Three groups whose existence depends on single family home sales—much like you, the real estate investor—are making some bold predictions for the U.S. housing market this year and next, saying sales of single family homes will rise from a projected 6.2 million this year to anywhere from 6.3 million to 6.8 million in 2018.
On the surface, it certainly appears that the United States is in a sellers market, and the signs point in the direction of healthy times ahead.
But when you step back and consider all things, such as the differences between a buyers market, a sellers market and a brokers market, you’ll realize there’s more to such numbers than some person or group boldly stating them. You must step back and ask yourself the question: “Compared to what?”
Sounding that message this week during an episode of his “Creating Wealth” podcast show was real estate investing expert Jason Hartman. In the podcast, Hartman goes beyond the home-sales numbers, which were reported by the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Mortgage Bankers Association (MBA), to explain the differences between buyers, sellers and brokers markets.
He does so to help you understand your single family home investments better and to answer what he says is that important question of “compared to what.”
And, in a follow-up from the subject of a podcast show from last week, about how public pension plans are in trouble in the United States, he compares the country’s pension liability numbers to those numbers in other countries. You’ll find that, for comparison’s sake, that the situation is direr over there.
The Projected Single Family Home Sales Numbers and What They Might Mean
All three mortgage groups predicted single family home sales for 2017 at 6.2 million, but they all predicted interestingly different numbers for next year. Freddie Mac predicts sales to rise to 6.3 million in 2018, while Fannie Mae says the number will rise to 6.5 million. “But the Mortgage Bankers Association,” Hartman reports, “is the most optimistic—and they should know because they’re the ones pushing the loans through. They say next year, we will be doing 6.8 million home sales.”
Hartman then challenges you to look beyond the simple statement of those numbers so you can compare them to what they might mean.
“We would be in a sellers market now, but the thing you gotta ask is, ‘Could there be a bubble?’” he asks. And, might that bubble burst before 2018 is done rolling around on the calendar?
Rising home sales are not necessarily a sign of market health, he proclaims.
“The reason it does not necessarily indicate market health is because sometimes the market may be so powerfully moving, it may be such a powerful sellers market that inventory is reduced to such low levels that home sales actually decline,” he says. “A sellers market, a so-called healthy market, does not necessarily mean more home sales.”
“In all of these statistics, you have to tease things out and really understand the dynamics … in the market dynamic, where you have a very strong sellers market, at first you will have very strong home sales. But then you will have a point at which inventory gets so gobbled up and so picked over that home sales actually decline, but prices are pushed up even further, to further and further heights.”
“The poster child for this,” he adds, “would be … that seven-mile-by-seven mile little bit of a peninsula, yes, the Socialist Republic of San Francisco.” That city has experienced ballooning housing prices in recent years, and, in turn, high rents, thanks mostly to the tech industry’s boom there and a housing supply that’s too small for a burgeoning population.
Will other parts of the country, in this sellers market, become like the Bay area and lose inventory and see prices go up dramatically, you might ask?
“Not in linear markets—I really don’t think so,” Hartman says in his recent podcast. His Platinum Properties Investors Network specializes in properties in linear markets (including single family homes), or those markets where housing prices have historically stayed steady over a number of years. As you already may know as a follower of Hartman and a listener of his podcast, Platinum avoids cyclical markets, such as San Francisco and Seattle, where prices have historically risen and fallen erratically over decades of time.
“Call me overly optimistic, if you’re a doom and gloomer,” Hartman says of his prediction that linear market prices will stay steady this year and next. “All of the doom and gloomers seem to be wrong all of the time. Maybe you’re one of those listening and think I’m too optimistic. Fair enough, you can think that.”
“But the lending has been conservative” in this sellers market, he adds. And, “The banks are not out of control this time around; people have to really qualify for loans; they have to put real money down. Of course, there’s a small margin of fraud going on in the mortgage world, there always will be, but it’s nothing compared to what was going on before the Great Recession.”
“And, in the linear markets, prices aren’t even up that much. They’re not that high. That is another huge component of it. So, if you are waiting for the crash, in the linear conservative markets, you might be waiting a long, long time.”
The Differences Between Buyers, Sellers and Brokers Markets
The typical market that everybody calls a “good market” is a sellers market, and what everybody calls a bad market is a buyers market, Hartman notes.
“Of course, when it’s a sellers market, what we mean by that typically is that sellers are in control,” he says. “They are able to command high prices and they are able to dictate the terms of the transaction, and that’s a market where inventory is low but affordability is high.” In a buyers market, meanwhile, supply exceeds demand, giving purchasers an advantage over sellers in price negotiations.
And then there’s the brokers market, which, when you enter into a real estate transaction with a network such as Platinum Properties, the network or broker has done your homework for you to identify which investment properties are linear and cyclical, as earlier explained.
“Yes, think about us brokers,” Hartman says. “Basically we (at Platinum) are a broker, though a non-traditional one. We are a referral network, but we do maintain a brokers license in my home state, the Socialist Republic of California.”
Some investors will hold onto their cash for when there will be a bubble burst in their investments, such as real estate. But if you follow Hartman or other brokers, you know that such bubbles can be hard to predict and that investing in linear markets, geographically spread throughout the country, is a safer bet.
“Why is the brokers market, in your host’s humble opinion, the healthiest market?” Hartman asks in his podcast. “Because the brokers market is more even keel.”
You can see evidence of this, he says, when you direct your internet browser to jasonhartman.com “and you look at the properties page and you look at the pro formas on there and you look at the largely realistic projections.”
If you don’t like the projections from Hartman and Platinum Properties, “then subscribe to Property Tracker and do your own projections.”
“That will make you a good investor,” Hartman says. “For $27 a month, you can’t beat the price; you can do that at propertytracker.com or right through our website … the numbers will show you that you’re probably going to get somewhere in the ballpark of 20 to 35 percent annual return on investment.”
Hartman adds that he’s not trying to be self-serving when he says the brokers market is the healthiest one.
“Though I’m not immune to serving myself, and neither are you—none of us are,” he says. “That’s why capitalism works so well, and when we all come to terms with the fact in life that we all have needs and wants and we’re going to try to satisfy our own, you know what we try to do.”
“We will work hard, and we will produce value in the world and make the world a better place and create progress. That’s a good thing, and that’s why capitalism is a good thing.”
The Pension Crisis, Global Demographics and Back to That Question You Should Be Asking
On Hartman’s last podcast show, “we talked about how messed up some of these states and municipalities around the United States are in a pension crisis, and that is absolutely true,” Hartman says.
“But the famous question is, compared to what?”
Citing numbers he heard from Mark Steyn, a Canadian author, writer and conservative political commentator, and whose print and audio books Hartman recommends, says that in the United States, “overall pension liability is somewhere around six percent of gross domestic product.”
However, in Germany, France and other European Union countries, the pension liabilities are a “mind-boggling” 15 to 17 percent, “and in Greece, the poster child for socialist, over-entitled, lazy economic disaster, it’s 24 percent.”
Compared to what?
“Here is where it ties in, obviously, with demographics,” Hartman says.
“If you look at the birth rates, it is shockingly tragic. In Europe, in most of Europe, it’s somewhere around 1.3 kids per woman, per female, which is extinction.” In the United States, on the other hand, the birth rate is about 2.1 children per female, “so, much healthier.”
“Why is that important and why does it matter?” Hartman asks. “It matters because who is going to support the older people? This pension problem, if you simply looked at the percentages, you would say, ‘Oh, yeah, the United States, we have a problem, but Germany and France, that’s really bad, and Greece, that’s a disaster.’
“But you know what makes it more of a disaster? There’s no kids to fix it! There’s no young people to work and pay into the system.”
Even if there were more young people in Europe, their countrymen and women would need to endure what Hartman calls “the whole lazy, over-entitled European mentality,” he says.
“In Spain, the youth unemployment rate under 30 years old is like 56 percent. The author Mark (Steyn) was joking in the book … and I don’t know if he’s joking, if he was right on, or maybe he was using artistic license … he was talking like the typical ideal (for Europeans) is you live at home with your parents. And, you hang in and around out of college until you’re about 38 years old. And then you demand retirement at 47, you spend six weeks per year on the French Riviera, you march in riots to promote 28-hour work weeks.”
“Folks, at some point, someone actually has to create value in the world economy, and they gotta go to work, and they gotta pay into the system. When you take these pension numbers and you look at them, yeah, they’re bad … they are tragic, they are pathetic. That’s why I’ve said over and over, and I hate to say it: Europe is over. I mean, all it takes is a couple of decades, and you’ll see how top-heavy these economies get.”
The demographics for the United States are better, he says, but it still has some problems.
For example, there are about 67 million baby boomers, whose typical age today is 55 to 68 or 70. But then there’s Generation X, born in the years between 1965 and 1984, at almost half of that, at 35 million or so. But, they’re followed by millennials, born in 1980 and thereafter, and at which the storks have dropped a whopping 80 million.
Comparing the ages, Hartman says: “I’ve got to think about how much fun life must have been for the baby boomers, who sort of went through like the ’60s, and there were so many young people around. For me, it wasn’t like that at all. I was in this lost generation—Gen X was sort of absent, largely. And then, there’s the big generation behind them, the millennial generation, and we’ve talked about it (in previous podcasts) extensively.”
As for the United States: “You can criticize it all you want and say it’s a mess, we spend too much, we got too much debt and we got a pension crisis. You’re right. You’re absolutely right. But the question is … the right question is … compared to what? Compared to what?”
“That’s the right question for so many things in life: Compared to what. The next time someone posts some idiotic comment on one of your social media accounts, simply ask the question, ‘compared to what,’ and see if that doesn’t blow a circuit in their little brain, and see what they say.”