you're. And that's. Then I guess we're assuming that our income is going to go up by 8% per year along with inflation. Right. For that to work.

Well, we don't know actually, because we're not concerned about our personal income. In that case, when it applies to an income property, we're concerned about the properties income. Income. Okay? So to get paid 2% to borrow, in a sort of simplified example here, let's assume that you could own a property with no insurance and no property taxes and no maintenance expenses. Now we all know that's impossible, but those expenses aren't really very high. So, you know, it's not a completely out of whack idea to consider that example. If you had a property with no income and no expenses, no insurance, property taxes or maintenance costs, okay? So you had no income and no expenses and you could own a property and get a mortgage. If you could borrow at 6% and inflation was 8%, you would be getting paid 2% to borrow. Now, the one thing we didn't say yet, that it's really important that we say is that the real inflation rate is much higher than the stated inflation rate. The Consumer Price Index, the most widely used measure for inflation, is a complete scam. It's totally manipulated in three major ways. Waiting, substitution and what's called hedonic indexing. Okay, And I can go into that if you want, but suffice it to say it's manipulated. I believe that the real inflation rate is about 15 to 17%. Now, why is there debate about this? Because everybody has their own personal inflation rate because we all spend it differently. Okay. But I would say for most people, the real inflation rate is about 15 to 17% in real life. But let's just go with the government's manipulated down number and call it 8%. Okay? So you would make 2%, you would get paid 2% to borrow in the example I gave you. Now, in real life, though, the property does have expenses and it also hopefully has income and usually the income will vastly outweigh the expenses. So this is a pretty incredible deal for the investor because you will typically make much more income than you have in expenses. And so you will not only make money on inflation induced debt destruction, the negative interest rate, getting paid to borrow, but you'll also make money on the positive cash flow, the tax benefits, the leverage, all of the other benefits of income. Property. Property, right.

So essentially what you're saying is, yes, mortgage rates have gone up, but it's still a good time to get a mortgage and invest into real estate, even at current prices?

Well, that depends. And what does it depend on? Well, it depends on many things. It depends on, number one, do you have a property that can produce income? Okay, that's the first thing. And number two, what type of real estate market are you investing in? There are three major types of markets that I've been talking about for the last 18 years. Linear markets, cyclical markets, and hybrid markets. And they all act very differently. For example, in a country as large and diverse as the United States, there is no such thing as a national real estate market. You know, we all hear the sound bites on TV or, you know, on a podcast or the radio or whatever, you know, where they talk about the housing market. Well, I don't know what the housing market is. I don't know what that means. Does that mean Los Angeles, Miami, Seattle? Does it mean Memphis, Kansas City, Dallas or Austin? It simply is not a thing. There is no national housing market. You just can't say that now in a really small country. Like, I remember my first trip back to Europe as an adult. Rented a car and drove all around Europe on that trip. Drove about 3,000 miles on that trip. And I remember one day myself and my friend drove through Luxembourg, an entire country, and it didn't take very long because it's a small country. Now Luxembourg has a national housing market. The United States does not. Okay, The United States is just too big and too diverse to have a national housing market. So cyclical markets are the markets that get all the attention. There are the expensive northeastern markets, Washington, D.C. new York, Boston, et cetera, the expensive South Florida markets. Where I live, you know, Miami, I live in Palm beach, just north of that. So this, this is all cyclical. There are the expensive west coast markets, San Diego, Louisiana, San Francisco, although San Francisco's had some different problems of late, but still a cyclical market. Seattle, Et cetera. Right. Those are cyclical markets. These are the high flying markets that get all the attention. But the vast majority of the country is a linear market. These are just boring markets that have really good cash flow, they don't have big ups and downs in prices. And they're the best markets in which to invest. And we've been helping investors invest in these markets for 18 years now. So there is a big difference between those markets. The cyclical markets are still, they've been feeling a lot of pain and they've got more to come. In my opinion. They are going to continue to suffer. But there are many ways to slice and dice the real estate market. Right. You know, not only linear cyclical or hybrid market, but price segment within that market. Right. So are you buying, you know, in the high end market, are you buying in the, in the middle, are you buying below the median price in a given market? What, what product type are you buying? Single family. Are you buying new single family, old single family? You know, are you buying condos? Like there's a lot of different things to consider, of course. Right. But linear, cyclical and hybrid. Understanding those three major markets is a really good start.

Okay, that makes sense. I guess. My next question is. So right now, mortgage is 6%, right? Let's say I get a 30 year fix, fixed a mortgage right? Now I buy a property, but now inflation actually goes back down to 2%. Now I'm paying 4%.

Well, the likelihood is with history as our guide, if inflation goes down that much, rates will also go down a whole bunch. Because when inflation cools, there is no longer a reason to have high rates. The reason to have high interest rates is to cool inflation. So those two are correlating indicators. Right? The reason we have high rates now, and historically they're not even that high, but we think they're high because we came off an extreme low. You know, they, they feel high. Right. But they're really not. That high, historically speaking, is because the Fed is trying to increase unemployment and cool the economy. They're doing it. It is happening.

Sure. But if I get a 30 year fixed of 6% and then the inflation goes down, the interest rate might go down as well, but I'm stuck with the 6%.

Well, no you're not. You're going to refinance.

I'm going to refinance. That's right.

Yeah, of course. I mean, look, one of the things I love about income property, I always say income property is the most historically proven asset class in the entire world. Think of it this way way. You know, we've all entered into agreements with people and companies over the years and sometimes the other party breaks the agreement and we call them a lot of bad names, you know, to keep it kind of clean. I'll just call them weasels, okay? These are people you don't want to deal with, people that don't keep their word. They're bad people, right? You don't want to do business with them because they break their agreements. But with income property, the beauty is we get to constantly renegotiate our agreement. Okay? When we buy the property, we agree to one deal, but that's not the forever deal. With stocks, with precious metals, with cryptocurrency. That is the forever deal when you buy it because you have locked in what the deal is, okay? You've locked in a price and the only way you're going to make money is to sell at a higher price with those assets I mentioned. Okay, stocks. One little caveat is you might have a dividend paying stock. You might make a little bit of money off dividends, but it's not going to be much. Okay. With income property though, it's a multidimensional asset class and it's a renegotiable asset class. So we can agree to one deal. Then later, when circumstances change, we can just make a new deal. We can refinance the property, we can improve the property, we can decide to rent it out on different structure. For example, we might buy it as a long term rental and convert it to a short term rental. Or we might convert it to a lease option or rent to own deal and increase our income. That way we might decide, hey, you know, we should really remodel the kitchen. We could do it cheaply and it would really increase the income quite a bit or the value quite a bit. Right. We can refinance and change the mortgage and change the debt stack underneath the the property. Right. So we can always renegotiate a lot of things. Another beautiful thing about that is that income property is one of the very few assets where we can acquire the asset and then later, sometimes very shortly thereafter, even get all of our money back out of the asset, but still own the asset. That's incredible if you think about, you know, that really is an incredible thing. You can't do that with many other things. So it has special multi dimensional characteristics and that's why, that's why it's such a proven asset class.

Can you explain that a little bit more like how that works with like getting Your cash back out?

Yeah, sure. It's just a simple cash out refinance. So we buy the property at one price, we get certain terms on that, that mortgage, and then we refinance the property later and we pull our cash back out of it. But we still own it.

For that to work, does the value of the asset have to go up?

Well, the value has to go up if we want to keep the same loan to value ratio. So if we put 20% down and we finance 80% of it on the purchase, then it needs to go up in value by at least 20% in order to make that deal work. Right. But you know, we might have put more down on the purchase or, you know, it all depends, Right. On how we structured the financing when we bought it. But simplistically, yes, it would have to go up in value if we want the same loan to value ratio in the future.

I've noticed since I was very, very young that investing in a house was a good idea. Just looking at my parents buying a house and then 10 years later looking at how much it was worth, I was like, wow, this is. When I was little, I was thinking, this sounds like, like getting rich while you sleep almost. Right. So I've always been a big believer in investing in real estate. I've owned real estate for 15 years now. But you know, I think there's a lot of like, because the interest rates have gone up so much now, I think a lot of people are hesitant to get into the real estate market. Right. To actually purchase. And it's also with the current interest rate, you need to, you need to put like the mortgage is going to be a higher percentage of your income than it was like, you know, a couple of years ago.

Right.

So is that, is that, you know, going to push prices down, you think, or not?

Well, you're talking about for buyers in the general market.

Yeah.

Or are you talking about yourself?

No, no, just the general market.

The general market. Okay.

General US Markets.

Yeah. This is a great time to look at a couple of charts because I got some really good data for you here. So I'm going to share my screen and I'm going to show you. Before I click share, I am going to show you the most important chart in real estate. Folks, like, pay attention because this is the most important chart you will ever see in real estate. You ready?

Wow. Well, you already built it up here.

I'm building it up because it's a.

Here it is for the listeners you can watch on YouTube or on Spotify. So you can actually see what we're looking at here.

Yeah. And I'll explain the chart. Okay, so what this chart is is basically a chart of the existing mortgages held by tens of millions of homeowners in the United States. Okay. And what it shows us here is that about 25% of all mortgages in the country are below 3%. Below 3%, 285,000 mortgages in the country are below 2%. 4.7 million mortgages are below 2.5%. And 13.1 million are between two and a half and 3%. This is incredible. This has never happened before. This is a first time thing. Okay, now let's go up a little bit. Let's take another percentage point. 65% of all mortgages in the country are below 4% interest. Think about it. If the official inflation rate is 8%, if these people live in the houses and use them as their own personal residence and don't produce any income from the property, they are not only getting a free place to live, but they're also getting paid 4% every year to borrow the money based only on the official rate of inflation. If they're one of the 65% that have a mortgage below 4%, not the people that are doing even better below 3%, but just below 4, okay. They are creating an incredible amount of wealth for themselves. Here's a thing I want you to understand. Well, let me ask you a question about this. Do you own something or have some loved one in your life that is worth more to you than they are to someone else?

I would say yes.

Yeah, everybody would answer yes to that. Because you have something that you own, a collectible item or not that you own them, but a person, like a child or a pet, maybe an animal that you love so much, but you know, a stranger doesn't love them. Right. They're not worth anything to them. They're just another dog or person. You know, it's no big deal. Right. But they're special to you. Right. And so the thing people have to understand is this, this is critically important, critical thing. I'm about to say super important. Certain assets are worth more to the people that own them than they are to the people that might buy them. Why is that important? Because it causes hoarding. And these properties with these low mortgages that are not transferable to a new buyer are worth more to the people that have them than the house. So here's an example. If someone has a house that's worth $500,000 and it has a mortgage at 3% interest. That mortgage is part of the asset. But upon sale, the buyer doesn't get that asset. In fact, the asset evaporates into thin air. So the seller loses the asset, but the buyer won't pay more for that asset because they don't get it. It doesn't transfer. There's something called a due on sale clause, which you know, that the Supreme Court upheld decades ago. So the mortgage does not transfer to the new buy buyer. It's gone. So this causes hoarding. And this is exactly the market we're in right now where so many people, millions and millions of people, have these incredibly cheap mortgages, and they just don't want to part with them. They don't want to sell the properties. And if you want to have a real estate crash that some are predicting, there is one critical ingredient that you must have to have a real estate crash, and that is a massive number of tens of millions of distressed homeowners. We don't have that. In fact, we're not even close to having that. We are so far away from that that we may be the furthest away from that idea that we have ever been in history. Let me tell you one more thing. This chart is the most important chart in real estate. That's up on the screen is showing you the interest rates of existing mortgages. But on my show, I always use the saying, you can't hear the dogs that don't bark. There's a dog here that isn't barking because you don't see it on the screen. And here's the dog. 43% of all homes in the country have no mortgage at all. Those people are pretty unlikely to go into distress because they have no mortgage. These people, 65% of them with mortgages below 4%, they've got an incredible bargain. And another 24% below 3% have an even better bargain. They're very unlikely to encounter any distress. So let's look at the foreclosure rate. Typically at any time, just typically throughout recessions and boom times, of all mortgages existing at any given time, about 1% of all the mortgages will be in some stage of default. Someone is 30 days late on their payment, someone is 60 or 90 days late on their payment, or someone is entered into the foreclosure process where a notice of default has been filed and the lender is getting serious about taking the property back, back. Some are the day before foreclosure, where, you know, the only way to rescue the house is at the courthouse steps. Right. All different stages of default. Typically, about 1% of all mortgages are in some stage of default. Right now, only half a percent of all mortgages are in some stage of default. But wait, there's more, because that doesn't even give you all the information. What's important to understand is, say, for example, we look back at 2008 during the Great Recession. At that time, the default rate increased and the foreclosure rate increased, and times were obviously very difficult. But what was different then, significantly different, is that the ability for that homeowner to get themselves out of the default had evaporated. It just wasn't there. But right now, it's very different. The likelihood of these half a percent, which is half of the normal rate, actually going all the way through to foreclosure is extremely low. Because if they simply put their house up for sale at any reasonable price, it's probably going to sell, sell. Now, the market certainly isn't as hot as it used to be, and sales volume is much lower than it used to be, about 35, 37% in some areas, at the worst areas. Now, in some areas, it's not that bad. And sales volume is chugging along, but it's still lower than before. Okay, so let me give you a metaphor that'll make this really easy to understand the market. And let's use the kitchen sink, okay? Because the kitchen sink is a really good example. Let me show you another chart. This is the chart of current housing inventory, and it shows you now that We've got about 465,000 homes for sale in the United States. Now, back in 2015, when we were in a normal market, not a bad market, just a normal market. I mean, we all remember 2015. It wasn't that long ago, you know, we were. There was a presidential campaign going on, you know, and. And a year later, Trump actually won the election. And we, you know, we all kind of know what happened, just to remember that time, okay? But 2015 was certainly a vibrant, healthy market. We were selling lots of properties back then. I mean, business was quite good. There were about 1.2 million homes for sale in the United States back then. So inventory today is substantially lower than it was back then. Now, when inventory got really low during the COVID era, you know, it got down to about 243,000 at the lowest point. So inventory is definitely higher than it was back then. But compared to what is the question? I mean, that was like a complete anomaly. Okay, that. That isn't even a comparison. So. So here's the typical headline in the sensationalist, soundbite driven, non intellectual news media. Inventory has increased. I mean, inventory is up by almost 200,000 more homes than it was before. Okay, so what? But what they didn't tell you is that it's still less than half of what it is in a healthy market, a normal market. Right. You know, but you, you can spin a headline any way you want, right? But let's look at the kitchen sink, because the kitchen sink is a good way to understand it. So inventory now is, you know, maybe what most people would consider about 40% of normal. Okay. You know, approximately. Okay. So with the kitchen sink you have the faucet. And out of the faucet comes new inventory. Houses coming onto the market, new listings. Okay? That's the new water coming into the sink. And in the sink you have existing inventory. Right? You have the sink filled about 40% of the way. It's not filled to the top. There's not very much inventory. It's filled up about 40% water in the sink and then you have the drain. And the drain represents buyers, the absorption rate properties being sold and taken off the market because they've seen sold. So the drain right now is a little bit plugged up. It's, you know, only about 60% open. Well, a little less than that, maybe 55. It's about half open. Okay. So, you know, if we assume that sales activity nationally is down by about 30%, give or take, it's actually not quite even that bad. But let's just go with 30%. So the drain is 70% open and 30% plugged in. There's 40% of the water in the sink and there is a trickle of water coming out of the faucet. New inventory. Okay, why isn't there more inventory? Well, it's because of the prior chart. These people simply don't want to turn on the faucet. They don't want to sell their houses because they've got those super cheap mortgages. So they're just holding them. And think of how long. You know, I have long said that this is the poison pill the Federal Reserve put into the real estate market now. Poison pill in terms of, if you're a home buyer, it's a poison pill. But if you're a homeowner or an investor, it's actually quite good for you because these people have 28 to 29 years left on these super cheap mortgages. And this will constrain inventory for literally decades to come. These people will not be motivated to sell until they can get a mortgage for less, the same as the same or less than the current mortgage they have. That's always going to be their analysis. So the sink is unlikely to fill up. And even with sales volume being down, inventory is still extremely scarce. One more thing and maybe we'll wrap it up with this. For the first time ever, possibly at least the first time in my multi decade career, we have this dichotomy in the market. On one side we have new homes and builders and on the other side we have resale homes and homeowners. When we looked at the most important chart in real estate, we were looking at homeowners, not builders. Because builders don't have that cheap long term debt on their properties. And during the COVID era when demand was so high, they started to try and ramp up their machine and build more properties. And some of those properties are starting to hit the market and more will continue to hit the market and you will see, well, we're already seeing it, but a good amount of builder motivation and builder incentives where builders want to unload inventory. And so some people say, well that's going to crash the market. No, it's not.

Okay.

Because builders first of all don't have that much inventory in comparison with the overall real estate market. I mean the overall real estate market is about 140 million homes. Builders like what they're going to deliver over the next year or two in terms of new inventory is like a drop of in the bucket. It's very small amount. But they will be motivated to sell those properties because they don't have long term debt. And some of them are being built as build, what's called build for rent. And that number actually right now has exceeded the number of build for sale. And I think that's also a new first. Okay. Because institutional investors want to buy these properties directly from the builders because they have really strong belief in the long term buy and hold rental market. Okay. So you're going to see some softening around the edges of the new home builder inventory. But here's the thing, in terms of our clients and the typical long term buy and hold investors, that doesn't matter very much. Why? Well, because the properties those builders are delivering are, they tend to be more expensive properties. Builders can't make money selling cheap entry level homes, so they don't build them. In fact, they haven't really built them in 14 years. So just show me builders building 250 to $300,000 homes. And you know, there's like hardly any of them. Right. Most of these properties that builders are delivering are more expensive. They're 600,000, $700,000 and they don't make sense as long term rental properties anyway way so that's not really an issue for the long term buy and hold investor because the long term buy and hold investor wants to buy entry level housing. And that's not to any great degree builder inventory. I mean, there's a little bit of it and we sell it to our clients. You know, we have that type of inventory in our network through the empowered investor network, but overall in the broad market, there's very, very little builder inventory in those low price ranges. 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.