2038: Why the Single Family Home Market Hasn't Crashed and What's Ahead

This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit hartmanmedia.com I just wanted to say, you know, Jason, I've been following you for a long time. Ten years ago is when I first saw your course. And I'm telling you, the way that things have played out are way better than you projected. For me personally, obviously it's been, you know, a good six years, but now I'm ready to kick it into high gear. As you know, I want to really build a portfolio that's, you know, five or four or five times what I have already. Obviously, you're advantageous, has been fantastic. It's been life changing for me.

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 2038 and thank you for joining me from beautiful Medellin, Colombia. I've been here for several days hanging out with George Gammon and a few other friends. We've been exploring the city. This is my second trip to Colombia, to Medellin and just getting another look at it. It's a beautiful place. Anyway, so we've got our main show today, which is a continuation of our discussion from last week as you hear me talk about the market and the overall picture of. However, I want to go into a couple of things before we get to our main segment today, and that again is mortgage delinquencies that are at their lowest rate since 1979, if you can believe it. Yes, we have not seen a mortgage market this healthy since 1979. That was the last time mortgage delinquencies were this low. So really, it's quite amazing. I mean, for all the crash grows out there predicting that the market would collapse and delinquencies would skyrocket, foreclosures would get out of control, the complete and utter opposite is happening. It hasn't been this good since 1979. Economic conditions are improving, though. Rising delinquency rates for other forms of credit point to early signs of consumer credit stress. And again, I want to stress early signs because again, this is not a big problem in the consumer market in any category yet. However, there are some signs that the auto credit market and other factors will put some stress on consumers. So just let's keep that in mind. We'll keep following it, but it hasn't been this good in terms of the mortgage market since 1979 with just very, very few people going into default. People are paying their mortgages without problem at all at this point. So that is very good news for a sustainable housing market with extremely low inventory and people just not having any stress in terms of these ultra cheap mortgages. So if you're watching on video, I'm going to show you something that's going to amaze you. Here is a chart of the median monthly mortgage payments. And we know that mortgage payments have increased dramatically with these higher interest rates. However, I don't want to look at mortgage rates right now. I want to look at when most people purchase new homes or refinance their mortgages. The vast majority of the country did this in the past couple of years. So let's just go back a couple of years real quickly to 2021. And we see that the median home price at that time was $397,000. And the median mortgage payment was a ultra comfortable, super cheap, extremely affordable $1,001. That's it for a $397,000 house. Absolutely bargain, an absolute bargain, very comfortable mortgage payment. And if you look back, let's go back 10 years or even 12 years to 2011, 2013. I've got a question for you. Don't you wish you would have purchased as many properties as you could get your hands on back in 2011, 2012, 2013? Of course you do, because look at what the prices were and the median mortgage payments Anyway, back in 2011, when the median house price was only $225,000. Right. Much less than it is today. Dramatically cheaper, almost half of what it is today. The mortgage payment back Then was. Was $1,019 higher than it was when most of the country refinanced or purchased. Remember, 25% of all the mortgages in the country at or below 3%, 65% of all the mortgages in the country at or below 4%. So again, very comfortable mortgage payments. And about 40% of the entire country has no mortgage at all. So where's the stress going to come from, I don't know. Look at 2013. The median mortgage payment then was $4 cheaper than it is today. $4 cheaper, 997 for a $266,000 house. So again, folks, if you want to have a real estate crash, you've got to have millions and millions of distressed homeowners. And what we have now is the complete opposite of that. Just no distress at all in the market. Lowest delinquency rate since 1979. And the vast majority of people have mortgage payments that are equivalent to what the mortgage payment was in 2011 or 2012 or 2013. So again, extremely comfortable homeowners out there with just no stress. Now, a lot of people are saying that the wild card that could really, really hurt the housing market is unemployment, which, as you know, the labor market is extremely robust, very strong unemployment low, just no sign of problems there. But the doom and bloomers, the Chicken Littles, the sky is falling people, the, you know, the Dr. Doom people, they say unemployment is going to go up. Okay, I am doing a new study on this because I have heard this concern and what I want you to know and think about and I'll give you some, some specifics on this soon. I'm just digging into a little more research, is that unemployment benefits that last for half a year can easily cover these very, very cheap mortgages and leave that homeowner with lots of money left over. In fact, their debt to income ratio on unemployment insurance, okay, not their job, that paid much better than unemployment insurance. Their DTI or debt to income ratio is extremely comfortable with these very low mortgage payments. So again, unemployment could go up a lot. And just with their unemployment insurance benefits, they will be able to pay their mortgages and have lots of money left over for other things very, very comfortably. So just a couple thoughts for you before we get in today's episode. Let's go to the main segment and continue that discussion with Dean Rogers that we left off with last week. Here we go. And so every 1% drop in the home ownership rate equals about 1 million more tenants that need to rent something. So if you are a buy and hold landlord investor, rents are going up, folks. I mean, you know, they have temporarily decelerated a bit to like the pre pandemic levels. They're still rising, but not as much as they were before. And in the apartment market, which is suffering a lot because there was just too much inventory built and a lot of it hitting the market at the same time, rents are definitely softening in apartment complexes, but not single family homes. Okay. And I say the rents in single family homes are going up a lot more than they are today. Okay. So here's another thing that's important to understand. In a country as large as the United States, there's no such thing as a housing market. There's no such thing as a national housing market. There's no such thing as a real estate market. It's too big of a country. We have over 400 metropolitan or about 400 metropolitan areas. We have about 3,100 counties, over 9,000 cities and countless neighborhoods. There's a saying which I'm sure you've heard, maybe you've said it yourself, all real estate is local. It's just too big a country to have a housing market. There's just a lot of different markets.

Yeah. So it doesn't seem like you think the market's gonna crash.

Not yet.

Okay.

Someday.

So what are your thoughts then? You know, like, we keep hearing about the 10 to 12 year cycle of, of a run up on a market and then a crash. And the crash happens for two years, it starts to reboot, starts to pick up steam. And another 10 or 12 years in a crash. We're overdue for a crash, according to the numbers.

Yeah, but I've heard that before. So here's what I say. That's sort of the Austrian school business cycle theory is where that kind of comes from. Right. And the past does not equal the future. Okay. That whole cycle idea, you know, I think you have to really chart that properly. Right. We went in such a low during the Great Recession, 2008. Okay. That I don't think you can really start that clock until about 2012, when things normalized a bit, number one. And then Covid was such an anomaly and changed things so much because we saw, literally, believe it or not, I'm going to say this, the lowest interest rates in 5,000 years. I know you think I'm nuts, Right. David Graeber wrote a fantastic book called debt the first 5,000 years. It's a really good read. I highly recommend it. Debt the first 5,000 years. Okay. And there are interest rate surveys going back to ancient Egypt, believe it or not. So that was the lowest interest rates in 5,000 years during COVID And that just reset everything. That just changed everything. Okay. So that idea that, you know, the market's long in the tooth and it's time for a correction, you know, it depends. I mean, look, if we, if, if inventory was overflowing, we would be having A correction, but it's. We're far from that. Far from it. Okay, so let me share with you a couple other visuals that I think will be valuable. So this is just another way of expressing that chart I showed you earlier about the distribution of mortgages, of existing mortgages out there. What are the interest rates on those mortgages? Right. You see here in the blue, we have a lot of people below 3%, a whole bunch more below 4%, and we have hardly anybody at rates at, you know, hovering around 6%. Very few people have those mortgages. But here's what I didn't tell you before. That is also very important. Number one, if you want to have a real estate crash, there is one ingredient you must have, and that is millions of distressed sellers, so very unlikely to get much distress with super low interest rates, with very affordable mortgages. But what I didn't tell you is that 42% of the country has no mortgage at all. They are free and clear. It's really hard to go into foreclosure when you don't have a mortgage. And it's also really hard to go into foreclosure and be a desperate seller when your mortgage is 3 or 4%. But you know what makes it even harder is the next chart. When you have a lot of equity and there's a lot of equity in the market right now. In addition to the 42% of people who have no mortgage at all, let's look at the folks that do have mortgages and see what their loan to value ratio is. You see that the vast majority of the country has 40% or more equity in their house. They have a lot of equity. They have a lot of skin in the game. They have a lot of reason not to walk away from that. If you go back to the Great Recession and leading up to it in 2005, 2006, 2007, people had no equity. They had loans that they got by lying. Their income wasn't verified, their credit didn't matter much. Okay? I mean, the whole mortgage market back then was built on fraud. Anybody who's taken out a mortgage since the Great Recession knows that it is insanely difficult to get a loan. They know that those banks have learned their lesson. And the vast, vast, vast majority, 95% of these loans are so tightly underwritten that these borrowers out there are just high quality borrowers and they have a lot of equity in the property. Okay, look at the rest of this. These people have 61 to 70% LTV on their property. Hardly anybody is underwater. This is the red over 100% or more, you know, meaning that they're over leveraged. You can't even see it on the chart. There's like nobody has that problem, right? And 91 to 100% LTV, you know, you got a small number of those. If all of these people and those people, and even these people went into foreclosure, that wouldn't be enough to have the sink overflow, in my metaphor, right? So you just don't have a problem with equity. You don't have a problem with expensive mortgages. And look at this one. This is the credit scores of mortgage holders at time of origination. These are golden high quality borrowers. Look at all the people that had a credit score, a fico score of 760 or more. I mean, that's an insanely good FICO score. Look at them. This is, this is the vast majority of the mortgage holders out there. And then there's another big swath, 720 to 759. That's a golden credit score too. And then you get into some of the lower scores and you see hardly any of the mortgages have these lower credit scores. If you looked at this chart back to the Great Recession, which we can do, you see here, look at how different it looks than today. Much better quality borrowers. So the likelihood of having millions and millions of distressed sellers dumping their properties onto the market is very, very low. Okay? The population trends say that there is a massive amount of demand for to purchase homes and to rent homes. The immigration shows us that too. Here's owner occupied housing units in the United States, 83 million of them. The share of homes purchased by investors. Lots of investors interested in the market. This is an interesting article I clipped. This is from Calculated risk, which is a great source. Inflation adjusted house prices are 3.6% below their peak in the Great Recession. Everybody thinks they're so expensive, but you adjust for inflation and they're actually cheaper. Okay, and look at this. This really is a super important chart because this shows the construction of houses, right? Of new home construction. And you can see that leading into the Great Recession we were overbuilding. There were just way too many homes and not enough demand. But since then, the money for development dried up. The builders got very cautious and very conservative. And There has been 13 straight years where construction is below the half century average. So that's the shortage, a massive shortage of new homes. This shortage is so much more acute, so much more pronounced, so much worse in the entry level housing Market. Everything we've talked about is just the overall market. It includes million dollar houses, it includes $2 million houses, it includes $800,000 houses. Show me the glut of supply of 300, $400,000 houses. Even if you even call those entry level, right, There is just a massive shortage of these properties. So I'll show you one more thing. This is a software I've been using for years. I liked it so much I actually bought the company. And it's called Property Tracker. It's free. So anyone listening can just go get this free software, propertytracker.com you can make these great performas on any property. It takes like just a minute to evaluate a property. You'll become very good at evaluating deals whether they're good, bad, so. So whatever, right? Just go to propertytracker.com get this software and it just gives you all of the numbers in one simple pro forma. And look at this one. This is a property we have for sale. Now. It's a brand new property, okay? In one of our really hot Alabama markets, okay? Brand new house. It is just 265,000 bucks and it's got a projected return on investment of 34% annually. Now a lot of people think, oh my gosh, is this guy kidding? If they don't know how to do the math, they think that's outrageous, right? Who's earning 34%? Well, real estate investors are because income property has multidimensional returns. You earn your return in a lot of different ways. I mean, think about it. When someone buys cryptocurrencies or precious metals or non dividend paying stocks, that is a one dimensional game. The whole game. Buy low, sell high, end of discussion. That's it, right? If that doesn't happen, you're not making money. Dividend paying stock buy low, get some dividends in between, sell high, then you're winning, right? Two dimensions. But income property, multi dimensional leverage, income, principal reduction, mortgage pay down by your tenant, inflation induced debt destruction, tax benefits. I mean it's just such a great investment. It's just multidimensional. It's the most historically proven asset class in the entire world. I hope that really helps people kind of understand what's going on in the market and why it hasn't crashed and why it does not look like there is any crash on the horizon. Certainly there will be someday. Things always change. The pendulum goes back and forth. But right now there's no inventory. Okay? So that's where we are.

Maybe we can end with this and Hear your theories. What are your thoughts on interest rates? I know this is another hot topic. What are your thoughts on.

That's the hardest one of all. And you know, I have made a lot of predictions on my show over the years and my podcast has been running for 18 years now. So people can just go back and listen to episode number 37. Right. And. And they can see if I was right or if I sounded like an idiot. Right. The only major thing I predicted that I didn't get right was interest rates. And they are super hard to predict because they're not really. You can't predict them based on market forces. We have a centrally planned economy and the chairman of the Federal Reserve controls the interest rates.

Okay.

And the fomc, so it's really hard to predict interest rates. But I'll give you a source for interest rates and that Grant's Interest Rate observer, that's sort of the, you know, the big wig in the interest rate world. Okay. You might want to get him on your show if you can. I haven't been able to get him, but good luck. Anyway. There's an expensive newsletter that does some interest rate forecasting and stuff, but if I have my two cents on it, I would say that the Fed might raise one more time. I think they're crazy. I think they should have pivoted already. And then they will push us into a formal recession at some point and then they'll pivot and they'll start lowering rates again. And I think mortgage rates will settle somewhere in the 5% range, somewhere in that ballpark. If I, if I had to guess, that's where it would be. But it's very hard to predict interest rates. I mean, I can tell you what's going to happen with prices, with rents, supply and demand, but interest rates are really tough. But you know, here's the thing. Most of the people, when they talk about real estate, they talk about it in terms of prices, right? Like where the price is going to go up or down. Right. And that's myopic. The reason is, is that if you are a buy and hold investor, which is the best kind of investor to be, in my opinion, you don't really care that much. What you care about is yield, cash flow, income. What are those doing? And I teach a strategy that people can, they can just go to Jason hartman.com, type in three dimensions of real EST on my search engine, on my website, on jason hartman.com and listen to the episodes where I talk about this. I teach this strategy that Prices and rents are non correlating indicators. And so when you see the housing market booming and first time buyers moving out of the rental pool into the buying pool and buying their first home, then you tend to see rents soften. But when you see not many people buying either because of lack of inventory or low affordability, then you see generally prices soften, which is not doing now. I mean, prices have gone up about 8% year over year, right? As everybody said, oh, there's gonna be a crash. I can't wait till it's 30% cheaper. I'm gonna buy everything. Yeah, you missed out. Sorry, sorry. Crash, bro. You know, your, your chicken little philosophy just hasn't worked for you in 15 years. Congratulations. You totally missed out, right? The, the, you know, investors. Guess what investors do, they invest. Like that's what they do, right? They just look for the best deal they can at the time when they've got extra capital and they invest, right? They just constantly do that. And all these other folks are trying to time the market and they're just wrong over and over again. And they just keep missing out. And most of them are just jealous. And so, you know, they go on my YouTube channel and they troll me and they write how stupid I am and, you know, and. And they're just jealous because they missed out and everybody else got rich, who took action, who had the confidence, the courage, you know, and they, they got in the game. You know, they just keep missing out. So that's. That's the human condition, unfortunately. But what you see when. When you have this soft buying market is you see more upward pressure on rents. Remember that number? Every 1% decline in the homeownership rate is 1 million new renters. Unless you decrease the supply of people or increase the supply of housing, it doesn't matter what they do with interest rates so much. It doesn't matter. Nothing else matters. People have to have a place to live, right? That's it. Okay. And a common mistake, Dean, people make is they make this mistake of thinking, well, Jason, okay, so if the prices are so high and affordability is so low, well, how are people gonna be able to afford to buy a house and support the market? Or how are they gonna be able to afford to rent a house and rent it from me? Well, here's the mistake they're making. It's a giant mistake. They keep assuming it's the same person, right? They assume the person today that affords $1,500 a month in rent when you raise your rent and their income stagnates and they keep falling behind. They can no longer afford your house and they have to move down the socioeconomic ladder and a new person that was higher on the ladder moves down into your house. And the same thing happens in the rental market or the buying market. Inflation is the destroyer of wealth for these people. It enriches people who understand it and it destroys people who don't understand it. So they simply. Their standard of living is diminished. They have a lower standard of living. And it's a terrible, sad thing, but it's just the way it is. That's what inflation does to people. It's a thief. It destroys their standard of living.

Well, a closing thought here that stood out to me when you talked about the inflation induced debt destruction. It's completely out of our control. You know, the economy around the central banks and government and how they move the economy with inflation and with interest rates and all of that is completely out of our control. But if we know how to play the game, then we can come out on the other side in a good position. So go buy income producing assets. Right. Real estate. And that'll put you in a good spot.

Yeah. And use property tracker to analyze them. Just go get a free account. I mean, you know, we have paid accounts. You can pay like 30 bucks a month or whatever, but, you know, with a free account you can do lots of stuff. Okay. You can analyze deals. You know, the one advice is the property must make sense the day you buy it.

Mm. Aimed under that.

Okay. And Dean, that's what you teach your people. And all the people, all the horror stories you hear in real estate are people that bought a property that didn't make sense the day they bought it. They were expecting something extraordinary to happen. Bunch of appreciation that didn't happen. And you know, things went badly. Right. So just buy good, sensible properties and keep doing that over time. You all know lots of people who've gotten rich in real estate. You probably don't know anybody who got rich in the stock market or got rich buying gold or, you know, anything else. Right. But you know lots of people that got rich in real estate. Why do you think that is? Because it's a special kind of asset class. 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 necessity 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 page 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.