Jason Hartman starts the show discussing taxes. He explains that income taxes will rise and that high-priced, cyclical markets will continue to rise. Later he hosts Rick Sharga to distinguish between foreclosures and opportunities. Sharga explains what will happen with the 3 million forbearance cases. He also breakdowns what will happen in commercial real estate.
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 multimillionaire 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 on now. here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 0:53
Well, Happy Tuesday to all and welcome to the intro for Episode 1576 1576. We’ve got another visit from Rick sharga today with realty Trac he shares some awesome information. But I have a question for you. Would you like to work for the government for the federal and state government for 228.5 days per year? 228.5 days per year? There are 365 days in a year. Well, most years, not all years. Obviously we have Leap Year and such. But imagine spending 228 and a half of those days strictly working to pay income tax. Just income tax, not gas tax, not sales tax, not tax on your cell phone bill, not tax on your landline phone bill, not the tax on all your utility bills, not sales tax. Not any other type of tax. Just income tax. Right here is the number to 128.49 days per year. Well, that’s what the folks running in selection think you should be doing. Check it out. By the way, if you need us, Jason hartman.com. If you’re in the United States, you can call us on the good old fashioned telephone. One 800 Hartman okay. So, as you are probably aware by now 50 cent. I don’t know if I’m pronouncing that right. But 50 cent has decided to endorse donald trump for president because he is scared of Joe Biden and Kamala Harris’s absolutely insane tax plan. This is you can’t make this stuff up, folks. It’s just incredible. So when you look at the combined state and federal income tax only, just income tax, no other types of taxes, no sales tax, no death tax or inheritance tax, no gas tax, nothing tax, just income, just your income only. You are going to work for the government. If you live in the Socialist Republic of California, my former home, you’re gonna work 228.49 days per year for the government just to pay your state and federal tax bill. Now, if you live in New Jersey, it’s a little bit better. If you live in New York State, it’s a little bit better, but New York City because they add all those other taxes. You’re basically up to California tax rates. Yes, it’s point 6%. Lower. So you can work if you’re in New York City, you’re probably going to work 227 days a year, just to pay your income taxes. Only. That’s it. Nothing else. Nothing else. Nothing else. Just income tax. Huh? Yeah, that’s it. So, so 50 cent is now endorsing Donald Trump. And you know, it’s interesting, I put this on Facebook this morning and Facebook decided not to show to anybody because Facebook is obviously pro Biden, anti Trump, they hate Trump in Silicon Valley. They hate them in Hollywood. You know, it’s kind of like, interesting when you when you have like 60 million people that vehemently hate someone. Is that person bad? Or is he just ruffling a lot of feathers disrupting draining the swamp? I don’t know. We’ll see. We got special election night coverage coming up. So join us for that. Be sure to join us more to come on that one. But when you look at this 55% of Americans in this survey, okay, now, this is a Gallup poll. So it’s a big Polling organization. Obviously, it’s not, not some little thing, right? It’s they’ve been around for many, many decades Gallup and 55% of Americans say they are better off than they were four years ago. That’s better than the ranking and asked the same question of George W. Bush. Comrade Obama. Reagan even did not have that high approval rating. And Reagan was, you know, super popular president, obviously, even on both sides of the aisle, Reagan was really good at kind of reaching across the aisle. And one of his best friends was Tip O’Neill, Democrat Speaker of the House, it would be like Nancy Pelosi and Donald Trump being good friends. Imagine that not gonna happen. And then George Herbert Walker, Bush 38%. So not a very high rating for him. But yeah, 55% say they’re better off under under the Trump administration. So there you go. Now the mass migration continues, buyers from New York, Chicago, and California, are flocking to Dallas, The Big D. And this is not the only place this is just one of many examples. You know, they’re coming into Dallas, they’re coming into every place. They’re coming into linear markets. Remember three types of markets linear, cyclical, and hybrid. And all of those. By the way, you want a prediction, here’s a prediction for you. The formerly cyclical markets after they have their continued crash. Now, the cyclical markets are the high flying, left wing controlled markets, they’re almost all left wing. Why is that? Well, because left wing governmental policies create housing shortages. Yes, I know. They all say they’re trying to help the poor and the needy. But for some reason, it just never quite works out that way, does it? It just never works out that way. in actual practice? No, it does not. So they have housing shortages, and they have high housing prices, and they have high taxes. And guess what else they have, they have people leaving in droves. And most of these areas share high crime rates and high unemployment. And, you know, the evidence is so profound. It’s just everywhere you look at it is undeniable. It’s like Marcia Clark. And Christopher Darden said when they tried to prosecute OJ Simpson, you know, they were the district attorneys at the time in the oj trial from years ago. They said we have a mountain of evidence, yet the jury would not convict. So here you go check out this ad. And this is a Baltimore politician, it’s pretty interesting what she says here.
‘Excerpt from a Campaign Ad’ 7:54
You care about black lives. The people that run Baltimore don’t, I can prove it. Walk with me. They don’t want you to see.
‘Excerpt from a Campaign Ad’ 8:09
I’m Kim classic. This is Baltimore, the real Baltimore. This is the reality for black people every single day, crumbling infrastructure, abandoned homes, poverty and crime. Baltimore has been run by the democrat party for 53 years. What is the result of their decades of leadership? Baltimore is one of the top five most dangerous cities in America. The murder rate in Baltimore is 10 times the US average. The Baltimore poverty rate is over 20%. Homicide, drug and alcohol deaths are skyrocketing in our city. Do you believe black lives matter? I do. The vast majority of crime in Baltimore is perpetrated against black people who make up 60% of the population. So why don’t we care about our communities? The Democratic Party have betrayed the black people of Baltimore, it’s the politicians walk the streets like I do. They will see exactly how their policies and corruption affects that. If they don’t want to see it, they don’t want you to see this. Go to any Baltimore neighborhood and ask this question. Do you want to defend the police?
‘Excerpt from a Campaign Ad’ 9:21
No, no, absolutely not. I had three sons killed in Baltimore City. And I think if we’d be funding to fully solve, it’s gonna be worse than that. So no, I’m opposed to that. What are you gonna defend the police for? Why? How do you defend your city, your community, families are losing.
‘Excerpt from a Campaign Ad’ 9:41
It’s not just Baltimore. The worst place for a black person to live in America is a democrat controlled city. It’s 2020 Malibu city where black people’s lives have gotten better. Try our wait. Look at this. How are children supposed to live here and play here? Democrats think black people are stupid. They think they can control us forever, that we won’t demand better, and that will keep voting for them forever, despite what they’ve done to our families and our community. Are they right? I’m complacent. And I’m running for congress because I actually care about black lives. All Black Lives Matter. Our communities matter. Baltimore matters. And black people don’t have to vote Democrat.
Jason Hartman 10:31
That campaign ad was one of the highest, what I want to say money raising campaign ads, it raised just an absolute fortune in like 72 hours after it appeared. So and she’s right, you know, she’s totally nailed it. I mean, the evidence is just overwhelming. You want to look at the poster child for big government disaster. Just look at Detroit. Absolutely pathetic, because after decades and decades of left wing policies that have just destroyed that city, absolutely unbelievable. Speaking of migration, I run a group like a social network, all the empowered investor inner circle, one of our clients posted in in here yesterday, and I thought this was really interesting. They wanted to rent a trailer from u haul to go from Folsom, California in Northern California to Boise, Idaho. Okay, it was $850 to rent it in that direction, one way. But if you want to go backwards, if you want to go from Boise to Folsom, if you want to take it into California, in other words, where nobody wants to take it, everybody’s moving out. They’re taking the U haul trucks one way they’re taking the U haul trailers one way and leaving them in the other city and u haul has the giant burden of transporting them back to where they came from, or at least where they’re needed. And they’re needed in California so people can leave so people can get out. So they can escape that potential for 62.6% tax having to work for the government for 228 and a half days per year, just to pay income tax, nothing else, just income tax. It’s only $99 to rent that same trailer to go backwards to take it into California. Soon. I bet your u haul will make that $1 they probably can’t pay you because just the way legal contracts work. But they can make it $1. So that’s enough consideration for a contract. This is absolutely telling like if this, if this doesn’t tell the story, and I showed you one of these examples previously, of moving from New York City to Palm Beach, Florida, that direction, very expensive. Moving from Palm Beach, Florida, where I am to New York City very cheap. I showed that example before so this is yet another you can just go to the U haul website and and you can plug in these things yourself just anywhere you’re leaving a democrat controlled city as everybody is trying to flee from them. Just go and do the survey yourself. You know, plug it in, go to u haul.com. And you’ll see how much less expensive it is to bring that vehicle that truck that trailer, whatever back into that area because they’re all leaving one way. They’re going on one way trips, leaving these cities. Try it for Seattle, Los Angeles, San Francisco, Portland, you know, even San Diego, but not too as big a degree. Try it for New York. You know, you’ll you’ll just see it’s just all all over the place. Folsom is near Sacramento, California, same idea, obviously. So you see what’s happening here, folks. But on the good side, well, maybe the good side, I don’t know. homebuilder confidence breaks previous 34 year record high is that absolutely unbelievable. I mean, increased buyer interest in the suburbs. And exurbs and small towns marked a bright spot for the economy, as people America is is just rearranging itself. This is one of the most mobile populations in the entire world Americans are it’s been that way for quite a while. After World War Two, we saw the rise of the suburbs, we saw people moving to the suburbs and what made that possible what was the the automobile? You know, America was one of the very rare circumstances in the world where people fell in love with the automobile. They were prosperous, and you know, they they moved out to the suburbs they got out of the cities. And now that same thing is happening again. You know, over the past couple of decades, we had this move back into the cities, but now it’s reversing you know, the tide goes goes in tide comes out pendulum swings back and forth. Right. And so that’s what’s happening. And by the way, David, who made that comment? Thank you, David. he happens to be watching right now. California is insane. run by socialist nutjobs. Yes, I would have to agree with you. And David, I hope you didn’t mind me sharing your u haul example, because that was a good one. So, thanks for that. Appreciate it. Yeah. Wow. I mean, we’ve broken the record. So the real estate market home is the center of the universe. The residential real estate market is absolutely booming. It’s on fire. in Fargo. Yes, it is. It is it is. Okay. All right. Well, hey, let’s get to the rest of our show. We’ve got our guest today, Rick sharga is back to talk to us about just what’s going on in the market. And a lot of data out there and a lot of interesting stuff. Like I said yesterday, you know, if you’re waiting for this big foreclosure, boom, I think you might be a little disappointed, a little disappointed. So you know, we’ll we’ll see. We’ll see. And just for future, I’ll let you know. I am interviewing in about seven minutes, economist from England’s monetary policy committee and former professor at London School of Economics. Charles Goodhart. And he is the one who promulgated good hearts law, which is very interesting. So we’re going to talk about that. And that interview will probably be published, maybe next week or so. So that’s what’s coming up. And oh, before I go, David made another comment. Thanks for sharing the you all example, well, thank you for sharing it, David. We really appreciate that. Because people have got to know what’s going on. They’ve got to know what’s going on. And they’ve got to be more informed voters. You do not want to work 228 days per year to do nothing else. But pay income taxes. I mean, that’s insanity. That’s just insane. I mean, look, think about it. Think about this, folks. Even if you’re not religious, and you haven’t been to church in a long time, or forever, you know that the idea of tithing is that you give 10% I mean, if God can live on 10%, why does the government need 62.6%? Wow. I’ll leave you with that one. Okay. Let’s get to our guests. Thank you for joining me today for the live stream portion. And the guests will be on the podcast today. It’ll be up in a couple of hours. So check out the creating wealth podcast for the full interview. But thank you for joining me today. And I will talk to you later. Until then happy investing to all. Do we have a concern for a big foreclosure crisis? Rick, that’s, you know, a lot of a lot of my very capitalist vulture capitalist friends are saying, Oh, I’m ready. I got my word chest. I’m gonna buy properties like crazy this time. I’m not going to miss it. Let’s,
Rick Sharga 18:09
let’s distinguish a little bit between foreclosures and opportunities. Do I think we’re going to see more foreclosure activity? Well, hard to picture scenario, or 40 million people filed for unemployment, where we don’t see some more foreclosure activity. Having said that, I mentioned earlier that a lot of the job losses have been among renters, not homeowners, renters typically don’t get foreclosed on. There could be some Fallout among landlords, if they happen to be in an area where there are bands on evictions, and the tenant stopped making payments. But so far every study I’ve seen shows the tenants have continued to make payments at almost the same rate they’re making a year ago.
Jason Hartman 18:50
You know what that amazes me. I think there’s more of this, these rent strikes in larger multifamily properties that are owned by institutional investors. But in our network with our investors, people are paying their rent very nicely. And what’s interesting about it, too, is even though they’re they have these various eviction moratoriums, you can still literally while your tenants occupying the property, go and sue them for to get a judgment for the money, even though you can’t evict them physically. So they know they’ve got to pay and one way or another, you know, the rent is being paid most of the time. So yeah,
Rick Sharga 19:29
so an investment investor I’ve known for a long time as at rental properties. He said he’s had to evict one person so far. Mm hmm. That person was fully employed, but was trying to game the system. Yep. And six other tenants have worked out payment plans with him. Other than that, he’s collecting everything on time. And and anecdotally, I’ve heard that same sort of story repeated over and over and over. So will we have more foreclosures? In fact, you’d ask for slides. I have a slide I can show you on this. So my colleagues at Adam and I know Todd data was just on your your program not too long ago, have done a look at what we might be seeing. So if you look at what we’re seeing in terms of potential foreclosure activity, prior to the pandemic, we were at historically low numbers of foreclosures. So in a normal year, about 1% of loans are in foreclosure. Before COVID-19, we were looking at about a half a percent. So that meant about 250,000 borrowers were in some stage of foreclosure, those are all on hold right now. Because of the foreclosure moratorium. The forbearance program from the cares act will put people into a protected state really until next March, when that program finally expires. So we don’t really see much activity coming back to market until the second half of 2021. We’ll see if the moratoria end in January, we’ll probably see those 250,000 properties start to work their way through the system will also we’re already starting to see this, we’ll also probably see, states relax moratoria on properties that are vacant and abandoned, no reason to keep them in that state. So you’ll be able to foreclose on them. But we won’t really see most of the activity until after the forbearance program. So Adam took a look at kind of a best case, worst case and middle case. And that that would give us an incremental number of foreclosures, ranging anywhere from about 200,000 more to about a half a million more on top of the 250,000 that will be released. So in that worst case scenario, you wind up with about 750,000 properties in foreclosure in 2021, which is three times where we were, but that only takes us to about one and a half percent of loans being in foreclosure. Right. And at the peak of the foreclosure crisis, that was 4%. So we’re nowhere near where we were during the Great Recession.
Jason Hartman 21:52
And by the way, it cut out for just a moment you said 4% at the peak back during the Great Recession, right? That’s correct. Okay, so this is 1.5% versus 4%. Is that the number
Rick Sharga 22:05
that’s corrected? And personally, I wouldn’t be surprised to see us maybe reach up to 2%, depending, depending on how the borrower is coming out of forbearance, are able to perform and get themselves kind of recent reset. Right? So far, they’ve been doing very well as they exit forbearance. A lot of people who I talked to, are concerned about the fact that there’s still 3 million people in forbearance programs. And doesn’t that mean, we’re gonna have 3 million people in foreclosure? And the answer is no. Right? On the so far, about 8% of the people exiting the forbearance program have gone delinquent? Yes, not default. That’s delinquency? Sure. And if we have that kind of success rate going forward, there will be a huge influx of those people defaulting on their loans.
Jason Hartman 22:53
I agree with you. And you know, what else economists always seem to fail to account for, is they fail to account for any sort of reaction, of course, the lenders are going to do something, they’re going to do workouts, short sales, loan modifications, you know, they’re not just going to sit there, and especially now, Rick, because we’re better at this. Now. You know, we just went through this 1012 years ago. So now the world is ready and adjusted. And, you know, you look at how quickly the Federal Reserve react, how quickly the government reacted. This is not the old world we lived in. And I’m just talking 1012 years ago, though, the banks are ready to deal with this problem much more so than they were during the Great Recession.
Rick Sharga 23:39
Well, a lot of good news here, really the the industry, the banks, the lenders work hand in hand with the government this time to avoid massive defaults. And anybody who has been in the mortgage industry for any amount of time will tell you it’s much better, much easier to work with borrowers and keep them out of default, than it is to let them default and try and fix things afterwards. And that’s, that’s the problem we had last time. A couple market dynamics are very, very different this time than last time as well. Last time, the market was overbuilt. So there was more supply than there was demand for new housing. This time, it’s just the opposite of most people that I follow. believe we have a net deficit of 300 to 400,000 properties a year, demand is extraordinarily high. And here’s the big thing. We have a record number of record amount of homeowner equity in the market right now six and a half billion dollars, and it goes up every month as home prices go up. That gives most of these and Adams numbers suggest that 70% of homeowners have at least 20% equity in your properties. If you’re a distressed homeowner with 20% equity in a market that has a desperately short amount of inventory for sale. Humans are much better options than ever losing your home to a foreclosure auction, which is why I said earlier. I think we’re going to see default activity go up but I don’t think saralee think that means you’re going to have a lot of foreclosures, or a lot of bank owned properties. I think a lot of these things are going to get resolved much earlier than the foreclosure auction through a traditional sale, or in some instances, rarely, I believe, short sales.
Jason Hartman 25:15
That’s a great summary. Thank you for that. So think about the differences. Now, folks, we have a housing shortage now versus an excess supply of overbuilding, which we had last time due to, you know, the crazy lending which, you know, was also money was lent to the developers who just built wantonly. And then we have a much better equity position for people. We don’t have all the ninja loans and the liar loans in the market, you know, all that subprime toxic stuff is not there. And, you know, we’ve got people who aren’t underwater in a market where they got 20% equity, and they can easily sell. It’s just not the same thing. I wish it was the opposite. I’d love to see some big giant opportunity because I’m ready to pounce too, but it’s
Rick Sharga 25:59
well, you have to be careful what you wish for people, people think they want that kind of inventory around but they really don’t. Because if that’s there, it means nobody’s buying. Yeah, so you can buy all you want. But the renting or selling, you’re probably one of the other headlines I wanted to let a little little of the air out of the balloon on is we’re seeing all these doom and gloom headlines about serious delinquencies increasing. And that’s true. And you’re going to see headlines saying, you know, more serious delinquencies and during the Great Recession and all time highs, and by the way, that’s exactly how the forbearance program is supposed to work. All of those loans that are seriously delinquent right now, virtually all those loans are in the forbearance program. And not only are they going to be six months delinquent, but at some point, they could be 12 months delinquent. And that’s still okay, because that’s what the program was supposed to do. If you actually look at new delinquencies, 30 day delinquencies, they’re down month over month and year over year. So what we’re seeing is really kind of a bookkeeping anomaly, if you will, even though the borrowers technically aren’t delinquent because of the cares act, their loans are being counted as delinquent because there’s no payments being made. But if you’re in forbearance for a full year, you haven’t made a single payment. And you come out of forbearance and agree to a repayment program, you’ve gone from being a year delinquent to current overnight. And that’s the other reason you’re not going to see a lot of activity until later next year. Because if somebody comes out of forbearance in March, they’re not technically going to go delinquent again for another three to four months. And that’s assuming they miss consecutive payments coming out of the forbearance program. So again, just something for your your viewers, your listeners to keep in mind, as you’re going through these these numbers they see in the in the headlines, serious delinquency, this case doesn’t necessarily equal a lot of foreclosures coming. It’s just really kind of a an unintended consequence of the way the program is set up.
Jason Hartman 27:56
I think that’s a very important distinction. So thank you for that. And this chart is from the Mortgage Bankers Association, the NBA, you know, what else is that you don’t see this same situation of people with with no options right now they’ve got the options. We talked about that a moment ago. So it’s just a very, very different scenario that people are in, you know, these aren’t under qualified homeowners like they were before, and systems ready to deal with it better.
Rick Sharga 28:26
So you want to talk about options. I think that’s one of the reasons the forbearance program is working as well as it is so far. Keep in mind that historically, if a lender did a did a forbearance, what that meant was, they were going to allow you to miss payments for a certain period of time. When that forbearance was over, you owed all of those deferred payments in lump sum, in a pandemic like this, with unemployment being what it is, if they follow those same rules, you basically just be delaying foreclosures for a few months, right. But that’s not the case. The forbearance program, as part of the cares act, basically stipulates if you have a if you have any government back loan, the preferred repayment plan is to just tack on those missed payments, till the very end of your loan. So you’re going to come out of forbearance and not owe any of that money, until you’re really done repaying your loan, you basically lengthened your loan, that’s a great deal for the borrower. It really is now there, there’s some minor, you might have some tax money that you have to make up or some insurance payments, you have to make up. But as people are exiting the program 92% are exiting in a positive way, either. There’s a loan modification, and you mentioned that we know more about how to do that today than we did back in the day. a surprising number of these loans are being paid off. Whether that’s because the homes being sold with loans being refinanced. That’s a very positive outcome. There’s other kind of payment deferral programs, there’s repayment plans that are being put in place, but the majority are just being reinstated or they’re cancelling for Barents and continuing to make their payments on time. So I do believe the number of non current loans will increase as the number of people exiting forbearance increases. But again, that even at that point, it doesn’t mean that they’re not going to work with their service, or to come up with a better option, or that won’t be able to sell the property on the open market. So I again, if you just look at the numbers, and you look at the options bar is available these days, there’s a lot of reasons to be cautiously optimistic.
Jason Hartman 30:34
You know, one other point we didn’t mention, Rick, is that there aren’t all these adjustable loans in the marketplace. You know, we we had, we had so many borrowers last time around get payment shock, because maybe in in 2002, or so, you know, they took out a three one arm or a five, one arm, and then that adjustment came along. And there was it was like looking, you know, I’m sure a lot of people have seen a, you know, a snake swallow a mouse or something, and it’s called fat in the middle is pretty disgusting look at but you know, I thought once, like my science class or something in junior high, I think, and you know, it’s got that big, that big bulge. And that’s what the adjustable rate mortgages were last time around, there was this big bulge, there were two of them from the three one arms and the five on arms that were so popular. And when they adjusted, the people got payment shock and went right into default. So and they don’t have that nowadays, it’s a, you know, the new lending regulations
Rick Sharga 31:30
eliminated a big problem from those arms, those arms, in many cases, was adjustable rate mortgages were given to borrowers who could only afford to move into a property because of that teaser rate that they started with, right. And nowadays, they’d have to qualify based on a much higher monthly payment. So even if they have that Adjustable Rate loan with a low initial payment, they’re qualified before they get the loan to be able to make the the higher payment or payment. And there’s just not that many people using adjustable rate mortgages lately, right? There really aren’t. I’m actually more so. So two things for investors. One is, if you’re going to be looking at deals from distressed properties, as we go through this cycle, I believe that most of the deals are going to be prior to the foreclosure auction. And that’s part part of the sales pitch here, I hate to do this, but sites like realty Trac, and other sites out there that will give you access to properties in the early stage of foreclosure is really where you should be focusing rather than at the auction, or at the reo category where the bank will repossess have already repossessed them.
Jason Hartman 32:38
What one other element to that is now we have a lot of big institutional players in the game. So how do you see that playing out in California, they want to make a law. Gavin Newsom is behind this one, the institutional buyers can’t buy foreclosure properties. Talk about a market version,
Rick Sharga 32:59
they’ve actually already passed that law, they passed that Oh, my gosh, and 70 Bill 1079. And they haven’t excluded them. But what they’ve done is put a 45 day hold to allow nonprofits or tenants to go and buy those properties. So right, basically, I have to outbid invitation homes or BlackRock, in order to buy that property, which doesn’t seem horribly likely in most cases. But yeah, that’s that you check with a real estate attorney or somebody who follows that if you’re if you’re looking at at an end, the law is not gone into effect yet. But it’s there. It’s another yet another wonderful move on on part of the California State Government.
Jason Hartman 33:35
Rick Sharga 33:36
So the institutional buyers Look, there’s the guys that have gone out and bought properties to rent. And then there’s the eye buyers, the open doors, right offer pad Zillow, who are probably going to do very well for themselves, once there is more distressed inventory on the market. But if you think about their value proposition to a seller, it’s certainty of transaction and speed of closing. Right now, if you put a property on the market that’s priced properly, in a lot of cases, you’ll sell it in a week,
Jason Hartman 34:07
right or less.
Rick Sharga 34:08
And you’re going to have multiple bids on the property from both home buyers and local investors. So the value proposition the institutions have is meaningless at the moment. And the institutional guys, the really big guys who have bought properties, I think their role in the market has been grossly overestimated. I was telling somebody earlier, it’s like one of those urban myths that won’t go away, like buy alligators in the sewers of New York. If you look at the fact that there are 16 million single family rental units today. Yeah, collectively they own less than 2%
Jason Hartman 34:40
Yeah, I mean, everybody thinks Oh, invitation Homes is so huge. They’ve got like 80,000 homes. And that’s true that is big as investors we all wish we could, you know, be be that big a deal. But in terms of the overall market, it’s a drop in the bucket. It’s just nothing,
Rick Sharga 34:55
so I don’t see them being a big player. The other area of opportunity, though, that I would see for Investors is in the commercial market. So a few people looking for distressed assets, we’re already starting to see a higher number of commercial foreclosure properties pop up on our website, then we would have expected this early in the cycle. We’ll survey more when you say commercial. Can you define what type of commercial? I mean, obviously, there’s a huge difference between multifamily hotel office and retail and industrial. So I hate that word commercial. Like, what you know what segment of it right? Your point, I don’t expect to see a lot of industrial foreclosures. Yeah, I market is going to come out as a winner because Amazon still looking for distribution locations. And we need more cloud computing centers. Now that everybody’s working from home, retail and hospitality are both getting hammered right now. So if you’re looking even at at kind of low dollar, retail opportunities, restaurants, small shops, all sorts of retail establishments, we’re starting to see pop up. And retail was kind of already on the edge before the pandemic. Oh, sure. The hotel industry is looking at occupancy rates below 40%, which is less than half of where they were a year ago, I can tell you, from my days at auction calm that we sold a lot of limited service hotels, your Hilton Garden ns and Marriott Fairfield suites to small investors who may not have the capital to get through this this long recession. So hospitality and retail are both going to get hit pretty hard. I think there might be some short term disruption in the apartment sector, because of what we talked about the fact that we have a large number of small investors who may not be able to collect rent for the time being and may have to sell off in order to salvage their their own personal financial situation. offices, I think are going to be protected for a while only because at least the lease terms tend to be a little bit longer. And I think the landlords are probably going to try and work things out with the tenants rather than go through the foreclosure process.
Jason Hartman 36:56
But with all the remote workers, I mean, are people coming back to the office? You know, you look at the big tech companies, they’ve said everybody can work at home indefinitely or for the next year and a half? And I think people might get kind of spoiled and used to that, you know, but they’re going to need a bigger house, that’s for sure. Yes, staffing. Nowadays, houses need to home offices and places for the kids to study. So you know, it’s not just like one home office anymore?
Rick Sharga 37:21
Well, again, that’s one of the reasons that for that trend acceleration we talked about earlier, with people moving from urban centers out into the suburbs, and even the distant suburbs. jury’s still out on how much office utilization We’ll see. Hard to imagine that New York and San Francisco remain ghost towns forever. But I think the the dynamic will shift quite a bit. If you’re going to reopen an office, you have to manage to have enough space per worker to have social distancing, to maintain health standards. And I think you’ll start to see some regulations come into play there. So while you may have fewer people going into offices, they’re going to be more spaced. Yeah, yeah. And the other the other thing that I think Mark Zuckerberg at Facebook has been talking about this, since you mentioned the tech companies, I think you’re going to see more decentralized locations of office workers. One of the trends I saw through the second quarter is, while office sales overall had dropped, we’re seeing more of an incidence of suburban office sales. So you might be seeing more movement towards second and third year offices. As the Facebook’s and Twitter’s and Googles of the world, realize that it might be cheaper for them to have an office in Omaha and pay Omaha wages moved to San Jose,
Jason Hartman 38:27
no question about it. Yeah. And also, a lot of the big companies have talked about doing sort of this, like hub and spoke concept like the airlines do with their office space. So we’re obviously reading the same stuff, you know, and so little sort of conference center type suburban offices, you know, where people can go and work can get out of the house and have a change of environment and still, you know, have some social distancing, but but not go in as often. It’s interesting, the world sure is changing, isn’t it? It sure is a ways that none of us could have imagined in January.
Rick Sharga 38:59
Yeah, this is this 2020 has been quite a year of the year of acceleration, you know, changes, again, that were already happening, but now, it’s just moved the future up 510 years sooner. Rick, one thing we didn’t talk much about is the different price segments of housing or, you know, different types of markets, like our investors like to invest in these linear markets, you know, with lower priced housing. That’s $150,000. Certainly not California type properties. It seems like the shortage is more severe in this lower price linear market housing than it is in more expensive markets. Do you have any data on that or any thoughts you want to share? Well, you’re absolutely correct. One of the reasons for that is that none of the inventory being built is being built in the lower price tiers. And one of the reasons for that is it’s so expensive for builders to build property. Fannie Mae estimates that it costs a builder $80,000 across the country before they break ground. hundred thousand dollars in California, that doesn’t include the increased building costs because of raw materials going up, labor costs going up. So you’re just not going to see a lot of new inventory being built at the entry level. In fact, some of the builders have shifted that kind of stock into build build for rent properties. The other problem is, we have a historically low level of existing home inventory for sale. So there are people sitting in those prices, the properties that would sell the lower prices, who simply aren’t putting the properties on the market, because they’re not sure if there’s something for them to buy. They’re not sure how stable their economic situation is because of the recession. And candidly, they may be uncomfortable going out looking for a new house for fear of catching the virus. So until we start to see a little more building activity, that frees up some of the properties at the lower end. And until we see people more willing to list their properties, we’re going to continue to see a shortage of inventory at that part of the price here. And we see the cost of construction materials like especially lumber lately, just rocketing. Now, that’s going to tone down a little bit when you look at the lug nut lumber futures markets, you know, has signs of toning down a tad, but still very expensive. And that’s just going to keep the upward pressure on. So we really do have an affordable housing crisis in this country, don’t we? And there are no easy solutions. I was talking to somebody yesterday about Vice President Biden’s notion of having a first time buyer credit tax credit of $15,000 that’ll just make more first time buyers and push the prices up. It’s exactly what I was gonna
Jason Hartman 41:38
say, Walker’s all over again. You know,
Rick Sharga 41:40
it’s it’s a well intended approach that doesn’t really understand the market dynamics, of course, but I keep going back to what Ronald Reagan said the scariest words in the English language are from the government and I’m here to help.
Jason Hartman 41:52
I love it. That’s one of my favorite Reagan quotes. He was so great. He said some of the best quotes, they’re awesome. Well, Rick, this has been really, really phenomenal. Anything you want to just wrap it up with any thoughts, any advice for investors,
Rick Sharga 42:06
there are going to be investment opportunities I would be looking at at rental markets as short term opportunities, whether it’s traditional rental or air b&b, I would keep my eye on low dollar commercial assets in the retail and hospitality space in particular. And again, I would I if you’re looking at the foreclosure market, I wouldn’t be looking at the early stage foreclosures as where a lot of the activity is going to be taking place. So you have to tune your game up and be ready to approach those distressed buyers or those distressed homeowners rather and not wait for those properties to come to auction.
Jason Hartman 42:37
Good stuff. And of course which website you want to give out just real t tractor calm Yep.
Rick Sharga 42:43
So visit us realty crack calm there’s no k on realty Trac ra lt y, tr AC, sign up for our blog. If you want to follow this kind of stuff. It’s free. Nothing required other than your email address. And if you like this kind of information, feel free to follow me on Twitter or, or reach out to me on LinkedIn. I’m not hard to find. It’s just Rick sharga.
Jason Hartman 43:03
Excellent good stuff. Rick Shakur, thank you so much for joining us.
Rick Sharga 43:05
It was a pleasure. We’ll have to do it sooner than another 10 years.
Jason Hartman 43:09
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