2484: Navigating High Mortgage Rates and Real Estate Opportunities in the Coming Chaos

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In the past 6 months, taking massive action has not always been my MO, so I'm extremely thankful. I think this group has helped me shortcut some of those decisions and taking action, and that's really ultimately what it's about. I think I believe that learning through taking action. And so, I'm just very thankful for being able to do that and learning along the way, trying to hold on. And this group has been a big part of that. So, thank you.

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 Jason Hartman 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, one of the largest bond funds, PIMCO, has a warning for investors, and that is the 10-year note is going to go to 6% at least. And if you know anything about the 10-year note at 6% plus, it means 8.5% and even potentially 9% mortgage rates. I'm gonna have a conversation with Jason Hartman about what would happen if we had 9% mortgage rates in What would happen to builders? What would happen to existing home sales? What would happen to sellers? Because I don't think anybody's talking 9%. I think a few people are talking 8%, but let's talk 9%. Jason, what's, uh, what's your first reaction to 9% mortgage rates in 2027?

My first reaction is I hope we never get there. But, uh, you know, that's, that's my first thing. The major thing this would do that few people are talking about is it would dramatically strengthen the rental market, and thereby the next step to strengthening the rental market is it would improve cash flow and income for investors.

Yeah, and we're going to walk that chain because I think you're absolutely right. You got to be careful what you wish for sometimes. Yeah, because the first thing that happens with 9% mortgage rates is you get a complete and utter collapse of home building, right? Home building is already at a 30-year low or whatever it is, right? It would go anemic.

Yep. The home builders are already pretty unhappy. Okay. I mean, yeah, by the way, I've got a chart for you. Maybe I can pull this up in time. It shows the builder margins. I mean, think about it, folks. Most of our clients are buying brand new Class A builder properties right now, and that changes depending on the market. If you asked me in 2015, 2016, the vast majority of our clients were buying renovated properties,

correct,

from our flipper network. Now they're buying new properties from our builder network. Okay, so this changes depending on the market. Why? Well, because the new homes are the best deal right now. They're a better deal than the resale homes. So that's why You know, it has flipped to that type of market. But here's the thing, Michael, when you increase rates like this, I mean, the builders, they just put the brakes on. I mean, they do have to keep the machine going because, hey, they're in the business of building homes. That's their widget. But it will slow to a trickle, and it is already slowing, and their margins are compressing. During COVID builders were making extreme margins, and I'm going to show you a chart on this. And now the those margins have compressed dramatically. So I ask you this, investors and listeners, would you rather buy when the seller has got a giant profit margin that you're paying for? Okay. Or would you rather buy when their profit margin is slim and they're making deals? I mean, it's an obvious answer, right?

Absolutely. And we'll kind of close with, with that topic. But yeah, I think when you think about 9% mortgage rates, The first thing I think is home builders. And we just had today, right? Today's— we're recording this on October 19th. It'll probably post on the 20th. We just had National Home Builders Association's survey just come out this morning. It came out at 29. Now again, you're going to say, compared to what? Well, last month it was 31. The 29 is a 30-year low. It ties 2012. Yeah. And if you know anything about 2012, that was an ugly year for home builders.

Yep. So, well, again, and it's, it's reflected right on this chart. So basically this chart shows you the margins of KB Homes, the gross margin. Now this is not their net margin, it's their gross. So their net margin is lower, obviously. But you can see that back to the year 2000, we're going back 26 years here, their margin was 19.8%. Okay, and then during the housing boom that led up to the crash, it was 27.4%. Huge gross margin. And then it went negative during the Great Recession or the Global Financial Crisis, and it was negative 28%.

Oh, gross margins.

Yes. So they, they were basically selling at a gross margin loss, which means their net margin was even worse, right? Okay. And then it recovered, okay? And by, you know, 2010, things were going okay. They were back in the money again. And you see this historically normal level is reflected in the gray bar, okay?

Mm-hmm.

And, you know, it kind of bumped around. They got up to 18.2% around 2013, and then it kind of went down and got weak again, and then it started trickling up during COVID It went way back to basically those record margins of 26.7%. And then we had the fastest, largest interest rate hikes in history, the ones we're still dealing with now, okay? And then their margins started to compress. And right now—

These margins will compress even more at 9%.

Right, right now it's 16.5%. So except for a little bit of an exception at 16.2%, and then the worst economy in 7 decades, which, you know, we can sort of take that out because it's not recent enough anymore, and it was a 75-year anomaly basically, they have the lowest margins essentially they've had since the recovery. So

yeah,

what a good opportunity for buyers, right? There, there it is. You can see it now. Why KB Homes? I mean, look, I could show you this chart for D.R. Horton, for Lennar, for any home builder, and it would be a somewhat similar chart. Of course, they're all a little different, but

sure,

it's, it's the same overall theme, and there it is for you.

Yeah, well, let's go to existing home sales because I think that is a lot more interesting. When I think about existing home sales at 9%, a couple of things kind of jump out to me, and I want to, I want to get your opinion if I'm crazy or, you know, if you have a different opinion. The first thing I think of is at 9%, because most home sellers are also home buyers, we even get less turnover, right? We get less move-up buyers, and it's already pretty anemic, but it, it, much like home builders, goes, goes near zero, right? So people, people just stay put. So the turnover in, in real estate slows even more. Here's the second thing I think—

Yeah, well, but before you leave that one, Michael, you are So right. But let's just unpack that for a moment and tell people why you're right. This is what everybody misses, okay? Everybody misses this, especially the doomers, the idiots that have been preaching the sky is falling forever, and the sky just hardly ever falls. It does occasionally, okay? And it will again, okay? I do want to say that, but it's not going to fall when you have a housing shortage. Okay. The sky is propped up by the shortage. Okay. So you can take every other fundamental housing affordability mainly, right? Which is terrible. And it's probably gonna get worse, which is gonna keep people in the rental pool. And by the way, I got a comment on that. I don't know if you've noticed this, but my renters are staying longer.

Yes. Turnover is much lower.

And they're just staying put. One of them gave me notice recently. I was very disappointed 'cause they've been great tenants for many, many years. But the renters are pretty much staying longer, and they stayed long too. I think they were 3.5-year term for those renters. So here's the thing nobody notices. They think, oh, higher rates is going to destroy the market. They just completely miss this component, really important component. That is that the existing homeowners, 25% of the country with mortgages at or below 3%, give or take, you know, it's about 25%. These are rough numbers. 65% of the country with mortgage rates at or below 4%. And And, you know, people with various—

40% free and clear.

Yeah, about 40%, 41% free and clear, no mortgage at all. But those people, it doesn't really apply to them the same way. And that's why I didn't mention the free and clear people. Okay. That applies in the subject of there's no distress in the market for existing owners, right? And as I always say, the one ingredient you absolutely must have if you're going to have a crash is you must have tens of millions of distressed homeowners who become millions of distressed home sellers.

Correct.

And we have the complete opposite. So what is— People stay put.

Yeah, people are gonna stay put.

But let's tell them the one thing that everybody's missing about this. Those existing homeowners with those low COVID-era mortgages, their deal gets better.

Absolutely.

When rates are higher. Why? Because of the compared-to-what phenomenon. Think about it. Anything you trade in the world is valued based on scarcity and utility, and borrowed money is very useful and it's very scarce. And it becomes more scarce when the delta between the existing mortgage market at 7, 8, 9% is bigger between those holders of mortgages They're from the COVID era at 3% and 4% in, in that area. Their deal gets better the bigger the margin is. When rates go down, their deal actually gets worse because that delta gets smaller between the new mortgage opportunity and the existing one they have. Now, I used to use the example of diamonds, but diamonds are now made in labs, so they're not—

Not scarce anymore.

The De Beers fake scarcity monopoly has been Pretty much undone. Thankfully, thankfully, that's a good thing. But the difficulty of replacing the item is what makes it valuable. So the delta gets smaller, the item's less valuable, the delta's bigger, the item's more valuable. Their mortgage— they look at their mortgage and they think, our deal is so good, why would we ever leave? When those rates get closer, they think, well, you know, we really do want to move, our deal is better, but it's not that much better, so we'll trade.

There you go. Yeah.

Yeah.

So I think what— so again, it hurts builders. Uh, it will crush existing home sales. Turnover will collapse. We'll get 8, 9, 10-year turnover or, uh, tenure in, in homeownership. You know, the negative outcome of all this, and you hinted at it early, but it will come, is rent increases will come.

Oh yeah.

Because again, supplies, all that. But there is one silver lining, one, one opportunity in all this. And again, I go back to a book I read that was written in 1981 and '82. Robert G. Allen's original book. I think creative finance—

I read that book. Yeah.

Yeah, I have. I spent hundreds of dollars getting the first edition.

Hey, Robert Allen launched my real estate career. I saw him.

There you go.

He was at a meeting for our mastermind group just about a month and a half ago, and I was talking to him about it. I've met him several times. Yeah.

Oh, good for you. I've never met the man. But I think creative financing kicks in because, again, if you go back and study the early '80s when interest rates were 18%, We still did 2 million existing home sales, which should shock you that in the '80s we did that many. But most of them, or lots of them, had some kind of seller contribution.

Yeah,

silent seconds, seconds, you know, this, that, and the other.

Right.

So I think we would see a boom in creative financing because, again, some people have to sell.

I think you're right. I just do want to give the one proviso that creative financing is much more difficult today than it was back then.

Oh, for sure.

Because, you know, the, the law has gotten in the middle of it. The government has gotten in the middle of it. Uh, of course, the due-on-sale clause is much more of an issue than it was back then, even though, you know, it was a thing back then. It just wasn't as much of a thing.

Of course. Yeah.

Uh, there were many more assumable loans back then, and there was no Dodd-Frank, which came out circa 2011 or so after the Great Recession or the global financial crisis. So Dodd-Frank makes all of that harder too.

Yeah, I would be very clear. When I think of creative financing here, it's about the owner's equity. And it, to me, it is always a note. I am not talking sub-to or all these other things that sure are possible, but nothing that I play with. I'm talking about a seller's got a $400K house, he's got, owns it free and clear, he wants to sell to go move near his grandchildren.

Yeah.

He's gonna take, you know, a $200K first and he'll carry $200K second. Yeah. Just because he needs to sell. So that stuff will come up. come to about. And then I guess the last thing is, at 9%, you're gonna have plenty of motivated sellers, because if you are even slightly not motivated, you are not listing at 9%,

right?

Uh, so you're gonna— the, the opportunity to find truly motivated sellers will probably never be higher than when we have 9% mortgage rates.

Well, I think you ought to start this conversation with, are you predicting 9% mortgage rates? I'm not. I think that would be Very extreme. But

so I think it goes back to PIMCO's call of 6% 10-year. Yeah, so I think that's where we start this, right? Today I think we're at 5.1%. We kind of peaked at 5.3%. Is a 6% 10-year note possible? Absolutely, it is absolutely possible, right? We have inflation getting worse. I think the next couple of months are going to be particularly bad on the inflation front. So a 6% 10-year is absolutely possible. You add on top of that historical mortgage spread of, call it, 200 basis points, bingo bango, you're at 8%. And if we go back to the mortgage spreads from COVID which they were 310, 9% is not impossible.

That would make it 9.1 in that example. Yeah. Wow.

Exactly. So again, it's just simple math for me. Again, I am not calling for 9%. Shit, I'm not even calling for 8%. I just want to be ready should things go those directions. And again, I want people to realize 9% is not the end of the world. 9% just means you got to be better. You got to get better deals. You got to see the opportunity through the chaos. Most people will run and hide. There's plenty of opportunity at 9% mortgage rates.

And, and you've got to understand that your renters have dramatically fewer options in a high-rate environment.

They're going to stay.

Let me tell you something. Let me tell you something to add to my prior point that very few people understand. Landlords investors that have big portfolios and own lots of property and are in the position where they're thinking, I've got enough properties, I've got enough doors, enough units now, okay? You know, I've got 50 properties, you know, I don't need any more properties, right? That's enough for me. I'm, you know, I could expand my portfolio, but I've got 50 doors, 50 units, right?

Whatever.

And 50 single-family homes, maybe a few duplexes in there, whatever, right? I don't need to expand. But I love the high interest rate environment because it just keeps people in my properties longer. It allows me to increase rents more aggressively. That's the dirty little secret. Investors love high interest rates if they already own their properties.

And again, if you're one of these, you know, landlords who's been doing this for 30 years and you've got 50 units, you know, the other crazy thing you could do?

Yeah,

is you could seller finance one of those.

Right,

right. If the mortgage rates are 9%, you probably seller finance at 10 or 11.

Yep.

You want to talk about passive income? There you go.

Yeah. If you— now, now that's not going to be nearly as good an investment as actually owning the physical asset, but you know, it's not bad if, if you want more simplicity. And you know, we deal in the note space a bit. Some of our investors buy notes. You know, we, we help them do that. You know, it's more simple. It's, it's not as, as good. It doesn't make as much money.

It's one of my exits. You know, again, all of us, you know, Father Time is undefeated,

right?

And, you know, we, Olivia and I, will clearly, you know, when I turn 65, that was our agreement, uh, we will be seller financing some stuff on the, on the out because, uh, right, it will, it'll just be that time for us.

Just make sure though, of course you're looking at your own timeline, but you've got to also consider the market at that point.

Of course.

It may not be the most opportune time. It may be great. You know, you just don't know yet.

There you go. Well, again, I don't think it— you know, I don't think Jason or I are calling 9%. But again, sometimes you just got to ask yourself what happens. And really, the goal of this talk for me was to see the opportunity in the chaos. And again, rent inflation would come, creative financing would spike, seller motivation would spike. So lots and lots of good news inside 9% mortgage rates. And again, If you can make a deal work at 9%, I promise you it works at 6%. Oh yeah, someday in the future you'll be able to refi that 9% to 6%, because again, a 30-year fixed-rate debt is amazing. It's a one-way bet, uh, so you can refi when the time comes. Jason, where can they find you?

empoweredinvestor.com, or go to empoweredinvestor.com. We have some great software that's totally 100% free. Go to propertytracker.com and You can analyze any deal. You can change the interest rates. You can play out Michael's scenario of higher rates, lower rates when you refi. The wonderful thing about income property, among others, is that the deal has multiple dimensions. You know, if this were the stock market and we were talking about how the S&P is going to go down to X, right? There's very little you can do with income property. You can pull this lever, that lever, that lever. You know, it's just so much better because it's a multidimensional asset class. You can always make money in any market. All you need to do is follow us and adjust your strategy accordingly, but also check out our free masterclasses the 2nd Wednesday of every month, empoweredinvestor.com/wednesday. For those free master classes.

Thank you, Jason. Have a great week.

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