CW 1043 - Housing & Urban Development Changes, Refinancing & Interest Rates

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Just about mid-2011, I was leaving command. I just taken over a position, a great job at the Naval Academy, a two year position there, and had a lot more free time than I did on my submarine, as you can imagine. And I was searching for a way to shift active income into passive. You know, I'd read Robert Kiyosaki's books over the years. I really just, I mean, they just spoke to me. Rich dad, poor dad and most of the others, you know, his prophecy, it all just made a lot of sense to me. So I was looking for, you know, following his model of shifting into, you know, passive cash flow income. And I'm a mechanical engineer. And the thing that made most sense to me, you know, not buying the coin laundry machine, although I think that that facility may be a great idea too. But for me it was about real estate and buildings and so I was looking into that. You happen to have a great podcast and I started listening in the teens, I think it was, and I've certainly listened to all of them and I just have kind of become a junkie of that, you know. So I got my first property in the end of 2011 in St. Louis. I bought a few more there. I'm up to eight and my wife Susan is today. In fact, we'll get her first three and she'll be at six by the end of this month. And hopefully if all goes well, we'll have Susan topped out and then we'll go back and start focusing on Gary again.

Welcome to welcome back 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.

Hey, welcome listeners. This is your host, Jason Hartman with episode 10431043 thank you so much for joining me today as I come to you from beautiful Santa Barbara, California. Yes, we are staying here at the Kimpton Hotel in Santa Barbara. And I gotta tell you, I am noticing something and it is not particularly positive. Yes, yes, I am sure you have noticed the same thing. Maybe you saw that Tucker Carlson report on the state of California. This isn't just true of California, but hey, California is an iconic state. It is. Hey, it's the Gold coast, right? It's the most populous state in the entire country with nearly 40 million people. So it's going to be the poster child. And what I have noticed here in beautiful Santa Barbara is I am concerned that like San Francisco, but not to the degree San Francisco has suffered from the ravages of various failed left wing policies with the massive onslaught of homelessness. I mean, what do we do as a society to solve the homelessness problem? I mean certainly it is a crisis, it is an epidemic. Look at San Diego, look at Santa Monica and look at Santa Barbara and look at San Francisco, look. And any other major city around the country. But some more than others, some definitely more than others. And I gotta tell you, Santa Barbara ain't as nice as it used to be. Am I just idealizing the past? You know, I've always told you you must watch old movies and old TV shows. You must do that. We all must be forever vigilant about doing that. We must make younger people watch old movies and old TV shows. Because it's just really a barometer, a very interesting barometer to see how the world has changed. Some things for the better and some things definitely for the worse. It's interesting, but yeah, you know, beautiful place. But I gotta tell you, I see signs that aren't so positive at the same time. And listen, I wouldn't even mention that to you. You remember when I did the show from San Francisco? Was it sometime last year when I was there? And I was shocked. I used to love San Francisco. I think it, hey, Journey said it was the city by the bay, right? It's this beautiful iconic city. You know, in my 20s I loved going there. You know, I would go there all the time and to have a lot of fun and love that place. Great food, great people, really interesting. And I wouldn't even mention this about Santa Monica, Santa Barbara, San Francisco, San Diego if it wasn't that. The fact that these places are incredibly expensive places to live largely because of the price of housing. The real estate is very, very, very expensive in These places, they should be great, they should be incredible places. They should be places without a lot of the burdens of lower cost places. You know, it's just, hey, you know, it just surprises me that people are still willing to pay these incredibly high prices for places that are plagued with these problems because of bad governance. You know, I see signs of it in Santa Barbara too. As beautiful as Santa Barbara is in so many ways, I just, maybe I'm just nostalgic and I idealize the past. That is certainly a possibility. It's a part of all of our psychology. It's something to think about. But if you have comments for me, go to jason hartman.com ask and tell me what you think. Couple things in the news that are interesting and it ties into what I was just talking about. So I've got the Wall Street Journal here. Let me find that article. Paper. Do you hear that, folks? The paper. Wall Street Journal, you know, they call it the paper. Well, it's actually paper. Well, at last. It's not on an iPad. Okay, so the Department of Housing and Urban Development is doing something that I think is a good idea. This administration, I think, is taking a much better tact than the Obama administration took. However, I think this could, what I'm about to talk to you about here, could have a slight, I don't think it'll be significant, but a slight downward impact on real estate values. Yes, yes, yes, yes. I think this will cause greater supply in the marketplace. And if you have a certain factor, a certain amount of demand in the marketplace, in the real estate market, and you have a certain amount of supply, you have what the economists call the supply demand curve. And as you have this supply demand curve, there are various points on the curve, right? Just like, hey, we talked about recently about the yield curve. Same idea, same idea. The supply demand curve shows where suppliers, you know, sellers and demanders, buyers meet at certain points on the curve. And how do we know they meet? Because they meet at certain prices. That's how we figure out what is happening on the supply demand curve. Because at various prices there will be various meetings of the mind between buyers and sellers. Ready, willing and able buyers. Ready, willing and able sellers will have a meeting of the minds and the ultimate appraisal will occur. A sale, a sale of a property. That is the ultimate appraisal. It's the best appraisal money can buy. But it could be expensive. Because if you are selling a $200,000 property or a $2 million property and you want to get an appraisal and you sell it too low as the seller. That could be a very expensive appraisal because you're basically forced to sell to get this appraisal. But definitely the most accurate appraisal. So the Department of Housing and Urban Development, run by former presidential candidate Ben Carson, of course, who was a guest on this show. I might remind you, Ben Carson was on the show before. We had him on a few years ago when he was running for president. And now he heads up hud, the Department of Housing and Urban Development. So they are shifting the focus on fair housing. Now, I've told you many times before that fair housing is something as a landlord, as a real estate investor that you and I and all of us need to be very aware of. We need to study this. It's pretty easy to obey the fair housing laws. They're not that complicated. But there are many aspects to the fair housing subject. Not the laws, but the subject in general. And the Trump administration is, is taking a very different view of fair housing than the Obama administration. Okay, so I'll just read you a couple little snippets from this article here in the Wall Street Journal. It says the Trump administration wants to shift the way it enforces an aspect of fair housing around the US Pivoting away from efforts to integrate low income housing into wealthier neighborhoods in favor of promoting more housing development overall, AKA more supply. More supply. Certain quantifiable amount of demand could lead to lower prices. Now, I don't think this is anything major. Okay. This is a thing that happens around the margins. It's not going to have that big an effect, but it could have a little bit of an effect, but it probably won't even matter to the single family home investor, but more so to the apartment investor. And by the way, I have some other papers here that I just notarized today. Gosh. I want to tell you about my apartment refi. Remember I told you this apartment building that we're refinancing, I own it with one of my clients. We are refiing this deal. It's a $2.2 million refi. And I told you yesterday, it is like an arm and a leg and the firstborn and the second born and another two arms and two more legs. And I don't even have that many arms and legs. This thing is unbelievable. So I'll share with you, I'll share that with you here in just a moment. But back to the fair housing issue. That could create more supply of properties. This affects mostly apartments large, especially large Scale multifamily developments. Okay, so reading on. The U.S. department of Housing and Urban Development announced the change on Monday. HUD will begin holding stakeholder hearings on how to change the way it determines whether communities are enforcing the Fair Housing Act. Now they go on to talk about segregation and patterns and using computers to determine all this. It's not important for what we're talking about here. What is important is that it says. In an interview, HUD secretary Ben Carson, former guest on the show, of course, said he plans instead to focus on restrictive zoning codes. Stringent codes have limited home construction, thus driving up prices and making it more difficult for low income families to afford homes. Mr. Carson said, now, you know when I had the brilliant, the brilliant Thomas Sowell on the show. Hey, follow him on Twitter. He's got some great quotes. Thomas Sowell, author of many books, professor, Forbes magazine columnist, just brilliant. But remember, he was on the show before. Right. And on that episode with Thomas Sowell, I coined the term, the phrase environmental racism. How they're using environmental laws. Well, more than even laws, they're using the environment as a fake way to basically drive up housing prices and enforce segregation. Okay? And I think this is totally wrong because hey, look, if you are purporting to be an open minded person who is concerned about the downtrodden, then why shouldn't you make it easier for someone to come along and build more homes for them? Thank you very much. I always, always wondered why this was this way. Right. He goes on to talk about the shift is expected to derail a signature Obama era accomplishment. Accomplishment. Do you see how the media is so biased? Simply using that word, Obama era accomplishment gives it credence it may or may not deserve. Of course, but that is a politically correct statement. Why is it an an accomplishment? Maybe it was a bad idea. But you know, look, the media, it all goes a certain way. We know that. Right. Okay. HUD had aimed to use computer technology to make it easier for communities. Oh, we talk now. We'll skip that. That's just not that important. Okay, Ben Carson. Let me get back to what Carson says. He says, Mr. Carson said he wants to simplify the process for communities to address the proliferation of stricter land use rules in recent decades. Quote, I want to encourage the development of mixed use multifamily dwellings all over the place. Mr. Carson said he hopes to have a new rule in place by the fall. Mr. Carson said that the new rule would tie HUD grants. Okay. Which many housing communities use to build roads, sewers, bridges and other Infrastructure projects to less restrictive zoning. So in other words, HUD makes all these grants to various communities and they make the grants based on all these various reasons as to, you know, the government picking winners and losers, which is absolutely pathetic and it shouldn't be that way, but it's the world we live in, folks. So it has all these ways of picking the grants. But Carson says now he wants one of the grant criteria. Of course, you know, this is just me talking, I'm not reading anymore. He wants one of the grant criteria to be easing of these really ridiculous restrictive zoning rules in various cities and communities around the country. Right? He says, quote, I would incentivize people who really want to get a nice juicy government grant to take a look at their zoning codes. And hey, Ben, Carson, go. Sounds good to me. I'm into it. I think he wants to let the market solve the housing problem for low income people rather than another letting the government pick more winners and losers with all sorts of unknown criteria. Right? It's just ridiculous. Okay, let me talk about this deal I'm in. So I just had to notarize a couple more documents today for this deal. This refi has been hell, it's been really tough on this apartment complex I own with Steve. Check this deal out. You think your closing costs are high, right? So this is a $2.2 million loan. The lender fee is $11,000. The origination fee is $55,000. There's a broker fee to a big commercial real estate broke has a loan division that lined up the loan for us. They're making $24,000. The escrow fee to Chicago title is 2,200 bucks. And this one may be more. Well, no, a couple of these things bug me a lot, but this one really gets me right. The lender's title policy for that loan. Okay, the lender's title policy. Guess how much that is. It is $4,900. We only purchased the property a couple years ago and we had a title policy then. So what this does. And title insurance, you know, title insurance, I don't know. This is a racket. But folks, everything's a racket nowadays. It's rigged. That's why I want to make a documentary with that title. The title companies will tell you that the reason their title fees are so high is because, yes, they agree that they hardly ever pay an insurance claim based on title. Based on a title problem. Right? They hardly ever pay a claim. But the reason they hardly ever pay a claim is because they spend so Much money in advance before they ever provide you with a title insurance policy to make sure that the title is good in advance. In other words, they do really good searches. They keep really good records of the chain of title on a property and that's why they can charge so much money. I think it's ridiculous, but whatever. Okay, I'll skip down here to the other fee I think is ridiculous and crazy. Legal fees. Now look, I told you before, this commercial property stuff is not for the faint of heart, okay? It is a ridiculous business. There are no protections the way there are in residential properties in the ones that you guys are mostly investing in. And listen, I own several single family homes. I've owned a lot of them over the years. I got apartments and I've got a mobile home park. The commercial stuff. There is no guardian angel on your shoulder watching out for you. It is every man for himself, okay? Quite literally. And it is a very cutthroat business to draw up the loan documents on this deal. These incredibly insane loan documents. The legal fees on the closing statement that we have to pay, by the way, as the borrowers. 10 grand. 10,000 bucks just in legal fees on the closing statement to draw the loan docs. Yes, the borrower pays for that. Oh, God, I don't like this deal. But anyway, it's done. So I'll quit complaining about it. I'll quit complaining now. I'll quit complaining. And oh, by the way, you know, I've been talking a lot about this, what I believe is a fraud that has been perpetrated and has generated a troll for me. What is interesting about this is that one of the regulatory agencies called me today as well as a reporter about some of this stuff and he said to me something very interesting. He said this looks like basically a mirror scam of something they had about 15 years ago perpetrated by a guy named Ned Majors. Ned Majors, who was, I guess running a similar tax lien scam to what I believe is this tax lien scam. And I've interviewed the victims on the show before. I have generated a troll who is trolling me, trying to destroy my life. Right. What's interesting about it though is every time someone forwards one of these emails to me, I just reply back with all the information about the suspected troll. So that's kind of interesting. I don't think our troll is helping himself very much or herself. You know, I'll be open minded here. Might be a female. All they're doing is getting more publicity for themselves, which is kind of interesting. It's sort of interesting how things can bite back, you know, they really can. Okay, so let's talk about interest rates for a moment here. And by the way, I'm now that I've learned about the Ned Majors scam, I'm researching that a little bit and we'll talk to you about that on future episodes because we want to make sure that you know about these various scams so you don't get burned. So interest rates, another big scam. The Federal Reserve part of the scam, right. You know, like I say, everything is rigged in nowadays. Everything is rigged, isn't it? There are some op ed pieces here in the Wall Street Journal that I just thought were kind of interesting, kind of educational and I thought I'd share them with you a little bit. So we all know rates have been going up. That is an attempt to cool the economy a bit, cool the housing market. And certainly on the higher end of the market, it is working. In the cyclical markets with the less favorable LTI ratios or land to improvement ratios. In those markets, we are definitely, definitely, definitely seeing a cooling, a serious cooling. And we've talked about that many times on the show. But in the good, solid linear markets, the markets we recommend, and you can find those@jason hartman.com Click on the properties section and you'll find them. But you'll also find them where else? Yes, on the new property cast. So make sure you rate, review and subscribe to the property cast, whatever podcast platform you use. Just type in Jason Hartman Property cast, like podcast, but PropertyCast and you'll get the newest updates with performance of all these great properties. So in that market, in those good properties with good land to improvement ratios or LTI ratios, a term I coined or a phrase I coined, those markets are still booming. They're crazy, crazy booming. Very little inventory, very little supply, prices being pushed up. Because they are the polar opposite of $5 million homes in Los Angeles or San Francisco or $2 million homes or hey, 700,000 or $1.2 million homes. They are the polar opposite of this. You know, when you buy these properties for rounded off, say $150,000, give or take. And they make sense. They make sense. So that is how you withstand a recessionary time. Again, commandment number five of my ten commandments is thou shalt not gamble. In other words, the property must make sense the day you buy it or you don't buy it or you don't buy it. Right. So the interest rates here, it's interesting because as You've probably heard me say I'm a fan of Milton Friedman, would love to have him on the show if you were still around with us. And Milton Friedman has written some very, very interesting books, has some very interesting views on the economy. You can see some of his old interviews with Donahue. Remember Donahue on tv? Good talk show there. And Milton Friedman's been on with him, as has Ayn Rand or most people say, Anne Rand. Another brilliant person of the days past. He's got some interesting stuff to say about the way monetary policy works. What's interesting about this comment in the Wall Street Journal is the distinction between the Fed controlling the money versus the Fed controlling interest rates. So let me read a little bit to you. And this is from Mark, Mike Smith from Sugar Land, Texas, if you're out there listening. Hey, good comments here, Mike. Appreciate it. Okay. With due respect to Martin Feldstein's economic bonafides, it seems somewhat disingenuous to suggest that the Federal Reserve should, quote, save low interest for a rainy day op ed, July 27, okay? As it is an inefficient as this is an inefficient monetary policy tool as an asset to be drawn upon at some future date, similar to a saver's nest egg. So the idea here, what he's saying, I think is that, you know, the Fed will control the interest rates and it'll save the low interest rate tool in its toolbox for a rainy day. It won't use it until there's a rainy day and it has to lower interest rates to stimulate the economy. Right. Reading on. According to the St. Louis Federal Reserve data, the interest rate charged for overnight bank loans, otherwise known as the Fed funds rate, dropped from 5.25% to 0% in the 16 months from September 2007 until January 2009. And this zero bound rate continued for six years until December 2015. By contrast, the Fed's fund rate in the six years from January 1979 way back to 1979, remember, that was the end of the Carter era and then in 1980 moving into the great Reagan era. Okay, not that I'm biased, okay, from the six years from January 1, 1979 to January 1, 1985, average, get this 11.9% with a high of 19%. So folks, just see the comparison, the crazy wacky comparison there, right? The Fed funds rate during the Great Recession here, right, went from 5.25% to basically zero percent and stayed that way for about, well, about, well, six more years from the End of that period, it was close to that, right? For six more years. But then in the recession in 1979 to January 1985, 11.9%. Okay. I mean, that's an unbelievable difference. It's incredible. Now, remember, that was the Paul Volcker Fed and Paul Volcker. And I don't know exactly when he was in and out, but, you know, Volcker was the guy that basically did that, right? He was the one that wanted to break the back of inflation. And he did. He did it successfully. He probably overreacted. He probably went a little too hard and he was a little too diligent on. On these high interest rates. But here's what Mike Smith says here in this piece, right? He says, I can think of no area of economics where a tolerance range of 0% to 19% would constitute efficient policy. Goes on to say Nobel Prize winner Milton Friedman observed that, quote, the Fed has given its heart not to controlling the quantity of money, but controlling interest rates, something that it does not have the power to do. The result has been a failure on both fronts. Wide swings in both money and interest rates, unquote. Friedman couldn't have imagined in his Wildest Dreams a $4.5 trillion market intervention by the FOMC, the Federal. The Fed, the Federal. The Federal Reserve Open Market Committee, fomc. So do you see that? He's talking about how Milton Friedman was saying that the original charter of the Fed was control the quantity of money, but instead it gave its heart away to controlling the interest rates instead, and it failed on both fronts. Very interesting concept if you really slice and dice that a little bit. I don't know, I get a little wonky about this stuff. I'm pretty geeky about this. This monetary policy stuff. I. I love it. I don't know why. It's kind of weird, I admit, but it's pretty geeky. And then there's another comment here from another person here. And, and it's interesting too. It says there is a more basic reason to increase interest rates. And I thought this was also interesting. The lack of discipline on the part of Congress and the administration on spending and debt leaves it to the Fed to balance the economic equation of debt service to cash flow that businesses and individuals have to live by. Of course, as rates increase, the burden to carry debt becomes more expensive. It was noteworthy to read on July 30 that the Treasury Department announced that it will borrow $769 million in the last half of the year, the highest for the period since the financial crisis in 2008 President Trump's rebuke of former Fed Chairwoman Janet Yellen for maintaining low interest rates for the benefit of President Obama and the Democratic Party seems not to have a lasting legacy. Well, that's pretty interesting comment. See, it's not only these low rates and how they influence the market, of course, but how they influence government. And this is one of the reasons that I developed my philosophy that I recommend to all of you and follow myself about inflation induced debt destruction and why we should be prudent borrowers and borrow to reduce risk, increase wealth and accelerate our growth as investors. Thought you'd find that interesting. And those were three articles I just read this morning over coffee and I probably should have talked to you then because when I'm having the coffee I'm a little little more on it on my game. It's 7:02pm here in Santa Barbara, 72 degrees. It's been a beautiful day. We're going to go have some dinner, so until then, Happy Investing. Thanks for listening. Be sure to join us in Hawaii first week of November. Go to Jason Hartman.com to get the details on our Hawaii events. We'd love to see you there. And be sure to enable our Alexa Skill. 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