Flashback Friday: Deflation Proof Investments, the Hedonics Index, and a Shortage in Property Inventory

If the signs are correct, the US is entering an inflationary period with the new Trump administration. In this Flashback Friday episode of the Creating Wealth podcast, Jason Hartman discussed the strengths and weaknesses of different assets during inflationary and deflationary periods as well as deflation proof investments. He also explained the Hedonics Index and how it is unwise to bet against the government and central banks.

He then covered an article explaining that single-family home sales rose in January, leading to a shortage in property inventory. He spoke about the Goldman Sachs article stating their predictions for interest rate rises by 2019.

NAR Article on January Sales

Jason Hartman issues a thank you to his listeners for their feedback and reviews and mentions that episode 800 is coming up soon, and 1000 will be here before we know it.

He states that he wants to talk about the inventory shortage and notes that he came across a news article a couple of days ago explaining that January’s existing home sales show the fastest seasonally-adjusted sales growth in almost ten years. This is according to the NAR’s senior vice president of research Lawrence Yun, who has been on the show before.

Hartman explains that we have to take these ratings with a grain of salt and clarifies along with this news that home ownership for oneself is not necessarily good. That belief is becoming less popular in the real estate industry. Hartman notes that some of his colleagues do very well for themselves when renting their personal residences, himself included. He’s been renting for about six years, explaining that he used to always own but doesn’t see the point now. It’s great to own a lot of investment properties, but it’s not necessary to buy your own home.

He states that it’s best to invest in single-family homes, as things tend to get complicated when you have condos that have a bunch of HOAs and people sharing walls. Get yourself a single-family home, Hartman says. Real estate investment is the most historically proven asset class.

Sales Are Up, Inventory is Down

Hartman adds that sales are up, and inventory is down. According to the NAR, sales increased 3.3% to a rate of 5.69 million homes. January’s numbers show a resilience in home buyers, meaning that business is still booming.

He states that for most of his providers, his clients are the biggest source of business. Sometimes properties slip through the cracks, though. He mentions that he tries to surrender to some things in life, and while he isn’t very Zen-like, he values the concept. Listeners should try to do the same thing. Sometimes one door closes and another opens, and once in a while things will happen for the best. He also adds that sometimes the best properties are not even on the market yet, and he advises clients to work with their counselor and grab properties as they come up.

Trump Administration Will be a Boon for the Economy

Hartman explains that although President Trump is making some missteps and annoying people, his administration is going to be a boom for the economy. Growth will be good for real estate and business, as Trump is one of our wealthiest, business-oriented presidents. He states that he is really optimistic about it and adds that with optimism and economic recovery comes inflation and higher interest rates.

Goldman Sachs, Interest Will Rise

Goldman Sachs says that they will rise to 5.5% for mortgages by 2019, which is not very far away. Hartman specifies that this is for owner-occupied homes. They’re at 4.15% now, so 5.5% is a very significant increase. He warns listeners not to be foolish and think that when 4 moves to 5, it’s a 1% increase. It’s a delta between the two numbers and would be more than 25% increase, hugely significant.

He explains that no person is always smart or always foolish. We just have moments. Like the Andrew Lloyd Webber song, love makes fools of all of us, Hartman says. We get foolish at times and we go with the mob mentality that can hurt depending on the situation. We have to use our minds and think things through, use the power of reason.

He adds that if you’re being foolish and think you’re going to time the market, it won’t happen. There are over 400 markets in the country, so it does not work as only one system.

Never Bet Against the Government

Hartman explains that the guest segment for today is himself. He’s going to share a live talk that he gave a couple of months ago at the Phoenix event. He spoke about the topic as well at the Meet the Masters event a couple of years ago, the asset matrix. He states that he spoke about and compared how different assets work in inflation, deflation, and stagnation. Deflation is the worst scenario, but it’s something the government cannot and will not let happen.

Hartman reminds listeners never to bet against the government. Both the government and central banks are too powerful to bet against. He mentions that this is part of why buying gold is a terrible asset. It has had moments of greatness, but it’s generally awful. Gold has no cashflow and is taxed horribly. Income property is betting with the Fed and the government, hitching your wagon to the most powerful forces the human race has ever known.

Upcoming Events

Hartman states that there are several guests coming to the upcoming Venture Alliance event on March 10th-12th. The event will be held at the Wynn in Las Vegas and it will be an awesome weekend of speakers, including the former governor of Nevada. There will several fun activities to take part in as well, as Hartman mentions that he always tries to add something fun to his events. There will be several local market specialists as well, so they’ll be available to talk with. Guests can attend an event once for a $2,000 one-time fee. If you become a Venture Alliance member, you can have your fee applied to your membership if you join shortly afterward.

Also coming up is the Memphis tour which is not sold out yet. The tickets are selling quick and the event will probably sell out but has not as of yet. This is set to take place at the beginning of April. Members get into this event for free. For more information, visit www.jasonhartman.com/events.

Mortgage for Inflation-Induced Debt Destruction and Deflation Proof Investments

Deflation proof investmentsHartman explains that the asset matrix explores the strength of different investments in different scenarios. He states that when you talk to inflation people that believe in the Federal Reserve conspiracy theories, they will say that you need to own gold or precious metals. This is a one-dimensional asset class, inefficient with no tax benefit. Mortgage is an asset more than it’s a liability. You can take advantage of inflation-induced debt destruction with mortgage, and it out-performs gold when it comes to inflation.

He adds that commodities are also great, and properties are made from them: concrete, lumber, steel, etc. All of these commodities are traded around the world and are not attached to any one currency. They’re needed universally.

He recalls a story from back when the price of gold was just over 400. Hartman states that he got a call from a company in Newport and the guy tells him that he needs to invest in gold before he starts mentioning doomsday scenarios. Hartman tells the man that he wants to buy twelve coins and mentions that he’s an income property investor and one reason for it is because he can acquire assets and rent them. He asks the man if he knows of anyone who will rent his gold coins and of course the man says no. Hartman states that income property can be financed for thirty years for low fixed-rate mortgages.

Manipulation Through Hedonics Adjustments

He adds that it’s debatable that the fixed-rate mortgage is a negative interest if you’re borrowing below the rate of inflation. He explains that the government manipulates the inflation rates in three ways: waiting, substitution, and hedonics. Hedonics is the amount of pleasure gained by an investment.

He gives an example of when he bought his computer two years ago for $2,800. Today, he can get a new one that’s of a higher quality, and with Apple products, it will stay pretty much the same price. He could buy a new computer for $2,800 as well, even though this is a newer, higher quality product. The hedonics index adjusts the price and says that if the new computer is better than the old one, the value is doubled. In the hedonic adjustment, if the new computer is twice as good as the old one, and Hartman still pays $2,800 for it, the index will assume that he only paid $1,400.

Hartman states that nobody considers inflation to be the rental equivalent in the price of a home, and they don’t consider the price of becoming an investor. It’s part of the concept of inflation. The only way you can get ahead is by being in the investor ranks. People with W2 jobs are taxed heavily and if you have your own business, you can invest into it, but you don’t get the phantom write off.

The Ultimate Investing Equation

He explains that commodities are the hedge for people with the gold bug mindset. He advises listeners to acquire a package of commodities. When you buy a single-family home, you are buying all of these commodities together. They have intrinsic value outside of currency. You get the house and land, and then you can go to the bank and say you want to buy them and only want to provide a portion of the money for them. The bank agrees and if you’re going to rent them out to someone else, you only need 20% down. The bank will give you 80% of the money you need and your leverage ratio from there is already 4:1.

When you buy these commodities, you’re using 80% of someone else’s money, Hartman explains. The debt is great when it’s used properly. You don’t want to pay back your own debt though, so you outsource it to a tenant. In addition to telling the tenant to pay your mortgage for you, you ask for a little extra, and this creates positive cashflow.

That money comes by way of a three-decade loan, so if we purchase a property in 2016, the last payment on it will not be until 2046, he explains.

Hartman mentions that the largest expense in our lives are taxes. If we can eliminate or reduce our tax liability, we can build wealth quicker. If you go to the government and tell them that you’re doing what they have incentivized you to do, renting homes to people, you can say that you want to save money on your taxes, he says. The government lets you depreciate over the years.

Hartman offers the scenario in which we can’t depreciate, and in that case, we can perform a 1031 exchange to invest all over again into a new asset. As tax flows change, the rent to value ratio becomes out of whack. Rents come up slowest compared to appreciation.

An Investment Must Produce Income

Returning to the gold story, Hartman recalls heckling the telemarketer. The guy has told him that there is no renting or financing available, and Hartman tells him that what he loves about income property is that it is tax-favored. He asks the man if he can depreciate his gold, and the answer is again no. He asks if he can sell or exchange for silver, and the answer is no. He also explains that gold has far inferior tax treatment because it is considered a collectible.

Gold also does not produce income, and anything that does not produce an income is not a real investment, Hartman reminds listeners. It’s speculation. An investment has to produce income, which is why he prefers to call his properties income property rather than real estate.

Cash and Bonds Are Destroyed by Inflation

He explains that mortgage gets devalued over time and the value of real estate is hedged to inflation. Real estate doesn’t go up as much compared to inflation, and leverage is what makes it phenomenal.

The best thing in an inflation environment is the strength of an investment versus inflation. Gold isn’t good and income from a job is only medium strength, Hartman says.

He adds that cash has no strength against inflation and explains that if you take $5 from your wallet and think about what it was 100 years ago, it was still $5. The name didn’t change, and we have to think about the difference between nominal dollars and real dollars, the value. Inflation is a pickpocket when it comes to cash because it debases the value.

He states that bonds and pensions are the same because there is no adjustment for them.

The IRS Does Not Account for Inflation

Hartman explains that taxes are interesting because the IRS does not account for inflation, which can be good or bad. People that do not have a tax advantage are getting destroyed. The fact that the IRS and tax codes do not account for inflation is good for investors.

Looking at it versus deflation, cash goes up in value. Bonds and pensions go up in value as well. If you have a pension at $5,000 a month, it’s going to be more valuable.

Taxes are pretty good as well. Job income has medium strength against deflation.

Rental income will stay about the same or deflate a bit, which makes it one of a few deflation proof investments. Unless you consider when the value of property deflates, as long as the population is stable or increasing, people never have the incentive to move from renting to owning a home.

Gold is terrible, and a mortgage is terrible during deflationary periods because the burden becomes higher. You have to pay it back in more valuable dollars.

Defaulting During Deflation

During deflation, debt can possibly crush you, Hartman explains. He states that in many of these situations, people just default. We saw millions of people do this during the recession. It’s unfair, but it is the way it is. The people with the highest balances got all of the bailouts and modifications. Some of them got to stay in their homes for up to 3.5 years for free. Lenders came along and paid people to participate in cooperative short sales to the tune of between $3,000 and $32,000 if they helped sell the home. If the banks took the home back, it would end up costing them more.

Hartman explains that when it comes to contracts, either the borrower pays the mortgage, or they give back the collateral. Those are the terms, pay or walk away.

You Need Your Own Business: Deflation Proof Investments

Hartman states that mortgage is highly valuable because it is tax-deductible. Another small benefit he mentions is that with the real estate that you own, you can travel and take a deduction to visit your property.

He recalls one speaker that advised people to buy properties in areas that you’d like to visit so that you can deduct your trips, another reason real estate is considered deflation proof investments. Hartman explains that this speaker was telling people to make a big decision just to deduct a $400 airline ticket, which he was annoyed about.

He advises listeners to own their own business. Corporate jobs are the worst when it comes to taxes. Even if you have a small business, it’s a good idea to have one for tax benefits.