2388: The Golden Rule of Wealth, The Warsh Effect & Yield Curve vs. the 30-Year Mortgages

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Hey, buddy.

Just wanted to say thanks again for the awesome job you did Friday morning. That was great. Just started out our day perfectly and put a cap on our event. I just thought it was awesome, man. You did a great job. But even more than that, just appreciate your spirit in the room, man. Seem like you're just more alive and just more enthusiastic than ever about things you're working on and things the family's doing. So I just want you to know I appreciate you, man. Travel safe.

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.

Alrighty, folks, you know that Jason and I talk about real estate all the time. We've got 50 years of experience in the business, but I thought we should take a, a dive into more recent.

More than 50 years in the experience.

Zuber, stop making us old, man.

Come on.

Okay, but anyways, over the last, between us, right? Yes, yes, yes. Over the last 72, maybe 108 hours or so, Bitcoin has gone from, you know, over 126 down to as low as 60, back to 70. We've seen a collapse in the silver market from 110 down to 70. We have this whole bet Amer or sell America trademark. We've got a new Fed president coming in, which I think Kevin Warsh really shocked the audience. So it looks like the dollar is getting stronger, not weaker, out of nowhere. And it's caught a lot of people off guard. So I'm curious, what thread do you want to pull on? Because there's so much things going on right now and people don't know what to do.

Many threads to pull on there. So that's a great way to say it. Michael. I think the first thing we need to realize just broadly from a macro level is we are Moving into an era of more accommodative monetary policy, more stimulus, easier money. And folks, you don't have to be a rocket scientist to figure out that that means that money is going to move into asset prices, especially real estate. And that is good news for all of us as real estate investors. We've got the most historically proven asset class in the entire world. I know there are cycles and every crypto bro on social media is a genius at some points, but now they're all looking like idiots. Look, I, I own pretty much every asset class. I can't think of one that I don't own in, you know, in any real way, right? And I've accumulated a decent amount of bitcoin and now I've given a lot of those profits back. I've always said the same thing from the day I discovered bitcoin, the day I heard about it when some guy was trying to explain it to me and the price was $74. Okay? And I did buy a little bit along the way, way back when, but most of my stuff is much higher than that. You know, I've always said this is a speculative asset class. You know, you have to understand the definition of an investment. According to yours truly, Jason Hartman, here is the definition of an investment. An investment produces income, Period. An investment produces income. If it does not produce income, it is not an investment, it is a speculation, it is a gamble. And listen, you can make money speculating and gambling. Oh yeah. I mean, Michael, I'm going to be speaking at your event this weekend in Las Vegas, the town that is known for gambling. I'm not saying you can't win gambling and speculating. I'm just saying that the older you get, hopefully, like me, the older I get, the more conservative I become with my money. I just want simple, proven things that have a track record that is thousands of years long and that is income. Property. You know, you can go back to ancient Rome and the rent to value ratios, and I did a podcast on this, are actually consistent with the current modern day rent to value ratios. Meaning. I'm really talking about the tenants income. That's what I meant to say. Not rent to value, rent to value. I don't know, I didn't study that one. But the tenants income to their rent was about the same in ancient Rome as it is today, about 30 to 40%. Okay. That was denominated in the denarius. Today we're doing it in US dollars or wherever you are around the world. It is just such a proven asset Class. Now why didn't I mention gold? As soon as I said I want something with a multi thousand year track record, people would have said, well, gold, Jason, gold is the thing. Right? But gold is a speculation. It doesn't produce income. Okay? Silver is a speculation. Bitcoin is a speculation. Raw land is a speculation. No income production unless you're renting it out as a parking lot or you know, whatever. Okay? An investment must produce income. A non dividend paying stock is a speculation. If you want an investment, it has to produce income. Now Michael, let's go to income property specifically. Should you ever buy an income property that doesn't have positive cash flow, would that qualify as an investment? Well, the answer is maybe. And the reason I say that is is because when you buy a property with leverage, remember you haven't paid for the investment yet you financed the investment. And pretty much every income property, I hope if you pay all cash for it, it's going to produce positive cash flow. Okay? Now granted it could not be rented and not do that, but if it's rented as it should be, it's going to have positive cash flow. So if you are able to, to highly leverage it, which is not necessarily a bad idea, it might be a great idea and that we have to unpack that. It's a little bit complicated. You're going to have positive cash flow. Okay. But no matter what, it produces income. As the name would imply, it's called income property, not speculative. That's an investment.

Yeah, you brought up a couple of things there. I want to pull on that thread of been, what's an investment income. So if it doesn't produce income, I, I'm already hearing people scream in the back of my head about gold or silver or bitcoin saying it is an, is an asset. I guess it would be, you would probably call that at best a store of value.

Yeah.

As opposed to an investment. Is that how you would look at those income producing things?

You know, look, you've heard Michael Saylor say a million times that you know, Bitcoin is digital gold and gold is a store of value. Right. It's been proven to be a decent store of value. But you're not going to get rich investing in a store of value.

No, you're. Yeah, you're protecting inflation, perhaps.

Yeah. The whole thesis of that statement is that you're hedging against inflation, you are preserving wealth. Okay? And as I always say, and you know, many others have said, there's an old saying, don't put all your Eggs in one basket. And then there's another old saying. Andrew Carnegie said, put all your eggs in one basket and watch that basket.

Exactly. Watch the epic basket.

So diversification perpetuates wealth. Concentration or focus creates wealth.

Amen.

Store value is not going to create wealth for you folks. Okay. That's just generally not going to work.

Yeah, but I actually want to go back to the beginning of your talk there because, you know, I think the market got the Fed nomination wrong. I think the market was set up for either Rick Reeder or Kevin Hassett, which would both would have been perceived as cut, baby, cut. Kevin Warsh.

Yeah, I agree with you.

Yeah, right. He is not the easy money guy. Right. And more importantly, money guy. But no, that's true.

Thinking that he's changed his tune now, you know. Yeah, yeah.

So I think there's a couple of things we have to watch with Kevin Warsh because I am not convinced. So first off, I do think he changed his opinion. I think he would, I think he would say that 2006, 7, 8 is very different than today because again, he was a hawk. He was a dissenting vote before. So again, people are looking at that going, oh, you know, why did Trump.

And what you're saying there. Just let's explain that to those who may not be too into this. But there's, you know, a Fed chair can either be hawkish or dovish. Okay. Hawkish means that you're like a hawk. You see inflation and you attack it with higher rates usually or tighter money. And a dove means, ah, you're just kicking back, you know, nothing, you're not paying too much attention and you're just going to let the easy money roll. But I think the overall, just the zeitgeist of the Fed in general, no matter who's there, except Paul Volcker in the past, in the early 80s, they're all doves really. Okay. I mean, by and large, I mean in comparison, they may not be okay in comparison to each other, but they're all going to let. Overall inflation is going to be the trend, if you ask.

Well, inflation is the only option when you're in the fiat money system. Right. So they all have different flavors of that. But let's get back to Kevin Warsh because I do think the market is missing something.

Okay.

I do think that ultimately he will be cutting, maybe not as quick, maybe not as fast or big as the other two, but I think he cuts because I'm going to guess he had a pinky swear or blood oath or something. To cut rates to get the job right, we'll never know. But that's my wild ass guess. But the little wrinkle that I don't think people are ready for is he is on record recently with saying things like the Fed balance sheet needs to be smaller. So my fear is yes, he will give us the cuts. Let's just pretend for a moment he delivers four cuts this year, which is two more than the Fed is currently saying. I think most people would call that a dovish Fed president. He'll give us four. But if he continues to shrink the balance sheet because it was as high as 9.2 trillion, it's now like 6, 7. So if he takes that from 67 down to 4 2, I'm just making these numbers up. That's not going to be the easy money environment that maybe we think it's going to be because you'll get a, you'll get a yield curve that is, I'm guessing really steep, really short, really low on the front end and you know, not, not much, you know, on, on the back end. That is what I think is coming is, is a very steep yield curve and I don't think the market's ready for that.

We shall see. There's a lot of debate as to how meaningful is the yield curve anymore. I mean you know, we were talking about our, our mutual friend George Gammon and how, you know, he's really called that quite wrong. You know, he was, he was saying, you know, at least a couple of years ago, oh, the yield curves inverted, recession disaster and you know, it was completely backwards. That's the complete opposite happened. Yeah, yeah, yeah.

But when you think about the yield curve, what does it mean to us? We're real estate guys. I would argue the yield curve means a lot to us because the ten year, because of the ten year treasury, which is on the long end and that's where the 30 year mortgages, you know what's really crazy is commercial mortgages, three fives and tens, three five sevens and tens, they could actually see a big drop. But you and I, home builder Joe, home builder Joe, home buyer, I should say, probably not going to see a lot of relief. Right? So, so that's how this will play out. If the yield curve is steep in real estate, commercial loans like you could get a commercial loan with a four handle. If, if I'm right, you will not get a mortgage with a four handle, a 30 year mortgage because they're really compensated or priced on different parts of the yield curve.

Right, right. In Other words, what, what you're saying, if I'm hearing you correctly, is that the commercial mortgages, because they term, they don't give you a 30 year fixed, it doesn't play out the same way as it does for residential, which is one of the huge benefits of residential over commercial is you get those long government subsidized fixed rate mortgages for three decades and maybe four or five decades soon you can get a 40 year loan. Today it's just not government subsidized.

So you can get a 10 year IO with 30 year after it if you want it.

Right.

Those, those loans do exist. But again, if I'm right about Kevin Warsh and he does what I expect, again, and this is important for the real estate market, the commercial players, the Ken McElroys, the Grant Cardone's, the developers, you know, all of those folks, their loans will get probably meaningful, cheap, meaningfully cheaper, especially the three year.

Right.

If I'm right, there's a chance that three year money has a three handle like 399 on it. But the 30 year mortgage that Joe Homebuyer gets, it's still going to have a six on it.

Right. So that's why he's got a much longer mortgage. It's a better deal. Yeah, right.

No, if folks, if you ever want to know how to lose real estate, get a three year loan, it's the debt that blows up. I'm just, it just is what it is. But I am looking at, in the future realizing that the cost of debt is going to be very different because of the yield curve and how they're priced and, and that will move the needle. I'm curious where you come down on this. Do you think we are headed towards Renter Nation, where, you know, I think currently homeownership's like 67. Do you think we collapsed under 60 in a decade or two?

Yeah. And I think now we're just under 66, if I'm not mistaken.

Yeah, I was guessing. Yeah.

And listen, I have long said that I think the natural homeownership rate should be lower. And really look at me like I'm the Antichrist for saying that it shouldn't be as high as it is. I don't think it's actually super healthy to be artificially high. I think it's fine. I think the natural homeownership rate, if you didn't have all this government subsidy would be about 55%. Okay. And that's a big difference between where we are now. You know that's what's been the low.

For the last 50 years. Wasn't the low just like 64%?

Yeah, I know. I think we got like 262 or something like that. I'd have to look. I don't look that a lot lately. I used to, but we never got.

Never got in the 50s.

Yeah. Hey, listen, here's the important thing everybody needs to know. 1% difference in the homeownership rate up or down equals about 1 million people. Okay? That's about the number. It's rough. Okay. But 1% is about 1 million. Okay, remember, there's 140 million housing units, but not all of them are owner occupied. So you have to segment out the owner occupied versus non owner occupied. Right.

Good call, good call.

And so, so you know, you're roughly at about a million people. Okay.

Okay.

And that's a million new tenants. If the homeownership rate is lower, pushing your rents up. If the homeownership is higher, rate is higher, that's less inventory, pushing your prices up. And that's the beautiful thing about income, property, multidimensional asset class. You're going to make money either way as long as you adjust your strategy. That's the beautiful thing.

I'm curious, when you look at the housing market today and if you were in charge for a 24 hour period, do you see the big rocks? Like one of the big rocks is, you know, we just, we're. I don't know, I hear all kinds of numbers. Are we 4 million, 5 million, 6 million, 7 million units short? Or do you think it's more? Hey, we don't have enough properties in the right areas of the country. Where do you come down on this supply issue? Is there a supply issue? Is it fake? Is it real? What do you think?

Yeah, well, that's a great question. And you know what, I've got some visuals for you on that.

How did I know?

Let's look at the shortfall of rental units and then we'll look at the shortfall of for sale units. Okay? So you know, you've got to look at this legend, okay? And the redder areas are the bigger shortfalls. The greener areas mean there's really not a shortfall problem. Right. And this is 2024. So this is the latest data. I just got this data, by the way. It's not old, it's just probably the latest data they've calculated. Remember, real estate data always has a pretty decent sized lag to it. Okay, but you can see here we've got huge shortfalls in some areas and not as much in others. Okay. Obviously you look at some areas in the middle of the country, there's just really no shortfall at all. Okay. There are people that are not in some areas like you look at some areas in Florida, big shortfalls. But again, Florida is going through a bit of an adjustment in some areas now too. So, you know, it's, it's complicated. That's why you have Michael and I to help you with this stuff because, you know, we live, eat and breathe this stuff all day long. And then here is the for sale units. And this is particularly interesting, more so than the rental, I think, because the rental may well be mixing in apartment renters for sure. It probably is. Okay. But the for sale shortfall is really significant. I mean, just look at this. And the estimates go anywhere from 1 million to 7 million as the overall nationwide shortfall. And you know, here you can see this number before it changes is 10,000.

Wow.

Okay, so if you look at one of these dark red areas, okay. It's 10,000 units short. Okay. So there are. We need to build a lot of fricking houses. I mean, the shortage has just been baked in for so many years that it is very serious. And this is the opportunity for you as investors to profit by serving the people that need the housing. Okay.

Yeah. It's interesting because you brought this up to me, you know, right when we first started talking every week that we've, we've basically created a transaction vacuum. Right. Six million transactions that should have happened didn't happen. And that's going to come. This actually points to the fact that we've been under building for well over a decade.

Oh, yeah. Well over a decade.

Yeah.

Okay. Absolutely. All right.

So again, the reason I wanted to ask that is there is, you know, President Trump has announced a housing emergency or whatnot. We've heard 50 year mortgages, loan portability. We've heard 200 billion in MBS. We now heard builders talk about Trump homes and building a million homes. I, I don't know about you, but frankly, I don't think we need more demand. I think we need more supply. And supply is hard.

Right.

You got regulations at the city or town level. It's just, you know, getting supply up is just really, really hard and unfortunately, really, really slow.

There are many, many obstacles to supply. You know, if you're in the tech world, you're certainly familiar with Peter Thiel. Okay, billionaire probably. Yeah. You certainly heard him on interviews and heard his name. But you know, one of the things he talks about in his great book called Zero to One, is he talks about in business and on interviews, you've heard him say this, right? He talks about you need to have a moat, okay. Around your business. Warren Buffett also talks about that. Okay. And the moat in single family home investing is that they're damn hard to build, they're very hard to create. So you have this natural moat. So any supply that you own as an investor is very difficult to recreate. Remember, everything in the world has two major value drivers, according to me, scarcity and utility. Okay. And wow. If single family homes don't meet those two criterias in massive amounts, I mean, they are scarce, they are hard to recreate, they have built in rarity, at least for the next seven years or so. That's what the experts will say before we reach equilibrium. Hopefully in seven years, by 2032, 2033.

Call me suspect. Call me suspect.

Yeah. Okay, well, you can comment on that one in a moment. But they also have super utility. Everybody needs a place to live. I mean, total utility. More so than, I would argue, more so than anything. They have utility. Right. Except, you know, food and water. Okay. Yeah. Okay. Yeah. But what's your skepticism? Tell me that.

Well, again, I think the skepticism was that I don't think we're going to get back to equilibrium. I think there's no, there's no, you know.

Oh, so you think 2032, 2033, we're not there.

Exactly. Yeah. I just, I don't, I don't see the economic will to get there because it's a national problem and we have very localized. I mean, I've tried to build in different cities and it's funny you brought up the idea of a moat because I get a lot of heat for buying in a blue state. And I got to tell you, I buy in a blue state because of the moat. Yes, I have. I have rental regulations, and yes, it's harder, and yes, it's more expensive to get people out, but you know what? I don't get a lot of new building. There's not a lot of new construction coming in my areas. That makes all my old stuff more valuable.

Yeah.

And when we've got a lot of old stuff, it makes it a lot more valuable.

So I get the idea there. And the moat is harder in places like the Socialist Republic of California, although it did get easier with the ADU laws and stuff like that.

Yeah, that's a net positive. Yeah, for sure.

And. And by the way, there's another thing possibly attacking that moat you should be aware of. They changed the zoning significantly around mass transit where they made it way easier to build tons of high density housing. And that's great. I think that's really smart. Okay. Has actually done a couple of smart things. Once in a while they get it right.

You know, it's like a duber. You know, every once in a while they're right.

Yeah, exactly. It's a broken clock. Is right twice a day.

Yeah, that's funny. That's funny. So, yeah, it's really interesting. Again, I think 2026 is going to be a year that separates folks. I don't know if you heard Ken McElroy recently, but Ken McElroy is basically talking about 2026 is going to be the year that that pain is recognized. A lot of these GPS and lps are going to go to zero in this multi family. But he's also like, hey, if you've been, you know, if you've been conservative, you've been saving your pennies, there's going to be a lot of millionaires created this year. And I believe that wholeheartedly. As somebody who's been on the conservative side, not doing deals because I couldn't. It's just nothing penciled for me. I'm excited to pick up stuff at 30, 40, 50% off here in, you know, the next 12 to 18 months. I think there's some real pain coming.

I don't know. You know, I don't think the discounts are that big, my friend. But literally, like every trend in the real estate world is going in the right direction right now. It's been wrong and it's been tough for about two and a half years.

Correct.

But look at the vacancy rate of homes, right? This is for sale vacanc vacancy rate and for rent vacancy rate. It's, it's very low historically. And remember, some of these homes are meant to stay vacant because they're second homes owned by people that can afford a second home. They don't have to Airbnb them. Okay. You know, they're just second homes. Okay. Yeah.

To be clear, Jason, just case it wasn't, I'm not talking single family prices, I'm talking busted syndications.

Yeah, right. Oh, yeah, that's a different thing. Yeah, yeah. With the, the syndicators in the multi family apartments that just, that's what I people.

Yeah, that's what I'm referring to. That, that pain has been paying because again, I would, I am an ac.

That pain is Going to continue for a little while longer, for sure.

Agreed. That's where. That's what's coming. Because I'm already starting to see some of the listings. And again, I've done this before. 10, 11, 12, buying busted apartment deals. And that's, that's where I think millionaires are going to be made. It's not single family. To your point, the trend in single family. Single family is just going to be boring.

Is just a boring, conservative investment that just works. It just works over and over. It's not very risky. You know, the risk profile is extremely low. The returns are fantastic. But if you're looking to buy an apartment complex from some syndicator who's lied to everybody and screwed his investors over and you're not going to suffer with any successor liability and litigation from that, you know. Yeah, there are certainly some deals out there.

That's the pain that I see coming. And again, it's not only going to be the big stuff, because I know in my market, again, one of my strengths is I only know one market. There were. There were, you know, I'll call them baby syndications going down to as small as 10 to 20 unit deals. And that stuff was still. I mean, there was a building that I sold for a million bucks that is currently on the market for 2.7. Why are they on the market?

How many years?

So seven years since I sold it. 20, 19. I sold, it's now 26. Call it five years. I sold at the end. Whatever. The point is, the, the building is still in a crap part of town. It's still 70 years old. And yeah, it's got a fresh paint job and a gate, but it ain't, it ain't worth 3x. The reason they're at that price, that's all the, that's all the debt they took on.

Yeah.

And they're just trying to get out. Right. And, and I've already talked to the bank. The bank's like, bail us out. They're like, they're, they're whispering numbers at me like, will take two, one. I'm like, that shit ain't worth. You know, I wouldn't buy that building for a million. I sold it for a million. I wouldn't buy it back for a million. You know, I might buy back for 700, but, you know, there's so much pain coming.

Yeah.

So at the end of the day, you are coming out to Vegas. Just hit us real quick. What's going to be the topic? What's going to be the value of your keynote day one morning before lunch.

Well, I'm. I'm really honored to be kicking off the conference. It's going to be great. I just did a video last week where we finally calculated return on investment for a real estate portfolio or a single deal over the course of a seven year period. We did it very differently this time. We took our main pro forma that, you know, anybody can get from a free property tracker account, propertytracker.com that's. I bought that. I made it free when I bought it because it's such a powerful software and the returns people get with their income properties are just unparalleled. You just can't do this in other things. And I only say that not because it's the greatest investment or anything like that, but just because it's multi dimensional. It's just a special type of vehicle. I mean, listen, if something else was a special vehicle, that's what I would be into.

I'm not.

I'm agnostic, man. I just want to make money and make profits. This is a special asset class and we should really understand its uniqueness and I'm going to demonstrate a lot of that on Saturday. So looking forward to.

Beautiful. Jason, you're amazing. Thank you for coming in. I know you've got high demands and you're a busy guy. I appreciate you each and every week and especially coming to Vegas for me, that means the world to me. Thank you, buddy. Take care.

Looking forward to it. Happy investing. Thank you so much for listening. Please be sure to subscribe so that you don't miss any episodes. Be sure to check out the show's specific website and our general website, hartmanmedia.com for appropriate disclaimers and terms of service. Remember that guest opinions are their own and if you require specific legal or tax advice or advice in any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to itunes or Stitcher radio or whatever platform you're using and write a review for the show. We would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.