In this episode of the Creating Wealth podcast, Jason Hartman reminded listeners of some final updates about the Meet the Masters event starting this coming Friday. He mentioned the remaining availability of seating, the live streaming option, and the social media opportunities related to the event. He also noted some advice that he has for residents of California and other high-tax states.

Barry Habib, CEO of MBS Highway and renowned mortgage industry executive joined the podcast to discuss his real estate predictions for 2018. He discussed with Hartman why the media does not seem to understand real estate, why appreciation in the real estate market does not have to match stock market appreciation, and why it’s acceptable that real estate rates are on a slightly higher rise than income. He also mentioned mortgage tax deductions, why they’re not being taken, and why the Roe V Wade case impacted the housing bubble.

John Denver’s Shanghai Breezes

Hartman begins the episode by saying that he appreciates the listeners who have tuned in and those who have been listening loyally for years. He mentions that he is currently listening to John Denver’s “Shanghai Breezes” and that he saw Denver in concert at the Orange County Performing Arts Center years ago. Denver shared a story about the meaning of Shanghai Breezes by stating that he was on tour in China at one time, while going through a rocky period with his wife. He called her and let her know that he missed her, recalling that she was a great person but not incredibly bright. He told her that there was a full moon in Aspen when he spoke to her and asked if it was the same moon she saw. This contributed to the song’s lyrics.

Hartman notes that Shanghai Breezes referred to the early part of the day in Shanghai before their massive industrial buildup. The days used to be hot and miserably humid, but breezes rolled in during the afternoon and cooled off the city. He notes that due to the huge scale of their industrial building, Shanghai might not have “Shanghai Breezes” anymore.

Get Your Meet the Masters Tickets Now

Hartman reminds listeners that there are nine seats remaining, so there are a few last-minute tickets available, as well as the live stream tickets. He notes that Ron Paul’s speech will not be included in the future-product if one is going to be released, due to the rights not being covered for it. Whether a future product is released depends on the video production quality.

Saturday night at the event, there is going to be a Journey tribute band performing.

Advice to Californians and Other High-Tax States

Hartman states that in episodes coming up in the near future, he is going to continue to explore aspects of the new tax reform and what it means to listeners, but will break away from the topic shortly thereafter, once it has been covered thoroughly. Generally speaking, Hartman says, people get bored when they’re listening to discussions about taxes, but it’s a problem we should all learn about.

Zig Ziglar, one of Hartman’s four great mentors, once said that a bum on skid row and the happiest, most well-adjusted person on Earth have something in common: problems. The only difference is, one has learned how to manage his problems, and the other has become a victim of them.

He explains that the interview with Barry Habib is going to cover some important economic things, as well as some of Habib’s real estate predictions for the year, including taxes. He states that taxes are the largest expense in any of our lives, and that while we spend a lot of time shopping around for deals on our purchases, we don’t pay enough attention to our taxes. He advises listeners to be careful and start planning their taxes, noting that if listeners live in California or any other state with high taxes, there’s something to do other than complain.

Hartman advises that instead of being angry about Trump and the GOP, put pressure on Jerry Brown (for Californians), “the governor frickin’ Moonbeam”. Given that Brown is intelligent, he is still bad news for people who want to do something with their lives. Achievers are punished in high tax situations, unless they’re part of the elite class, like Brown.

He continues by saying that if listeners feel that they’re being hit too hard with the new deductions, to put some pressure on their state to stop over-taxing. Vote with your feet and walk away from the state that has punished achievers and left them looking for an exit.

Hashtag for Meet the Masters Will Be #JHLive

Hartman mentions that this coming Friday, the coffee-networking for Meet the Masters will start at 8:30am and that the actual presentations are going to begin at 9:00am sharp. He notes that he spoke with Carrie, who is helping with the event’s organization, and she stated that there are ten speakers on Friday alone, so things need to move ahead in a timely manner. Adam, the podcast producer, will be publishing an episode every day for the Meet the Masters event. There is also a lot of social media related to the event to check out.

The hashtag for the Meet the Masters of Income Property event is #JHLive. See what’s going on if you can’t attend, or if you’re on the live stream.

Barry Habib, Bullish in Real Estate Market

Barry Habib, CEO of MBS Highway, top real estate forecaster by Zillow and Pulsenomics, and winner of the Crystal Ball award for his accurate forecasts, joins the podcast from a cold and storming New Jersey.

He states that in the real estate market, he’s very bullish and has been that way for a long time, but notes that the media never seems to understand real estate. They usually get their real estate predictions wrong, and Habib notes that it’s important to look at the factors of supply and demand. Builders are not keeping up with household formations, which are going to continue to rise. This is based on two things, he says, people who are living together and split up, and people moving out when they’ve lived at home previously. Zillow says that the median age for moving out of parents’ homes is now 33.

Habib explains that if we look back to 1985, the birth rate of that year and the subsequent eight years looks like stairs on a graph, with each year having a higher rate of birth. Demand is going to continue to be strong and supply is not loosening up. Habib calls it an amazing dynamic that’s going to continue. The media seems to worry about real estate prices going up and income rates not climbing as quickly, but they don’t understand the math involved. Income doesn’t need to increase right alongside real estate.real estate predictions

Habib presents an example to explain this, stating that if someone was looking at a property that would cost $1,000 per month, chances are their income is about $5,000 per month. If real estate prices went up 5%, and the person involved wanted to purchase that same home, it would cost only 5% more, at $50 more a month. Their income would only need to go up 1% to keep up. The media mentions that properties go up at 6% and income only goes up at 2% but that’s a fine rate to keep up with affordability.

The Power of Leverage

Hartman agrees that the media is often stupid when it comes to the way they look at real estate. He mentions reading Robert Chiller’s book and hearing Jim Kramer talk about real estate and in both cases, they do not consider leverage. He notes that if you’re looking at real estate in a vacuum, it’s not going to be a correct view. Interest also plays a big part in this.

Habib notes that Hartman has made a great point on leverage and references the piece on CNBC by Diana Olick, when she states that people shouldn’t buy homes because if they chose to rent instead, they could take the difference that they aren’t paying in mortgage, invest it into stocks, and they’d do better. Habib states that this is nuts. Stock is not for everyone, and it might look good now because the market had a banner year, but it isn’t the same every year.

Diana Olick says that real estate went up 6% but that the stock market has gone up 20%, but she neglects to mention that this is only considering one year. Habib explains that if we’re looking at a $100,000 home, in 60% of cases, people are going to buy with only 10% down. This is a $10,000 investment and if the home went up 6%, it’s a $6,000 gain on the $10,000 investment, which is a 60% rate of return. That dwarfs the 20% in stock.

Hartman notes that in one of Robert Kiyosaki’s books, “Who Took My Money?” he had a chart of SNP versus the $100,000 house and over the ten years of his samples, the traditional single-family home with 10% down outperformed the SNP by almost 800% because of the leverage involved in the real estate market.

Returning to an earlier point, Hartman mentions that another thing that is rarely considered is that when the media says things like ‘the housing is going up a certain amount and income is going up a lesser amount,’ they never talk about the assumption that’s flawed. The media assumes that the expectation of the standard of living is a standard and stagnant thing. It changes. People move down and will accept less if they have to. The standard of living is a moving target and not all homeowners are on the same level.

Habib agrees that it’s a moving target and references ten years ago when there were mansions all over and that it’s changed a bit. He also mentions that when media talks about the benefits of renting and how it’s better than buying a home, they also do not do the math. According to the CPI, rents are going up at 3.9%, which is about 4% for convenience. He mentions that Albert Einstein said that the eight wonder of the world was compound interest, and it’s amazing what that 4% will do over a short period of time. It will basically eclipse the monthly mortgage on a property.

Interest to the Lender, Principle is YOUR Money

Habib states that another thing no one considers is that, when people make a mortgage payment, they know it’s made up of principle and interest. People know that the interest goes to the lender, but the principle is their own money. Habib says that the principle remains their own money, and it is simply a matter of moving it from their checking accounts to another area. If you consider the amount of time, on average, that someone stays in a home, it’s about ten years. In that time period, just by making their mortgage they’d gain between $70,000 and $90,000 if they were in a $300,000 home, tax-free.

He also notes that he hears the media talking about how the incentive to purchase homes has gone down due to the tax change, but he explains that there are only six states in the country that it didn’t work out well for. Habib states that only 21% of tax returns utilize the mortgage deduction, even thought he homeowner rate is closer to 64%. A good deal of people aren’t using the deduction. Even with doubling the standard deduction, it’s estimated that only 4% will utilize it. He also mentions that he doesn’t feel that this will derail the housing market. Interest markets might also be a little higher this year, but it isn’t due to the Fed hiking them. The secret, Habib says, is that there’s a money drain around the globe. The European Central Banks, for example, have gone from $60 billion a month to $30 billion a month.

Our Fed has already started to slow down the rate of reinvestment of the principle that they have from their holdings, treasuries, and mortgage bonds. Habib points out that they did so in the fourth quarter last year by $4 billion per month, and have now start to up it by $8 billion a month. He explains that in April, it’s going up another $4 billion, another $4 billion in July, another $4 billion in October, and will then rest at $20 billion less a month.

He states that we’ve seen rates start to get a little higher because of less Fed buying and with all else equal, he anticipates mortgage rates to be up about half a percent on averages through 2018. It isn’t enough to derail the housing market, but between that and the tax benefit, it does create a headwind. Habib predicts that instead of seeing 6%, it will be closer to 4.5% in appreciation.

Why Not Take the Mortgage Deduction?

Hartman revisits a statistic mentioned by Habib, about how 21% of tax returns have mortgage deductions and wonders why more people wouldn’t take the deduction. He reminds listeners that this statistic is regarding owners who occupy their homes, not regarding investment properties.

Habib explains that we know that about 64% of tax filers are homeowners, but only about 1/3 of those filers have a mortgage. About 42% of homeowners are eligible to take the deduction but only half of them do. This could be due to the fact that in order to take advantage of the mortgage deduction of about $12,000, your benefit including interest and taxes would have to exceed that amount.

Hartman mentions that this seems to consider the higher end markets, being that only those markets have mortgages of over $750,000.

Bullish Stock Market Sentiment

Habib mentions that there are many things that have bearings on the real estate market, including stock. He states that he thinks that because of the drain in central banking, the optimism in stock being extremely bullish right now. He notes that stock bullishness is at its highest since 1987, while bearishness is at its lowest since 1987. History tells us that when there are these sorts of levels, we need to ask why. Habib states that if you’re bullish in stock, you’re probably in the market, and if you’re bearish in stock, you’re probably out of the market. He asks where the new money is coming from in order to fuel the rise and states that Joe Kennedy asked the same question before the stock market crash.

He explains that stating this does not mean that there is an oncoming crash, and that it does not mean he believes that there will be a crash. He does note that if you’re looking at stock now, it’s the most expensive in history on price to sale ratio, and the third most expensive on a price to earnings ratio. He notes that at some point, there should be a breather along this very long run to the upside.

Roe V. Wade and the Housing Bubble

Habib states that there is another thing to consider about the housing bubble. He notes that if you look at the birth rate charts, we have had an echo boom and leveled off at about four million births per year. There was a housing bubble between 2006-2010 and if we go back to the chart 33 years ago, there was an enormous drop in birth rates in 1973-1975.

This had a lot to do with the Roe V Wade case. Abortion became legal, birth rates dropped and 33 years later, there is a housing bubble. This means that if you believe in the laws of economics, demand will continue to be strong, supply will be tight, and it’s a recipe for well-supported prices in real estate. Income levels in this market will see a bit of an increase, but there are a lot of legs in this market. It’s much safer than the bond market which might be heading into slightly troubled waters.

Hartman mentioned that the pair didn’t yet discuss the softening or repeal of Dodd Frank, the experience of the economic boom, shadow inventory, and the positives for the market. Habib mentions that Barney Frank of Dodd Frank said there’d be no housing bubble right before there was one and just afterward there was Dodd Frank developed to punish the banks.

In closing the podcast, Barry Habib gives the address of his website,