447: Navigating Mortgage Rates: Tips for Homebuyers and Investors

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All right, what's up everybody? This is Dan Barrett from AdWords Nerds and I am here with Jason Hartman. Jason, welcome to the show, man. So happy to have you here.

Hey, thanks, Dan. It's great to be here and I hope to share some good information with your audience about market cycles, the economy, the real estate market, predictions as to where it's going, and a little bit of talk about where we've been because that helps us all understand where we're going.

All right, well, I'm pumped to have that conversation because I usually say like, you know, I do the marketing piece and the economy part is above my pay grade, so I'm glad someone could explain it to me. So. So before we jump into the specifics, I would love to pick your brain a little bit about data and thinking in a data driven kind of way because I think a lot of people, particularly investors, will say they are a data driven person when in actuality it is not always the case that like, their behavior is driven by data. So to take a step back, you work with so many students, so many investors, you sort of helping them get this mindset.

Yeah. So, you know, the first thing, of course, and you alluded to it, Dan, as much as we'd like to believe we are logical, we're all human and we're emotional creatures and we largely make decisions based on our emotions and then we justify them with logic. Okay. That's just human nature. It's probably never going to change. It's probably always been that way. You know, what I try to do is really help people understand the market and make good decisions based on that. You know, there has been so much doom and gloom or fear porn as people call it. During the COVID era, a new phrase came up to describe all the the people that believe the sky is falling and we call them the Crash Bros. Okay? And so the Crash Bros and the Doomers have just been wrong, wrong, wrong over and over again. I can definitely remember coming out of the Great Recession, so the last 14 years, 15 years, everybody has been thinking, oh my gosh, you know, the market is just going to crash, crash, crash. And really they've been thinking that for much longer. If you go back 250 years, there was an economist named Malthus who thought that the world was going to run into a period of mass famine and the human race would basically be wiped out because of overpopulation. And the environmental movement picked up on that. And they've been saying this for decades and decades and decades. During the 70s, there was a lot of doom and gloom. There were a lot of people saying peak oil, peak energy. Jimmy Carter was sort of a doom and gloomer president, really. They've just been wrong over and over because these people don't account for the fact that humans interact with their situation. And every morning, pretty much 8 billion people wake up and they're driven largely by one dominant thought. No matter who they are or what their station in life is, the dominant thought of every human being always, pretty much. Of course, there's an exception is this thought, how can I improve my situation? You know, let's just give some examples of that. If they're an alcoholic, their improvement of situation is getting their next drink, okay? If they're a drug addict, it's getting their next fix. If they're a business titan and successful entrepreneur, how can I make my next deal? If they're lonely, how can I find a relationship? Right? If they're unhealthy, how do I get healthy? Right? Everybody is just motivated by the idea of how can I improve my situation? And since, thankfully the vast majority of the world now lives under capitalism, the only legal way you can improve your situation is to help improve somebody else's situation. And this is an incredibly powerful thing, and it really shapes our entire world. And so when you have all of these predictions about economic collapse and this and that, they sort of presuppose this falsity, that whatever's happening will just continue to happen without any intervention. And that's absurd. You know, of course, people play on their environment, they play on the situation. And people are a resource. People solve problems by trying to improve their situation. And that's what makes the world go round.

First of all, I mean, I thought that was a really fascinating kind of breakdown of how things kind of interact. And I definitely think you are absolutely right in the sense that particularly things like the economy or society or, you know, whatever, they interact with each other in these ways that are really complex and given your current situation, make it basically impossible to say, well, whatever's happening right now will just continue to happen without interruption. Right. So you know, you mentioned forecasting. This is something that I've been thinking about in my own business. So I want to ask you about. So take for example the housing market, which is kind of your area of expertise, right? I look at that and I say, okay, you've got millions and millions of people making every little tiny decision. You've got governmental decisions, you know, infecting the interest rate and you got foreign investment, you got all the, all these players and all these things interacting with this system and changing the rules of the system. And I look at that and I say like, I don't know what's going to happen. I don't know what's going to happen today, much less tomorrow, much less the day after. So how do you go about thinking about forecasting such a deeply complex system? Is it simpler than I'm making it? Is it? You got to have, you know, supercomputer running the math in the background.

Hey, look, you know, I think the way to think about it is they say that the study of economics was created to make astrology look respectable. So there you go, okay? And you know, look, it is very hard to predict things in markets and economy because there are so many actors that are playing on the system and you just don't know what decisions all those actors will make. And when they make decisions, it impacts every other thing. But let's just take interest rates in the housing market for a moment. Okay, so basically let's look at interest rates in the current housing market. The mortgage rate predictions now are getting pretty optimistic. It's been a rough year and a half with these massive interest rate increases that we've had the fastest interest rate increases in history. And so this is what they're forecasting by the end of the year, under 6%. Okay. In terms of 30 year fixed rate mortgages. Now that's pretty phenomenal. Let's think about what is going to happen if this forecast comes true. I mean, look, rates are coming down and they will come down further. Exactly when is only really up to Jerome Powell and the Federal Reserve. Okay? But that's the direction. No one could disagree with that. So why don't we take a look at how many people can afford to buy the median price house based on the mortgage rates, which are essentially the mortgage payment. So right now we'll use a baseline of 7%. And I know it's give or take, okay, this is just for discussion. But if the rate drops from 7 to 6.5. That means an additional 2.8 million people can now afford a single family home. If it drops to 6%, 5.4 million additional people can now afford that house. And these two are in green because they're very likely to happen, okay, these interest rates. But I put this one in yellow because I thought at the time I made this chart this was unlikely. I put this one in yellow, 5.5%. But if that happens, 7.7 million new buyers can enter the market. Now, we don't know what will happen, and we don't know how many of these people would actually become buyers. Just because they can afford to buy a house doesn't mean they will buy a house. Right? So let's just assume that only, and I think this is pretty conservative, only one third of them would be interested in buying a house and entering the market to buy. So they would start looking at houses, they would start bidding on houses, they would start making offers, and some of them will actually buy. Most of them would, right. If they're in the market. So if this happens, let's just round off this first cut at say, 1 million new people enter the market. And at this one, let's say, you know, just under 2 million people enter the market. And here let's say, you know, two and a half people enter the two and a half million people enter the market to buy a house. Well, how much inventory can the market supply for them?

Right.

The most fundamental law of economics is supply and demand. Right? It's really quite simple. So how much inventory can the market supply to these new people entering the market? Not including all the people that are already in the market buying. Let's just not give them any credit at all. Well, this is our inventory. We ended the year with 499,000 homes for sale. So let's call it a half million homes. Now there's about 140 million housing units in the United States. Only half a million of them are for sale. That's insane. I mean, we have a massive inventory shortage. And I know there are people out there that have been predicting doom and gloom for. I mean, there are many on YouTube, I've screenshot their thumbnails predicting doom and gloom for the last four years. But there are many that have been doing it much longer than that. Okay? And they all say the inventory shortage is not true, that the market is going to crash, that we're going to see a 35% reduction in housing prices. And they have been wrong, wrong, wrong and wrong again. And they just won't quit. They keep being wrong. And frankly, they're misleading people and causing millions of people to miss opportunities. Now it's interesting, Dan, that if you go to someone for investment advice and they give you bad investment advice in our country, you could sue them. Right? But if someone gives you bad investment advice and the advice is not to invest, and you miss out on 45% home price appreciation, why isn't anybody suing them? You know, I mean, it's an interesting question, right? Because the biggest cost in life is usually opportunity cost. Yeah, right. I mean, think about it. If you invest in a deal and the deal doesn't go well and you lose money, how much are you going to lose? Maybe you'd lose 20% of your money, 30% of your money. That's the downside, right? And with real estate, because it's a multi dimensional asset class, there are really so many ways to make money. We're just talking about the super simplistic cut of price. That's all we're talking about so far. I mean, there's a lot of ways you can make money in a market with prices declining. Right, but that's a longer discussion. So we're just talking about this very simplistic one dimension, which is price. Okay, so let's look at inventory. Year over year. From a year ago at this time, inventory is down by about 10%. And from the pre Covid era, it's down by 50%. Now, during COVID we saw the lowest inventory in our history. Only 240,000 homes were for sale at the worst, lowest inventory point. But one of the questions I always ask on my podcast and my YouTube channel is this question that I think is really life's most important question. In fact, I did not invent the question, but my listeners call it the Jason Hartman question. Okay, okay. And the question is. And this question, Dan, you could ask in any area of life, not just economics, anything, anything. It really is the question that drives human knowledge of anything. The only way we know anything is by asking ourselves this question, compared to what? That's the most important question in life about anything. Compared to what? Because when we have the reference point of comparison, then we are able to make educated decisions. So it begs the question, what is the right amount of housing inventory? Almost every expert will tell you it's about 1.2 to 1.4 million homes for sale at any given time. And if you think about it, 1.4 million would be. About 1% of the housing stock would be for sale at any given time. So now we have very low inventory. If you visualize the sink in your kitchen and you visualize the drain as the buyer demand is sucking up the inventory, and you visualize the faucet as new homes coming up for sale, right? And then you visualize the basin of the sink as told the current inventory, right? What you have is since the rates went up, you have a drain that has become clogged. Demand has declined. No question, housing man, demand has declined. Now, normally when demand declines, the sink would start filling up, but it hasn't. Because the faucet is at a trickle. Hardly any inventory is coming up for sale. Why is that? Well, one of the biggest factors and why there's so little inventory is the fact that during the COVID era, when we saw the lowest interest rates, quite literally in 5,000 years. And I'm not kidding when I say that there are historians that have tracked interest rates back to ancient Egypt, okay, 5,000 years. I'm not kidding. Okay? Read a great book by the late David Graeber called debt the first 5,000 years. It's an excellent book. Okay. And he shows you the chart, okay? Right in that book. But there are other sources, too. So we have these super low rates, and virtually everybody in the country either bought a new house or refinanced their existing house. So we're left in this position where 25% of the country has a mortgage at or below 3% and 65% of the country has a mortgage at or below 4%. Now, that's of the people, Dan, that have mortgages. But guess what? 42% of the country has no mortgage at all. They own their homes free and clear. Now, the one ingredient you must have if you want to have a real estate crash, there's absolutely one completely necessary ingredient. I mean, you can't make an omelette without eggs, okay? So the necessary ingredient is millions of distressed homeowners that become millions of distressed home sellers. And we have the complete opposite of that right now. We have tens of millions of very comfortable homeowners that refuse to put their house up for sale because their deal is so good. And here's the big mistake people made when they saw the interest rates go up. All the crash bros renewed their opinions that we were going to have a real estate crash. And they did it by myopically looking at the reality of a new buyer entering the market. And the reality was that housing had the lowest affordability in 40 years. Four decades, low affordability, and the market just seized up. It kind of froze. Where volume Went way down, but the prices kept appreciating. And so few people could understand that. They just couldn't. Like, why would that happen? Right. And the reason it happened is because the existing holders of housing inventory refused to sell it because their deal is so good and they have 27 to 28 years left on that incredibly good deal. Their mortgages won't come due and they won't make the last payment until 2053. Right. They're not selling. Okay. And this is the poison pill that the Federal Reserve has put into the housing market. And when I say poison pill, it sort of depends what side of the equation you're on. It's the poison pill if you're trying to buy a property, because this is the pill that will keep inventory constricted for many years to come.

First of all, that was a really incredible explanation. I've never heard it explained so clearly before. So that was really helpful for me.

Yeah, thanks.

If I could extrapolate from that. Right. What we would probably expect from that situation as like, let's say you're a real estate investor, your buying and flipping, you're holding whatever you do.

Right.

The challenge is going to be for those folks finding deals in the first place, not necessarily disposing of the deals because the demand is still high. If you have a deal, you can flip it, you're going to make the money. The challenge is on the sort of lead generation, lead acquisition side.

Yeah, yeah.

Okay. So that makes a lot of sense. And that definitely jives with, like, I think what I, you know, my business is such a one little corner, right. Of real estate. And so I always say it's like, it's like I'm looking out a little window and I have to kind of guess what else is going on in the world because I just don't necessarily get it. So that definitely lines up with my experience. I'm curious, when you work with investors and, you know, like you said, you work with people who haven't done their first deal, the people who are already really successful and just growing. When you talk to investors today, what do you tell them about what they're going to see in that marketplace when they jump in there and they try to, you know, let's say, do their first deal or do their fifth deal, what should they expect? What are they going to be, their difficulties? Do you basically just say, like, hey, it's a numbers game and you got to stick to it? How do you advise people?

I'll tell you something, I have been doing this for A very long time, probably longer than almost anybody you'd interview on your show. Okay? And I have never heard a client say, in almost 10,000 real estate deals that either I have personally done for people as a broker or my companies have done for people, okay, 10,000 deals. I'm close to that number. I don't know the exact amount because I failed to keep track, but. But it's a rough estimate. I'm getting close to 10,000, okay? So here's the thing. Nobody ever says, boy, that was such a great deal. Until they wait a couple of years, then they look back and they think that was a great deal, okay? Every deal looks like a good deal in the rearview mirror. It always seems too expensive at the time. And if you think about it, anything you buy that's, you know, not just a thing with a price tag on it, anything you buy that is on like an auction basis or any kind of competitive market, you know, if you go to a Sotheby's auction and buy a piece of art, or if you buy a house sitting on the market, right? Anything you buy, you're overpaying for it. What do I mean by that? Well, let's, let's unpack that for a minute. If you were underpaying, the seller wouldn't have sold it to you. It was clearly worth more to you than it was to them. Let's take a house for an example. There's a house that's sitting on the market for 30 days. The market is aware of the house. It's in the Multiple Listing Service. It's on Zillow, it's on Redfin. Everybody knows it's there for sale, but you're the only sucker that comes and actually buys it, right? Okay, you overpaid. Anybody could argue that you overpaid, right? Because no one else wanted it until you came along. But that's the way it always works with everything, okay? Everything. When that meeting of the minds occurs, the buyer overpaid because there wasn't another person that was willing to pay more. Okay? So, like, just if you think of it that way, you're never going to feel like your deal was the greatest deal on earth until you wait a while and someone else comes along and wants to pay more than you paid, right? And because of the natural scarcity of housing and how it's very hard to duplicate, unlike silly assets like NFTs, for example, non fungible tokens for people in the crypto world, right? Those are infinitely duplicatable, right? There is a hardcore constraint on housing, okay? Whether it be through land use or just the commodities used to build a house. Think of it. A house is nothing more than a set of what I call packaged or assembled commodities. Copper, wire, glass, steel, concrete, petroleum products, energy, labor, wood. Right? All these ingredients that build a house, right? And those ingredients are hard to make and scarce. And they don't tend to get disrupted by technology because they're built of atoms. Atoms are hard to duplicate. Bits on a computer are easy to duplicate. You know, back in 1999-2001, we had this. This.comrevolution, right? That was the first dot com bubble. And what these investors in all these tech companies believed at the time during that mania, when the stock market was going through the roof and then it subsequently crashed, they believed that if you had a product to sell or a service to sell and you had a website, you could reach the whole world, because technology's infinitely scalable on the web. And they were right. But here's what they didn't realize. Your competitors could also reach the whole world.

Right?

And you were just a mouse click away from going to the competitor. So there's no scarcity in that. But in real estate, there's a lot of real scarcity. Okay.

Okay. So I think that was really insightful. I think the thing about scarcity, too, really makes a lot of sense. And also it reminded me of, you know, when you're talking about how every deal looks great in hindsight, or good deals are great in hindsight.

Right.

But they look bad. At the time, it reminded me of. I can't remember where I heard this might be a Charlie Munger thing, but it was like, every great investment is a bad idea at the time that you make it, because if it was a good idea, that would be priced into the price you bought it at. And because it's not, that means everybody thinks you're an idiot. You know what I mean? And it's like. So I think that makes all the sense in the world. You know, you talk about a lot about inflation. Are people anchored in their minds to, like, the price they paid three years ago? And that kind of holds them back? Like, they go to do a deal and they're like, this house is super overpriced. It doesn't make any sense because they're kind of anchored at a previous inflation rate. Does that happen to people? Do you think that's affecting people? Or is it more just like people having sticker shock and they're having trouble kind of pulling the trigger on a deal that really would be a good idea.

In 1970, everybody thought buying your first house was too expensive. And guess what? In 1980 they thought the same thing. And in 1990 they thought that, and in 2000 they thought that. And in 2010 they thought that too. Nobody thinks it's cheap when they buy it, okay? It's only after some time has passed that it seems cheap. Yeah, because inflation is just this persistent thing. I mean, I, I talk a lot about inflation and unfortunately we don't have time to go into it today. But I'm kind of the go to expert on inflation. But I will leave your listeners with one clue about it. Okay? I created a strategy and I actually trademarked this because I was becoming so known for it. I filed the trademark. It's, it's a mouthful though. It's called inflation induced debt destruction. Okay? Say that 10 times fast inflation Destruction, destruction. Yeah. And what it is, it's the hidden wealth creator with real estate. Because just very simply, I mean, I have, you know, hours more content on this, but very simply, think about it this way. If, if everybody listening or watching was to go to their favorite website, Jason hartman.com thought I'd throw that in. And if they were to go to Jason hartman.com and click on properties and buy four of those properties for sale, okay? And you know, say those properties were like, you know, $400,000 each or $300,000 each, okay? They're, you know, little entry level rental properties, okay? So they were to buy four properties and take out mortgages against those properties totaling $1 million. Okay? They get their first mortgage statement or they look at their loan documents and they say, hey, I just borrowed a million dollars. Now say, for example, they got interest only loans. Just to keep it simple. They probably would get amortized loans, meaning you're paying principal and interest. But let's just assume it's interest only for simplicity. So they're not paying off any of the mortgage balance, or their tenants aren't paying off any of the mortgage balance. They're paying interest only. So after 10 years, the mortgage balances are the same. They look at their mortgage statements 10 years from now and they say, hey, I still owe a million dollars. But in 10 years a lot of inflation will have occurred. And inflation destroys the value of our savings, our stocks, our bonds, and thankfully our debt. So I like to joke and say debt is my favorite four letter word because inflation induced debt destruction occurs. So let's just unpack this a little more. In the past 10 years, there has been about 27% inflation. Oh, sorry, there's been more than that. The study I was looking at was from 2011 to 2021. Okay. Because I have an example. I talk about that. So the inflation rate according to the consumer price index was about 27 in that 10 year period. So if someone borrowed the million dollars in 2011 and it was interest only until 2021, and they looked and they say, hey, I still owe a million dollars, what's up? Well, in reality, that million dollar loan balance has been debased or reduced or paid off by inflation to the tune of $270,000. 27%. Because the dollars you borrow it at are the value at the time you borrow it. You get a million dollars and you could spend a million and it's still worth a million, but 10 years later, a million is only worth, you know, $630,000. So now you basically had a $270,000 freebie. Inflation has given you a gift of over a quarter of a million dollars. It's incredible.

That's why I never thought of that. I mean, everybody's heard the thing where it's like, oh, you know, your investments because of inflation, you know, you got to factor that in. I never really thought about it in terms of debt, but that's awesome.

When it comes to debt, the debt becomes the inflation asset. Okay. It's. It's the greatest thing ever. But it doesn't work on all debts. Well, it sort of works on all debts, but, you know, you wouldn't want to have credit card debt or expensive debt or debt against depreciating assets. But when you have debt against appreciating assets and the debt is paid by someone else called a renter or a tenant, it's like the ultimate formula. That's why so many people get rich with income, property. And they don't get rich in the stock market and they don't get rich in the bond market, and they don't get rich owning gold. They get rich with real estate. Yeah. Because it's got these multidimensional characteristics.

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