CW 1095 - Suburban Rent Increases, Yield Curve, Toll Brothers Decline, CoreLogic Negative Equity

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Welcome and thank you so much for joining me today. This is your host, Jason hartman with episode 1095. 1095. And good news for investors, Good news for our clients who have been following our plan in so many ways. And we'll talk about that more. But first, I want to welcome Doug, who is back on the show and here to join me today. Doug, how you doing?

Always great to be on the show, Jason.

It's good to have you. And congratulations on finally making the full move. I mean, you've been working with us for almost a decade now.

It's been a disturbingly long time.

A disturbingly long time. I love.

Has been a long time. I mean, I remember you over 10 years ago. Can you believe it? You know, you've spoken at several of our events and so forth, but you finally took the plunge and became a full fledged investment counselor. Congratulations.

Thank you, thank you. Yeah, I'm really looking forward to it. I mean, I think your, your sales pitch to me was one time you said, you go, Doug, you're helping people invest anyway. Why don't you get paid for it?

Yeah, exactly.

That was probably not a bad idea.

A fairly easy pitch, right?

And this, folks, the one thing you can definitely say about me is I am a long term thinker. I am insanely tenacious. Like, I never give up on anything ever. I mean, I can't think of anything I ever give up on. Maybe it's not always the best trait. I will admit that sometimes tenacious is not always the best thing. But mostly it is. Mostly it is. And hey, this has been a 10 year job interview. So, hey, you made the cut.

I made the cut. Good to hear.

Yeah. Yeah. You know, like if you went to work for you know, one of these big prestigious firms, I mean, hey, I always say they're a bunch of crooks, but that's beside the point. But like Goldman Sachs, right? You know, you'd have 16 job interviews with all these different people in the firm and it would take forever. And they hardly ever hire anyone because everyone wants to work there and you know, get these insane Wall street bonuses. Right. But hey, with us it takes like 10 years to get a job, so. Welcome.

Yeah, exactly. Well, I'm really looking forward to it. I think. I mean, I think that I've been saying this for a while, but I think the strategy is really sound. You know, I think that people who are following the platinum strategy are going to continue to do very well.

Yeah, you know, it's sort of like the. Who is it? Ray Dalio, I think, who talks about the All Seasons portfolio. Is he the one that has that? I think he's the one that has that. Right.

Yes, he is. And who's the one that introduced you to Radiality?

Well, you did, thank you very much. Yes, that would be me. That economics in one lesson or something like that or you know, that 30.

Minutes, about an hour long. Yeah, yeah. How the economy works. But it's fantastic.

It's great. That's a great video. And so the strategy really is a winning all around strategy. And you know, you've been doing the job of being an investment counselor for the last 10 years but you know, you haven't been getting paid for it. So it's about time we change that. And we have good news to today. This is not like we didn't know this already, but hey, I caught a couple of articles that actually aren't very recent. One dates back to May 26th on Inman. You know, it's something I've been saying for a long time, but you know, it's sort of nice to see a graph. Right? And I didn't actually see a graph on this before and it is. Look, most of our investors have been buying properties that are suburban type properties. They're not in the urban core. The urban core is mostly, and it depends on the city, of course, and you know, we're nationwide investors, so it depends where. But mostly the urban core is too expensive. It's usually crime ridden. There are some benefits to it, of course, and that's why people are willing to pay the prices. But you know, it typically doesn't work for our model. So the vast majority of our investors are suburban investors and rents have been rising in the suburbs quite significantly. Now, if you combine this with what I've predicted a long time ago, and I call it the revival of the suburbs, and that is mostly due to the autonomous vehicle, the self driving car. Again, you know, for a while I thought that was, you know, 2025, and then I thought it was a lot sooner when I bought my first Tesla and I was pretty impressed with how close we were seemingly to really achieving autonomous driving. And then I got second Tesla and they had a couple accidents and I think they really pulled back the capabilities of the car. It probably could do more, but there's too much liability to let it do more. Right. And so, so now it feels like the self driving car is a little further off. But either way, look, we know it's going to be here. It's not going to be too terribly far away. And it is going to have a big impact on real estate in two ways. One, I've been predicting the resurgence of the suburbs, the revival of the suburbs, but also there's going to be a lot more real estate available in the urban core because parking spaces will free up, parking lots will free up as cars become a subscription rather than an ownership model. It'll be a sharing economy model. When they're self driving, they should just be driving all the time. They don't need a rest just to refuel. That's it. And they can drive 24 hours a day, seven days a week. So it kind of does both two things at once. But when you look at this graph. Doug, any thoughts on that?

One of the things that I really noticed is that in some of the cities, like say New York or San Francisco, there is a huge gap between the rent in the urban core and the outer areas. As I'm fond of saying, the price goes from insane to ridiculous. But there's also a number of places, places like Atlanta, where we've been pretty active over the years, that still have a pretty material differential between the middle of the city and going out in the suburbs. I think that that differential is going to become really important over the next few years for a couple of reasons. Number one is that affordability is going to drive people out to the suburbs, which will push up rent. It may not go up as fast as the inner city, but if you lock in your price now, who cares if it doesn't go up as fast as the inner city? It's still going up. And then number two, as you keep saying that, self driving cars and moving transportation from being something that people own to something that people subscribe to, that is going to make it much more accessible to get to the city from a long way away because people will just ping an app and then can continue working while someone drives them in or while an autonomous vehicle drives them in.

I can hardly wait for that to happen. It's going to be great. We've all heard the term SAS S. AAS software as a service. Well, this is going to be CAS Car as a service.

Exactly, exactly. Well, and because the thing I think that'll be really fantastic about it is once autonomous driving really takes off now, people will have unprecedented mobility and you can live in a place that's just absolutely gorgeous, but still effectively commute to an urban location for a job that's.

Pretty much you and your wife Jasmine and your kids.

Yes, exactly. And a half right now. And it's a pain.

Yeah, right, right, exactly. So you, you bought this beautiful home in the Portland area in the burbs. I think you spent about a million bucks on that house. And it is, it's just gorgeous. I mean, it's, it's amazing. And if you wanted to buy that closer to the core, it would cost dramatically more than. Wait, first of all, it may not even exist. A home like that, you know, no matter what.

Yes. Three flat acres close to Portland just doesn't exist. You can't find it.

Right, yeah, exactly. When we look at this graph and we look at the rent to value ratios in the suburbs versus the urban core of any city, they're always dramatically better in the suburbs, with a few exceptions like Detroit, where you can't collect rent anyway in the urban core. So. So it's sort of irrelevant what you think your rent to value ratio is. It's just kind of irrelevant, you know, but look at the annual change in URB and suburban rents in the top 25 metros. Right. The suburban on the graph we're looking at is represented in green and the urban is represented in blue. So if you look throughout the country, the average is 2.5% for this, the burbs, and 2.3% for the urban. Right. So the urban rents are increasing at a slower pace. But wait, there's more. As they say, the rent to value ratios in the urban areas are already so much worse in almost every city. Okay, terrible. So it's really very telling. Dallas sticks out. Okay. Now we've sold probably hundreds of properties in Dallas over the years. You know, that market became a little too expensive, so we're not promoting it at the moment. But when it gets reasonable again, we'll be Back, you know, Meanwhile, our investors have made a lot of money. They have stabilized properties. Just hang on to them, you know, you don't need to do anything. It's just, would you go into that market at this time is another question. But in the Dallas suburbs, rents have increased by 4.5% and in the urban areas, only 3.3%. Another one that sticks out. Let's look at a couple others here that are really telling. Oh, boy, Seattle. Wow. Now Seattle's a market we've never recommended. It's always been too expensive, but especially now. But the. It's amazing what's happened in the burbs. 8.2% versus 6.3%. That's amazing. That's astonishing, really.

Especially when you think about 8.3%. That's on rent, you know that. Yeah. Values, you know, go up by rent moves like mountains. You know, it's like, you know, it's a, you know, you know, rents are like geoglyphs. They don't move very fast. You know, they're like continental plates. They can move very, very.

They have a slow tectonic shift, but prices can react much faster. And this another, yet another reason why I like residential properties over commercial properties. Because in commercial properties the value can't move very quickly. And definitely the rents can't because they're tied into even longer term leases with maybe just CPI increases every year. And the CPI is always understated, the Consumer Price Index. So, yeah, absolutely. Very interesting. Just any more thoughts on this before we leave the topic?

Just the main thing that I keep thinking of is that. But I read articles every day saying, hey, is the market at a top? Is the market at a top? And I don't know, maybe it is, but I thought it was back in.

2010, 2011, when you say that, you're talking about the stock market.

Yes, yeah, exactly. But typically the stock market tends to be the dog and then everything else tends to be the tail. Right. When the stock market is going bonkers, then people feel rich and they're willing to spend money on stuff. When the stock market crashes, people feel poor and they don't want to spend money on stock.

Yeah. So it's the wealth. It's one of those things where it's like the wealth.

Exactly. So yeah, so real estate investors should pay attention to what's happening with the stock market, even if you're not invested in it, because it's going to impact investors sentiment. And so you know that as I say, it's, you have, it's the Dog and tail effect. But a lot of people are worried the market's going to crash. And it's like, you can't play that game, because if you do, then you'll just get to where, you know, what Dennis Waitley calls, you know, someday I'll.

Right.

Someday I'll invest. When it's better. Well, you'll end up waiting forever and you'll miss it.

Yeah.

And so sometimes you just have to keep going.

Yeah, that's the problem. The market timers never work out, and they don't really work out in any market. But if you want to talk about the idea of being slow and steady and consistent, the tortoise and the hare parable, if you will. Look at what I've been saying for years, right? Just buy income properties. You'll make a fortune ultimately. Right. It was hard to convince people to do that in 2008 and 2009. Well, 2008 was actually. Okay. 2009 was hard to convince them. 2010, for sure. 11. And then it started to really turn in about 2012. But at the same time, you know, we look at something like gold, we look at something like cryptocurrencies, and they've been absolute disasters as investments. Okay. And that hasn't worked at all. And, you know, it's very hard when everybody is glowing with hope and they're bragging about all the money they're making. Sometimes for you to just be the slow and steady one that ultimately wins the race. You know, life is a. It's a marathon, not a sprint.

The thing is that I think, too, is that I think a lot of people have a skewed idea of what winning the race means. People say, oh, I beat the market, or, oh, I need to make more money than so and so, or, oh, I need to beat Benchmark X. It's like, no, you just need to get there. You know, you need to get to being able to have a good life. It doesn't matter if you do it a year faster than somebody else. Most people never get there. Just get to the life you want. And I think a lot of people are like, oh, if I'm not getting there faster than so and so, then I'm failing.

Right?

No, if you're getting there, you're winning.

Yeah, well, that's actually a good point. And I was saying this a long time ago as things were looking very gloomy, you know, 10 years ago. Right. Is that economics? Even though you're recommending, you know, don't compare yourself. And I totally get that. Idea. But ultimately, economics and wealth and poverty are a relative game because if the whole thing collapses and you know, your net worth is $100 and your neighbor's net worth is $50 and all the prices in the markets adjust, then you're rich. Right? So it's the old the two hikers with the bear, right? They bear and one says, come on, man, you gotta run. There's a bear. And then the other stops to tie his shoelaces and he says, what are you doing? You can't outrun a bear. And he says, I don't need to outrun a bear. I just need to outrun you. Right.

Exactly.

Yeah, the competitive metaphor.

Right, exactly, exactly. Well, hey, let's look at a couple pieces of economic data. And last week when I read these, they were different than this week's, by the way. But last week when I read them, I was sitting there with Carmen and I said, you know what? But don't let me comment on any of these because I just wanted people to notice the contradictions in the headlines and how. Oh yeah, I know, you did hear that, didn't you?

Yeah, I heard that. Yeah, you failed on the first one. Carmen called you out on it, too.

It's hard to get me to shut my mouth, you know.

Not always easy. Not always easy. But anyway, this week, well, really last week's update. So buyers are spending more time trying to find the perfect home, often three months or longer. However, most buyers say they refuse to give up and will keep looking. Now, to me, that's an indicator of a lack of inventory, but as we know, in any of the higher end cyclical markets and any higher price product, and I'm about to share another detail on that, by the way, another piece of economic news. The market is really getting painfully slow. I've got to think that's going to trickle down to our market. It certainly hasn't yet. Inventory is very tight still. But I mean, good inventory. Look, there's a lot of crappy inventory out there, folks. If you want it, go, go to my competitors and you can buy crappy inventory from crappy providers all day long.

Bad deals aren't tough to find.

Yeah, bad deals are pretty easy to find. You know, they'll put lipstick on the pig, they'll wrap it up in a bow and they'll make it look nice.

But every one of those has a good pro forma. But they're all bad deals.

A good Performa and a nice little report that comes with it too. But listen, I know the people they're working with. Okay. And they're the crappy people we refuse to work with. We'll just make a little less money.

But, but the industry's not that big. It really isn't. You know, it doesn't take that long to figure out who the players are.

No, it's. It's pretty small. You're right. Okay, so here's the next piece of economic news that relates to that last piece. As you all know, Toll Brothers is a sort of high end home builder. Right? And when you look at the home builders and their perspective on the thing now, most of them build a variety of product, low, medium and high end. Right. But Toll Brothers really sticks to the higher end of the market and they build nationwide. And they reported the first decline in quarterly sales in more than four years. And they think that rising interest rates and already high home prices were to blame. And I agree. I mean, those prices have been way out of bounds for three years or so. The market was slow to react and they should be rejecting those homes at those prices because they're just too. They're just too damn high, as they say.

Exactly. At the prices are too damn high.

They are. They are. Okay. CoreLogic, the big data company, and this is good news, by the way, they reported that homeowners around the country with negative equity, and you know, some of you might be surprised, some people still have negative equity. You heard a lot about that coming into and during the Great Recession that people were underwater right now. This is a very good sign that the market has some degree of stability to it going forward. Because the number of homeowners, according to CoreLogic with negative equity, declined by 81,000 in the third quarter. The average homeowner gained $12,400 in equity in the last year.

And so, Jason, I think that that's really important to stick on for a second because negative equity is what drives price spirals. Because whenever you get into forced liquidations, that drives down comparable prices. And then you can get another forced liquidation which continues to drive down comparable prices when people don't have to sell. That actually is fantastic for price stability.

Yeah, absolutely. So just to elaborate on what you're saying there, when somebody has negative equity in their property like they did moving into the Great Recession, so many people, did they just walk away? They don't care if they don't have any skin in the game, as the saying goes, there's really not much incentive to stay in the deal. Why not just take the other option? You know, the mortgage contract says, hey, look, you can either pay the mortgage or give us back, back the collateral. And so they'll just opt to give back the collateral and walk away and let the property foreclose. And, you know, they're probably wise to do that. Look, millions of people did. And I think it was actually a very good strategy for those people to do that. So the positive equity issue really prevents that downward spiral. Because what happens just to go one more step? So they walk away and then the lender takes the property back and then they resell the property at a lower price. So it's like you have more decline, decline, decline. And that's why when you compare that to the monetary policy issue of deflation, that is literally in my opinion the worst economic malady that the Federal Reserve and governments and central banks around the world will avoid at all costs. Inflation, very good deal for them. Deflation, terrible deal. Why? One reason, major reason. Everybody postpones decisions in a deflationary environment. They don't buy, they just wait, they put it off.

And I think that the other thing too is that it's a kind of corollary of what you're talking about is that when people have positive equity, they have something to lose. People who have something to lose tend to be more reasonable and more measured in their actions. They tend to do less things that are knee jerk.

Absolutely, absolutely. And that's. We see this in inner city areas, by the way we were talking about that earlier. And crime, you know, people that don't have anything to lose with their life in general, they don't act in a very thoughtful, prudent, measured way, do they? They got nothing to lose. Right. You want everybody in society to have something at stake because then exactly. They, they act like better citizens. Right? Yeah.

People are far more civil when they have something to care about losing.

Yep. And you know, that's as it should be.

That's not a bad thing.

Yeah, no, it's a good thing. It's a very good thing. Very good thing. Okay, okay. So the trade deficit widened a little bit more than was forecast in October, and it was the highest deficit in a decade. This underscores the continued fallout from the China US trade dispute. Ultimately, I think we just had to do that. And it's part of a business plan. You know, it's kind of similar to the way Reagan spent a lot of money on the arms race. And you know, look, look, I'm not in favor of the military industrial complex, but Reagan had a business plan. And ultimately that was a major part of why the Soviet Union fell, it worked, and it was an investment and it was, in my opinion, worth it.

So I have a little bit of a variant perspective is that I think the trade thing with China might have something to do with it. But I think the main reason why the trade deficit's widening is just that the dollar is strong because interest rates have been going up. When the dollar is strong and interest rates are going up, imported stuff's cheaper.

Yep, yep.

It's not evil. It's just math.

Right? It's just math. Exactly, exactly. It is. But when we see those jobs come back to the US that's going to be inflationary. And I think it's in a good way, you know, because people are going to have more money to spend, even though prices will be a little bit higher. Ultimately, I think that plan just works out better. And, and look at lover, hey, Trump. I think in this little part of his job, I think it kind of had to be done because for decades Americans had just been sold down the river. It's been a bad deal. You know, at first it looked good because everything was cheap when you went to the store. Then everybody realized a few years later, hey, look, I don't have a job. Where do all those high paying jobs go? And again, I want to tell everybody you must watch old TV shows and old movies just to understand the context in which people lived. And I, I get that it's fiction most of the time. And by the way, I just finished. You know, as much as I love to hate cnn, the communist News Network, they do have this great. Of course there's a ton of left wing spin in it. This great series on Netflix called the 60s, the 70s, the 80s. I've watched them all. The 90s, I just finished last week. They came out with the 90s, and in about 10 episodes they cover the whole decade. And they cover everything from culture to economy to politics. Very interesting. I'd highly recommend those. And I'd watch them in order to. Chronologically, it's the way to do it. And those are fantastic. Just to kind of remember where we were and what the world was like at those times in history. Very good stuff. Okay. Mortgage rates improved last week as stocks. Stocks tumbled and bonds rallied. Remember, when bonds rally, mortgage rates fall. When bonds fall, mortgage rates rise. Okay, so concerns the economy is cooling off could help rates continue to improve so they'll be less aggressive on rates as the economy cools. Any thoughts, Doug?

Well, yeah, bonds are the safe haven for scared money. Bonds and gold, Right. They're the Fear currency.

Exactly. The fear currency. Now, the thing that's different this time. Famous last words of any investor. This time it's different.

This time it's different. I'm gonna remember you said that, Jason.

Yeah, well, I'm not the first one. But the thing that's different this time is cryptocurrencies. Are those going to be the scared money play? I don't know. I don't think so. I'm. Again, I'd love to be wrong about crypto, but I, I don't think it's going to happen until it's the cryptocurrency sanctioned. Yeah, it's got to be the 1.

Cryptocurrencies to be real. Yet they're, you know, because you can still create a new one whenever you want until they're real. I don't think they matter.

It's absolutely ridiculous. But when the cryptocurrency that's sanctioned by the Federal Reserve and the government comes out, that'll be the one that'll work.

Yeah, that'll be the one.

Exactly. Whichever cryptocurrency has a standing army behind it, that's the one I'm going to go with. But hey, that's just me. And by the way, I'd love to be wrong about that. I want to say that again, and I'd love to be wrong about that. Okay, yield on five year treasury bonds slipped below the rate on the two year Treasuries. This is called an inversion. Remember, we talked about the inverted yield curve before and that has been a common sign of a prediction of a recession. Now this one, Doug, you're going to have to be very brief on because we could talk about this for an hour and a half and we got to wrap it up, but any thoughts?

Yeah, I've always been a little dubious about the yield curve predictor because the thing that creates a recession is default. Either default on debts or default on obligations. Now, what a yield curve tells us is that people aren't getting paid very much to put their money at risk for a long time. So that means that there's no incentive for anybody to put their money at risk for a long time. I think that's all that the yield could really tells you. Maybe I'm a little, being a little pedantic here, but I don't view it as a, you know, as a holy signal. It's just saying that nobody's getting paid to take risks for a long time. So nobody's taking risks for a long time.

Right, but what does that tell us that the psychology of investors is short term minded rather than long term minded. Exactly right. But what does it tell us? I'm not asking for an answer like a narrative. I mean, what does it tell us? It tells us that what people think things are going to change. They don't know where to go, they're confused.

Yeah. It tells us that people aren't confident. Either that or they're a little jittery. And that when something happens that's contrary to expectations, you'll probably see a lot of volatility. I think an inverted yield curve does tell you you have volatility to look forward to. So that means that if things go bonkers. Good. Then price prices can shoot up. If they don't hit expectations, prices can collapse and you'll see a lot of seesaw motions, right?

Yep, exactly. Okay. Hey, we gotta wrap it up. I do want to let the listeners know that we are about to announce our very exciting Meet the Masters. We are going to have some fantastic speakers. I'm really excited about our 21st Meet the Masters. Meet the Masters. Number 21. Maybe I want to number them. I think think the problem is it's too close to the year. See, we're having 21 and 2018. That's kind of confusing. Anyway, the 21st Meet the Masters is coming up and we are about to announce that and launch the registration page. I think everybody's gonna just have a great time at that event. So that'll be in Southern California and we will announce that very soon. Doug, any closing thoughts before we go?

Just as you keep saying, it's a fantastic time to be alive. And there's always opportunity out there. You know, somewhere out there is an awesome opportunity and we're going to help you find it.

Absolutely. Good stuff. Thanks for listening, everybody. We'll talk to you in two days. We're here every Monday, Wednesday and Friday and sometimes with an extra episode or two during the week on Tuesday and Thursday, occasionally, but every Monday, Wednesday and Friday. And we will talk to you in a couple days on the next episode. Happy investing.

Welcome to today's property profile on the Creating wealth show. This is producer Adam. Today we're going to take a look at a property that's currently available through Jason's network that's located in Kansas City, Missouri. This is a three bedroom, two bath, 1,456 square foot single family home that is located in Kansas City, Missouri. Kansas City is the largest city in Missouri with a population of around 490,000, which makes it one of the 40 largest cities in the U.S. from the 2000 to the 2010 census, the city saw a 4.1% population growth and is estimated to be up another 6% since then. Kansas City is home to an NFL team, the Kansas City Chiefs, a Major League baseball team, the Kansas City Royals, a professional soccer team, Sporting Kansas City, and has been home of the Big 12 college basketball tournament every year since 2008. Top employers in the area are government and healthcare related. This property's $149,500 price tag gives it a cost per square foot of $103. It rents out at $1,250 for an RV ratio of 0.84%. With assumptions of 5% vacancy, 5% maintenance, 8% management fee and 25% down $37,375. For those keeping score and an interest rate of 5.75%, you're looking at a cash flow of about $214. Your cash on cash would be about 6% and total return on investment with tax savings would be in the 32% neighborhood. If you're interested in this property, contact your investment counselor and tell them you want more information about the property listed in the show Notes. For more properties available in Jason Hartman's network, go to jasonhartman.com properties obviously, this information is not guaranteed and investors should do their own research, get professional advice and conduct due diligence prior to investing, but we're doing our best to help.

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