Debt Based Assets in a Debt Based Economy

Jason sends his greetings from beautiful Scottsdale Arizona, where he and his business partners Ken McElroy and George Gammon just had a virtual meeting with members of The Collective Mastermind to discuss the stock vs bond market and what that is signaling for mortgage rates and property prices. They also took a deep dive into the totalitarian decisions currently being made around the world. Could that happen here? What could this mean for the United States and for us as investors? What is happening in democratic countries is quite startling and we can never be too prepared.

Back to real estate: Jason has been busy exploring properties in Sarasota and Scottsdale – two very competitive markets. There are multiple offers on everything; it’s like the tulip bubble all over again! When looking at properties in context though, the monthly payments are still quite reasonable, even though the overall prices seem high. Why? Because interest rates are so artificially low – what a phenomenal opportunity! Don’t forget that this is a debt based asset class and right now we have incredibly cheap money.

Money Is Lent Into Existence

So as an investor, maybe you’re thinking: “Oh I’ll just wait for the market to correct or crash and then I’ll have a bunch of cash and just swoop in and buy up everything.” But here’s the problem with that: if the correction happens (and undoubtedly one will happen at some point in the unknown future), what is going to cause the correction? The greatest likelihood of that cause will be more expensive money (more expensive mortgage money to be precise). We are dealing with a debt based asset class and a debt based economy where our currency units are created by lending. All money is debt and it is lent into existence. So as investors, the question we must ask ourselves is: do we want the property cheap or the money cheap?

Currently, we have almost the lowest interest rates in 5,000 years. Seriously! Jason recommends you read Debt:The First 5,000 Years, by David Graeber. By looking at long term interest rates over the course of millennia, you’ll see that money is incredibly cheap right now. Another common scenario for investors is that during a correction, they sit on the sidelines thinking it will get even cheaper. But how do we actually know when we are at the bottom? Here’s a hard truth: when it comes to prices, we don’t know. We never know. However, when it comes to the price of money, we have a lot of historical reference for comparison. When interest rates are near zero, the only way they can go is negative, and arguably we have negative interest rates now vis-à-vis inflation. For the first time in probably anybody’s lifetime listening, we have the official rate of inflation higher by a factor of more than double the owner occupied mortgage rate. So Jason asks you again: do you want the money cheap or the property cheap?

Fear Of Missing Out

We must see this as an opportunity and remember that every deal looks great in the rear view mirror. There is a lot of FOMO in the real estate business. If you look back at the properties that you owned or that you sold and you see what they’re worth today, you might think: why did I sell that? We’ve all had that thought, whether it be about our investment properties or even our personal residences. What if the opposite happens? If the value declines and we’re not in a position where we have to sell because we followed Jason’s Ten Commandments of Real Estate Investing (check them out on his YouTube channel if you haven’t already), then who cares? Just keep the property and ride out the economic storm with cheap money and cheap mortgage rates. When the rates get lower again, we’ll see more flare up in house prices as housing affordability increases due to lower interest rates.

How much lower can interest rates actually go? Probably not much. We have many years of historical references when it comes to rates, but not many with property prices. Sure, we have data from the last ten years, fifteen years, even one hundred years, but each time you look at that market cycle and give it a ten year span anywhere, the price is higher and higher. It never goes down. So of course you can try and time the market, but it seems really silly to do that when you have cheap money. Remember: this is a debt based asset class. Time the money instead, because it’s a great time to take advantage of inflation induced debt destruction.

Ashley & The Jason Hartman Team