2078: The Dark Side of Private Equity; How It's Reshaping Real Estate & Impacting YOU with Gretchen Morgenson

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Hey, Jason.

This is Scott Crook. I was on the Empowered Investor zoom call last night and just so thankful for the value that's created inside that group. And you know, you just consistently bring subjects that are so important and relevant to what I'm needing and I believe other investors need. So thank you so much. I appreciate you and all that you've done for helping us become better investors. Thanks, men.

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 2078. And today we are continuing our conversation about these are the plunderers and how private equity runs and wrecks America. So we're going to continue that in a moment, but I've been wanting to go over the Atlanta Federal Reserve bank data for a while and we are finally going to get to that today before we have Gretchen back to talk about private equity and how it's changing the face of American business and American life. All right, let's go ahead and get into this. First, though, I want you to realize that 8 billion people woke up today and they thought one dominant thing, how can I improve my situation? And as they were thinking that, they mostly realized that the way they improve their situation is by delivering some value to other people, thereby stimulating the economy and keeping this whole engine going, regardless of what the doom and gloomers say. So let's look at some population statistics about the United States and a change in projections from the Census Bureau. That's kind of interesting. So, you know, not only do these 8 billion people that we talked about worldwide create value and keep the economy going forward, they create innovation, they have ideas, they solve problems, and that's all wonderful, but they also need three major things, food, clothing, and shelter. So that places upward demand on the asset that we love to supply. Shelter, buy it, rent it, whatever we supply it. Okay, but let's look at some United States population data here. So two sets of projections here from 2017 and then from this year 2023. Now these projections have been revised downward, saying that the population is not going to grow quite as much as expected. But regardless of that, even with the lower projections, we still have a massive housing shortage. And let's talk about how acute that is. Then get into the Atlanta Fed housing affordability data. So look at this. In 2017, they projected that by 2025, remember, that's right around the corner, we would have 344 million people in the U.S. and now that number is 338 million by 2025, right around the corner. But let's fast forward a whole bunch. Let's just go to 2030. The 2017 projection was 355 million people that all need housing and all contribute to the economy and create value in the economy and keep the machine going. But now they're saying it's going to be 10 million less than that. See, people aren't having children. We are going extinct, folks. This is going to take a long time. It's going to happen much later. All of will be gone by then. But overall the population is really, really going to decline. We are going to see that in the next hundred years the world population is going to be an empty planet to some degree compared to what we have now. Okay, 345 million people. The revised downward projection by 2030. So that's right around the corner as well. But let's head over to 2050. The original projection five years ago was 389 million people in the U.S. now they're saying there's only going to be 361 million people in the U.S revised down to 28 million less people, 28 million fewer people. And by 2060, 440 million people was the initial projection. Now it's only 364 million people. So again, you can see how we are going to have a massive increased demand for housing and how we have an incredible shortage of housing that we are already experiencing. By the way, I interviewed an economist yesterday, a professor from Florida University, and we will get that here on the show for you soon. But we just really sliced and diced these numbers as far as housing supply and demand. And you're really going to like that interview coming up. So we'll get that out to you in the next week or two. But yeah, this, I mean, even with these revised numbers, we still have an Incredible housing shortage that no one is really solving. Again, the only way to solve the problem either reduce demand, meaning reduce the population, or increase the supply. And the supply increases that are in the hopper, that are in the oven, if you will, are minuscule in terms of solving this huge, huge problem. But remember, the value of your asset, whether it be the for sale value, the exchange value of it, or the rental value of that asset, will have a lot of upward pressure due to this low supply problem. And it's just funny to me how people don't really understand the. Compared to what? Issue, because they think housing is expensive now, but compared to what? How much worse could it get? Could housing get just massively more expensive? Remember that great poem that I've shared with you before, the Reluctant Investors lament, written in 1977, where he said everything was so overpriced. Now, you know, everybody feels like it's much more overpriced now than it was in 1977. So the question is, how much more overpriced can it get? See, no one knows the answer to that. That's the funny thing about people. We're just not good at interpreting that. People say, oh, there's a bubble because it's more expensive than it used to be. But you really got to measure it in terms of how expensive could it be, right? And nobody knows the answer to how expensive could it be. It's like that Berkeley professor I interviewed years ago on the show who wrote a few books about overpopulation and how the Earth was overpopulated. And he just, you know, at 8 billion, you know, he was whining and complaining on and on about how there's too many people and the Earth is gonna die. You know, now this is the same Malthusian thinking they had 250 years ago and probably long before that, that they thought the world was going to end due to overpopulation. And, you know, they certainly had this in the 60s. Read that great book called the Bet, which is about Julian Simon, John Ehrlich. That's really good book. You got to read that book, the Bet. I've recommended it before, but. But they constantly think that it's so overpopulated. And then I simply asked the question of the Berkeley professor who was grousing about the population being too high. And I was saying, well, what is the right number? And he did not know the answer to that question. And I said, should we have 4 billion people or 5 billion? I mean, you say 8 billion is too many. But he didn't know the answer as to how many people we should have. And then I said to him, you know, how do you know how much population, how many people the Earth can support? Right? Because remember, the people also support the Earth. As much as people say that the people ruin the Earth. Yeah, they kind of do. They make a mess, but then they generally clean it up later, right? They figure out some great new innovation like, you know, cleaning up that big giant plastic disgusting mess in the middle of the Pacific Ocean. Right? They're cleaning that up. Okay? Now it's bad, it's terrible, I agree. But people solve these problems, okay? They solve the overpopulation problem 250 years ago with Malthus, right? He thought the world was ending, but clearly the opposite happened. We have too much food, too much abundance, okay? The complete opposite occurred. All those people were wrong. When are they going to apologize for being wrong? When are the doom and gloomers going to apologize for being wrong about the real estate market? You know, if you can sue someone for giving you bad investment advice, can't you sue the people that told you not to invest for the opportunities you missed? It's a good question. So if you listen to Peter Schiff, for example, for the last 20 years, who, as Robert Kiyosaki said, it's just so funny, you know, Peter Schiff has predicted 19 out of the last two recessions. I love that. Oh, Kiyosaki, that was a good one. Why can't the doom and gloomers be sued for causing tens of millions or maybe billions of people to miss opportunities? Because our minds don't work that way. They don't work on, you know, not hearing the dogs that don't bark. It's just a, it's just a huge blind spot in human thinking. And you can see this everywhere in life. You can't hear the dogs that don't bark and you don't properly answer the question or they don't properly answer it. I know you do because you're listening to the show, but they, these others, these doom and gloomers, the fear porn purveyors, they don't answer the question. Compared to what? They don't know the answer to the question. Right? They don't know. Okay, let's look at the Atlanta Fed data as I promised you. So this chart is really interesting. Now if you're not watching on video, I'll try to explain the visuals. But the affordability threshold is the 100 number, right? That's the sort of balanced affordability. Right? And now it is very, very low from 2019 to 2021, it was above 100. So it was good. Back in, you know, 2011 to 2013, it was very good. But that affordability threshold was not good leading up to the Great Recession, and it is not good now. Now most people think, oh, well, Jason, isn't this a predictor of a housing bubble? Well, it's not enough data. Just because housing is not affordable does not mean it's going to become more affordable. Right. To make it more affordable, you have to have, in addition to the affordability index, you have to have either higher supply or lower demand. And we have the supply constraint as we've talked about ad nauseam. So the com. The supply constraint keeps the bubble from happening. Right. I'm going to actually pull up this actual website because it's a dynamic map and I want to just go through it with you. Okay, so here we go. Let's look at this dynamic affordability map. So we go back to 2006, January of 2006, the median home price was 200. And I'm going to round off here for speed, was $231,000. The median income was $48,000. The interest rate was 6.1%. And a principal and interest payment on the typical home was $1264. All right, that meant the annual total payment share of median income was 41%. No bueno. Right. That was not good. But a lot of supply was being created. More supply was being created at that time than there was demand to absorb the supply of housing. Thus we had a problem. Okay? And, you know, not to mention all of the imprudent loans that were made and all of the shenanigans that went into the, you know, ingredients of the Great Recession. All right, so then let's look at this spot. Let's look at April of 2009 as we're, you know, right. In the Great Recession, affordability actually got quite good again. It got over the 100 mark, which means housing became more affordable than normal. Right. Than the balance number of just a flat 100. It was slightly better. Median home price $188,000. Median income $50,000. Interest rate only 4.8%. See what happens when you lower interest rates, right? The affordability becomes dramatically better. And the annual total payment share of median income was a comfortable 29.8%. And then, you know, the Great Recession kind of went on. But it got really good. Affordability got really good again in 2011. And it PE peaked out during this era in 2012. March of 2012. Listen, to this median home price $181,000. Or well, 182 if you're rounding median income 51,000. Interest rate only 4% now. And that annual payment share of median income, 26.9%. Very comfortable right now. Let's fast forward. We had some good affordability over the course of the decade. It got lower during, you know, that we started to notice the lack of building, lack of construction in the 2013, 20, 2015 era. But then mostly affordability was pretty darn good. Now let's go to, let's go to right before COVID started. And I, I don't like that. My mouse kind of covers some of the numbers here. That's quite annoying. Atlanta Fed, you gotta have your tech people fix that because it's hard to, hard to see this. Okay, so let's go to November of 2019. This is a good, a good spot, actually. Yeah, even, even December 2019 affordability is pretty good. It's pretty darn strong at 105.3 again, above the 100 balance number. And the median home price is now $264,000 or 265. Rounding and the income, 66,000. But the interest rate is only 3.7%. That means that the annual total payment share of median income is a very comfortable 28.5%. But during the COVID era, it got better and better and better, and housing became more and more affordable. So let's go to the peak of affordability during the COVID era, July of 2021. According to their chart, median home price, $279,000. Income $67,000. Interest rate only 3%, generating a monthly principal and interest payment of just $1,060. And the annual payment share of median income is a very comfortable 27.5%. Now, if you're watching on video, you see this huge span of green here. This is all the big, nice affordability era from 2019 all the way through the COVID era. Then we saw interest rates, of course, tick up and we saw affordability decline, decline, decline, right as prices had increased and rates were higher. So naturally, affordability is going to be lower because the incomes did not increase fast enough to keep up with rate hikes and a market that set prices much higher. So affordability got lower. And again, so many people make the huge mistake. The giant just irresponsible. I mean, are they irresponsible just neglecting data here? Are they just stupid? I'm not sure. But again, when this affordability got into the Orange here. And then it got really, really low when the massive rate hikes occurred over the past, you know, a little over a year, right? And now we see affordability very low. We'll get into that in a moment. But what this chart doesn't tell you is during these low affordability errors, kind of the post Covid low affordability e, there were very few transactions, and a lot of transactions happened here in this high affordability era in the green. I mean, look, all the realtors, you know, were making a ton of money. All the mortgage people, you know, that you're just friends with in life, were making a ton of money, right? All the people in the settlement business, escrow companies, title companies, settlement attorneys, they were raking in the dollars, right? They were doing great because there were so many transactions. But during this era, when affordability declined, there were very few transactions. Now in this green era, you know, we're not just looking at the number of transactions, but we're looking at the number of refinances. So the whole country basically either purchased or refinanced, locking in these very low rates when they've got 28 years left. So what matters is what happened in this time frame, this era of high affordability, because that's most homeowners, very few homeowners have the low affordability deal, right? If they're buying today, they have the low affordability deal. So now, how bad is that? Right? It's pretty unaffordable. And again, I do want to say that when you discuss median home price, median mortgage payment, all of these surveys have a little bit different methodology. So the numbers do vary a little bit. Like, some will say the median home price is higher than this. For example, this Atlanta Fed data. You know, this is one survey. There are others. Right. But, you know, it's good enough. It's good enough for government work because, you know, they all have a slightly different methodology, but they're close enough. Okay, it's good enough. So affordability now. Now, what does it look like? It's only 67.3%. It's very low. Lowest in 40 years. Very unaffordable. Median home price, $378,000. Median income, $77,000. Interest rate, 7.1%. Now, of course, that's even varied since, you know, this chart isn't completely up to date. It's as of August, right? So it's a couple months old. Median principal and interest payment is now almost $2,300. And the annual total payment share of median income, which is a Key number is now 44.6%. So for people that bought since the prices went way up and have not come down and keep going up, and they also got a high interest rate, their affordability is very low. But there's not many of those people. They are a rare breed because there have been a very low number of transactions since the affordability got so bad. Right? So this is the thing people just fail to understand when analyzing the market. It's not about what's going on now. It's about what happened a couple of years ago. Because those are all the homeowners that have great affordability and now their deal. I mean, look at this. If you go back here and you see that that annual total payment share of median income is only 27% versus today it's 45%. I mean, these people are never giving up their deal. They're just not going to let go of those properties, thereby constraining inventory. And we might have to just keep talking about the same thing for the next 28 years, folks. I'm sorry, but unless interest rates go down to the pandemic era interest rates or below that, the inventory shortage has a real incentive to persist and persist and persist, even with a possibility of higher unemployment rates in the future. Although there is a structural labor shortage. Okay, there's a structural labor shortage. Remember, I read that book when the Boomers Bail and I interviewed the author on the show that. That interview has not been published yet. Mark. Mark Lautner or Lotman. Anyway, what he said in that book was chilling and just shocking. Okay? And here's the statement. Talk to any business owner and tell them that anybody you plan to hire in the next quarter of a century, anybody you plan to hire in the next 25 years has already been born. Just think about that. Think about how that tells us that there is a massive, massive labor shortage. Not only housing shortage, but a labor shortage. And when there's a labor shortage, you have wage inflation pressures, supply and demand. The employers need people and the people aren't there. So all the people that are there are going to increase their price to give their labor. Right? That's Supply and Demand101. So I know I got a few skeptics out there and they're saying, well, Jason, what about artificial intelligence? Yeah, I agree. That's. That's a good question. And I don't know the answer. You know, I've been struggling with that, if you've been listening to this program for any length of time. But I can tell you that every Prior technology throughout human history has only made the pie bigger, the economy bigger, and it has increased the number of human needs and wants. A lot of these things aren't really needed, they're just wants. But every time there's some new technology, people just figure out a way that they got to have it. It's a necessity. Hey look, doesn't your nine year old kid have to have a $1,000 smartphone? Yeah, that's a new necessity. When I was a kid, smartphones didn't exist. So we didn't have to have a thousand dollar smartphone because we didn't know it would come. Right? We didn't know it existed. And so now the things that were unimaginable before and luxuries before are now necessities. So luxuries become necessities and new wants and needs are created by new technologies. And everybody's got to have them. You know, I'm always saying you got to watch old movies, read old books, listen old music, especially the great music from the 70s, that's my favorite. And when I say old, you know, maybe just from the 90s. The 90s, the 80s. Just see how different the world was back then, right? It's not really that old. Okay, yeah, you could watch stuff from the 50s too if you want. But you know, just 80s and 90s, you're gonna get a whole different, I mean, life's very different than it was back then. And look around the scenery when they go to someone's house, right? And when you know you're in someone's home in that TV show or that movie, and like, look at the lack of stuff they have. They just don't have much stuff in their house. There's just not much stuff, right? Nowadays everybody has so much stuff in their house, it's unbelievable. I was reading this one book and they did these surveys, this research where they, they actually literally went into people's homes and counted the number of things in their house. And like just in one room, thousands of things right? In one room. And I'm not talking about hoarders or anything like that, just normal people, okay? We live in this consumer society where 70% of the economy, 70% of the s and P, is consumerism. Because all the things that used to be unknown, unimagined, magical, they are now the new necessities. And in the future, what artificial intelligence creates and automation creates and new technology creates, those things will become the necessities of the future. Remember, according to, I think the bls, the Bureau of Labor Statistics, only one job has ever truly been eliminated by technology in the last hundred years, that one job. You've heard me say it before. Elevator operator.

Isn't that funny? So now we push our own buttons in the elevator most of the time we got to do that ourselves. Right? Jobs do get eliminated, but whole new sectors, whole new unimaginable jobs are created with new technologies. So I'm pretty bullish on the future. It is an amazing time to be alive, but it's not without its problems and concerns for sure. All right, let's get to our. Oh, wait, before we get to our interview, wait, let me go back to my slides here for a second because I do want to remind you of our Empowered Investor Guides program where we have got a wonderful class coming up, a live class, six zoom sessions on how to eliminate property management from your life on all your properties, how to turn your tenants into tenant buyers, how to get much higher security deposits from your tenants, and how to delegate a lot of maintenance responsibility, almost all of it to your tenants. Okay, so go to fireyourmanagers.com that's fireyourmanagers.com and sign up. There is a $500 discount on this and we're giving that discount because we're starting really soon and it's our first time doing this course. But we've got two expert guides, John and Scott, who are teaching this. I'll be there of course, and I'll be teaching it along and asking skeptical questions to make sure, you know, the thing really works right. Really, really excited. This is the answer to the challenges people face with their portfolio. How to get more income from their portfolio, how to get much higher deposits, how to get tenants that act like owners, that are at stake, that have skin in the game. And you're going to love this. Go to fire your managers. That's plural. Fire your managers. Plural. Because you've probably got multiple property managers.com and you're going to love this. Really, every single person listening. As long as you own a property, you need to join this course. The six week course. We've got fireyourmanagers.com okay, let's get to our continuing discussion with Gretchen and talk about private equity.

Private.

Private equity has gone, as you say, full force into single family homes and have really changed the environment in cities across the country. Small, medium, large cities have really changed the dynamics so that regular investors who mom and pop, you know, smaller investments investors really are priced out of these markets and first time home buyers honestly are also priced out of these markets and you know, we really do want, I think, to try to help other people gain the wealth creation that is a, a matter of course in real estate ownership. But if you've got these very wealthy, very high powered firms buying up all of these properties, you're really going to crowd out a lot of other investors.

Okay, so there's the crowding out effect because what the private equity companies are bidding up the prices of the homes. Right.

And buying them en masse and you know, entire neighborhoods, et cetera.

Okay, but here's where, like, are you sure about that? Because aren't these the same companies that we just were complaining that they're like hyper efficient and hyper focused on profit? Why would they overpay?

Well, they are not necessarily overpaying, but what I'm saying is they are crowding people out who might have a bid in the area. Right. Who might want to make a bid on a property. Now, yes, they're paying more to make sure they get those properties out from under somebody else. But I think where they're doing their efficiency game is in not keeping up the properties and not maintaining them. This is what I've seen in a lot of my reporting. They also specialize in sort of gentrifying neighborhoods. And so what you find is the efficiencies are less about buying low and selling high and more about we're not going to mow the lawn, we're not going to fix the pipes, we're not going to make sure the heat is operative in this apartment or this home.

Yeah, right, right. Okay.

And that's a problem for the renters and you know, obviously, but often my research has shown that if these renters have nowhere to go and so it's not like they can vote with their feet.

Yeah, right, right. So. So they sort of create, I mean, a semi monopoly in a market, right?

Yeah.

And you know, if they have to pay 20,000 more, it's no big deal to them. That's like a, not even a rounding error for them versus a, you know, typical home buyer. $20,000 is a big deal. Right. On a first time buy. So that's the other thing. And you know, to answer my own question, they have so much capital to deploy that they've just got to deploy it. It's like a bulldozer. It just has to come through and just buy stuff. But where are they getting all the capital? Why do they have so much capital? How is it that investors have thrown so much money at them versus throwing that money at the other places they would normally Invest.

Great question. So the oxygen that these firms need to exist comes from public pension funds. Big, huge funds like CalPERS, CalSTRS, New York State Common, all of these massive, massive pension funds that have huge liabilities, huge pension obligations to their past workers, to their current workers, and to future workers. And so what they have done in, say, you know, I would say starting in 2000 area like that a little bit, you know, Calpers was ahead of the curve, going in the 90s, started to go full force into private equity investments, even though they're opaque, even though they're illiquid, meaning you can't sell relatively quickly, even though you don't really know the value because there's no market quote, unquote for them. You can't see what The S&P 500 did yesterday day and value your, your portfolio based on that. So all of those negatives, they poured money into them in spite of those problems and drawbacks. So you had a huge investment over the period of the last 25 years in private equity by public pension funds. And they were searching for yield. They were searching for returns that they needed because they've been underfunded for many, many years. Now, initially, those private equity funds did create alpha. They did generate outsized returns over and above what the pension funds were getting in stocks, in bonds, et cetera, in real estate, even sometimes. However, now, Jason, very interesting. Those returns have disappeared. And so the pension funds that are all in on private equity are now being faced with a diminishing return in the asset class. And they have to really start to think about what the implications are for their obligations going forward.

And can you give us some time reference points there? Like, when did the industry sort of gain so much traction? Like, you know, many decades ago. I never heard of private equity. You know, where did it sort of come from? And then when did it get these great returns? And then when did the returns start to suffer? Like, give us some context. Time.

So private equity is, as I said, what we used to call leveraged buyouts. And so they were.

So the 80s then.

The 80s, the 80s. So KKRs are, you know, prime example. RJ Nabisco, that big deal, of course, that was sort of the beginning.

Marians at the Gate book, by the way, folks in the movie, if you haven't seen it. Yeah.

And so that was when it really became kind of a household word, but it was not private equity. Then after leveraged buyouts kind of got a bad name, private equity decided they'd like to have different name for their industry. And so they took on this kind of more genteel, you know, name private equity. So that's why you never heard of private equity in the 90s or the 2000s, because it was also called something else in the early 2000s and before, actually, you really did have arbitrage possibilities here. Okay, so you remember in RJ Nabisco, you had a period of time when stocks were in the doldrums, they were taking a beating. Nobody wanted to own stocks. Right. All the way up until 1982. And so there was a big difference between the valuation that the market was putting on public companies and what those companies really were worth worth. And so the initial guys who were in this business were, were playing that arbitrage and doing it for a lot, a lot of money. Well, that continued in certain industries along the way through, like, say 2010. And in healthcare was a big, big foray for them in the early 2000s because, of course, the nation spends 18% of GDP on healthcare. So of course it's a big, huge money piece. But it starts to diminish after the financial crisis of 2008. And so that's when you start to see the returns start to revert to the mean, revert to what you can get in an S&P 500 fund with a lot less opacity, a lot more liquidity and low cost.

Yeah. Okay. Anything more you can share with us about the real estate market and your thoughts on how private equity will impact that market now? Now, before you answer, I do want to say that even though RFK has sort of made a big deal about this, and a lot of people have, their impact is bigger than it's ever been. And I'll just sort of categorize private equity. With all institutional buyers of single family homes, the impact is bigger than ever. Right. It's never been this big a thing, but compared to the overall market, it's really still not that big. Okay. But many think they want to just buy up every home in America, make America a renter nation. You know, you hear RFK parrot those kind of phrases, which I think are a little over overkill, but, you know, do you really think that's true, Gretchen? I mean, do they want to buy up every home in America? Could they buy up every home in America and what would that mean?

I think they only want to buy up the homes in America that really look to them to be undervalued and, or a real opportunity for profit. Obviously, they're not buying up enormous numbers of apartments in New York City that are, you know, very high priced. What they'll do is they'll go and buy middle income and lower income neighborhood, really sort of take those over because there's just a bigger play, I think, for profit there for them. But what is going to happen, it's very interesting and I wish I had a crystal ball, but we can for certain say that the rise in interest rates is having a negative impact on the private equity business model and especially in the real estate model. So you have much higher rates to borrow and that just always translates to higher costs as an investor. So I think it's probably slowing down even as we speak, Jason. And so I think that you're really going to start to see, especially in commercial real estate and we have seen it, some of these companies giving back the keys to properties where they're really sucking wind and pondering death.

So I mean, that's mostly on the office buildings and we've seen that. And it's, it's starting to, you know, there's some real pain in the multifamily apartment market as well. But in the single family home market, the opposite. You know, these groups seem to be very good at just getting hyper focused on rents and using rental management software algorithms. In fact, there's a lawsuit about that, which is kind of a fascinating lawsuit right now, saying it's discriminatory. And I don't know if it is or not. You know, they're saying the algorithm algorithms discriminatory of how it makes the rent increases. But it seems like this is all going to lead to much higher rents because mom and pop landlords are notoriously bad at raising rents. They're just, they just kind of get very lazy about it. You know, the tenant's pretty good, they don't bother me too much.

Right.

Keep it the same. But I tell you, if anybody's ever lived in an institutional apartment or institutional single family home, every chance they get they're going to raise the rent, they're going to nickel and dime you. They're going to have all these complex schemes. You know, if you renew, if you don't renew, if you go month to month, the rent's much higher. If you renew for three months or six months or nine months or a year or two years, you know, there's all these different pricing structures. This is stuff only a sophisticated piece of computer software and financial engineers could even figure out.

Absolutely.

And they're good at maximizing that income.

The junk fees that are associated with this, I mean, you know, if you're five minutes late with your payment. You can only pay through the portal and then the portal goes down and then you're late and then they charge you a fee. Yeah, there's, you know, fees for garbage collection, there's fees for this.

So it's just like being a homeowner.

Exactly, exactly. So, you know, if I were to bet and I could be dead wrong and you can invite me back in a year and I'll say mea culpa, I was wrong. But you know, we are in a period now with 8% mortgage rates. Okay. So individuals cannot afford that, can't afford to buy homes. Right. New home purchases have ground to a halt, you know, in the individual market. So this is a moment when these firms with all the capital that they have can continue to buy where others can't. So I have a feeling that they're really probably continuing full force in this area because they don't have any competition or they have so much less competition than they would if mortgage rates were at four or even four and a half. And so it could be that this period enables them to, to take on far more properties than otherwise might have been the case. And about your, your prediction on, you know, how they, how it turns out for them.

Yeah, I think we're seeing much more upward pressure on rents due to these companies because if they own hundreds and hundreds of homes in a given sort of couple of neighborhoods, if anybody wants to live there, they're just going to bounce around from one of their houses to another and they can, you know, they've got a semi monopoly.

The other thing that I wanted to mention is that in my, my reporting about this in several cities, I've noticed that these firms figure it's a cost of doing business when they get in trouble with the local housing officials. For instance, if a local housing group comes in and says, you know, and I'm talking about, you know, the city officials, not, you know, an, an individual group, but city officials come and say, okay, you're not mowing your lawn, you're not fixing the pipes. You know, they're happy to pay the fees because they're minimal. They are minimal as far as their, their cost of doing business is concerned. And so when finally have to pay the piper, it's really not a lot of money.

Yeah, well, the other thing they do is they have the power to lobby the government and to get things changed in their favor, which the mom and pop landlords don't have that power. So. Yeah, it's interesting too, but you know, What I was going to ask you is we started off, Gretchen, talking about how LBOs or leveraged buyouts work where they saddle the company with a bunch of debt and then they pay the debt back through the company's own cash flow, which is really a phenomenal deal if you can get it. How are they financing the single family home purchases? They're not getting individual loans on each property.

No, no.

What are they doing?

They would be raising capital from again, these big institutional investors and then they would have that pool of capital and they would go in and try to be as efficient as possible to find a vast number of houses in say Nashville, Tennessee or Cincinnati, Ohio or whatever, you name it. Yeah, and so no, they are not doing it one mortgage at a time.

Time. So what is the cost of their debt and what are the terms? What do they look like? Do you know that? Are you aware of the cost of.

Their debt And Right, so it depends on the balance sheet. Right. Are they very, very sound financially? If so, then you know, they could probably get capital, you know, in the 7, 8 range. If they are not sound, if they're really levered, then you're going to be talking double digits. Right.

And how long? I mean they're not getting 30 year fixed rate loans. Like what do the terms look like, five years, seven years on those loans.

Or you know, the, generally with private equity, the, the, the holding period is like seven to ten years.

Yeah, okay. Interesting, interesting. Anything else you want to tell us? Any questions I didn't ask you that you want to share with listeners?

Well, you know, I think it's just important again to go back to that question that you, you mentioned, you know, Milton Friedman and what kind of capitalism do we want to have? And you know, it's one thing to have an idea that you want to get rich and I am certainly for that and I. But you know, at the expense of whom? And so that's really the question that I think we as a people really want to ask. And so if you're benefiting the vast number of people, if you're benefiting your workers and your customers and your pensioners, et cetera, then great, go to town. I wish you the best. But if you're penalizing all of those people to make money for yourself, then that's a problem them.

Yeah, I mean that's the whole idea of capitalism is that it creates all these win win relationships where people were free actors, hopefully rational actors in a marketplace, you know, trade value because hey look, the thing you have is more important to me than the money I have. So I'm going to give you my money and you're going to give me your thing. Right. And that works until you get either crony capitalism or monopolies and duopolies or lobbyists.

Or, or a technocracy. Right. All of those things really kind of circumvent that free market. And you know, what we thought capitalism was and you know, worked pretty well for a long time. But you know, now you can, you can see why it's not really capitalism in the typical sense anymore. Gretchen, any closing remarks and give out your website.

Well, you know, I don't have a website. But I will say this, Jason. Tell your investors that private equity is coming for their money now. Now because they have tapped out all the pension funds, the pension funds can't put any more money in. They are up to here in private equity. And so you'll notice, you'll see little stories here and there about trying to raise money from individuals, trying to raise money from high net worth individuals. Be careful out there because these people don't have your interests at heart necessarily. They might one sometimes, but be careful. Read the documents, make sure you understand the illiquidity, make sure you understand the costs, make sure you understand the other negatives. But they are coming for the individual investor next because they need a new pool of capital.

Yeah. And you know, Gretchen, a question I actually wanted to ask you earlier, sorry about the pension funds. You know, we are on the verge of a pension crisis, not just in the U.S. but worldwide, that I don't think anybody really understands the magnitude of, of how significant this is. And if you have these private equity groups that are investing that pension money and they're just in it for their gain the short term and they're going to cash out, they're going to take a huge percentage of the deal. Are they going to manage those pension funds responsibly? I'm guessing what your answer is, but any thoughts on that and what that's going to mean?

They, like Friedman, believe that if they do the returns properly, that's all their obligation is. Right. And so to the degree that they can beat the, you know, whatever benchmark, yes, they're going to be helping those pensions out. However, I would say this to your question, which is, I agree 100%, this enormous, real huge obligation out there that we are not going to be able to pay. The scariest thing involving private equity and pension obligations to me is that that these firms are now going into the insurance business and they are funding annuities and buying pension obligations from major corporations and managing those. And that scares me because these are real risk takers and I don't think the pensioners begin to understand what the risks are involved.

Yeah, I think you're right, Gretchen. Thank you so much. The book and your other great books are available in all the usual places, of course. This one is these are the How Private Equity Runs and Wrecks America as well as your other great books too. Thank you so much for joining us.

Thank you, Jason, and good luck to all your listeners.

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