Jason Hartman and Thomas the Economist take today to discuss a different view on Inflation Induced Debt Destruction. Jason and Thomas dig in to some stats from Shadow Stats that show what is, potentially, the real rate of inflation, and its VASTLY different from the numbers the government puts out for public consumption.
I always have had an interest in investing in general and educating myself about different types of investing. And I’ve always kind of come back to real estate in general because of all the things that we we discuss on your podcasts all the time. I read you know, a lot of real estate books and I think a lot of people probably talk about that Rich Dad Poor Dad book which opened up some some new thoughts in my head, especially the actually the 1031 exchange they mentioned in that book. And my medical partner is the one that actually turned me on to your network because he he had invested with you. And that’s how I came specifically to to your podcast. I spent a lot of time educating myself before diving in. The method that I hadn’t started my investing with you was was through this 1031 exchange.
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 1:40
Welcome to Episode 1293 1293. Thanks for joining me today. So today we’re going to look at a very real life case study because it happened to yours truly, yes, a property that I purchased. We’re going to look at it how performed after I sold it over the course of decades, sometimes, you know, you’ll regret selling those properties, right? You go and you look online. And you check out Zillow and you see those estimates and you think to yourself, if only I would have kept that one. But that’s not really telling the whole story by any means. It’s really not telling the whole story, because of course, those handy dandy inaccurate zestimates that you see, and yes, a lot of times they are very inaccurate, but hey, like I say, they’re better than what we had before. They’re better than nothing. You know, you see those but they don’t adjust for inflation. They don’t adjust for the amount of cash flow you would have gained or lost over the years. They don’t do any of that stuff. They just show you a non inflation adjusted in other words, nominal dollars. Price, versus the price that you remember that you paid for it, and then the price that you remember when you sold it. And of course, that price today will probably be a lot higher. But it’s not all it’s cracked up to be. It doesn’t tell the whole picture. Anyway, I’m your guide. I’m here to help you with this learn from my experience. And what a vast amount of experience it is, I must say, you know, there’s that old quote, and I can’t remember it exactly. that talks about how experience is the best teacher. The problem is, you have to learn the lesson to get the experience and most of the time, hey, that lesson can be pretty darn expensive. So I’m here to guide you and help you learn from my lessons, both the profitable and most of them have been very profitable, but some of them have been unprofitable. So learn either way. And we’re also here of course to share the experiences of Literally thousands of the clients I’ve had over the years, who have invested who have purchased properties, sold properties, and all the stuff they’ve done. And thank you all for sharing those so much. We’ve got another guest interview that I’m recording today not to be played today with one of our clients, who’s going to talk about his challenges and how he overcame them. And the J curve. Yes, the J curve as it applies to real estate investing. If you’re not familiar with the J curve, look it up on Bing. Don’t use Google because they’re evil. Okay, anyway, do whatever you like. But more tracking or less tracking,
Jason Hartman 4:42
more invasion of privacy or less invasion of privacy actually use DuckDuckGo or some other better search engine. But yeah, we’ll guide you through that stuff I just wanted to make before we get to our in house economist, Thomas, who’s here with me today to talk about this property. First off, I want to mention Sorry for the sound quality and one of our segments of yesterday’s show. We’ve been having some technical sound problems over here. do apologize for that. Hopefully it won’t happen again. Well, actually, it will happen again. Because, hey, that’s life. But we’ll try to minimize the amount of time we have sound quality problems. Yeah, I’m interviewing one of our great clients today. And I really can’t wait to share that interview with you probably next week, sometime, as he talks about how he and his wife had been investing and had challenges overcame them. And the J curve as it applies to investing in in what Seth Godin calls the dip. We’re going to talk about the dip if you’ve read that book, but I wanted to make a nother book recommendation to you today. Now, I realize you’re hearing this and you’re going to hear this recommendation. You’re going to think, Jason, you’re way late to the game late to the game. Where were you years ago when this author was hot. Well, I admit I am late to the game. But lately, I have been geeking out as one of our venture Alliance members said at the last venture Alliance mastermind meeting in Savannah, Georgia. He said, I’ve been geeking out to George Gilder after seeing George Gilder speak at our meet the Masters event. And he says, you’ve been reading all his books and really getting into it, and I appreciated that term. So what have I been doing? Well, when I was in New York City last week, I was geeking out to a brilliant, brilliant author, and I want to recommend, I finished one of his books on audio, and it’s called skin in the game. You probably heard about this cemetery’s in daily life. It’s Nassim Nicholas Taleb, of course, he became very famous. I think his most famous book was the black swan. And I am familiar with the black swan theory, but I have not read the book. And we have not had Nassim Nicholas Taleb on the show, but I’m going to go get him on the show because I’m just amazed by his brilliance really, really good skin in the game, get that book today. It’s fantastic, really helps you understand a lot of things. And now I am digging into one of his other books called anti fragile, anti fragile, which is fascinating to I’m not finished with it yet, but I recommend that one also, so far, so good. And there’s a couple book recommendations for you and aseem Nicholas lab, really interesting author fantastic books. Okay, without further ado, let’s talk to our in house economist, Thomas, you’ve heard him on the show before I asked him to do an analysis of this property that I bought and sold and how it has performed over the years and whether or not I should regret selling it or if I should be happy I sold it, or maybe somewhere in the middle, let’s go ahead and dive in. But before we do that, be sure to get your tickets for upcoming profits and paradise event. At the end of the month in Orlando. One of the things I’m going to talk about at that event is the concept, which is really great in real estate investing. And that is the concept that we may not realize we’re benefiting from all the time, the concept of optionality and I was thinking about this, as I’m diving into Nassim Nicholas celebs work in anti fragile, he talks about optionality and he doesn’t talk about it in terms of income property or real estate investing. He talks about it in terms of many other things. But I keep thinking, Wow, it’s one of the huge benefits we get, as real estate investors the optionality benefit. So we’re going to talk a lot more about that at the upcoming profits in paradise event. So be sure to join us for that. And without further ado, here is Is my interview with Thomas, as we analyze this deal on a historical basis, I think it’ll be very enlightening to you and your thoughts about buying and selling properties.
Jason Hartman 9:14
Hey, it’s my pleasure to have our in house economist Thomas young back on this episode today, we want to talk to you and take a deeper dive into a realistic example. Not a comprehensive example Mind you, because, frankly, we’re still working on this modeling a little bit of inflation induced death destruction. But we’re going to give you some parts of the example today, and more will come on a future show. And then we want to talk about a guest that we’ve had on the show before and that is john Williams, the founder of shadow stats calm and look at the way he calculates real inflation versus the misleading And misaligned official or government numbers in the consumer price index. Thomas, welcome back.
Good to be with you.
Jason Hartman 10:08
So Thomas, looking at a real world example, I’ve asked you to look at this property. And the reason I asked you to look at this property, and we’ve talked about it on the show before, is because I used to own it. In fact, it was my first house. When I moved out of mom’s house. I moved in to this house. I was never a renter for a long, long time. I always was a homeowner and I used to think that was just quite great. Now I’ve changed my view of that, for reasons discussed on many episodes before, although I do happen to be a homeowner again at the moment. I believe in owning lots of investment properties, not necessarily the one in which you live. But suffice it to say, I moved out I moved into this brand new place in Irvine, California. When I moved out of mom’s home. I bought it for 102 thousand dollars. I was very happy because I made a great return on it. I borrowed most of the downpayment from my grandmother, bless her soul, and I did pay her back when I sold the house. It was a great deal. And when I moved into this property, I already own one rental property. So the first property I bought was a rental, not a home to live in. The second one was a place to live. It’s interesting to look back at the history of what this property has done over the years. It’s particularly interesting, because I sold this property exactly 30 years ago, this year, I don’t know what month exactly, but 30 years ago, and I sold it to a couple of friends of mine. Their names are Mike and Colleen, and they bought it for $158,000. Now, it’s interesting to analyze what this property is worth today. In nominal dollars, which means in name only. That’s the definition of nominal. It’s just what something is called. So $1 is still called $1. But then you got to look at what’s called real dollars. And you economists know this all too well, Thomas. And that’s the real value or the buying power of that dollar today. So take us through a little bit of this, if you would tell us how much is the property worth today, according to our friends at Zillow?
Yeah, the home is worth 635,000 Oh my god. 30 years it’s gone from what would the 102,635 so Thomas,
Jason Hartman 12:43
the typical reaction would be, Oh, I’m so mad at myself. Why did I sell that property? I’m such a fool. I could have owned a $635,000 place that I only paid $102,000 for And you know what? I probably would have just paid off the mortgage, it’d be free and clear. I’m such an idiot. I have sellers remorse. I’m not I don’t know about that. I’m not so sure I have sellers remorse. When we look at the real numbers, it’s not what it seems, is it?
Yeah, if you convert that 635,000 into 19 $89, then it’s worth 307,000 according to
Jason Hartman 13:31
the official rate of inflation, which would be the consumer price index. And by the way, listeners, we won’t dive into this one today. But there are multiple CPI highs or consumer price indexes. We’re just using the common one is that the CPI you Thomas,
yeah, CPI you for the urban consumer. Okay, good. across the US now.
Jason Hartman 13:52
I started off introducing you back today by talking a little bit about a prior guest on the show. JOHN Williams, the founder of shadow stats calm, which is a great website. And what he does is he analyzes behind and beyond the government economic reporting. So, at least in theory, if you believe shadow stats and john Williams and they’re credible and I think he is quite credible, then these numbers are pretty dramatically different. Okay. Now, according to shadow stats, the $635,000 house in today’s nominal dollars, if you take that back to 1989, what would john Williams and shadow stats say it’s worth today, Thomas?
And Felicia has been much higher according to shadow stats, so 635,000 is worth 143,000 today.
Jason Hartman 14:57
so are you really telling them billion real dollars, the property has gone slightly down in value in three decades.
So if you get 5.4% annual inflation, which is what real shadow stats has, then yeah, it’s gone down in value a little bit.
Jason Hartman 15:18
Okay. Now what is the consumer price index say the inflation rate has been during all that time?
It’s been between three and 4%.
Jason Hartman 15:25
Yeah. But we need to look at the cumulative inflation rate, and we may not have those numbers. Maybe you have them on the other page of your site. Yeah. Yeah. So give the cumulative inflation numbers, just the the average. I don’t maybe I’m saying it wrong, not cumulative. But
the average inflation rate over the three decades. Yeah. From 99 to 2019. Inflation grew by 107%. That’s a good deal less than what shadow stats as
Jason Hartman 15:52
Yeah, if you divide that by 30, there’s your average Okay, by the way, that is pretty incredible. Now you know what’s interesting thing to look at is the interest rates and the mortgage payments. Remember, listeners, I have stated this for you many, many times. And this is what is so misleading in well, among many things in all of the stats that you read and hear out there in the lame stream media, aka mainstream media. They tell you the price of houses, as if to say that we’re in a bubble, or houses are cheap, and you should buy as many as you can. They’re saying one or the other thing, because back it, x year in time, houses $400,000 and now they’re $200,000. So they’re overpriced. There’s a bubble, the markets going to crash. But wait, there’s more. That’s so misleading to look at the price of the house because no one buys The house on the price of the house, except for a relatively small number of cash buyers. And even I would submit to you that even if they’re cash buyers, they always know that real estate is the most debt friendly asset, and it can be refinanced very easily. So most people buy with a mortgage, they buy based on a payment, not a price. And therein lies a very important distinction. So let me give you an example. When I bought the property, my nominal mortgage payment was $735 a month when I sold the property at a higher price. The mortgage payment for my friends Mike and Colleen was 1100 and $39. So they were paying a higher payment. Now if you bought that property today, remember the property has quadrupled. Approximately in nominal value, but the mortgage payment in nominal dollars has only doubled approximately 220 $443. But guess what? In 1989, the interest rate on that mortgage was 10.32%. And today, it’s only 4.06%. So, in real dollars, what is the payment? Today? Everybody thinks I’m going to walk in and pay $635,000 for this 944 square foot, two bedroom, two bath condo in Irvine. Wow, that’s a lot of money. How Thomas? But is it? What’s the monthly payment? I don’t care how much the sticker price is. I just want to know how much I’m paying every month.
Yeah, so the nominal payments 2004 43 you know, I I looked What that 1989 payment, the 1839 bucks would be in today’s dollars. And if the real shadow stats numbers are correct, then you’re basically paying nothing today the payment went from 1939 to 236 bucks.
Jason Hartman 19:18
Yeah. And remember at our live conferences, I have many times told the story of how when I was 11 years old, mom saved for her first house in West Los Angeles still owns that house today. I remember overhearing her conversations as a kid and hearing her talk about how she just didn’t know how she was possibly going to make the mortgage payment. Because the mortgage payment was a whopping $416 a month for 16 a month. But over time, even over just a few years because the inflation rate was pretty high back then. That’s $416 payment felt like nothing, just, you know, four or five years later, it felt like nothing felt very, very cheap. So the 1989 buyer, if they kept that mortgage, which of course they would have refinanced it probably many times. But if they kept it, and they were still paying a note rate of 10.32%, just after inflation, debasing the monthly payment, they pay how much to 56 a month in today’s dollars, as they’re making the last payment. paying it off. Wow, incredible. Okay, but the question I actually was asking you was a different question. The buyer comes along today. They pay 635,000 for that property. And they think, Oh my gosh, I’m gonna have to pay 20 $443 per month 2443, four month almost 2500 bucks a month. Today to buy it at a 4.06% interest rate. But compared to what compared to, if that was the interest rate and the price in 19 $89. Thomas, how much would they really be paying today according to the official rate of inflation,
and they’d be paying 1182.
Jason Hartman 21:19
So they think they’re paying 2443, which they are, because it’s today. But what I want to illustrate to the listeners is that in 1989, three decades ago, the buyer was paying a 1139 when my friends bought that property from me, they were paying 1139, Mike and Colleen, and today, a buyer buys that property and thinks, oh my god, it’s quadrupled in value. Real estate is so overpriced, there must be a bubble. Everything’s going to crash. This is the common thing here. Yet, they’re only paying 1182 in 19 $89. So the question is always compared to what? This is the thing that the morons in the mainstream media never analyze or explain is that the house today is barely any more expensive than it was in 1989. Like, there’s almost no difference in monthly payment. Isn’t that amazing? It’s amazing, folks. You should all be amazing. Now’s the time you’re clapping. Okay.
Jason Hartman 22:42
Thank you, Thomas and Jason, for telling us the truth, the reality of things. Okay, let’s talk a little bit about shadow stats. And on a bit of a rant. I’m very passionate about this stuff. Thomas, the three major ways that the government and manipulates the inflation index and it’s very important Know how and why they’re manipulating the index, they have a very vested interest, they’re very much at stake for manipulating the index. They do it in three major ways waiting substitution, and hedonic x. These are the three ways. So waiting, is you take this basket of goods, which is the consumer price index. And they will say, well, this item in the index shouldn’t get as much weight as this item. And we’re going to change the weight. We give each of those items in the basket of goods, so that we can manipulate the index to look like there’s less inflation, and there really is, or substitution. So if the price of beef goes up, then they’ll say, Well, everybody will just switch to chicken. But maybe you don’t like chicken. Maybe you think chickens a dirty bird, and you’d rather eat beef. Okay, so substitution, that’s another way and then Dominic’s where the index, how much pleasure the consumer gets from a certain item in the basket of goods. And technological items have massive hedonic indexing, because technology advances so quickly through you know, Moore’s law and other things, you know that the network effect of the other network, the power of the network, and, you know, all the all these different technological things, but Moore’s law would be the most prominent. Gordon Moore, the founder of Intel said the speed of the processor doubles every 18 months. Right. So, Thomas, tell us more about john Williams and his analysis of these things, and why he doesn’t believe the official numbers.
Yeah, basically, you go back 30 years, john Williams was part of the debate among politicians and economists about how inflation should be measured. And for 300 years, going back even further, but at least the lab past 300 You years economists have considered innovation just
Jason Hartman 25:02
300 years, we want to give you a decent sample. Go ahead.
Inflation was considered as the change in prices for a fixed basket of goods. So the idea was, people were going to buy eggs at, say, 4% of their income. And we’re going to go out and sample the price of eggs every month and see how that changes. The debate changed from that fixed basket of goods to being what are they going to spend their money on to keep a constant standard of living? So that’s when it onyx and you know, substitution effect came into play. What he does is he says, well, let’s keep the way to these different prices the same and see what happens to the overall inflation figure over time. And, you know, he gets a higher number obviously,
Jason Hartman 25:57
yeah, much higher number it’s, it’s In fact, it’s generally more than double the official or CPI government rate of inflation, right?
Yeah, from 99 to 2019. Shadow stats has inflation about 345%. And the CPI EU is up 107%. Wow,
Jason Hartman 26:16
that’s pretty significant isn’t it?
makes a difference these tiny changes, actually I say tiny but that depends on the reviewer, right what tiny is, but you know, you change the weight on housing from 19% to 24%. And you change the weight on say, purchase of meat from 6% to 4%. In over 30 years, that makes a giant difference.
Jason Hartman 26:40
Yeah, I want to just play devil’s advocate here for a moment Thomas and argue on the side of the the powers that be okay. And that would be the folks at the government who compile these stats that Bureau of Labor Statistics, etc, etc, right? The same is true with unemployment. You know, it’s all just totally misleading. Basically, you’re being lied to. Okay? But here’s the thing, there is a case to be made for substitution. Sometimes, for example, like, it’s kind of like the old Henry Ford, saying, you know, when he was asked about, you know, wanting to listen to your customer hold a focus group, etc. Well, if I listened to my customer, they would have just told me they wanted a faster horse. They rather than a car. So, there are some things in reality that people don’t buy or need anymore that they used to buy a need. Right? Is that a fair statement?
Yeah, I mean, I don’t have a giant TV that weighs 400 pounds and my friend knew in my front room, and I never had one but
Jason Hartman 27:48
right, but a lot of me, ya know. And the thing is that we come to expect as normal in modern life, like one of the things that totally puzzles and amazes me is how every tenant Seems to just expect air conditioning is a totally normal thing. Like there’s no, you know, I remember when I started selling real estate, a lot of houses didn’t have air conditioning that was completely normal. I mean, when I went to school as a kid, I don’t think I was in any classroom ever that was air conditioned. You know, now, oh my god, their conditioning doesn’t work in a school, but kids are gonna die. You know? You know, we just have different expectations nowadays, right? Yeah, it’s true. So there’s a case to be made for substitution. But the reality is the substitution that they’re generally making is not a failed case. They’re doing it just to truly manipulate the numbers. Now, there’s another case to be made for hit onyx, isn’t there? I mean, look, if your computer keeps getting faster and better, is it really deflating and price you know, I use the example of every year so I’ll buy a new Apple laptop. And it seems like The cost is always about 20 $800. But the computer itself keeps getting so much better, and so much faster. And the features are better, and it’s just always better. But the price is about the same. So the inflation index wouldn’t look at that as though I’m actually paying the 20 $800 every time would they?
Now in that case, the inflation index would say, because your computer became more useful, or more powerful, you actually had deflation. So instead of paying 2800 bucks, you’re maybe paying 2500 bucks.
Jason Hartman 29:38
Oh, even more than that, if it doubled in speed. Yeah, the processor doubled in speed when they say I’m paying 1400 dollars. If speed was the only factor in determining the hedonic Lee adjusted price for the computer, then yeah, 1400 bucks, right. By the way, just a side comment on that. You know what the big fallacy of that is, the software always keeps becoming more robust. The process or even though it’s getting faster, the actual user experience doesn’t seem like it changes much because you know the software is just hogging more processing power. So it doesn’t feel like your computer actually faster
go ahead that’s the thing I mean, do I really believe that computer got cheaper over the years? Obviously my pocket book does not say that I you know, computers any cheaper, but hedonic adjustments say yeah, computers cheaper. Same thing with like the iPhone, right? iPhone came out thousand bucks last year, right.
Jason Hartman 30:39
I think it’s cheap. I think it’s totally cheap. My first cell phone cost 30 $200 and wait 14 pounds. So I think all these phones are totally cheap and everybody needs to totally stop complaining. No, okay, so anything else on the waiting substitution
had onyx and shadow stats? It matters right? That’s my open Is that how you measure prices and inflation matters across a broad range of industries and obviously in the mortgage payment matters a lot.
Jason Hartman 31:10
It sure does. It sure does. Okay, one final thought I want to leave you with and Thomas here. I’m looking at the spreadsheet we are we’ve been working on. I’m looking at the interest rates. You know, this is something I’ve said over the years, but understand that these interest rates are so incredibly cheap. Okay. So if you apply and Thomas on and I’ll just bring it right to you on our row 46 be okay, so cell 46 bait. I think what you did there is you took the shadow stats number and subtracted it right from the interest rate to get that effectively demonstrate. Okay, so what Thomas did here, folks, is he took the shadow stats The inflation rate and deducted it from the interest rate at the time in 1987 1989 in 2019, and guess what? The real interest rate based on this calculation of nominal interest rate, meaning that’s what you think you’re paying versus what shadow stats says inflation really is, you simply subtract that amount from the interest rate and then you get what I call your effective rate after inflation. So your effective rate in 1987 was 3.66%. In 1989, it was 4.83%. And today, your effective rate is 1.74%. Less than 2%. Now the tax benefits are more Complex on rental properties and they’re better on rental properties. But for purposes of simplicity, let’s just assume it’s at home in which he lived, okay? Because then the tax benefits are, while they’re lesser, but they’re also simpler to calculate. So what I’m just saying is that if you deduct your interest rate, then if you’re in a combined tax bracket, I’ll just throw out an estimated number. It depends what state you live in. Of course, it depends on what your income is, etc, etc. Okay. But say your tax rate is 40%. Now, if you live it on no income tax state, like I do in Florida, or if you live in Texas, or one of the other great no income tax states, it’ll probably be lower depending on what your income is. Okay? But let’s just say it’s 40%. So all you do is you take 60% of that real or effective action Straight that I just quoted, and then you get your after inflation and after tax effective interest rate. And I want you to see how incredibly cheap it is to borrow money cheaper than it was in 1987. Cheaper than it was in 1989. So the answer is in 1987, you’re effective after tax and inflation interest rate was 2.2%. On a mortgage in 1989, it was 2.9% went up a little bit. And today, it’s right about 1% 1%. So if you’re listening to this, and you’re thinking, should I put more money down on the property, should I pay cash for the property? And you look at the opportunity cost of tying the cash up in the property. Now I have said before and I’ve got a video on my YouTube channel, about Were there, you know, a few instances where you want to put more money down or pay cash, but they’re relatively infrequent. Mostly, you want to borrow the money when you can. If you can make more than 1% on your money elsewhere by like, buying more properties without money, for example, which you surely can make dramatically more than 1%, maybe 20 times the 1%, then you should conserve your cash and use the leverage. So that’s just an example for you. All right, Thomas. We got to wrap it up. As usual, we went much longer than expected. Any final thoughts before we go?
That number you just mentioned after tax interest rate and after inflation, we may never see these type of conditions again, based on interest rates that I’ve been looking at at rates are the lowest they’ve been in perhaps five years. In years,
Jason Hartman 36:00
well, if you look at the macro, maybe you’re right. But there have been little dips where they’ve been lower than this. But they’re very low in the macro sense. You’re absolutely right. incredibly low. Hey, but there is some talk, maybe they’ll even go lower negative interest rates. So, you know, you can always renegotiate the deal and refinance. Okay? You’re not stuck with the interest rate in which he borrowed. That’s one of the beautiful, beautiful things about income property, you can refinance it, you can change the deal along the way. So very good. Thomas, thanks for helping us kind of sort through these numbers and, and see the reality that the mainstream media just won’t tell anybody. So it’s good to have you on again, talk to you later. Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website heart and Mediacom for appropriate disclaimers and Terms of Service Remember that guest opinions are their own. And if you require specific legal or tax advice, or advice and any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.