2477: Builder Profit Margins Hit 26-Year Lows and Solving the American Housing Crisis

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Hey Jason, so I thought I would share a hybrid management update. I just had 5 back-to-back closings with 5 different investors in the same market. 3 of them are self-managing or hybrid managing, and they all have Tenants already, and the 2 that are using property managers do not. You are so right on all of that, and I just wanted to share the progress and how boldly our clients are starting to take management into their own hands.

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 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.

Good day, empowered investors, and welcome to episode 2477. We are so glad to have you here as always. And I want to share with you a quote from one of my newer mentors. This guy's great. I saw one of his quotes recently and I really liked it. The last person you should ever have to meet on your deathbed is the person you could have become. Wow. That is a painful lesson I think too many of us learn. And let's not learn that lesson because let's become all we can be. You know, most of that in life is all about the opportunities That you didn't take. Maybe a good movie to watch again, I've recommended before, and you know what, I'm going to watch it again because I haven't seen it in a few years, and that is Yes Man with Jim Carrey. Yes Man. He says yes to everything, and at first it appears that he's just a fool, but you see how saying yes actually turns out to be the better decision. the vast majority of the time, because one thing leads to another and another and another, and there's this processional effect, this domino effect, and things just tend to work out. So err on the side of taking more opportunities rather than being this shut-in type of person who never does anything. We all have friends like this. We've all been like this at times. I have admittedly, but this is not the optimal way to live life. The optimal way to live life is to just do it. In fact, I think there's a famous sneaker company whose stock, by the way, is not doing too well lately that has that saying, but it is a great saying. So just do it. And wouldn't it be amazing that we would actually be talking about how the people who locked in At 6%, mortgage rates are actually quite ecstatic right now because the value of their mortgages, even at 6%, which is if you're judging from the compared to what during the COVID era, ain't that great, right? That ain't that great. We really loved those low 2.5%, 3.5%, 3.5%, 4% rates, but those are gone and those are likely gone forever. If we get down to 5.5, we will be very, very happy. But right now we've been going the other direction. And the funny thing about human nature— nothing new here, I have shared this with you before— but the funny thing about human nature is that most of you are jumping at it right now. Business has picked up for us, and I'm happy to say that. And it's funny how The fear of loss is just a bigger motivator than the desire for gain. And back to that quote from Anthony Trucks, right? The last person you should ever have to meet on your deathbed is the person you could have become. That represents the idea of the opportunities we did not take, the things we could have done that we didn't do, the risk we didn't take, the chance we didn't take. Whatever it is, right? And those are usually the things that are the biggest cost because you can't hear the dogs that don't bark. And let's make sure we are always aware and conscious of the dogs that don't bark because those many times are the biggest cost. How do you say that another way? Opportunity cost. Let's talk about that for a moment. Do you have a bunch of assets sitting around doing nothing, like equity in property, maybe equity in your home, equity in investment properties that is sitting around just doing nothing? It is not working for you. It could have become something. Like the quote, the last person you ever want to meet on your deathbed is the person you could have become. Well, think about it. What could that equity have become? And you've got equity sitting in properties right now. You've got money sitting in the bank that is being just completely debased and destroyed by taxes and inflation. And that money could have become something. It could have helped you become something. So the unused opportunity, the dogs that don't bark, the opportunity cost is mostly the biggest cost in life. So don't let that be your cost. Always be conscious of the things you are losing by not taking opportunities. Let's talk about a couple of those opportunities right now. Now, by the way, you can see a lot of opportunities if you go to empoweredinvestor.com and you click on the properties page, or if you want to go directly empoweredinvestormarketplace.com, either one. And there's lots of great opportunities there that offer nice high returns on investment. Probably much better than whatever you're doing now. That's the opportunity cost. Okay, so let's just first talk about tenants. Now, I've talked many times about what I call the 3 dimensions of real estate, but there's really much more than 3 dimensions. There's about 8 dimensions of ROI, or return on investment. We know that. We've talked about that extensively. Most investments, the whole deal is buy low, sell high. That's it. Dividend-paying stocks, buy low, get some dividends, sell high. That's the hope. Precious metals, cryptocurrency, most other things, buy low, sell high. One-dimensional, maybe two-dimensional investment. Income property, 8-dimensional. Wow, that's amazing. We usually don't think of being in the 8th dimension. What would that be like? Let's get a physicist on the show to discuss it. We'll do that later. Maybe we'll discuss the space-time continuum and quarks and things like that. That's pretty cool stuff. But Let's look at renters. Because the interest rates are so persistently high and because prices keep rising even with these higher interest rates, and because housing affordability is so persistently low and bad, people are staying longer in rentals. And I am certainly noticing this in my own personal portfolio. My renters are sticking around. Vacancies are lower. Tenant turn is much, much lower. There's no sign my tenants are going anywhere. Why? Because they're not going to turn into first-time buyers anytime soon. Even second-time buyers like the post-divorce tenant, right, that used to be a homeowner and now rents because divorce is one of the biggest destroyers of wealth. So they're sticking around longer. And that is also true in the institutional side of the market. Because here we have a chart. If you're looking at video of the institutional homeowners, the build-to-rent people, those big institutional Invitation Homes, all those big builders we've talked about ad nauseam, their renters are staying much longer. So if you see in 2026, the tenure of a tenant that is going 3 years and above is 30%, 4 years and above 15%. 5 years and longer, 18%. Never plans to move, 10%. And all of these for 3, 4, 5+ and never plans to move time frames are the highest they've been in the last 3 years. What did I tell you? When the housing market is quote unquote bad, and I wouldn't even call it bad now because prices have been rising all along. But it's definitely a frozen, boring market. No question about that. Activity volume is down, although recently it's spiked up a bit. So that's good news, at least for us. These tenants are just sticking around because the other options are not that attractive. It's better for them to stay. So this is the time as an investor to just be a good operator, a good manager, a good manager of your managers. If you're not self-managing, and we hope you're self-managing, and if you're not self-managing, be sure you're attending our monthly masterclasses. They're totally free. We've got one coming up. It's going to be a good one. Just go to empoweredinvestor.com/wednesday and register for those every single month. Never miss one. They're free. Join our Empowered Investor Pro small group where we do our monthly private Zoom meetings. empoweredinvestorpro.com for that. Ask your investment counselor if you're working with one of our investment counselors. And by the way, they are here to help you with maximizing return on investment in your portfolio. They'll do a free portfolio makeover and show you the highest and best use for any of your assets. So get with one of our investment counselors. You can just reach out through empoweredinvestor.com or call us 1-800-HARTMAN.COM, press extension 2, get with an investment counselor. and let them assist you on your wealth-building journey. If you're an existing client, they'll do a portfolio review for you. If you're a new client, they'll do a free portfolio makeover for you and really help you maximize ROI, reduce risk, refer you to the right asset protection people, estate planning people, mortgage people, cost segregation, whatever you need. It's all there. Free Property Tracker account at propertytracker.com. Literally the best deal evaluation software in the entire business. Bar none. I've used it for 22 years. It's the best thing going. Okay, one more thing before we get to our guest today, who is here to talk about land liberty and why private property rights are so critically important. Okay, this is KB Homes. This can be used as a proxy for the real estate market in general. And you know, everything has an equalizing factor to it, doesn't it? So Housing affordability persistently low, interest rates persistently high, prices persistently high. And a lot of people would look at that as saying, wow, you know, that's just not good. I want it to be better. But look at what the builders are doing. Their margins are compressing. Now, would you rather buy a property from any of our builders or our home remodelers, renovators, flippers, whatever you want to call them, our local market specialists, that you can all find at empoweredinvestormarketplace.com. Would you rather buy from them when their profit margins are the highest or when they're the lowest? Which one gives you a better deal? Well, certainly the lower profit margin is a better deal for you. And guess what? KB Homes right now is operating at some of the lowest profit margins, the most compressed profit margins since 2000. That's 26 years, folks. Over a quarter of a century, KB Homes— and this is pretty much a proxy for every other builder because it's all, it's pretty much the same across the board. You look at all the other builders, it's pretty much the same story. Okay, 16.5% is their margin now. Okay, and I'll just read you what the chart says. KB Homes gross margin on home sales for the 3rd quarter by year.

Okay.

So the 3rd quarter of every year for over a quarter of a century, KB Homes is now at a 16.5% margin. And that is pretty much— yeah, that is the lowest except during the Great Recession when they literally had negative margins. But since we came out of the Great Recession, 2010, they were operating at 17.5%. And there was a little blip here where they were slightly lower at 16.2%. in around 2017, a historically weak level there. But right now, 16.5. So things are on sale, folks. These builders are cutting deals, and we've got them for you. We've got those deals, we've got those incentives, we've got those discounts, we've got those mortgage rate buydown programs, lots of incentives. Our investment counselors can help you get the best deal. So reach out to us. All right. We'll see you on our masterclass hopefully next week. Empoweredinvestor.com/wednesday. But now let's go to our guest and let's talk about Land Liberty. It is my pleasure to welcome David Rand. He is the founding president and CEO of Land Liberty Movement, a national nonprofit focused on housing and property rights. He was a key strategist behind Montana's 2023-2025 housing reforms, known nationally as the Montana Miracle, and he hosts Build the Dream, a new media platform to advance housing reform in every state. And gosh, we sure do need this, don't we, David? It's just crazy, the housing shortage and the housing crisis we have in this country. Tell us, you know, just kind of broadly what you're all about and, and what your organization's all about.

Yes, thanks for having me, Jason. Yeah, so we are a new media platform to build the policy consensus for the solutions that we advance in Montana nationwide. The idea is, you know, we went from the most constrained state, one of the most constrained states to build, to one of the freest in only 4 years. And I think many other states can embrace this opportunity from a center-right point of view. And that's what we exist to do because 66% of Americans feel like they are struggling to pay their rent and to pay their mortgage. The amount of Americans that are rent burdened right now means 30% or more of their income is going to rent is doubled. It's up to 40% of all renters now. So we are in a desperate situation in this country, specifically amongst the youth. People are filling in the building trades, they're filling in the realty market, they're filling in the investment market when it comes to the health of the housing market. And I think natural, real market prices will make the difference in satisfying what consumers want, producers want, and what investors want in this space.

So are you strictly focused on the pro-growth, in other words, pro-development, pro-building aspect of the problem, or Are there other areas?

Um, you know, I, I also talk about monetary policy. I mean, I'm a political machine, right? I'm a political nut. Like, this is what I do. So I mean, a lot of things intersect with this. I talk about labor reform. Uh, there's lots of things you could do when it comes to the challenges we have in the trades. A lot of states have a lot of protectionism in the trades, and not to mention occupational licensure challenges that can make it harder to get started in construction. There are things you could do, especially out west when it comes to land use and our public lands that make lumber more expensive than it needs to be. We've gotta import a lot of Canadian lumber and we can't pull it out of all those forests across the Mountain West. So there's lots of different ways that we approach this issue and talk about this issue as a political solution. But our starting point, our starting point is what is property rights? Where do prices come from? How do we make sure that we can satisfy consumer demand and, and so that builders can make a profit and everyday Montanans and people across this country can achieve the American dream.

Yeah. So what are your thoughts on— I mean, I know the developers are facing— the homebuilders are facing huge labor shortage problems. You alluded to that. Of course, wages, material costs. I mean, just the land use problem. The regulatory burden on every house is about, you know, I think I saw a survey that said it was about $130,000 per house. And at the same time, when we have all of this add NIMBYism to it, where, you know, people don't want to allow more building in their areas because, you know, they, they think traffic, it'll lower their real estate prices, it'll let, you know, undesirable people be able to afford in their areas and so forth. So I actually had Thomas Sowell on the show many years ago, and I coined a new—

Yeah.

I coined a new phrase that I thought of in my interview with him. And that was from my having lived in Orange County, California for so long, where in the master-planned communities of Irvine and Newport Beach, they would have all these dedicated open spaces. And, you know, it's just land that's like, they're making it useless on purpose for no real reason. And the phrase I coined was environmental racism. It was all the lefty people that own all the expensive homes in those areas. You know, they wanted to lobby for the environment, but what they really wanted to do is keep others out, you know? And so the NIMBYism problem But then add to that the just kind of non-acceptance by Americans of the new, much better version that is nothing like the old version of manufactured housing. And I think as a country, we have got to start accepting manufactured housing, which really is much smarter. You know, why is it that a home is such this low-tech item where you bring all the materials to a job site, there's tons of waste, You bring a zillion different trades in where you could build the walls and panels in a factory and ship them to the worksite and construct that house in a matter of 2 weeks, probably, right? But for some reason, Americans just won't— they won't do it. They just don't like manufactured housing. I gave you a lot to chew on there. Take it.

Yeah, yeah. No, I love it. I love it. So let me start out with, with a really big picture that we tell about this story, because a lot of people think that the baseline that we're operating from Is zoning has always existed and we're doing something crazy and weird by saying, well, maybe we should give just a little bit more latitude to property owners to transform their property and builders to build on a lot, empty lot, or redevelop an old lot, right? The underlying assumption is that the status quo that we've had since the 1960s is everything that we've ever had. But how did we build all of our cities that were around prior to the 1960s? And across, you know, even the earliest forms of zoning and say, for example, the early 1910s, There's still already cities there. So where did they come from? How were they built? What was their modus operandi? Those cities were built largely on property rights and ordinances. So one of the ways that we need to reconceptualize this is what is the root problem that is making manufactured housing so hard to put in or incentivizing the ways that we build and the very specific geometries that we build in? Largely those existed because there was a big idea. that happened around the progressive era of the last century. And it said experts should be in charge of the biggest and most important decisions in our lives as Americans. Where we live, how our food is grown, every— what food, what drugs we can consume, and every other way. And that was called the Progressive Revolution. Scientific progressivists came in and said experts can plan society better than we can. So our solution to this is to say, well, we're going to peel back a little bit of that. We're gonna return some of that to the property owners. And by doing so, we'll open up the range of freedom For people to use their property. We call it property rights to develop land, to add that ADU, to install that manufactured house because it's the thing that suits their values. I think one of the reasons why we have such a bias against manufactured housing is because we've limited the areas, specifically in a lot of rural areas where you're allowed to build it. And a lot of your kind of mid-sized towns across the West, they were everywhere. Trailers and manufactured housing was everywhere. And what we've done over the last 20 years is systematically just zone those out of existence. and remove them from our mid-sized towns and cities. So we're in a place where the best way to bring those back is to give the market their opportunity to operate, which is manufacturing housing's biggest challenge is they have 1,000 different jurisdictions to satisfy across the United States, not just by state, but by locality. And so if you give more property rights back to more states, manufactured housing can better compete in the marketplace and take up more. And Importantly here, importantly here, especially for what we talked about.

And when I say that, I just want to be clear that I'm talking about high-quality manufactured housing. I mean, the stuff they're doing now is nothing like your grandmother's double-wide. Okay? These can be 2-story homes. They're very nice. You really many times can't even tell they're manufactured. But there's still that stigma, you know?

Yeah. What we see in the market right now is it's very expensive, like very, very high-end pre-manufactured and very low-end. And there's a whole middle area that should be fulfilled. And people are working on ways to do that now with more additive and innovative manufacturing processes. But it's, it's still a big challenge because of the governments in the middle. And really what our comparative advantage in this marketplace is, is leveling those government barriers.

Yeah, I mean, the problem when it comes to housing is that it's a very complex problem because you've got over 3,000 counties in the US, over 9,000 cities, You know, you can't just make a federal law and fix this. And listen, I'm, I'm no fan of central planning, but there are some efficiencies with it, you know. 100%.

Yeah. So our strategy of how we approach this is state by state. So you're right, 3,000 jurisdictions is too much. 50 states, very doable. Most states, almost all states in the union— there's a couple commonwealths that exceptionalize for this— but from a legal standpoint, the authority from house to zone comes from the state and from a Supreme Court decision called Euclid v. Ambler. So what year was that?

Euclid v. Ambler?

Uh, the 1934.

Oh, it's old.

Yeah, I want to say. Okay. Yeah, it's been around for a long time. It's one of the first, like, major wins of the Progressive Era. Basically, it's an Ohio town got zoned and they had damages from it. They tried to sue, and that pretty much empowered zoning from that point on.

Okay.

If you go state by state, what we did in Montana is we said our new standard in Montana is that There was a floor for your property rights. We're raising that floor. So now if you are in a single-family zoned area in every city in Montana, you can now build a duplex if you want to. If you are any place in the state, any chunk of private land, and you have, you want to add an ADU, you can, period. Now, a lot of people say that's bigger government overlying local government. What I say that is, is that is empowering the smallest level of government, which is the individual, the family, and the business owner. Those are where actual governance happens and how we built our cities in the first place prior to the 1960s where zoning really exploded.

Really interesting. And the other interesting thing about the housing problem, David, is that it seems to me that all of the most desirable— I mean, of course there's exceptions, but the vast majority of these highly desirable areas where people really want to live and pay huge premiums are mixed-use, walkable communities. And yet in America, we just keep building suburbs. It's crazy to me the way that happens. And, and people have to realize how much more expensive it is to build a suburb in terms of bringing sewer lines and electrical and all the utilities to each of those homes Versus in higher or mid-density product where you've got maybe some plexes, maybe 4 stories. I'm not even saying that dense, but the cost difference is enormous. And the way this works is so lopsided because the people living in the higher density environments are actually subsidizing the suburban property owners because they're paying taxes at a rate that does not match what they get for their tax payments in terms of property taxes. So it's just sort of this lopsided equation that we've gotten ourselves into, isn't it?

You know, there's going to be a range of preferences that people have. And though what the difference is from my vision from the status quo is, from my vision is there is a natural order that people's values express themselves in the marketplace. So when you own a piece of property, When you, uh, are a developer and you want to build something, you're gonna look at a range of incentives and a range of things that you're trying to solve, problems you're trying to solve for your consumer. And so the natural thing, if you look at the history of how cities were built for 2,000 years, the mixed-use walkable area was the default. Of course it was. Now those values are gonna transform over time. You know, some of the earliest suburban neighborhoods were really done before zoning when you're talking about Levittown and places like that. And they were, they were built the way they were for all the incentives that existed at that time.

Yeah.

But the thing is, is how do we transform what we have? How do we go from where we're at to where we want to go? And who's going to make those decisions? A giant government plan that just says everyone is going to live in high density is not going to work. That's just not how it can work. Not only is that politically impossible, but I think it would be immoral to tell everybody how they're going to live.

I agree.

So my rule is, if we empower the property owner and developer, we'll get more walkable areas, we'll get more mixed use. The biggest government barrier to mixed use is the government.

Mm-hmm.

Let me tell you a quick story. We did a video about a, a builder in Newnan, Georgia who wanted to add just a couple extra, extra units, like a dozen extra units. He was already enabled to build a couple units as well in a mixed-use development in Georgia. And the city councilman got there and they shut down his application for a variance for a couple extra units, all because they were worried about oversupply, as if they know what the amount of supply should be.

Right.

Like, it's the typical protectionist mindset, right?

It reminds me of that story of, uh, who was it, one of the Soviet leaders, I want to say in maybe the late '80s or '90s, visited Washington, D.C. and then took a trip to New York City and was being escorted around by our people and asked, how do you know how much bread to make? He was looking at a bakery in the morning and like, who tells the baker how many muffins to make, you know, like the market just figures that out for themselves. Amazingly. Yeah, the invisible hand works.

Yeah, exactly. Yeah. And this is the key insight that we need to bring to the housing conversation, which is so much of it is about why walkability is good, which is fine. That's all right. There's nothing wrong with advocating for a particular design, but it doesn't solve the fundamental, which is how do we get to the place where people's values are expressed in prices, and then we will get these kind of cities we want because it'll be economical. It won't be forced by a singular plan, which is how we wound up here in the first place.

Yeah, yeah, no question about it. Okay, so let's talk about some solutions. I mean, what do we do? What can people watching and listening do if they're interested in solving this housing affordability and shortage problem? What can be done?

So basically, take these, these, these solutions, which there's a very wide range of model legislation to studies about their effects that have arisen across like the think tank market space. to advocate on state-level policy reform in states across the United States. Our effort at the Land Liberty Movement and our outlet, Build the Dream, is to garner this movement, is to build the ideological consensus. And one of the ways that you can help us do that is just go to buildtheamericandream.org, enter in your email, join us, and subscribe to us on YouTube. Follow along, share these policy solutions that we're talking about with other folks in your community. And we can get these laws changed. I mean, it's really not any more complicated than that. If you wanna see what the change looks like, we're, it's, we're experiencing this sort of change right now. Flock cameras, whatever you feel about them, are changing the political environment just by people making content and talking about their upsides and downsides and—

Right.

The public debate about it. We can do exactly the same thing on housing and save the American dream for young people just by talking about it and talking about solutions. Right. The solutions are a little more hidden than they are than just banning flock cameras, but they are very practical and understandable. And really, the big solution here is re-empower the property owner. Let's return to the way that we used to build our cities and allow them to change over time, and we can solve this and, and unblock the American dream.

David, thank you so much for joining us.

Thanks for having me.

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