In this latest episode of Jason Hartman’s podcast, NEO Home Loans’ Director of Physician Lending, Josh Mettle, joins Jason to discuss the current trends shaping the housing market.
Despite a recent decline in mortgage applications, Josh explains why a housing crash is very unlikely by highlighting some key demographic shifts—like millennials and Gen Z entering the housing market and the impact of baby boomer wealth transfers—that will continue to support home prices for many years.
Jason Hartman: It is my pleasure to welcome a returning guest back to the show, and that is none other than Josh Mettle. He’s an expert in the mortgage market and interest rates. And my predictions have been fantastic except for interest rates. I always say, I always take responsibility and say I suck at predicting interest rates, but we might get a little prediction from him today, but we’re going to really talk about why rates are the way they are, why they are where they are, why they didn’t necessarily change and follow the Fed in terms of the mortgage rates. So we’ll dive into that and maybe a little bit about our favorite topic, why inflation destroys debt. Josh, welcome back.
Josh Mettle: Thanks for having me. And look, I got to give you a plug before we get going here. You were kind enough to come on my podcast and I was following you. You were talking about inflation induced debt destruction, and I learned that right before the massive mortgage rate drop in 2020, 2021, in the course of 24 months after meeting you and following you and doing a podcast with you and you teaching me what that really meant, inflation induced debt destruction because it’s a mouthful. I went on with my partners to acquire $30 million in real estate and we lock those rates in between two and a half and three and a half percent. And you literally changed the trajectory of my life and if my kids don’t blow it, their lives, and I just really want to sincerely tell you that what you’re teaching matters and makes a huge difference. And so I appreciate you having me back. But more than that, I appreciate you being my teacher.
Jason: Yeah, well thank you Josh. That’s always wonderful to hear and that’s what keeps me doing this. I mean, I’ve told my listeners when I sold my last company 17 years ago, I know 19 years ago now, oh my god, it’s been a long time. I could have just retired then, but I wanted to do something meaningful with impact, and so that’s why I’m doing this every day. So I love hearing a story like that and that’s great. And I mean, think about that folks. You don’t have to buy $30 million worth of real estate for most people. It’s just a couple, three, six houses with those long-term, 30 year fixed rate mortgages that even at higher rates, what really Josh was just saying is of course he’s taking advantage of inflation induced debt destruction, but he also took advantage of negative interest rates on top of inflation induced debt destruction.
So that’s really a double whammy. And arguably even now with the higher rates that we have, you’re probably still in a negative interest rate environment. Plus you have inflation induced debt destruction, plus your tenant pays off your mortgage, plus all the other multidimensional benefits of income properties. So it’s just no investment can beat this. It’s just the best thing going. So good stuff.
Well, Josh, thank you for that plug, but tell us about the mortgage market and the interest rates. Finally, we saw a fed pivot. We’ve all been waiting forever for this and it was pretty big pivot, but it didn’t really impact mortgage rates very directly, did it?
Josh: Well, no. In fact, mortgage rates went up since that moment, and there’s reasons for that. But I think what we should talk about is why do mortgage rates move up or down? People confuse the Fed funds rate, which is the rate that the Fed sets, which is a 24 hour lending rate. It’s quite literally the rate at which banks lend money to other banks on a 24 hour term. So if you just understand that that’s a lending rate set by the Fed for 24 hours at a time, that’s the length of those exchanges, then you could easily figure out that that’s not going to directly impact a 30 year mortgage rate. So this is the concept that just because these rates might be moving in similar directions and they’re correlated, meaning that mortgage rates and fed rates might be moving up or might be moving down at the same time, there’s correlation, but that doesn’t equal causation, which means the Fed’s 24 hour overnight lending rate doesn’t impact 30 year mortgage rates.
So I’m lending you money for 30 years and let’s just say it’s a hundred thousand dollars and let’s just say that you’re willing to pay me 7%. Well, if I think the future inflation rate over the next 30 years is 3%, that means as an investor, I’m going to make 4% on that money, and that may be enough for me. If I think it’s a bulletproof loan, that could be fine. But if I believe that inflation is going to be 7% or 8%, then I’m making no return or a negative return. So I have to increase that rate to hedge for that future expectation of inflation. So hang on one sec
Jason: Though. The distinction I want you to make, Josh, that’s going to be helpful to people is I get the question occasionally, if banks know what inflation is, why would they lend at such low rates if banks also know that the CPI is really the CP lie, as I like to call it, that the measure of inflation the government tells us is not true. It’s understated massively. Why would they lend at such low rates? I mean, it’s easy to argue that right now when we have, what are mortgage rates today?
Josh: Low sixes.
Jason: Okay, low sixes, right? It’s easy to argue that inflation is higher than 6% right this minute, even though the official numbers say it’s lower, of course, and banks know that there’s a potential for lots of future inflation. Why would they make this deal? It’s because they’re not keeping the paper most of the time, right?
Josh: Yeah, I was going to give you my answer, I’d love to hear yours, but my answer is because if I can play a depositor who’s put their money in my checking, savings and CD accounts, if I can pay them two and lend to you at six,
Jason: They make money
Josh: On the margin. It’s not my money man lending. You’re the one who’s actually losing because you’re giving me the money in a checking or savings account. I’m paying you 2%, which is way below inflation, and then I’m going to lend to somebody else below inflation. But who cares? It’s not my money. If banks weren’t lending other people’s money, if they were lending their own money, I suspect, and there wasn’t a secondary market like Fannie Mae and Freddie Mac, I would suspect that you’d see mortgage rates normalize to a higher rate.
Jason: So they’re making money on the margin, the spread on the spread, but they’re selling the paper off. And they can do that in many ways, and you’re welcome to just go into that if you want. I mean, look, anybody who saw the big short or read the book, they know who Louis Ranier is. If you remember him, he changed the world. That guy, nobody talks about him. He should be super famous because he changed the mortgage market in such a huge way.
Josh: Well, let’s give a simple explanation on how the mortgage market works. Then you have an owner who wants to buy a home and they don’t have enough money to do so. So they need a mortgage loan, they go to a bank or a mortgage broker or a correspondent mortgage bank. It really doesn’t matter. They go to somebody, a loan officer, who can give them a mortgage loan. That loan officer, whether let’s just say they’re going to lend their money in the short term because if it’s a bank or a correspondent mortgage banker, they’re going to lend their money long enough to fund that transaction for the buyer and then immediately turn around and sell that loan off into big pools called mortgage backed securities. And those pools are sent to sold to the government sponsored enterprises, Fannie Mae, Freddie Mac, Jennie Mae, and they bundle hundreds of millions of dollars worth of mortgages together.
And then from there, those are sold off to investors that are going to, and essentially they’re securitized and sold off on Wall Street somewhere. And there’s all of the shenanigans that goes on in rating those. And that’s what you were talking about with the big short, how they had those collateralized debt obligations and all kinds of craziness. But at the end of the day, the person lending you the money on the street, it’s not their money. They’re going to turn around and sell it to Fannie Mae, they’re going to bundle it in huge, gigantic pools and they’re going to sell it off to Wall Street. And as long as that person that is buying it from Wall Street is okay with the rate, it’s all good.
Jason: Yeah. Right, right. Okay, good. So let’s go back to what you were saying before we got to that, if you remember. Yep, I do. And just go tie it back in.
Josh: Alright, so let’s just go back. I think some of the things that we want to talk about today is housing market demand. I want to talk a little bit about demographics being destiny. And look, the fact is, is that mortgage purchase applications have hit the lowest point since 1995. And a lot of people are saying that means that there’s a housing crash that is imminent. So let’s debunk the media news and let’s think about why this is for a minute. This is mortgage rates and I’ve got three different mortgage rates pulled up here. I’ve got your
Jason: 31 other thing. One of the things, Josh, some people will listen on audio only, so we’ve got to make sure we’re describe it really well. But if you’re watching on video on any of the video platforms, obviously YouTube, but there are others as well that are censorship free out there that we are also on those platforms. So if you’re watching on that, you’ll see this, but if not, please make sure the audio listeners get it.
Josh: You got it? So what you’re looking at is a view of mortgage rates going back from October 2nd, 22 to October 2nd, 2024, and I have pulled up your 30 year conforming loan, a jumbo and an FHA. There’s not a lot of difference there, but I’m just kind of pulling up the difference. So you can see the point I want to make is we saw mortgage rates peak, and I’ll just talk about conventional rates here, and this shows about 7.8% was the peak in mortgage rates in this would’ve been October 26th, 2023. Now keep in mind, this is the mortgage rate peak for a credit, and this is the peak that probably included at least one or two discount points to get that rate. There were many borrowers in the mid eights at this point, and if you were an investor or buying a second home, it could have been even higher than that.
So that’s the moment where there became a real kind of affordability issue and the market pulled back. But what’s interesting is this was the peak of the interest rate cycle, and you saw mortgage rates drop from 7.8, let’s call it 8% ish all the way down. And if we fast forward to today, we’re somewhere in the low 6% range. And again, this is a credit, this is probably somebody paying a point or two because that’s kind of normal in the market right now, but that’s a 2% decrease in mortgage rates and most of those gains, you see that we were clear down here at six before the Fed even cut the Fed funds rate by 0.5%. And then interestingly enough, the Fed cuts by 0.5%. We actually saw a little pickup in mortgage rates. So if there was ever a time in history to prove that the Fed funds rate has absolutely nothing to do in terms of causation for the mortgage market, this is it. Because the mortgage market’s down 2%, the Fed only reduced the Fed funds rate by 0.5%, and after they did, you saw a mortgage rate bump up just a little bit. Now I have more to say about that, but let me pause Jason and get your feedback and then I’ll add a few more comments here.
Jason: Yeah, so it’s a situation where people can’t understand sometimes why when there’s a positive Fed announcement, why did the mortgage market not react and rates just went down? Is it because the mortgage market had already priced in that announcement and they already knew it was going to happen? I mean, of course they don’t know exactly when it’s going to happen probably, but we all kind of knew the pivot was coming, right?
Josh: Yes. I think there’s two answers to that question. So the question is why did the mortgage interest rates bump up immediately after the Fed dropped the Fed funds rate? Well, if we go back to what I said earlier, that mortgage interest rates are set on future expectations of inflation, I think part of that answer is because, whoa, if the Fed is going to drastically reduce the Fed funds rate, could that become inflationary? And now do we have to price in a higher likelihood of inflation in the future? Because as the Fed drastically reduces the Fed funds rate, that could trigger inflation to come back. That’s what happened in the seventies and eighties. You had a pullback of inflation and then it shot back up. So that’s part of it. The other part of it is there is a lot of instability in the Middle East right now, and now we have the ports, right? The port strikes both of those things. If you shut down oil out of Iran, if you shut down the ports of basically everything in America comes through a port. I mean, we just don’t manufacture that much stuff anymore. So if you shut down stuff coming through ports and you shut down the oil in Iran, that is hugely inflationary. So we’re seeing over
Jason: The last, and wait, there’s one more thing. What am I missing? Well, there’s a couple more things. And if you shut down the keystone pipeline, your first day in office, and then if you deplete the strategic petroleum reserve, and then if you tell everybody they have to drive electric cars that mostly don’t make any sense and aren’t ready for prime time, and then you ship off all the jobs offshore, and then you import all these uneducated immigrants who are a burden on public services and so forth, it is just insane. I mean,
Josh: What about the a million estimated people that have been taken into sanctuary cities that these are undocumented illegal aliens paid for transportation into these sanctuary cities and then essentially put on welfare. They won’t call it welfare, but that’s basically what it is. You don’t think all of that stuff is inflationary and why it is that the service industry is still hiring because every unused hotel room in these sanctuary cities is now being used by these illegal immigrants. So yes, yes, and yes, Jason.
Jason: It’s insane. The stuff our administration and many administrations before, except for the Trump administration, what they’re doing is treason. They are literally giving away your country. They are allowing and encouraging an invasion to happen, and you could just liken it to your own house, okay? It would be like the government’s saying, you have to let these people into your house and let them use your bedrooms, and we’re not going to pay you for it. Tough. I mean, can you imagine, I said recently on the show that for the first time, maybe, well first, certainly the first time in my lifetime, we have legitimate political risk in the United States. Political risk, as I define it, is something I only thought you had in Argentina and Russia and all these other places in the world, not the us. The US has rule of law. It’s a stable country, but I think we have real political risk now, and I especially thought that after the Springfield, Ohio invasion with Haitian immigrants, I mean, can you imagine a town of 50,000 people getting 20,000 new immigrants dropped on their doorstep? I mean, this just an insanity. Can you imagine what that would do to your neighborhood, your property values? You have real political risk and you better be thinking about that. It’s terrible to say we’re in this situation, but we really are.
Josh: It’s not hard to figure out. And you have governors like Gavin Newsom who has just made it illegal to make somebody show their ID before they can vote. I mean, imagine bringing millions of people into the country from Venezuela all over the world, hostile places, and then let allowing them to vote who is the future president and how we’re going to control the United States of America. It is insane.
Jason: It is absolute treason, folks. We are victims of treason. What’s going on with our country right now? I can’t believe it’s happening in America, but it is.
Josh: I’m with you.
Jason: I’m
Josh: With you. Alright, so what I wanted to add back onto this, so there’s a couple of points that I want to make. Number one, inflation and the future expectations of inflation is what is running the mortgage market? Because the people that are buying these mortgage backed securities investing in these mortgage backed securities, which is just pools of mortgages, they’re trying to figure their inflation adjusted return, and they are, if they expect more inflation ahead, they’re going to want a higher return. Now, I think the return that they’re asking for is still too low based on expectations of inflation, but that’s what the market is based on. That’s takeaway number one. Takeaway number two that I wanted to show is that there is this belief out there that if you go on X, for example, and you just put in the housing market, it’s 90% the housing market is going to crash.
And the reality is that even at a time where we saw mortgage interest rates hit 8%, and I think this is a cyclical high, I think that it’s likely we’re going to see continued economic contraction. I think we will enter a recession if we’re not already in one, I think we will see lower mortgage rates ahead. In fact, speaking of making prognosis on what future mortgage rates are, if you look back and look at what the average decline of the 10 year US treasury, because the 10 year US Treasury has a relationship with mortgage rates going back over history, the mortgage rates are about two to two point half percent. I’ll call it 2% above what the 10 year treasury does. So if you look back on from the first time the Fed cuts, the Fed funds rate, on average, the 10 year US Treasury goes down a percent and a half after the first cut.
So if we know where history tells us the 10 year treasury is going to go, we can then forecast where mortgage rates are likely to go based on history, and that tells us that we would see mortgage rates somewhere down in the 5% range as we enter into this, what I believe is the next recession. So that is going to bring millions of buyers back into the market. And I’m going to let you explain your slide on that, but I wanted to just show if I could, this is kind of like some of the doom and gloom that’s on. Oh yeah.
Jason: This is Nick’s stuff. He’s always wrong yet he’s got a giant audience.
Josh: It’s so unfair. It is. But here’s the thing. We can figure this out if we just think intellectually at this kind of stuff right now, this is scary, right? What this shows is mortgage purchase applications, it’s the Mortgage Bankers Association has a mortgage purchase application index, and what it shows is that the number of mortgage purchase applications are their lowest levels since 1995, even lower than the Great recession. Now, that’s pretty dang scary, but we have to ask ourselves, why did those purchase applications go up? Is it because people don’t want to buy homes? Is it because the demographics don’t support home ownership? No, it’s none of those things
Jason: You meant. Why did they go down?
Josh: Why did the purchase applications go down?
Jason: Right? Right.
Josh: Exactly right. It isn’t a demographic thing, which is what we saw in 2006, 2008, there was a legitimate demographic pullback because Gen X was smaller than the baby boomers. But now we have the opposite thing happening. I’ve got, I’m going to show you a, we did a YouTube video called Demographics or Destiny, I’ll show you that in a minute. But the millennials and Gen Z are a huge cohort, and those people are sitting on the sidelines waiting for greater home affordability. And as mortgage rates have come down from 8% all the way down to low six, and based on history, based on what happens after the first fed rate cut, we’ll likely see rates down in the low fives before the end of this cycle. You’re going to bring a wall of buyers into the market. And what’s interesting is even with this huge pullback, and I want you to comment on this, please, Jason, even with this huge pullback in mortgage applications, if you look at the K Schiller home price index that just came out, home prices have still gone up about 4% over the last year despite applications hitting their lowest level since 1995.
What would you add to that, Jason?
Jason: Well, the other thing, and you didn’t mention this one, but you mentioned some very good points about the demographics, Josh, the other thing is people are so equity rich that a lot of people are buying cash. The number of cash transactions has
Josh: Skyrocketed.
Jason: Clearly, these people don’t listen to my show, and they don’t know about inflation induced debt destruction, otherwise they’d be using debt even if they didn’t need the debt. Right? About 40% of all the homes in the country are free and clear, and a lot of the new purchases are just people buying with cash.
Josh: Yes.
Jason: I mean, it’s amazing. Any property I’ve sold in the past few years, and I’ve done 10 31 exchanges on many of them, et cetera, or even selling my own principal residence more recently, cash buyers, it’s just amazing how I would get cash offers. I never used to see this. Years ago, everybody was financing. Hardly anybody was cash. If it was a cash purchase, you thought, oh, here’s some old rich guy. But now buying with cash is kind of like a common occurrence semi. I mean, it’s almost half the transactions. So when you look at mortgage applications, yeah, you can have doom and bloomers like Nick put out a video. Oh, mortgage applications are way down. The world’s going to end. There’s going to be a crash. No, he just fails to mention, and I know he’s doing it on purpose because he’s a smart enough guy to know the truth. He just fails to mention all of the cash buyers. Right? It’s unbelievable. Yeah, it really is.
Josh: So that’s another huge part of the buyer demand that isn’t accounted for in the application data. You’re absolutely spot on. Let’s hit the demographics if I could, because I think that to me, demographics are destiny. That is the future and the past. If you study the crash of 2006, 2008, yes, there was a lot of loose lending standards. Yes, people got over exuberant. Yes, all those things. But 33 years before 2006 was 1973, and that is when you saw Roe versus Wade, and the legalization of abortions and contraceptives became mainstream. So 33 years later, you saw the birth rate drop in nineteen seventy three, thirty three years later in 2006, the people becoming the age of a first time home buyer, which at the time was 33, it’s a little older now, dropped off a cliff. So you had demand dropping, right when you had home builders building more homes than they ever had.
And it was a demographic issue on top of that other layer of instability in the mortgage world. But we need to think about what’s happening with demographics now. So let me just show you a quick slide that we put together, and then I’d love your feedback. And I can put a link to this. We did a YouTube video really explaining this, but we looked at the baby boomer generation. Those people are between 60 and 78 years old. There’s 71 million in that cohort. Their home ownership rate is 74% by the age of 30, 48% of them were homeowners by the age of 40, 65% of them were homeowners. So you can see a trend. The older they get, the higher percentage of home ownership, 48%, 65%, 74%. Alright, gen X, this is my generation, there was a drop in the population size. So this generation is 44 to 59 years old, 65 million cohort.
Current home ownership, 65% by age 30, 42% we’re homeowners by age, 40, 59%. Same trend as they get older, the percentage that own homes rise. Alright, here’s where it gets juicy. Millennials, 73 million that is greater than the boomers. They are currently 28 to 43. The current home ownership rate is 45%. As a 30-year-old, millennials had a 33% home ownership rate. And the estimate is as they move forward, and as the millennials are turning 40, which is going to be the oldest part of this cohort, 55% of them are homeowners. So that tells us that we have, as these millennials get older, they will move from 45% owners to 55% owners as they move from 28 into their forties. And if we go down here, we’ve broken this down, 17% of millennials still live at home, and by age 40, there’s 4.4 million new millennials that need to buy a home.
But then check out Gen Z. Gen Z is almost as big as the boomers. They’re 12 to 27, there’s 69 million of them. There’s only 8% current home ownership rate. And if we forecast, if we just estimate that by age 30, 33% of them are going to be homeowners, that means that we have another 17 million gen Zers because they’re going to move from an 8% homeownership rate to 33% homeownership rate. You’ll have 17 million buyers by the age of 30. So in the next 10 years, Jason, these estimates would show that Gen Z and millennials alone, this doesn’t include immigration. This doesn’t include any more Gen Xers that may increase their home ownership rate. But just from Gen Z and millennials alone, there’s 21.4 million homes needed. And you and I know we’re only building about 1.6 million homes per year, and we lose about 200,000 a year to fire and tear downs for rebuilds and those types of things. So maybe we build 15, 16 million homes over the next 10 years, but we need 21.4 million homes over the next 10 years just for Gen Z and millennials. Demographics are destiny.
Jason: Yeah, absolutely. Right. The shortages will persist. So Josh, this is really, really telling. So the first thing I want to say is there is some disagreement among demographers as the exact numbers of the Boomer and Gen X and Gen Z. Okay? So I have commonly said that boomers are about 76 million Gen Z, much lower like 48 million. Millennials higher at 80 million. But it doesn’t matter. The point is the same. Okay, roughly the demographers do disagree a little bit, but the point is pretty much the same. But always ask yourself, what is he not telling me? What did Josh’s chart not in include? What didn’t he say? And now there are many things he didn’t tell you and he didn’t say, and many things his chart didn’t include. But I’m going to tell you a really big one. And that is that the baby boomers are dying off and the millennials are in store to have the biggest wealth transfer in the history of planet Earth.
Never before has there been such a big wealth transfer as there will be in the next 15 years. This transfer is about $80 trillion. Some say more, some say less. They’re all estimates. Nobody knows the exact amount. Some say 85 trillion, some even say higher than that. But compared to what, when people throw out these big numbers, I don’t know what they mean half the time. So let’s just compare those numbers to a couple of things. The GDP of the country, all the economic value of everyone working in the United States for an entire year is about $25 trillion. So that’s at least triple the GDP of the United States. That’s going to transfer from one generation to another. The GDP of the entire planet is about $120 trillion. So that’s almost the entire human race. 8 billion people, their entire GDP for a year is the amount of this wealth transfer.
It is enormous. It is going to change everything in so many ways. What are those millennials going to do? They’re going to go out and buy more houses. They’re going to go out and buy more assets of every type. Okay, this giant wealth transfer is coming and nobody can stop it because so far we have not found the fountain of Youth. And I don’t know that we will in the next 15 years, but it, it’s pretty staggering. It really is. There is a definite housing shortage don’t fall for the doomers who are just trying to sell clickbait. It’s upon us. These are just numbers. The data just doesn’t lie. Josh,
Josh: I’m curious, you mentioned that the millennials are going to get this windfall of inheritance. Why?
Jason: Well, some Gen Xers and some Gen Zs too.
Josh: Okay, got it. Got it. Okay. Yeah. My question was, because just in my family, I’m a Gen Xer, my mom is a boomer, and that wealth, well, actually, that wealth won’t transfer to me. We have a trust and it’ll actually end up with my kids. But I would guess that there’s a lot of it going into Gen X as well.
Jason: Yeah, no question about it. This is a giant, giant thing, but even with that trust that you have a generation skipping trust, you’re probably going to have some control over how it’s managed and how it invests.
Josh: I get all the cashflow, baby. I get all the cashflow. They get the principle.
Jason: Yeah, exactly. Good stuff. Okay, so did you want to look at another chart?
Josh: I would love you to explain to me one of your most recent YouTube videos. You had a great explanation of how when mortgage rates go down, more people qualify for home ownership. And I think that dovetails well onto the slide that I just showed. With the huge demographics coming into the home ownership market. Would you be willing to explain that?
Jason: Yeah, sure, sure. So basically we used 7% as a baseline when mortgage rates went up and we just said, Hey, if rates drop 50 basis points, a hundred basis points, 150 basis points, in other words, a half a percent, 1%, or one and a half percent, what will that mean? How many new buyers could suddenly qualify for the median price single family home? And the answer is a half a point drop is 2.8 million. New buyers a point is 5.4 million new buyers and a point and a half is 7.7 million new buyers. Now, the reason the 5.5% mortgage rate number is in yellow is because at the time, I didn’t think that was likely, but now I do think it’s very likely because Fannie Mae and Freddie Mac, the two largest mortgage players on planet Earth, they both say the same thing. They both say we’re going to see rates in the mid fives. And so think about what happens when all of these people enter a housing market, or of course all of them won’t enter the housing market, so that’s not a fair statement. Some will stay in the rental market even though they can qualify for the median price home. Some won’t buy it even though they have the ability to get it. But say approximately a third come into the market right now we have just over 700,000 homes for sale. I mean, folks,
If a million new buyers drop into the market and start bidding on the existing inventory of only 700,000 homes, what’s that going to do? What if 2 million people come in? What if 3 million people come in? Which is very possible. I mean, nobody knows how many of these buyers that can now qualify, will actually buy, some might just stay renting. I’m assuming maybe 60 70% of them will continue to rent even though they can afford to buy. And if they don’t buy a principal residence, they might certainly buy a rental property or two. And that’s just going to push prices up. During the Great Recession, Josh, you’ll remember we heard a lot about shadow supply,
How the banks were withholding distressed houses and they weren’t dumping them onto the market. And the government wanted them to do that because they didn’t want to make the market even worse by dumping these properties suddenly onto the market. Well, right now what we’ve got is we’ve got shadow demand. We’ve got all of these people record numbers of young people living at home with their parents who are very slow to form households, but they’re eventually going to do it. They’re eventually not going to want to live at home, and they’re going to want to have their own house. Even if they wait, their parents are going to pass away and they’re going to inherit that money. So they’re definitely going to buy a house. And there is a flip side to that Nick and the Doomers talk about. They say, well, all of these baby boomers that are dying off are going to put their houses on the market.
You’re right. That’s true. And I did a study on that, and I don’t know if you saw the video, I don’t have the slide handy, otherwise I’d love to pull it up. But the amount of new properties that come onto the market with people dying in the 2030s in the next decade, it’s not that big a deal. It’s just not that big a deal compared to the obvious demand that is there with just subtle population increases. But look at the current administration. They’ve let 11 million illegals into the country. They’re just giving the country away. It’s disgusting. But those people need to live somewhere too. Okay? They’re living somewhere. The demographics coming at the purchase market and the rental market over the next 10 to 15 years are phenomenal. I mean, they’re just phenomenal. The only thing that could change it is maybe a pandemic that kills a lot of people or a massive great new technology that allows us to build cheap homes really quickly. That could be a disruptor, right? And it’s not going to be 3D printed houses. I’ve looked at that in depth. I don’t see the big disruptor.
Josh: I mean, even at that, even if the technology did come along, you’d have to go municipality by municipality and have them rewrite all of their building codes. I mean, just locally, we tried to put tiny homes on lots, and we fought with municipalities for two years, and we finally just gave up and said, screw it. You obviously do not want cheap housing. It can’t be your real mandate.
Jason: It’s not what they really want. They say they want it. They’re just trying to score political points. It’s like Kamala Harris saying she wants an opportunity economy. Well, there’s no specifics. I mean, it’s a joke. It’s really just a soundbite. And in California, you know this, they changed the law and they made it really easy supposedly to do ADUs accessory dwelling units. But talk to the people that are actually in the A DU business, and it is so expensive. They’re like a thousand dollars a square foot to put a stupid little 400 square foot a DU on the back of your big lot that you happen to have in California. It just doesn’t work. None of this stuff really works. It’s insane.
Josh: You can’t get a positive cashflow when you’re building for a thousand bucks a square foot.
Jason: No, no. And even if it’s less, you can’t, even if it’s $400 a foot, it doesn’t work. The economics just won’t work. So Josh, let’s wrap it up with anything else you want to talk about or anything we didn’t discuss, questions I didn’t ask you.
Josh: I want to pivot just a little bit back to inflation induced debt destruction, because I’ve really spent the last five years since I started following you, continuing to think about this and developing my thinking. And one of the gifts that I have is I still own that first plex that I ever bought with my mom back in 2000. So we’ve owned the property, same property 24 years.
And when you look over things over long periods of time, like you did so well with your breakdown over three decades in the inflation induced debt destruction work that you’ve done, you can see the power of that. For example, that building, Jason, when I bought that building, the average rent on the units, two bedrooms, beautiful overlooked, great salt lake views right by the capitol, the average rents for the 800 square foot units with decks, two bedroom $300 a month. Today we get 1595 plus 50 bucks for storage, plus we pay for parking. We charge for parking. So think of the math there. We went from $300 a month in income to $1,650 a month per unit in income. That’s more than a five x 500% increase. And what happened to my mortgage payment over that period of time, went down, refinanced it three times, and it’s actually paid off now, and we should probably re-leverage it, but it’s like there’s lots of fish to fry out there in our investments. But let me just show you a progression of the thought on this inflation induced debt destruction that I’ve put to work on my own portfolio because I think it might be helpful for people. So there’s a blended rate calculator that we use from a company called MBS Highway who has all kinds of real estate.
Jason: Yeah, he’s been on the show. Barry
Josh: Barry’s amazing. He’s a great friend at an incredible guy. So this is all of the properties that we own and the mortgages that we have against those properties. So we own, in our real estate portfolio, we have 43 million in indebtedness at a blended rate of 4.014%. So once we calculate that, we built a little tool, which we call the inflation destroys debt calculator, where we plug in the total mortgage indebtedness the remaining term of the years. Now, just for my portfolio, I just put 30 years, and my rationale behind that was I anticipate to refinance these. Most of these are commercial properties and they have 30 year, but 10 year terms. But I
Jason: Just, yeah, it’s complicated. I understand that. But the one thing you could do is you could do a blended year calculator. Okay,
Josh: Explain that to me please.
Jason: Well, just like your blended rate calculator, you could blend the maturity dates of the mortgage, right? Got it. So if you have, I don’t know how many properties that was, maybe that was 20 different properties or so, you can just take the maturity date of each mortgage and just average them.
Josh: That’s a great up level. Thank you. Thank you. So I took all of the mortgage indebtedness, I took our blended rate, we plugged in inflation. As you said, this is the CP lie number. But here’s the cool thing, Jason, this blew my mind when I did this work that the $43 million in mortgages, if I pay it off over 30 years, my monthly principal and interest payments 223,000, my interest rate 4.014 is my blended, but check this out. My nominal payments, which nominal means name alone, that’s how many dollars. We’ll leave our business accounts to pay those mortgages
Jason: And name only just what the checks say. It doesn’t mean that’s the value of them.
Josh: Unadjusted for inflation. What did you call a hundred dollars bill in 1924? A hundred dollars bill? What do you call it in 2024? A hundred dollars bill. But the only difference is it only has about 3% of the buying power today. So in now,
Jason: It should be called a $3 bill. It should
Josh: Be called a $3 bill. That’s right. But in nominal terms, I’ll pay 80 million back on 43 million in indebtedness, but in inflation adjusted payments, I’ll pay 45 million on 43 million in debt. So would you borrow 43 million for 30 years if it only costs you $2 million or a million and a half dollars in interest?
Jason: 1,000,005. Yeah.
Josh: And so your inflation adjusted rate is 0.08%.
Jason: Okay. Josh, wait a minute. This is a live calculator, right? Or is this a slide?
Josh: I’ve got a slide. Sorry, I could pull up the live, but I don’t have the link right in front of me. I apologize.
Jason: Because really, if you put the real inflation rate estimate going forward, I mean, you could easily say it’s going to be with all this, with 35 trillion in national debt and all of the unfunded mandates coming at us. I mean, you could easily say, I think that inflation on average over the next 30 years is going to be 8%. I mean, I don’t even think that’s a very conservative number. I think it probably would be much higher. But if you put that in at 8%, you’d be instantly getting paid to borrow. You’d be getting paid really well to borrow.
Josh: You’d have a negative carry cost on what you’re actually borrowing. You’d pay back less. And to your point, when you teach inflation induced debt destruction, that doesn’t include the tax de deductibility, right? I haven’t even factored in the tax deductibility. So my point with sharing that with everybody is that one of the major speed bumps or the things that causes people not to invest in real estate is they’re conflicted about debt being bad. And if you start to think in terms of decades into the future and you understand how inflation destroys debt, you will make completely different investment decisions. And I could just tell you, there’s no way that we would’ve went on a $30 million buying spree from 2020 to 2022 if I didn’t have this knowledge because it created courage in the direction that I was heading. So I can share the site where people can go up and use it for free if you’d like. I’ll email that to you afterwards.
Jason: Yeah, please do. That’s great. Well, Josh, it’s always a pleasure talking to you. We got to have you on more often. This is just such interesting stuff. You’ve just got such a data-based approach to it, a very analytical approach to it, and I can see that the passion comes out of the data. So that’s always good. Go ahead and give out your website.
Josh: The Mortgage World is really where I spend a ton of my time. And you can find us at medical professional home loans.com. You can find us on YouTube under Medical Professional Home Loans. And if you just want to reach out, you can of course find me on all the normal social media channels. Just search Josh Metal. There’s not too many of us out there.
Jason: Sounds good, Josh, thanks for joining us.
Josh: Pleasure to be here. Hope to see you again.
