2047: Resilience- Why the Housing Market Won't Crash- Yet

This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit hartmanmedia.com so I closed out last month on the real estate side. Sold three houses, got two more under contract. It's been a long time coming. But all that stuff that Jason and the rest of the team and I have been working on since Jacksonville, all coming through. So all good stuff.

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 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.

Greetings empowered investors and welcome to episode 2047. Today we are on a holiday and we have got an interview I did with my friend Mike recently and I think you'll find this to be very insightful. Where we talk about the market, where it's going, what to do, what are the right strategies and all of that good stuff. But before we get to that, thank you for all of you who attended our 2.99% buy. By the way, I should say with zero points. This is not a buy down program. This is an owner financing program. 2.99% no buy down, zero points. Yes. Sounds too good to be true. Well, it's not perfect, but it is pretty darn good. We had a whole bunch of people sign up for the financing after our zoom meeting last week and we do not have another zoom meeting scheduled. However, feel free to just go to the page even though this event has passed and register one of our investment will get in contact with you. They'll connect you with the lender or I should say the seller, seller lender and they can tell you all about this great 0 points 2.99% financing. Just go to jasonhartman.com financing. That's jasonhartman.com financing. Register for that. And one more thing before we get to today's episode and that is tomorrow night at our monthly Empowered Investor Pro meeting, we will have two great guests. We will have LA Landlord Tenant law attorneys from two different states and they will be discussing the landlord tenant laws and the eviction process. These will be great contacts for you. One of the many, many reasons to join Empowered Investor Pro is not just what you learn, but it's who you meet and how you can build your team, develop your Rolodex, your resources for when you need help with your properties. Whether you are self managing or hybrid self managing or using a property manage. We're going to introduce you to so many great resources. Every single month we do this. This is something you need to join. So go to empoweredinvestor.com this is a no brainer. You know, I'm going to join a new gym and literally that new gym, which is not like the most expensive gym in the world, it's nice for sure, but the cost of that gym membership has an initiation fee. Plus it is more than three times the cost of Empowered Investor Pro. This is the bargain of the decade. So join Empowered Investor Pro, go to empoweredinvestor.com and join us for our monthly Zoom meetings. Those are great. You get a chance to interact, I'm there, you can talk to me, you can ask questions and we'll introduce you to a whole bunch of great team members to further your real estate investing career as an empowered investor. Okay, without further ado, let's get to today's episode. Foreign.

Folks, this is Big Mike, Mike Zlatnik. Welcome to the Big Mike Fun Podcast. And today it is my pleasure and a privilege to welcome back my really good friend, Jason Hartman. Hi, Jason.

Hey, Mike. How are you?

I'm doing well. How about you?

Good, good. I am constantly dealing with these trolls who missed out on the real estate market the last 10, 12, 15 years and they're upset about what? And they are trying to convince the entire world that the real estate market's going to crash. And they got more evidence than they did before. But I think they're still wrong. We call them the Crash Bros. So the Crash Bros are giving a message and I hope to add some truth to that message, some accuracy to it today.

Give me more, please. Because a lot of folks are concerned that we're going into a recession, maybe a severe recession. Who knows, right?

Sure.

And I'd love to hear your view of the world. Do you think real estate is going to do well in this environment? The high interest rates are causing a lot of pain and grief for real estate. That's what concerns me most. The Fed pushed the rates up so fast and so much.

You know what's Interesting about that. And first of all, Mike, I want to say that I am under no delusions that our economy is sound. It is not. Okay? Our economy is built on a house of cards. But that's really always been true since 1971 when we went off the gold standard, okay? This is an economy built on smoke and mirrors, okay? But that's true of every economy around the world. We live in this super symbolic economy globally. And virtually every currency is backed by nothing. The US dollar is the most backed currency in the world because it's backed by the largest military industrial complex the world has ever known. The gold bugs and the cryptocurrency people and the bitcoin people, they like to say, well, the dollar's not backed by. But they're completely wrong. It's backed by 12 aircraft carriers. It's backed by thousands and thousands of nuclear missiles. You know, this is just not true, okay? The US dollar is very much backed, okay? So that's the first thing we need to understand is that every economy is relative to every other economy. And you mentioned the high interest rates. And that has definitely caused a decrease in housing demand. It's caused some demand destruction, no question about it. But interesting. And what most people don't understand is it's actually made the owned houses with mortgages. And by the way, let me just define that. 25% of the country has a mortgage at or below 3%. And 65% of the country has a mortgage at or below 4%. And just over 40% of the country has no mortgage at all.

That's very interesting. So what you're saying is wide majority of the houses today are owned either with no debt or with debt at very low interest rates that was acquired when the Zurb policy was in place.

Absolutely. So here's the deal. If you want to have a housing crash, you must have a massive amount of distressed sellers, period. End of discussion. That's it. If you don't have a whole bunch of distressed sellers, you can't have housing crash. I'm sorry, okay? It just doesn't work. All right, so what's happened that's really interesting about the high rates causing demand destruction is for all of these people that have these cheap mortgages. It's actually made their house more valuable to them. And here's what these like linear thinking, myopic people just simply don't understand. Something can be more valuable to you than it is to somebody else. So the value of a house on the open market is lower to a new buyer that has to pay 7% interest, give or take, than it is to the existing owner who's paying only 3% interest because the mortgage is attached to the house.

The mortgage is a liability. But the interest rate, that mortgage feels like an asset.

It is an asset. It feels like an asset because it is an asset. Think about the bond market for a moment. If people understand the bond market, they understand that interest rates and bond values are non correlating. Right. When existing bonds are out there. And this is what happened to Silicon Valley bank, right. You know, this is essentially the story there. I mean, it's not exactly the story, but it's part of this. It's a big part of the story. Okay. When you have a hold to maturity asset like a bond, okay, and that Bond is at 3%, we'll use the example of the mortgages and the current rates are 7%, then all of those existing bonds got a lot less valuable. If it goes the other way, you have the exact opposite situation, right? Because there's two sides of the trade, right? The counterparty wants the highest yield when they buy the asset and the borrower wants the lowest yield when they pay for the asset.

So what you're saying, it makes total sense. It's the price of the bond. So the price of the bond, as far as the Silicon Valley bank was concerned, on their books, the price of the bond fell. They use the exception held to maturity not to mark the market.

Right.

But what you said makes total sense. So if they loaned a million dollars at 3% and now the rate is at 7%, as you said, that million dollars ain't worth a million dollars, it's worth 800,000. On the other side of the spectrum, if you borrowed the money at 3% for 30 years and now the interest rate is at 7, this bond feels like it's worth $800,000. So if you were to pay it off today in cash now, the bank wouldn't accept your offer for 800,000. But in reality, if this bond traded on the market, it would trade for 800,000 instead of a million dollars. So that's how it feels like an asset. You gain almost like $200,000 asset on your balance sheet by virtue of locking in that low interest rate. So what you're saying makes total sense.

Yeah. Anybody who has ever traded notes or bonds or discounted mortgage notes, because that's a business, that's a market, there's a whole industry, mortgages. If you have a mortgage and you are the lender that you own an asset, that mortgage is an asset for you. And if you've got a mortgage that's paying 3%, you can't sell that mortgage for much money at all. In a market where new mortgages are originated at six and a half percent.

Okay, so you have, you got it. You're going to be forced to sell it at a discount at a huge.

4,800,000 exactly at a big discount. So the inverse is also true. If you have a mortgage that's yielding 6.5 or 7% and the market rate is 3%, your mortgage went up in value to you as the lender, the holder of the mortgage. Right. But the opposite is true for the borrower.

So that's right. But the borrowers can refinance. It's a one way, it's a one way street that you've always talked about this. You can always refinance on the way down. And that's, that's, that's the condition today when people buy houses today and they lock in high interest rates. When the rates come down, you can refi. So the bank's position is actually terrible because they're forced to hold cheap, well, low interest rate notes held to maturity. And when the interest rates start falling again, the new originated paper is going to get refinanced. It's a bad place to be a bank, Mike.

It's like without question, I have not found an exception to this. And I've said it on my show many, many times and no one has countered me or disagreed with this. In mid to early 2020, in the COVID era, I was saying that the Fed has placed a poison pill into the real estate market. And when I say poison pill, I mean it's good or bad. You know, it's like one man's junk is another man's treasure, right? The poison is good for one, bad for the other. Right. What I mean by the poison pill though is poisoning the lack of inventory. Because now look at the situation we're in. My prediction was absolutely right. I was the first one to say it. I couldn't find anybody else in the media saying this was going to. Now we're in a position where tens of millions of people have ultra cheap mortgages and they have 28 to 29 years left on them and we have a massive housing shortage that doesn't show any signs of relief whatsoever because of this. Now there's a couple of things that could happen, okay? The only thing that would loosen up the inventory in housing because inventory is extremely low. I'm going to show you Some charts on that in just a moment. And by the way, for those listening on just audio, I have a chart up on the screen that shows the number of mortgages and the interest rates of those mortgages. This is Black Knight and Axios data held by all of the mortgage holders in the country. Right. For single family homes. And you can see 65% of the people in the country have mortgages at or below 4%. That's absolutely phenomenal. I'm going to show you some inventory statistics in a moment. But these people that have these cheap mortgages, just like if you had a bond that was yielding a very good yield, you're going to do whatever you can to keep that bond. Right? And that's exactly. We have tens of millions of people in this position, so they're just not going to be motivated to sell their houses. Now look, life will happen. There will be reasons they want to move or need to move, and a lot of people already want or need to move now, but they're not selling because there's no way they're going to go out and replace a 3% mortgage with a 6, 6 or 6 and a half percent or 7% mortgage. They're just not going to do it.

Right, Let me just comment on this very quickly. I want this quick comment. Yeah, life needs to happen for these fol to sell, they basically have to get laid off.

So demand even then. I'm going to talk to you about that, but go ahead.

Yeah, basically to force a distressed sale or a motivated sale, the has to be distressed seller from that point of view, unless something else happens. But of course they don't want to sell that house because it's a very valuable lesson. But if they lose the job, they can't pay the mortgage. What do they do?

Yeah, well, remember, their mortgage is very cheap. That's the first thing to understand. So it's not a difficult mortgage to pay. And even in the face of economic distress, which I believe is coming, by the way, I'm under no delusions that the economy is okay. It's not okay. Right. But even under economic distress, you have to always ask the question, compared to what? So what else are they going to do?

Right?

So say for example, like we've got 13.1 million plus 4.7 million plus 285,000 people with mortgages at or below 3%. Right? So we'll round it off. We'll call it almost 20 million people. Right. Say these people get laid off from their job. First off, their mortgage is very affordable. It's easy to pay that mortgage. They could probably pay it with unemployment insurance. It's so cheap. And think about their thinking. If they have to move, what else are they going to do? Well, they're not going to be able to buy a house because they're not going to qualify for a mortgage with no job. So they're going to have to rent. And rents have just skyrocketed. This house is cheaper to own than it is to go and rent a new, lesser apartment. Okay, so you say. Well, Jason, they're forced to. It doesn't matter. Okay, so they could live in their car, right? They could live in the car. But in terms of replacing that house, they're not going to be able to do it. So the likelihood is they're going to rent that house out, they're going to rent one room of the house out. They're going to do Airbnb, they're going to get a roommate, they're going to do whatever. They're going to do whatever they can to protect this irreplaceable thing. And that's what people don't see now. People will want to upgrade and move. Let's look at the positive side of the economic equation, right? Say, you know, people, over time, they get richer, they save more money, they want to upgrade and move to a better house, right? Well, the likelihood is they're going to keep this house as a rental because they're going to say, well, my payments are so low and the rent is so high, why would I sell it? Okay. Or, and this is another thing people might want to look at as investors. And I predicted this back in 2020. I didn't act on my own prediction. Unfortunately, I would have benefited greatly. But stock in companies like Home Depot and Lowe's and the remodeling business is going to be a great business going forward because instead of selling the house, people are going to remodel the kitchen, remodel the bathrooms, fix up the house and stay put. They're going to add a room onto the house, whatever, because they want to keep that cheap mortgage that is not transferable.

Yeah. So I agree with you 100%. Everything you said is right on the point. Makes great logical sense, and it's really amazing and fascinating that people will do everything possible in their power to maintain that valuable asset, that cheap mortgage, even if they are stressed and they lose a job. And when they upgrade, that's a. It's a pretty clear from a decision perspective. Do you sell? Well, if you need a down payment, Right. If you need a down to payment on a bigger house, you're forced to sell. But if you, if you have the ability to put a down payment from other funds, you definitely want to keep that, that house with cheap mortgage as long as you can. Unless again, you have 5 million dollar house and that house ain't gonna rent for great rent to valuation, right?

Yeah, no question about that. But if they have a five million dollar house with a cheap mortgage, boy, they could turn that into a short term rental. They could rent out rooms, they could do all kinds of stuff. They could host events at their house. You know, I have a friend who has a 33,000 square foot house and you know, he and his wife once or twice a month, I don't know if they're still doing it, they're quite rich. But they used to host weddings and let people rent their house for weddings. Okay. And you know, they would get four times the amount of one month's mortgage from hosting one wedding. So it's pretty amazing. You know, the other thing we've got to think about, Mike, is in the face of 10 consecutive radical rate hikes, just comprehend for a moment that a typical $300,000 house, the mortgage payment has increased by 70% and they still haven't killed the real estate market. That's like an amazingly resilient asset class. I bet no other asset class could withstand a 70% increase in the monthly cost. Certainly not the automobile business. If someone was looking for a new car and in the course of seven months the monthly payment on that car went up by 70%, they would just give up. There'd be no way they'd buy the car. Right. But amazingly, people are still buying houses. In fact, our business is fantastic. I mean, it's really quite good. Now, it did take a breather when we had the initial rate hikes go up. And by the way, my business is helping investors buy properties nationwide through a referral network where we pick the best markets, we pick the best teams, and we refer clients to them and they buy these investment properties. So here's a good metaphor, Mike, for the way the market is now. I like to liken it to a sink. So let's take your bathroom sink. And the faucet represents the new inventory coming onto the market. Right now that faucet is just a trickle. There's barely any housing coming on the market. The water in the sink represents the existing inventory. And the drain, the water draining out of the sink represents the demand the buyers buying houses, the absorption rate. So what's happening. Well, we know that the faucet is at a trickle. Hardly any new homes are coming up for sale. There's very little new inventory. The current inventory, the sink, if we call the full sink, not overflowing, but just completely full to be a normal market. Right. If we. If that was normal. Right. That means right now the sink only has one third of the normal amount of water in it. So we only have one third inventory, missing two thirds of the inventory. There's just over 400,000 homes for sale in the United States. And to be in a quote unquote normal market, most experts would tell you there needs to be about 1.2 million. Now, I want to say something on that before people comment below. Okay. I'm using Alto statistics, which is active listings in the mls. Actual properties you could buy today. The national association of Realtors has long time published inventory statistics and they do it differently. They use all the active listings plus all the pending sales, plus all the contingent sales. So their inventory numbers look higher. You can use either one as long as you compare apples to apples over time. So if you wanted to compare the NAR numbers, you would look at today's number and then you'd look at, you know, two years ago, three years ago, 10 years ago, whatever you want to understand what's going on. And the ratios are about the same. But I like to only look at actual properties you could buy today, which are the active listings. Okay, so here's, here's what's happening with the drain, though. The drain is clogged, the demand has declined. The Fed, with its 10 consecutive rate hikes that are the most historic, quickest, most radical tightening policy probably in history. Right. Has caused some demand destruction. So that drain is about 20 to 30% clogged, and that water is draining out more slowly. Fewer buyers can afford to buy. But the sink only still has about one third of the water it needs. And the faucet is trickling. Hardly anything coming up for sale.

The inventory is still shrinking because the drain capacity to absorb more water or buy more houses is still greater than the new inventory coming on the market. But let me ask you a follow up question. What's happening with the new construction? Because basically this is all about existing.

Yeah.

Is the new construction product coming to the market? The cost of construction has gone up, obviously, during COVID and you've got much higher debt service on for the developers to build those properties. So what's happening on that front?

Yeah, it's a great question, Mike. So remember when we Talked a few minutes ago about the existing mortgages and how people with these cheap mortgages don't want to sell their homes. And that is true whether they be investors or owner occupants. But the builders are in a completely different situation. They don't have cheap long term debt. They have either no debt or they have equity partners, or they have short term debt. So they do need to unload their inventory of homes. The problem is, and by the way, everything I've talked about is a discussion about the overall housing market. All areas in this huge country. Nationwide, we've got about 400 metropolitan areas in the country. We've got over 3,100 counties and over 9,000 cities. And in all of those markets, we've got various price ranges and product types. So you have to peel back a lot of layers on this onion to really understand what's going on. And this, of course, is what we do every day. So new homes. For the past 15 years, coming out of the great recession, there has been virtually zero entry level home building. There is a little bit, but for all intents and purposes, it's a statistical blip on the radar. It's nothing. It's a bucket of water in the ocean. Okay. There are hardly any builders building entry level homes because they can't afford to build them. There's simply no profit in them. With all of the regulations and all of the things that builders need to pay for and all of the increasing construction materials costs, which, by the way, have come down a bit, thankfully, but they're still high. And with all of the diminishing labor market for construction workers, the average construction worker is about 50 years old nowadays. I mean, just imagine that for a moment. In the past, a construction site was full of guys in their 20s, mostly their late teens and early 20s. Okay, you know, physically robust young men that were out there swinging hammers and building houses. Nowadays, the construction workers have just aged, aged, aged, and they're not being replaced. The generation we have of younger people is just too spoiled and unwilling to do construction jobs. So there's a huge shortage in that labor market. And labor prices have increased dramatically. And the ability to even build at all has been very challenging for home builders. So those are a couple factors to understand. And when we look at the new home market, there are finally, because of the huge demand during COVID there are finally some decent amount of new homes coming up for sale. But again, it's a blip. It's just not nearly enough to satisfy the imbalance of low supply and demand. Even though demand is a little bit lower than it was when rates were really, really low. It was course. And we'll be back with a lot more on this topic with this guest on our next episode. 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, hartman media.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 on the next episode.