Jason Hartman and Evan Moffic begin today’s show by talking about senior housing and how it may be overbuilt. They chat about how you as an investor can take advantage of the aging at the home trend. In the second segment of the show, Jason brings on guest Ali Wolf, Director of Economic Research at Meyers Research, LLC. They talk about wage growth, inflation, home appreciation, and why interest rates have created some of the bubbles that we find ourselves in.
Investor 0:00
I love your podcast. I think you educate you entertaining, and I always learned something even if it’s not real estate related.
Announcer 0:08
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 0:58
Welcome to episode number 1320 513 to five. Thanks for joining us today. I’ve got our client and the guest host for my Solomon success show biblical principles for business and investing on to help me with the intro portion of the show. And that is Rabbi Evan moffet. Rabbi, welcome. How are you? Hey, Jason. Great, I’m good. I can’t believe we’re 1325 just seemed, we got to 1300 and boom, we’re already a quarter of the way through. It’s, it’s a lot of episodes. I’ll tell you that. And, and with all my other shows, we’ve got well over 5000 episodes. So, folks, you don’t need to listen to anybody else.
Ali Wol 1:43
If you have a long commute, it could be Jason Hartman,
Jason Hartman 1:46
all the way all directly, you know what it could be all the way for the next 10 years, even if we never produce another show after this, but we’re gonna keep producing them for you. Because we love you and we love being with you and we get such positive feedback. from you. And by the way, if you’ve got feedback for us, go to Jason hartman.com. Slash ask Jason hartman.com slash ask and you can tell us or ask us anything. We always love hearing from you. Jason Hartman comm slash ask, engage with the show, help the community whatever question or comment you have, believe me, someone else out there has the same question. The
Ali Wol 2:26
truth is, you will get an honest answer as a client, I can say that if you go to some websites, where they say ask us a question, you get a sales pitch in response. Yeah, that’s what you get. You get one line, maybe saying, Oh, that’s a very interesting question. We’ll be happy to look into it for you. Now. Send us your money. If you ask a question to Jason, he’ll get you a good answer a real answer without any kind of sales pitch saying you need to buy this you need to buy that now might be a good idea eventually for you to buy something but it’s not a sales pitch. It’s an actual question with a real answer.
Jason Hartman 2:56
Yeah, good stuff. Good stuff. No, that’s what that’s what we’re here for. That’s our mission to empower investors to be consumer advocates to be your guide on your journey. And I just love hearing from clients that started investing with us 10 years ago and to see their success and it’s just an awesome feeling. I mean, look, I could have retired 14 years ago, I don’t need to be doing this. I’ve got enough money to live well for at least my lifetime, if not a little longer, as long as I don’t screw it up. You know, you but, but this is a mission. You know, it’s fun. I really love doing it. And I love empowering people. Our guests today will be a continuation of the alley wolf interview. She’s the chief economist for Myers research. We’ve had her on several times over the years. And we did this really long, 90 minute interview with visuals By the way, if you go check out the YouTube channel, my YouTube channel, you can see the visuals on there that are being described here but you don’t have to it just adds a nice dimension to it sometimes if you have the visual, we’ll get to that in a moment. But Evan, you posted in our content group just yesterday or the day before, an interesting Wall Street Journal article. Tell us about that.
Ali Wol 4:12
Well, there’s an article about senior housing, which, as we know of you, as you’ve talked about for years, is something that is always being talked about in the real estate investing market. And what this article essentially says is, it’s been way over built, and that there’s a new trend, which is seeming I guess, much more historically true, is that boomers want to stay home. There’s so much technology where people can stay and live in their homes. In fact, I see it all the time. I see many people in my congregation who sell a beautiful home that they have and they move into a ranch house. They plan to live there until they pass away.
Jason Hartman 4:48
Now you know when you say Ranch House, you’re just simply saying they move into a one story one story, one story and I think that that remaining they you know they might have mobility issues with stairs.
Ali Wol 4:58
Yes, people are afraid of falling down stairs. Yeah,
Jason Hartman 5:01
we’re meeting about that go ahead
Ali Wol 5:03
for sure. But it reflects a wider trend whether people move to a one story home or not. It reflects this wider vision that people want to stay in their homes as they age. And the technology is more and more there to put in railings so that they can walk easier to have home. I’ve people in my congregation who are involved in home instead, businesses where they get caretakers to come into people’s homes, people would much rather stay in their home than live in an institution. Now sometimes an institution is the only thing that can provide care, but it has been so overbuilt what this article says, and that it may be one of the biggest miscalculations in real estate in a generation.
Jason Hartman 5:45
I hate to say folks, I hate to say I told you so. But I did tell you so I just intuitively, and you know this is without I’m not going by data here. I told you before. This is my anecdotal impression. But you know, Sometimes you got your finger on the pulse. And you just know it to be true, right? And I remember back in the late 80s companies going into the business of senior housing and assisted living, and all through the 90s. This graying of America trend was not hard to predict. It’s simple math. That’s what I love about economic demography, the study of economics, through demographics, and that’s, you know, really why I took a liking to Harry dense work. Now, you know, Harry dent has not been without his bad predictions, but he certainly had some good ones too. And he’s been on the show many times, and we’ll have him back. But you can just tell you know that everybody today, who is 50 if they’re still alive, guess what? They’re going to be 60 in 10 years. That’s not hard to predict. But the concept of age has changed. And the technology has changed. And I’m looking at another article here. By the way, I didn’t tell you about this one before. We Started, Evan. But it says with the rise of technologies that help the elderly stay in their homes. Yeah, a glut of senior housing looms, developers and senior housing companies have spent billions of dollars over the past five years. Well, hey, they’ve been doing a lot longer than that, to build facilities that provide housing, food, medical care and assistance for the elderly. But this wager on elderly care is falling short of expectations. And there are concerns that it could become one of the biggest real estate Miss calculations in recent memory. Some analysts suggest that is in part because venture capital and other companies are expected to invest about $1 billion this year in these other aging in place technologies that are starting to enable seniors to enjoy the living standards, similar living standards and access to care. in their own homes, that is about to double the amount investors spent just three years ago, according to forging ventures, a new venture capital company, focusing on such startups. These are the tech startups that are providing the aging in place technologies. new products and services include sensors that respond to a range of medical conditions, facial recognition for identifying visitors, and houses with malleable fixtures that can be adjusted as residents age. Now, let me just say something about myself. I went to the doctor just two days ago for an annual physical exam. And as I was talking to her, you know, doctors must be in some ways it’s made their job easier, but in some ways, they’re probably annoyed by that super ultra informed patient like yours. Because Because it’s like it’s almost like a battle of wits. You know, you go in and the doctor who used to be considered this like pillar of knowledge that was not accessible to all of the patients, right? You know, a spoken Latin just like lawyers do doctors same thing. And you know these all these professionals including the realtors, look, the realtors all used to have command of all the property data because they control the MLS Not anymore. Right? All of this has been disintermediated right with technology. And so I’m talking to my doctor and I’m thinking, you know, I diagnose so much of my own health. Of course I use all the fitness tracking quantified self products like the Apple Watch. I have a little $80 EKG sensor that is a tiny little thing about the size of a credit card that you put two fingers on two thumbs on it. And it integrates with an app on my phone. You know, I have a blood pressure cuff I test my own blood
Ali Wol 9:58
pressure. So you have more data than They know what to do it.
Jason Hartman 10:00
Yeah, I’ve got I’ve got one of those little things you put on your finger that detect your oxygenation level. Now, granted, I don’t use all this stuff all the time. Two months ago, I decided I should test my I think it’s called the vo to max you know, like my lung capacity. So I bought one of those things for I don’t know $8 where I blow into it and it tests my Yeah, I mean, like, look at we can do all this stuff ourselves. And guess what’s coming next folks? soon. Hey, look, you know, what goes in must come out, right the toilet. Okay. Soon the toilet will be hooked up to Google. I know it’s scary. And they will be diagnosing our waste for signs of disease or, you know, nutrient imbalances and all sorts of things, folks, it’s not the same world. All of these assisted living people thought that 65 years old was old. Number one. That was a massive miscalculation. They thought that you know, this technology wouldn’t arrive. Now, if you want to keep track of your aging parent or grandparent, give them an apple watch or a Fitbit or anything like that. And you can be alerted if they fall. Y’all know about that you remember
Ali Wol 11:19
those old commercials where they
Jason Hartman 11:24
were gonna say? Yeah, it’s all changed. It’s a whole new world. And guess what else from the real estate perspective? Here’s the other thing that keeps people aging in place. And we’ve talked about it already on prior episodes, low interest rate mortgages, these folks are not likely to give up that cheap mortgage. Now this pressure will increase. If and when Well, it’s not if but definitely when it’s just we don’t know when rates increase When mortgage rates increase, and these cheap mortgages become even more valuable, guess what? There’s going to be more incentive to keep that house and age in place. Because the mortgage is not portable, it doesn’t go to the next house, okay? And it’s a whole new world, okay. It’s just a whole new world.
Ali Wol 12:20
So Jason, with all of this knowing this about senior housing, and that it’s probably a bad idea to invest in sort of owning, I mean, I guess there’s always a decent deal if you find a really good deal, but how could the an average person who knows a little bit about income property, is there any way we can benefit from the aging of the boomers? Is there some way that we can respond to this demographic trend and make a good investment?
Jason Hartman 12:46
Well, look, buy bread and butter housing, number one, because that’s always going to be needed. It’s always going to be insulated from whatever happens in the economy, the next recession whatever. Number two, if you Want to focus on this? Try and make some of your portfolio single story homes. Okay. So I know that’s pretty simple, right? single story is going to have a little wider appeal. Remember you, there’s always trade offs with everything right? with a single story home, you obviously have to lose some yard size, because yet the pad is larger in the, you know, a lot too. You know, if you build two stories, the pad can be smaller, because you’re going up, obviously. So single story homes are going to be obviously more appealing to the aging population. So, but listen, don’t panic, because it’s not all about aging population. Yes, there are 76 million aging baby boomers, but they’re also 80 million millennials that aren’t even 40 years old yet or they’re barely 40 years old yet. So you know, you’ve got enough market on either side. The one market you don’t want to invest in is my generation Gen X because I’m like the lonely generation with only 46 million Americans, there’s like half the number of Gen Xers is there are the bookends of our generation. So
Ali Wol 14:06
well I remember on a on an earlier episode, you interviewed a really prominent demographer. I can’t remember his name now. But he talked about how he learned about demographics when he saw Honda motorcycle sales drop off tremendously when Gen X reached a certain age. And they hadn’t anticipated that because they hadn’t realized how much smaller the Gen X demographic was. This is sometime in the 80s or 90s. It’s hugely important to understand that
Jason Hartman 14:32
that’s a great point. And you know, what else? Another one of those, I was thinking about it yesterday? golf courses? Oh, I mean, golf courses are going out of business left and right. A lot of these new housing developments have been built on golf courses. They just plowed over the golf course and made it a housing tract. I just looked at one recently here in South Florida. And think about it if it were 2020 Five years ago, you would have been thinking, Oh, man, we gotta you know, if you were a big developer, we got to get some money in the golf course business. Because I mean, look at the demographics coming at the golf course, or the demand for golf rounds. I mean, let’s find some land and make a golf course that’s going to be a great investment. But guess what, then you get to about 2007. And Millennials are like, we don’t care about golf. We don’t give a damn about golf. In golf rounds between I think it was 2006. In 2016, the number of golf rounds were down by 35%. That is a staggering decline in 10 years, if 35% of your market demand just evaporates. And guess what? It’s only going to get worse. You got a bunch of impatient millennials who are used to looking at their Instagram on their phone every five and a half seconds. Do you think they can actually handle a game of golf for five and a half hours? I mean, it’s just not appealing away generation. No. So golf courses, elder care homes, assisted living homes, you know, these guys are going to get their rear ends handed to them. And, you know, I predicted this years ago I told you so.
Ali Wol 16:21
It’s true. It’s true. You know, you gotta, it’s so important to keep that in mind. And I think that’s one of the reasons why these bread and butter housing essentially always works. Yeah, because there’s always going to be some basic demand and, and thinking about aging in place. I was thinking about, there has to be workers who go and stay in somebody’s homes or at least go you know, they’ll go from, you know, nine in the morning till five at night to watch somebody they need a place to live to. Well, it’s such a new kind of workforce housing.
Jason Hartman 16:49
Yeah, right. That’s a new workforce housing because those people don’t get paid too much. So yes, the caretakers you’re talking about our killer gasps like well, it’s funny as 20 other name changed, you know, they used to call it a caretaker. Now, they called In a caregiver, it’s the same person. That’s true. caregiver is the more appropriate name. It was kind of funny how that changed over the decades. But you know, the other thing about that is there’s another element of technology that makes that possible. An app on your phone, or maybe an automated alert from an apple watch that senses the change in heart rate, fall, whatever it is, can now summon these people in real time instantly. So yes, we always had in home care that’s not a new thing. It’s been around firstly forever. But now the accessibility and the efficiency at which that occurs is much better. And remember my opening speech at prophets in paradise was all about information and real estate investing the bits, right we think of our business as real estate investors is we invest in atoms because We have a very material thing. But the bits, the information, the bits and the bytes, very important. And that’s another example of something that dis intermediates and diminishes the need for assisted living facilities, is the fact that the information is so quick in the systems in the supply chain of getting that care to someone in need is so efficient, where you can just submit on your iPhone app. It’s like Uber Eats, you know, yes, someone can just come over, maybe it’ll be an Uber or Lyft driver in the future. Who knows? Because those drivers, here’s another prediction folks, you saw them go from just driving. That’s how it started. They were a taxi to then they started doing package delivery. And then they started doing food delivery. Let me tell you something, they’re going to start doing a lot more that mobile workforce. ride sharing drivers are going to do a lot more, who says they can’t come over and help grandma up if she falls and see if she needs if we need to call the paramedics? You know, sense. I mean, these people are, in most cases, at least background checked. You know, they’re all available out there, that whole workforce can be summoned on demand, who says that that person can’t be at that house in two to four minutes to check and see what’s going on? Who says they might not use an Amazon key type system, the way you know, the Amazon delivery people are using where they actually can enter the house with an electronic lock, you know, maybe the Apple Watch or whatever that devices that senses the fall automatically signals the electronic lock to make it open a bowl to certain parties in a circle of concern. I mean, it’s just there’s no end to the possibilities, folks. There’s no end to it. All right. We got to get to our guests. Let’s talk to Ellie Wolf, you ready? Looking forward to it?
Ali Wol 20:09
Well, this is what we had talked about a little bit earlier, you were talking about maybe some markets needs a little bit of a correction, maybe we’ve seen a big gap between wages and what has happened with home prices. So the stat that you can see at the top of this is since 2015, collective wage growth on a national level is up 13% compared to 25%, when you combine home price, appreciation and inflation. So the problem with do mortgage rates matter? Well, they may in this case, because we’ve seen such a divergence where it’s really hard for people to make the payments work, given where their current incomes are and where home prices are.
Jason Hartman 20:45
Okay, so I gotta stop you here. This is really interesting. So this basically what you’re showing the audience and again, if you’re watching the YouTube channel, you can see this visually, an alley we need to explain it for those who aren’t watching the channel. You’re saying there’s a 13% growth in wages since 2015. But what is needed if you take wage growth or Well, just price growth of property property appreciation? Right? That’s been a 25% growth since then, is that what you’re saying? Yes.
Ali Wol 21:17
Okay, home prices plus
Jason Hartman 21:19
right in place and what I hate about things like this, just so you know, although it’s not going to be that inaccurate because the rates haven’t been dramatically different. But I think you need to compare wage growth with mortgage payments, not prices, because nobody buys a house based on a price hardly ever. They buy it based on a payment here, though, since 2015. Yeah, the rates have gone a little up and down, but they’re not like dramatically different. So here, it doesn’t matter. But folks, if you’re looking at home price appreciation from 1982 now or 1992 now, and you’re saying wages have only done this versus home prices doing that, that you would be very misled. Buy something like that because you have to look at the interest rates and factor them in to know what the actual payment impact is not the overall price, the sticker price of the house, right.
Ali Wol 22:11
And we don’t have this slide here. But we also have affordability. So it we have affordability over time, which is exactly to your point, you can look at the 1980s. And that’s going to look at the income in the 1980s versus the home price in 90 days, and adding in mortgage rates as well. So we can chart that out. And it shows you the same trend, which I think is just another way of saying it, but it does show that even compared to five years ago, 10 years ago, 20 years ago, affordability is clearly the biggest issue for the homebuilding industry and for the housing market in general. Good. Okay, but what we’ve seen is the graph what it’s going to show you is just the percent of communities that are taking price cuts. So going back to the idea of a correction, you can see in markets like Dallas, in 2016, you had 20% of all of the actively selling communities, doing a price cut 20% and It’s almost 35%, you are starting to see sellers have a certain expectation. The reality is maybe you can sell your home, but you got to do a little bit of a haircut. And that’s what this is capturing.
Jason Hartman 23:11
So this includes the entire market, it doesn’t segment that price, or homestyle, or anything like that. And what’s interesting about this kind of stuff is when you look at new homes sales 10% of the market, as you pointed out earlier, the builders are just not building affordable housing this time around, they’re building to the higher end, the higher price point, when I say that, I don’t mean really high end, I just mean and of course they are doing that, like Toll Brothers, etc. But they’re not building cheap bread and butter housing anymore. Whereas before the Great Recession, you know, you saw lots of Home Builders building hundred hundred and $30,000 houses. Now, you don’t see any of that. It’s been a completely different cycle, post Great Recession, in terms of the kind of new home inventory so when you throw new homes into the new That’s gonna throw the stats off or if you’re only talking about new homes is really going to throw them off. Right.
Ali Wol 24:05
And what I’ll add to that is that’s been true for pretty much this entire expansion, which is crazy. It’s been 10 years that it’s been mostly the higher price point. But at least we’ve been talking about affordability and attainability. so long that you do have lgi homes and you have Express homes, the Dr. Horton division, you have different builders that are finally saying, there is a huge part of the market that we can capture at our you know, the tiny share over the overall, we’ve seen that and we’ve also seen a shift towards more attached product. So we have seen even markets that you wouldn’t expect. Columbus, Ohio, for example, that is now seeing a bit more attached product is they’re saying affordability is our number one problem and this is the best we can do with where land prices are today. Good. Okay. All right. So this is just going a little bit more on just the price situation is that I’m calling it the evidence of a price ceiling which shows the year we’re changing The Case Shiller home price index. This is the index that a lot of people like to follow. It’s not necessarily the best, it’s lagging. It looks at same sales of homes. So it has to match up a home that is sold once and look at when it sells again. But it’s basically telling you the whole story that we’ve been talking about is that there still is home price growth. But compared to this time, last year, when it was six and a half percent, now we’re seeing closer to two and a half percent growth.
Jason Hartman 25:25
This is the main Case Shiller index that only profiles 20 metros, right. It is Yeah, okay. This is so darn misleading. I hate this index. But
Ali Wol 25:36
misleading, but it’s accurate. today. There’s a lot of different indicators that will show you that price growth on a national level has definitely slowed but it’s still growing. And we can show again, I don’t have it with me today. But we have price growth this time last year versus price growth this year for different markets across the country and you’ll see some Vegas Phoenix maybe still growing 567 percent But you will see a lot of markets that are growing 234 percent. Yeah,
Jason Hartman 26:03
yeah. And I mean, if you’re just looking at stats, and you’re not in my business or in the business, most of our listeners are in, you know, it’s fine. The problem is when you have 400 markets, and you only profile 20, and 75% of those 20 are kind of the high flying cyclical markets that are largely overweighted in the index. But the other thing listeners need to understand is that when you compare the same home, I like the idea that it takes the same home and then compares it when it sells again, right. But the one flaw that you get in this is when you have a very in a certain market when you have a very active rehab market, where investors are buying these houses doing significant rehabs and they’re doing the fix and flip. There’s a huge disparity there between what it’s sold for last time and that can skew it in the favor of making you think there’s more appreciation than there really is. So I just the only reason I’m pointing out all of this stuff is I want people to be more aware, I want them to be aware of how the stats and the macro view can be a little bit tainted. Right? You know, you gotta just understand there are these factors that, you know, they’re mitigating factors everywhere in life, but go ahead.
Ali Wol 27:19
Alright, so this goes back to the opposite. And I know most of your listeners are not new home focus, but you can see the year to date. This is the same graph that I showed you for the existing home space now for a new home. And you actually are seeing that there’s growth over 1817 and 16 for new home sales so far this year, including the spring selling season and these are prices. So yeah, new home sales prices or sales. Yeah,
Jason Hartman 27:43
yeah. And listen alley. our listeners would love to be buying more new homes, but the builders just aren’t building for the bread and butter rental market this time around, sadly, Yeah,
Ali Wol 27:53
I know. I understand that. Well, I’ll show just this. This is going back to overall sales rate and by market Just to see the markets that are so far outperforming the rest of the nation. This is the spring selling season this year and you’re actually seeing some of the markets that took a little bit longer to come back. In this cycle you’re seeing they’re starting to see a lot more growth. Austin’s just kind of always dominating and dominates on every list. Minneapolis, they’ve done a lot of changes to what they’re allowing builders to bring to the market. They’re also just becoming more of actually a millennial hotbed more than you would think. So a lot of growth in Minneapolis, DC took them a while but they’re really coming back and you can see the spread San Antonio Salt Lake City Indianapolis right. But what’s interesting to me of the markets that are doing really well this year, is to compare this list to the list that was doing really well last year, right which
Jason Hartman 28:43
is a lot of way what you’re talking about is sales growth, not price appreciation. Exactly. So in that chart for example, the leader was Austin with 19% growth in sales right here in Minneapolis number 216 percent growth and sales Washington, DC 14% growth and sales. And then on that list also you’ve got Salt Lake City, Indianapolis, Houston, etc. Okay, go ahead. And then what’s what do that comparison?
Ali Wol 29:08
So it’s just so interesting to me when you look at this list, this is the top 10 best markets so far this year, at least for the new home space, and you pull up the same markets compared to last year and the only two that you see an overlap of having a lot of growth in sales would be Indianapolis and Phoenix. So last year, we were talking about Charlotte and Denver and Atlanta. And it’s not to say those markets are not still strong and they still don’t have growth. It’s just they were growing. Charlotte was growing 17% this time last year, and you’ve definitely seen that pullback to the lower single digits. Right. So a little bit of change, but not necessarily a problem for those markets. Denver. Denver is a little bit more concerning, depending on the price point that you’re operating in Denver seen a bit of a pullback, but that’s mostly affordability driven. Yep. So the whole point of going through that segment was really to build up. Why are we talking about A change in policy right now. And the reason that we would even be talking about some kind of rate cut is because we’re seeing the economy is slowing and whether or not it’s tariffs or whether or not it’s uncertainty or whether it’s not we’ve just had a long expansion and businesses are finding it hard to be profitability profitable today. There’s a lot of different factors that could lead to that. But historically, when you look at rate cuts, we see it happens during or after a recession. Or you see it in an effort to pump up an economy. And so right now, we’re hoping that if the Fed and it’ll be likely that the Fed does cut rates later this month in July, that’s their insurance policy, they want to pump it up, they want to pro long growth, and that’s half the time that happens, and half the time it’s too late, and things start to turn down. And you can see that here in this graph. This basically just shows you different times that the Fed has cut rates, but it’s cut rates. This is the 1990s expansion which is The second longest on record, you saw they cut rates stimulated growth, they were able to raise it, and then a couple little cuts before the final cut before a downturn. So it’ll be, it’ll be interesting to see where we are, because as we showed there is some slowing in the economic data. But the question is, will a 25 basis point if that’s what they end up doing? So that’s point two 5%. If they cut rates that much, will that do anything to the market? And I think a more serious and concerning question is, why can’t the economy withstand rates as low as they are today? Because you can see on this graph, we’ve really never had this before. Any kind of prolonged period where the short term rates are as low as they are.
Jason Hartman 31:47
Okay. So when you say we’ve never had this, we’ve had the short term rates very low for a very long time. This is the longest Yeah, okay. Interesting.
Ali Wol 31:56
Yeah. And almost to me, I’m trying to coin this as My thing, but I could see the next downturn being called the Fed induced bubble. Because when you have rates this low for this long and your yield seeking, you’re going to try to find different ways to make money. And maybe it’s creative. And maybe there’s things that’s going to come out of the woodwork. And maybe I’m just being alarmist. And I don’t know. And there’s nothing actually going on. But I think this has allowed for some risk taking that maybe we should be aware of,
Jason Hartman 32:25
and you know, what is very sad about that alley, and all of us critics of the Fed. And I’m talking critics conceptually that there is a Fed, okay, there is a central bank, and the markets not just allowed to kind of regulate itself, especially being a private company. And you know, there’s a lot of people that are very critical of all the way the system is. What’s really sad about it, is that because the yield is so low, it punishes Savers, and it rewards debtors. And so these older people that have done the right thing all their life, they’ve saved up money. They’ve delayed gratification they they didn’t spend, when they might have wanted to enjoy life a little more, they save for retirement, they did the right thing. And now they’re forced in this position where they’ve got it invest in riskier speculative assets. They can’t buy, you know, CDs and ladder them. They can’t buy bonds, they can’t do the conservative stuff that this class of people used to be able to do in the older old days. Because there’s just no yield
Ali Wol 33:32
in it not to go into wealth inequality, but it does create if you’re not investing in the stock market, think about all your friends who were invested in the stock market or the past 10 years and all of the average Americans who maybe didn’t know that they should be doing it or didn’t know how to do it, and then how you just see that huge gap between the people that I guess were a bit more investment savvy and those that were looking to do some kind of safe, they don’t want to take on too much risk as they’re saving for retirement creates a big challenge in the world.
Jason Hartman 34:00
Same thing, of course could be said as the real estate market. It’s just easier to quantify the stock market. So I understand. Yeah, yeah. Okay. Go ahead.
Ali Wol 34:07
Okay. Well, just talking about the Fed, as we talked about, then for your investors, and as you think about the homebuilding industry, for so long, we’ve been so focused on what is the Fed doing and what is that going to mean for mortgage rates? And you’ve seen that, yes, in the past, you can follow this. There are times that the federal funds rate, which is the rate that the Fed can hypothetically control, you’re seeing that as it goes down, you see a similar trend and rates. But as we’ve gone through this prolonged period of zero interest rates, and as we’ve started to slowly raise, like I said, nine times throughout this cycle, we haven’t seen the accompanying change in mortgage rates. And when I do presentations, I often have people say, Well, that doesn’t make sense, because why are we not seeing that they move in lockstep? And the answer and I think, Jason, you probably know is that it’s not really the focus of the federal funds rate. It’s really what the bond investors are doing and how that impacts the Treasury. yield, because these are more competitive investments and they tend to move together closer when the federal federal funds right.
Jason Hartman 35:08
I’m glad you brought this up. So yeah, the bond market controls the mortgage rates. And, of course, I’ve said this a million times, but people just sometimes I don’t think they want to hear it. Understand the Fed that does not control mortgage rates. The Fed does not control mortgage rates, they influence them, obviously. But according to your chart, not that much. And then that was a very telling chart that you just showed, you know,
Ali Wol 35:35
so what’s interesting is I was trying to say, Well, why is everyone so obsessed with the Fed and mortgage rates? Like is it just because people don’t know? Why? Why is there that focus? And the answer I found is the bond investors are going to take and how you said influence. That’s the right word. The bond investors are going to take that action into consideration because they say if the Fed does this, what does that mean for the economy and the bond Investors are trying to forecast out what’s going to happen to economic growth. And so they are influenced by Fed policy. But really, they’re the ones who are determining what’s going to happen with the fixed rate mortgage. And what’s awesome for your listeners is every day you can open up the Wall Street Journal, you can see where the 10 year Treasury is. You can know what the historical gap between the two, and you can forecast out where rates are today. And so it’s a really useful tool when you actually step back from Fed policy and say, Oh, just look at the 10 year Treasury and you have a pretty good idea of sentiment and mortgage rates.
Jason Hartman 36:34
Very good.
Ali Wol 36:34
But I think what we should notice, though, is that this graph, if you’re looking at it on the online version, the blue is the 10 year Treasury. And when we were talking about the fourth quarter slowdown, this is when the 10 year Treasury hit 3.2 and that’s when rates had gone up to right about 5%. What we’ve seen since then, is the 10 year Treasury last I look today, it was 2.1 and mortgage rates are 3.75 And again, we’re excited about this because we’ve seen all those stats on affordability and a price ceiling and what it means. But we also need to think about why would the 10 year Treasury be going down? And it is growing down because investors are saying, well, there is some slowing domestic growth, there is some trade tensions. We’re seeing China’s slowing Germany slowing turkeys in a recession. All of those factors say to investors, well, I’m a little bit nervous. And if I’m nervous, I want to put my money somewhere safe. The government bonds and bills are considered safe. bond price goes up, bond yield goes down. So it’s not that rates are down because everything’s great. It is actually that rates are down because there’s a little bit of unease. But you could also argue that it’s down because again, if you’re yield hungry and you’re an investor, you’re not going to Germany, you’re not going to Switzerland, you’re not going to Japan because those are negative yielding. You’re going to go to the US or at least you can get a little bit of return for your money. Yeah, good point. And then finally, just for last On raises, what could make them go up? Well, if you see when we started about auto sales, and we started about the housing market, and we talked about capex spending, if you start to see those numbers start to trick back up, investors will say, okay, things are starting to look better. If China’s numbers come out better if you see inflation, if we get a rate cut, there are different things that could make rates go up. But I think as an industry, we need to remember that when rates go up, it’s not a bad thing. It’s actually that the economy and the outlook look good, which is counterintuitive. And I know that it hurts our industry to some extent, but there also is some positive when rates go up. Oh, sure. There are Yeah,
Jason Hartman 38:36
everybody thinks, oh, it’s good. When rates are down. It’s good when it’s a seller’s market. Not necessarily. There are benefits to other the other side of that equation, too, of course. Yeah. Yeah,
Ali Wol 38:46
totally agree.
Jason Hartman 38:49
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