The Science of Flipping - Breaking Down Real Estate Markets: Linear, Cyclical, and Hybrid Explained | Jason Hartman

Starting point is 00:00:00 Yo, yo, what is up everybody? Welcome back to the Science of Flipping podcast. I have a very special guest that you are going to want to stay for the entire episode, I promise you that. If you are seeing us here, we have Jason Hartman, but if you're listening, before I give a full-blown introduction on Jason Hartman, because he's that cool of a dude, this episode is brought to you by MinutePages.com. If you're interested in websites that are professional for real estate investors and agents alike, and you want leads to drive into your inbox, then you want MinutePages.com. Go to there and check them out. Now, guys, I'm super excited to introduce you to Jason Hartman. Many of you may even know who he is because he himself has a podcast on iTunes as well, but he is the CEO of Empowered Investor. He is so data-driven that yesterday we're both a part of the same mastermind. He did a presentation for our mastermind that literally

Starting point is 00:00:53 today I have him on my podcast. That's how impressive this man is. And it's because he's saying the same thing I am saying, but he backs it up with the data in the economy. Mr. Jason Hartman is here. How are you, brother? Well, Justin, it's great to be here. And I hope to share some data that's really valuable for your audience to give them a more accurate picture of the real estate market, because there's a lot of misinformation out there. There's a lot of fear porn. And, you know, people, the whole world runs on sensationalism and clickbait. And I think a lot of people are really being misled about the real estate market, where it's been, where it is, where it's going. So we'll dive in.

Starting point is 00:01:36 Yeah, let's dive in. And I've been screaming from the mountaintops, in my opinion, and we don't maybe fully agree on, I believe this is the next best time since 2008. But the reason why I say that is because we're at this impasse where there's just no inventory. And I've been telling people that is why there's still going to be, you know, this price increasing. I know interest rates are rising, but because of the fundamentals of supply and demand, I still believe there's no better time to be buying rentals. There's no better time to be buying rentals. There's no better time to be buying flips and fix and flipping because there's no products out there. There's no assets out there for people.

Starting point is 00:02:12 So when you find them, they're like gold, right? And so I just want to give them like to you because you do such a great job with the data to support all this. I'm going to kind of hand the mic to you because I believe for all of you newbies out there that are trying to figure out when I should be getting in, I'm telling you, and we're going to support it with Jason right now, like today, hurry up because, you know, there's never, you know, the best time is today. It's not yesterday or tomorrow, it's today. And so Jason, I'm going to give the mic to you. Let's just talk about kind of the supply and demand

Starting point is 00:02:41 issue. Sure, sure. You know, and I'm happy to dive into that. Just a comment on what you said. You know, I'm not sure it's the best time. I think it would have been better to buy two years ago, obviously, right? When you could have locked in a 30-year fixed rate mortgage at around, you know, 3%, and you would have had a lower price on the house, too. Now, the housing market has become much less affordable. However, the general research over lots and lots of decades and lots of lots of asset classes show that market timers fail, okay? The investors that win the game, regardless of the asset class, are not the people who are trying to outsmart the market, not the people who are trying to time the market, because

Starting point is 00:03:32 I'll give some examples of how the market timers have definitely gone wrong. They're the people who invest. If someone watching or listening to this calls themselves an investor well then you're supposed to be investing as the name would imply right now market timers that try to speculate and outsmart the market they just never really win and look I've been doing this a very long time longer than almost anybody you'll talk to. And I remember back, you know, 18 years ago, right, when I got into the investor only business. Before that, I owned a traditional real estate company. I sold it to Coldwell Banker. It was in Southern California. And then I got back to my first love after that. I had a local non-compete agreement.

Starting point is 00:04:25 So I thought, I want to help investors build nationwide portfolios of properties. And I'm still doing the same thing. 100% investor business for the last 18 years. And, you know, so many people coming out of the Great Recession, for example, by the time you got to about 2011 and 2012, they were saying, oh my gosh, the market's recovered a bit. We're going to have a crash. It's not the time to buy. It's going to have a downturn. And then those same people were saying that in 2014, 2015, 2016, 2018, 2019. And then, of course, they were all predicting a crash in 2020 when COVID hit. And they were saying, you know, now is the time to keep your powder dry.

Starting point is 00:05:14 I'm glad I have a little cash because in a few months, we've got the end of the world here. I'm going to pounce on every deal. I'm going to buy as many properties as I possibly can. And the exact opposite happened we had a giant run-up a historical run-up in prices so look you know we are definitely in a time of transition real estate is a credit-based asset class the fed has increased rates dramatically so much so that this is a historic increase in interest rates. And everybody listening or watching this should be amazed at how incredibly durable and resilient

Starting point is 00:05:54 this asset class has been. We've seen interest rates nearly triple, and yet we don't see a housing crash. Like that should blow your mind. Yeah, exactly. We have not see a housing crash. Like that should blow your mind. Yeah, exactly. That we have not seen a housing crash. Now, everybody said we would see one, yet our inventory levels are so low. Let me give you a comparison.

Starting point is 00:06:16 Now, just understand that there are a couple major data sources for housing inventory. One is the National Association of Realtors, but I don't use their statistics, and I'll tell you why. Because when they count current housing inventory, they count pending sales, contingent sales, and for sale properties. I like to use Altos data because they only count actual for sale properties, a property you could buy today. Now, you can use either one as long as you use the same one over time, because all you're looking for is the trend line and the comparison. You want to answer what I call life's most important question, which is compared to what okay so that said uh with the altos data the inventory levels

Starting point is 00:07:08 at their lowest point during the savagely uh competitive housing market during the covid era we got down to about 240 000 homes for sale that's why that was incredibly scarce. Remember, this is a country of three hundred and thirty two million people. And how many houses are there in the country? There's about one hundred and forty million of them. So out of those, we only had 1.2 million homes for sale. Wow. So now with interest rates nearly tripling, we have a little more inventory, but it's only a little more. That's right. How much do we have? We have about 460,000 homes for sale now. Still a shortage, I said shortage, of about 700,000 homes. To just get to what the experts would agree on is a normal market. That is not a buyer's market. It's not a bad market. It's not a crash. It's just a normal market. Is 1.2 million. We only got about 460,000. So we are in an inventory shortage that is really terrible. It's not the worst it's ever been, but it's close. Okay. Now, why are we in inventory shortage? And why will we have a savagely difficult inventory shortage for many years to come?

Starting point is 00:08:47 Well, our friends at the Federal Reserve, led by Jerome Powell, put what I call a poison pill into the real estate market during the COVID era. And what is the poison pill? Well, when I say poison pill, most people hear that thinking, oh, that means the market's going to crash. No, it means inventory is going to remain tight. That's the poison pill. A savagely unaffordable housing market for literally decades to come. low interest rates. Because the vast majority of the country either purchased a new home or refinanced their home during the COVID era when we had literally, Justin, the lowest interest rates. Now, don't laugh because I'm going to back this up with data. In 5,000 years, yes, there are actually statistics back to ancient Egypt on interest rates and borrowing. And if you read a fantastic book by the late David Graeber, I wanted to interview this guy. He passed away. I never got him on my show. He wrote a great book, though. It's called Debt,

Starting point is 00:09:58 the First 5,000 Years of Debt. And in it, he talks about the interest rate history, 5,000 years. That's what we just experienced, the lowest interest rates in five millennia. Okay. That was a complete abnormality and we all know it, right? Now, I think the Fed will probably pivot and we will see rates settle in somewhere in the 5% range. But my disclaimer is interest rates are incredibly hard to predict. So I could be wrong. I don't know. But regardless, as long as we don't have rates as low as they were during the COVID era, we are going to have a big housing shortage. Because these people that got these low rates, guess what? They have 28 years left on their mortgages. And that mortgage, just like a bond,

Starting point is 00:10:59 a mortgage acts like a bond. So how does the bond market work? Well, when interest rates go down, bonds go up. When interest rates go up, bonds go down in value. Why is that? Because a bond is just the flip side of a loan, okay? And so when a company issues bonds, corporate bonds, if they issue those bonds at 5% and interest rates go to 7 percent and now the new bonds being sold are at a higher rate well that makes the value of those old bonds lower because nobody wants to take a low rate if you're trading the bond right and the opposite happens in the opposite way so all of these millions tens of millions of mortgages out there that are currently held by homeowners have actually become a giant asset to them and they don't want to give up that asset because they can't move it to a new property they're stuck it's kind of like living in a rent control department that is such a good deal that

Starting point is 00:11:59 even if you want to move you just don't want to give up your great rent control department. Okay. And that's why rent control is a disaster because it, it, it distorts the marketplace. So let me show you a chart for those. I know some are only listening on audio, but if you're watching on video, you'll see the chart. If not, we'll just tell you what's on it. Okay. And go, go to justincolby.tv. Make sure you watch this because this, these charts I've seen, obviously. So go to justincolby.tv. Make sure you watch this because these charts I've seen, obviously. So go to justincolby.tv and make sure you watch this video. So this is a chart of all of the existing mortgages in the United States of America by rate, by interest rate and percentage. And what it basically shows us is that about 25% of all the mortgages out there are at or below 3%. And about 65% of all mortgages out there are at or below 4%. These people have an asset that has increased in value, and they don't want to part with that asset. Now, it's important to

Starting point is 00:13:06 understand something, and I didn't say this yesterday, but I wish I would have made this point. Is it possible for something, anything, to be more valuable to the owner of the thing than it is to the marketplace in general? Of course it is. You know, my dog, for example, right? I love my dog, right? Great dog. You know, many of us have pets that we adore, right? Well, my dog is more valuable to me than it is to anybody else, right? Okay, I might have a sentimental item, you know, maybe a piece of jewelry that my grandmother owned or something, right? That's more valuable to me than it is if I just sold it on eBay, okay? So that's the way it is with a housing market, because the houses that have the existing mortgages are more valuable to the current owners than they are on the marketplace. And when that occurs, the owners won't sell them. And that's exactly what they're

Starting point is 00:14:06 doing. Now, keep in mind, I predicted this in early 2020, when COVID was just getting its foothold. Because I thought, you know, these people are going to have these mortgages as the Fed was lowering rates, historic, you know, rate cuts, right? I thought these people, they're just not going to want to part with these houses because if they do, they lose the mortgage at the same time. And so that's what's happening. That's the poison pill. The poison pill is lack of inventory. It's not a bad market. Look, one rule of life we have to always know is that if you want to have a housing crash, or if you want to have a crash in any type of asset class or any market, you have to have highly motivated, distressed sellers.

Starting point is 00:14:58 And the chances of anybody being in distress when they have an ultra cheap mortgage is very low. And they're just not going to want to part with these houses. Now, here's what I didn't tell you and what the chart didn't tell you. That showed the mortgages that are out there. But you know what it didn't show us? It didn't show us all of the houses because 42% of all homes in America have no mortgage at all. You said that yesterday. I'm going to pause you for a second because that's where my mind went. Like, Oh my God. So if we have 330 million, I believe you said was the statistic of, of people home. No, no, no. About 332 million people, about 140 million housing units. And 44% of those housing units don't have a mortgage at

Starting point is 00:15:47 all. No mortgage. So this is where I'm just going to step in. How are those people going to get into trouble? Tell me where, like some of these idiots out there are just predicting this giant wave of foreclosure. Right. Okay. Like where will they come from? Are they going to come from the 25% of people that have a mortgage at or below 3%? Are they going to come from the 25% of people that have a mortgage at or below 3%? Are they going to come from the 65% of people that have a mortgage at or below 4% super cheap payments on a nice house? Are they going to come from the 42% of people that have no mortgage at all? We're like, who's going to get foreclosed on? Yeah. It's interesting. So the marketers are out there screaming this right to your, to your point of fear porn. Right. They just it sells. Right. So it is what it is. But this is why I'm so I mean, I could probably have you on every week if you wanted to do that, because I want all my listeners to understand what he is saying. Right. And hopefully you guys watch that because that graphic is really important. But let's just use. And the question I'll have for you is that 65 percent that are 4% and under, is it inclusive of the 24%? Yeah, yeah.

Starting point is 00:16:47 It's inclusive of the 3% because it's under 4%. So that's everything. Just wanted to make sure. So the reality is this. Everyone in the nation that has a mortgage, 65% of them have under 4%. You are going to be in a hunt unless the job market catastrophically fails, which after COVID I'm not in a position to ever have a crystal ball. Let's put it that way. Right?

Starting point is 00:17:09 I mean, we have had basic big cities at this point. And you brought this up yesterday, Jason, LA is where you were born and raised and is very sad of what's happened in LA, San Francisco. I'm born and raised very sad of what's happening in San Francisco. And it's because of big businesses, the Googles, the Facebooks and the like, they don't need the office space because of COVID anymore. The culture. They don't want to be in such business unfriendly places. I mean, you know, California chases business out of the state. They hate companies. They hate employers. They hate landlords. Don't invest in

Starting point is 00:17:47 landlord unfriendly places. Just avoid, avoid left wing environments. That's the rule, right? Yeah. And so the reason why it's so imperative for Jason to share this, and I want him to be on as many times he's willing to be on for all of you out there. If you're just getting started, the reason I make the statement now is the best time, because if you don't do it now, you just won't. You will be one of those people that Jason talks about that waits on the sidelines to speculate and speculate and speculate. And what I believe in what Jason is proving to you is you're going to be sitting there for a very long time. There's not going to be this moment of mass foreclosure, let alone mass defaults, which would be pre-foreclosures.

Starting point is 00:18:27 And here's another thing that Jason hasn't touched on that I know very clearly, because he and I both have the luxury of sitting in these rooms. We just haven't discussed it. I've been sitting around a lot of hedge fund managers, and guess what they have? billions and billions of dollars waiting for their sign to pull the trigger on specifically single family assets specifically there's also funds that are going to go into the commercial and the apartments and all that but if you think for a second that this market is going to downturn at any catastrophic level at all let alone margin, you are just going to sit on the sidelines forever. And that is why I will tell you, from what Jason statistically is showing you,

Starting point is 00:19:13 and what I've been yelling from the mountaintops based around gut understanding, I've done this for 15 years, is the hedge funds weren't around in 2008. If they were, the real estate market would not have taken the hit that it did, but they weren't. And if the real estate market, because of what the Fed has done, at some level in 3, 4, 5, 6, 10 years, does want to take a hit,

Starting point is 00:19:36 well, they will be right there. And they're not going to let the deal go all the way down so the little mom and pops can get the deals that they can't because their money costs them a lot less than my money does. It costs a lot less than Jason's money. They have the cheapest of money, right? They are going to be able to pull the trigger when we're still sitting here waiting and hoping it's going to continue to fall. Guys, for Jason's time, he's a very busy man and he's given me the flexibility today to be on this episode. But I want you guys to understand the value of this man's education, understanding his company, Empowered Investors is phenomenal.

Starting point is 00:20:10 Jason, offline, we're going to talk about a couple of the rentals that I might be able to sell through your turnkey network that I have. But where does everyone follow you? Where do we want to send them all? Yeah, so, you know, I'm on YouTube. My podcast is my main podcast is called The Creating Wealth Show. You can get it anywhere you get your podcast or just go to Jason Hartman dot com. And before we wrap it up, though, Justin, and I appreciate you, you know, keeping the interview

Starting point is 00:20:36 kind of short, but I do want to share one more thing that I think is really important, at least one more point. And I'll just share my screen here again, because, you know, it's really important to distinguish that there's no such thing as a national housing market. When these talking heads are on TV, or, you know, you read the newspaper, or, you know, whatever you're reading online, national news, especially, you know, they talk about the housing market and the real estate market. And I can't quite figure out where that is. I don't know if it's in Los Angeles, San Diego, Miami, Seattle, New York, or Boston, or where, you know, because it's a giant country. In the United States, we have almost 400 metropolitan areas. We have over 3,100 counties, and we have over 9,000 cities.

Starting point is 00:21:29 It's a giant country. And these markets act very differently. There's a saying in real estate that all real estate is local. So it's not just geographical, but it's also by price segment. And everything we talked about in terms of inventory is all inventory nationwide at all different prices. The entry-level housing market that is what at least our investors like to buy, those bread and butter entry-level houses, the inventory shortage is extremely acute there. And I can show you a chart on that in a moment. I shared it yesterday. But before I do, I just want to tell everybody that it's best to understand the real estate markets in three different types, linear markets, cyclical markets, and hybrid markets.

Starting point is 00:22:18 This is powerful. You can break them down that way. And these are the three that act very differently. Okay. So a linear market, it looks like this. This is Memphis. We've been helping investors buy properties in Memphis for a long, long time. And, you know, it's just a kind of a boring linear market where you have good cash flow. And the prices, if you're looking at a chart, look just like Indianapolis, right? Another market of ours. They just kind of chug along, do their thing, nothing too exciting. No big ups and downs. Those are linear markets, the ones we like to invest in. We've got several markets in Alabama, Florida that are also linear that we like and other markets around the country. Now, to contrast that,

Starting point is 00:23:05 the opposite is where I grew up, Los Angeles, California. This is a cyclical market. When you're looking at a chart of appreciation and depreciation, it's like a roller coaster. It's glorious highs and really ugly, terrible lows. The prices go up and down and they fluctuate a lot. The markets that are suffering now are cyclical markets. The linear markets, yeah, they have minor ups and downs. They just kind of do their thing, though. Nothing too extreme, nothing that the media is very interested in talking about, because there isn't much news there.

Starting point is 00:23:42 They're just kind of boring, frankly. It's great to report on the LA market or the New York market because there you've got a lot of action, and that's what the news media likes, right? And the most popular real estate index that's cited probably the most is the Case-Shiller Index. Well, guess what? Their main index only profiles 20 markets and 15 of the 20 are cyclical markets. 75% of that index is cyclical. So when you hear about the market going up or down, just know that you're mostly hearing a very weighted opinion that's weighted toward cyclical markets, not linear markets.

Starting point is 00:24:23 Yet most of the country is a linear market geographically. It's all the stuff you fly over when you go coast to coast. Okay. That's linear. Now I'll just grab that other chart for you, but go ahead. And while you're grabbing now to ask you, because I'm someone who does it all right. So I call myself a dynamic investor. I fix and flip. I buy rentals. I wholesale. I will do what the asset allows me to do. I look for the potential in the asset, right? And so I'm buying rentals like Jacksonville, Florida, St. Augustine, Florida, Charlotte, North Carolina, Oklahoma City, Tulsa, Oklahoma. But even if I were to buy a rental in a fluctuating market, I guess, because I would say

Starting point is 00:25:06 most of those markets are more in the linear than they are fluctuating. Maybe you'd agree, maybe you wouldn't, but even if you buy in a fluctuating, but your intention was to hold it, does it really matter? Yeah, right. The only thing to know there is, is that all of those cyclical or fluctuating markets, they have very high prices. So you can never make the rent to value ratio work very well. And it's very hard to sustain them through the bad times. That's why people that invest in cyclical markets, it's like boom bust town. Most of the horror stories you hear about real estate are like, I bought a property in LA and I expected, since there had been so much past appreciation, I expected it to continue. And then guess what? It didn't continue. So I went

Starting point is 00:25:59 bust and I lost my property for foreclosure, right? You'll hear stories like that, or I had to take a big loss and sell it because they couldn't sustain it. Now, I recommend you engage in sustainable investing and the linear markets will allow you to sustain the property because it's not gonna be an expensive property and the ratio of rent to the value of the property will be much better in those markets. And that's why

Starting point is 00:26:26 it's more sustainable. Okay. Now, we talked about geographies, linear cyclical hybrid geography markets. But what about segmenting by price? Well, that's really, really important. Okay. So let's look at what's been built coming out of the Great Recession. Okay, obviously going into the Great Recession, you know, it ramped up in, you know, 2004, 2005, 2006, we had a building boom going on. And there were so many properties being built, it was crazy, just a massive oversupply of homes. And then everybody got hurt in the Great Recession. And so the building came to a screeching halt. I mean, home builders suffered financially. Many went bankrupt. They just stopped building. They pulled the reins in and just stopped.

Starting point is 00:27:23 And bank financing stopped. So that wouldn't allow them to build because they couldn't raise money for their projects as easily. And so that took a long time to sort itself out. But they also just psychologically became very conservative after that. And so we saw this massive shortage of supply being built in the last decade. There was hardly any new homes built. And if you look at this chart, it just shows you that, you know, the historical trend of, you know, 2008 up to 2020 was just a complete like deficit of construction, right? Now, what's even more pronounced, and you don't see it on this chart, but I'm just going to tell you, and I don't need to show you anything, because most of you that are just aware of what's going on in the world, you just intuitively know this, what I'm about to say. And that is that this shortage is dramatically more acute in the entry-level housing price ranges.

Starting point is 00:28:28 Because those properties have become very unprofitable for builders to build. I mean, how many builders, show me the builder building $200,000 houses. None. It simply doesn't exist. So now, like an entry-level home from, say, D.R. Horton or KB Homes, those are the builders that build, you know, cheaper entry level homes. They're three hundred and fifty four hundred thousand dollars. That's the new entry level home. The average new home price or median new home price is four hundred and seventy five thousand dollars in this country. No builder can make a profit building cheap houses. So there's this

Starting point is 00:29:05 huge shortage. So if you're playing in that market and you're thinking, oh my gosh, you know, the economy is a house of cards, which you're not wrong about that, okay? Because the economy is pretty precarious. I'll be the first to agree with that. But you catch people as renters or buyers, when you decide to sell the property, either moving up and forming a new household or moving down because they've had troubled times and you're going to catch them in your low priced entry level bread and butter rental property. So that's the market in which you should play. Guys, I'm sure all of you listeners and those watching, you can tell wealth of information years and years and years in this space has incredible companies.

Starting point is 00:29:49 Again, tell everyone where to find you, Jason. Yeah. Yeah, thanks. JasonHartman.com is my website. That's J-A-S-O-N-H-A-R-T-M-A-N.com. And then my podcast is in all the places, iTunes, you know, wherever you get your podcast. It's called The Creating Wealth Show. And my YouTube channel is also very popular. And, you know, you can see all the stuff visually on YouTube or other video platforms that are free speech friendly, shall we say.

Starting point is 00:30:17 I'm on those too. So you can find me on all those places. Okay. And I just want to say, thanks for having me on Justin and happy investing to everybody. You know, obviously be careful, be prudent. This is not the time to take giant risk, but it is the time to do something. You know, there's a great saying, when's the best time to plant a tree? Well, 20 years ago. When's the second best time? Today. Amen, brother. I'm so happy you came onto the show. I appreciate you. Thank you so much. You're a very busy man, very sought after. So appreciate you very much, guys. That is all we have for today's show. Go check out Jason Hartman. We'll see you on the next episode.

The Science of Flipping - Breaking Down Real Estate Markets: Linear, Cyclical, and Hybrid Explained | Jason Hartman

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