307: Why The Rich Are Getting Richer
By Keith Weinhold
The wealthy are enjoying federal monetary stimulus. Meanwhile, unemployed tenants can now be evicted nationally (check your local law). Own assets? Great. Mortgage interest rates are at historic lows; the S&P 500 is at an all-time high. (Entire episode transcript is below. Read as you listen.) In the pandemic, tenants want single-family homes more than communal apartments. Fannie Mae & Freddie Mac want to add a 0.5% refinancing fee. Homebuilder sentiment is high? Why? High demand, low inventory, low rates. Stagflation is explained. It is a stagnant economy with high inflation. There are signs that inflation is poised to increase. Resources mentioned: Inflation Triple Crown video: https://youtu.be/dZojl686fU0 Section 8 turnkey property: www.GetRichEducation.com/Section8 Stagflation video: https://www.youtube.com/watch?v=YaC_PNKu_Cg&feature=youtu.be Elevator Anxiety: https://www.axios.com/elevator-anxiety-reopenings-9a474985-4786-43a3-8b64-5119ff7f2267.html Mortgage Loans: RidgeLendingGroup.com QRPs: text “QRP” in ALL CAPS to 72000 or: eQRP.co By texting “QRP” to 72000 and opting in, you will receive periodic marketing messages from eQRP Co. Message & data rates may apply. Reply “STOP” to cancel. New Construction Turnkey Property: NewConstructionTurnkey.com Best Financial Education: GetRichEducation.com Top Properties & Providers: GREturnkey.com Follow us on Instagram: @getricheducation Keith’s personal Instagram: @keithweinhold Complete Episode Transcript: Welcome to Get Rich Education. I’m your host, Keith Weinhold. The rich are getting richer and the poor are getting poorer. I can’t think of any one time in my life where that’s been happening more than it has been than right now. I’ll tell you why - and what you need to do to get on the right side of that. What is going on in the real estate market and what are the real estate economics that matter? Then, a discussion about inflation. Today, on Get Rich Education. ____________ Hey, you’re inside GRE. From Manila, Philippines to Managua, Nicaragua and across 188 nations worldwide, I’m Keith Weinhold. This is Get Rich Education. The rich are getting richer, the poor are getting poorer - and I can’t think of any one time in my life where that’s been happening more than it has been than right now. Because Americans living paycheck-to-paycheck might now be ... paycheck-less. Some of them are laid off - because of the pandemic - and now they're concerned that there's no national eviction ban. That’s right. In most states, non-paying tenants CAN be evicted at this time. Now, you’ve got to check your local law. Well, when is Congress going to do something to relieve those that the pandemic has left unemployed? Well, they don’t even reconvene until after Labor Day. Some people are wondering - “Where is the CARES Act 2?” Where are those updated forbearance options, eviction moratorium, the PayCheck Protection Program, and the $1,200 stimulus checks and the stepped-up weekly unemployment compensation? In fact, Richmond Fed President Thomas Barkin had good metaphor. He said: “Months ago, when we did the first stimulus, we thought the economy faced a pothole and the stimulus put a plate over it so we could navigate. Now escalation of the virus may be making that pothole into a sinkhole and creating a need for a longer plate.” That’s the end of what the Fed President said. Now, look, I think there’s a lot to be said for just letting the free market do it’s job. But it’s a little hard to be in this laissez-faire, Austrian economics school of thought when some people could be suffering. So that you know what I’m talking about, “lay-say-fare” basically means no government intervention into the free market. Meanwhile, the rich are bingeing off Federal Reserve policy and liquidity injections that keep mortgage interest rates at historic lows and the S&P 500 at an all-time high. Mortgage rates recently dipped below 3%, which is just amazing. You don’t even have to be THAT rich … to benefit. If you’ve got substantial exposure to the real estate market or the stock market, chances are, that those assets are doing alright. One thing that you need to keep in mind as an investor, is that, when the Fed puts rates on the floor, it affects more than just MORTGAGE rates - it affects other rates too - like savings account rates. Just look at the rates at bank savings accounts. Even if you’re in one of these online banks that give better yields than traditional brick-and-mortar banks - we’re talking about online-first banks like Ally Bank and Popular Bank - they were paying two-and-a-half percent on savings accounts not all that long ago. Even those banks are now down to about three-quarters of one percent - probably less than the real rate of inflation. So because savers get punished worse than ever right now, that, in turn, forces more people INTO things like real estate, because you’re in search of that yield. Even retirees can’t rely on the paltry income from three-quarters of one percent yield so they have to go to the markets to chase yields too - sometimes unwillingly. Well, when all these people that got negative REAL yield on savings accounts and CDs - and aren’t going to stand for it anymore, it forces more demand … and money into markets and consequently, floats the price of everything up. That’s what’s going on now. Now, I personally don't really like this deepening canyon between the "rich” and the “poor". But I know which side I'd rather be on. Besides the investment properties, a lot of people want to move and shake-up their living situation like never before - their primary residence - and filter their new home-buying criteria on pandemic ways of life. Bidding wars are rampant for single-family homes. How rampant are they? Well, Zillow just reported their highest daily active user count ... ever. Now, though property data can move even slower than your last 1031 Exchange did, Real Estate Economist Daren Blomquist just compiled THESE year-over-year price changes through quarter two. You’ve heard Daren Blomquist on the show here. He broke this down this way: City real estate is up +4% - again, this is all year-over-year through the second quarter. Town +4% Suburban +5% Rural +11% The two sources are ATTOM Data Solutions and the U.S. Census Bureau. So rural is appreciating the best. City and town is appreciating the least. With time, I expect urban areas and apartments to slump. Of course, urban areas and apartments kind of go together. In the pandemic, living in a lot of large apartment buildings has become about as fashionable as Jazzercise and The Atkins Diet. Of course, at GRE, we've long focused on rental single-family homes. We’ve talked a little about apartments and you know that I started out with a four-plex & got my start in real estate that way. This week, NAR Chief Economist Lawrence Yun noted: " ... (There's) an oversupply of apartment buildings, especially in city centers given the evident recent shift in consumer preference for single-family homes in the suburbs. Lawrence Yun continued: "Apartment rent growth could therefore be tough going ahead. The rise of single-family units is welcome, as overall inventory of homes for sale are down 19% from one year ago and there is intense buyer competition in the market as a result." That’s the end of what Lawrence Yun said. As long as your tenant can pay the rent, this is welcome news for your existing single-family rental homes - like the ones that you’ve acquired through GREturnkey.com. It puts upward pressure on the price. So congratulations there. The appetite for real assets, especially desirable rental single-family homes, now propelled by low inventory and low interest rates has put you in good shape if you’ve acted. But of course, the COVID pandemic isn’t over. We don’t really know how all of this is going to turn out. And even when a vaccine is developed, remember that it will probably take … at least a few months to distribute it. In my OWN portfolio, all of my single-family rental homes are occupied - 100%. But my apartment building vacancies are unusually high right now. When we talk about apartment buildings and office buildings as well - Axios recently reported about how residents and workers are experiencing what they call “elevator anxiety”. I’ll put that in the Show Notes for you. An elevator is one of the most physically, uncomfortable awkward places to be in the pandemic. If you’re wondering about how that real estate looks - we’re generally talking about buildings that are four or more stories in height. In fact, the ADA - the Americans with Disabilities Act - stipulates that properties with four or more stories generally are going to need to have an elevator. I’ll tell ya - if apartment buildings are as unfashionable as the Adkins Diet these days, then being inside an elevator is about as hip as Jane Fonda workout videos, NordicTrack, and Sweatin' To The Oldies with Richard Simmons. https://youtu.be/na9ZZ4ZjVa8?t=28 Oh geez. Did that really just happen? I guess it did. So … while we’re all processing that, getting back to real estate here. Now, Fannie Mae and Freddie Mac recently said that they will start charging a 0.5% “adverse market fee” on all refinances, including both cash-out and non-cash-out refis. They were trying to put that new fee into effect for next month. What a drag that would be. So for every $200,000 you refinance, you’d have to pay an additional $1,000 fee - or maybe your lender would pay it. What Freddie Mac said is: “As a result of risk management and loss forecasting precipitated by COVID-19 related economic and market uncertainty, we are introducing a new … what they call ... Market Condition Credit Fee in Price”. Freddie sent in their notice to lenders. Wouldn’t that be an annoying fee? Well, almost immediately, the National Association of Mortgage Brokers struck back. They launched a campaign to reverse that newly announced one-half of one percent refinancing fee. We’ll see where that goes. Now, things are really good for homebuilders these day. An index measuring homebuilder sentiment matched its highest level ever yesterday. Why? I mean, it’s simple. There is a healthy amount of DEMAND from buyers and not enough homes to meet it. Also, the 30-year fixed mortgage rate bottomed out at 2.88% in August, the lowest point on record. Those low borrowing rates are boosting homebuyers' appetites … obviously. There really are a few recent stories that are de facto microcosms - reflections of this appetite for a work-from-home arrangement and less dense housing. For example, it’s really telling to look at what the outdoor clothing and gear company, REI just did. Do you like REI? I like shopping there. Even if you aren’t into outdoor stuff, you can always find a cool water bottle or something at REI. Well, they just announced plans to sell the lavish corporate campus that they had just finished building near Seattle. REI executives concluded that employees were able to collaborate remotely better than the company originally THOUGHT ...so a massive physical HQ just wasn’t worth the cost any longer. So REI is selling what they had just built. Other real estate segments falling out of favor - are those high-density places, like you might expect - New York City and San Francisco. StreetEasy reported that Manhattan home values dropped 4.2% since last year and homes are lingering on the market more two months longer … than they had just last year. San Francisco list prices are down 5% annually, while inventory is up 96%. Yes, a near doubling of available inventory in San Francisco. NYC and San Francisco were already the most expensive housing markets in the country BEFORE the pandemic. And life under lockdown has given people that nudge they had already been considering for years. And then, single-family homes in outlying areas are the real beneficiaries here. There have been a number of notable milestones. COLORADO SFH sales rose 21% July-over-July. The median price statewide in Colorado is now $444,000. Just looking at Denver, Denver just broke the $600K mark for the first time ever. So, a few months into the pandemic, we’re getting a clearer sense of who the winners and losers are - a lot of them are what we expected. If I had to slim it down to just a 3-word answer for you on why the rich are getting richer, those 3 words are: Federal Monetary Stimulus. And the stimulus is disproportionately benefitting … asset owners. Well, the pandemic hasn’t affected some real estate investors at all. Others, feel more reliant on the next government stimulus program to give their tenants the wherewithal to pay the rent. Well, if you, as an investor want to have the majority of your rent income payment guaranteed to be made by the government to you over the long-term, well, that’s what landlords of tenants with HUD-funded “Section 8” housing have enjoyed for decades. You have guaranteed rent income. I think you remember that I had a turnkey provider that specializes in Section 8 housing here on the show on Get Rich Education Episode 297. So just ten show ago, which was 10 weeks ago. Like any investment, Section 8 Housing is best viewed through a prism of pros and cons. Section 8 is not for everybody. Some love it, some don’t … but this provider manages the Section 8 administration FOR you. They’ve got a great relationship with the housing authority. That’s something that most landlords of this government-subsidized housing never had. “Guaranteed rent income” has a nicer ring to it than it did just a year ago. Get the provider report and learn more at GetRichEducation.com/Section8 That’s our Richmond, Virginia provider. In fact, CNBC named Virginia as the most business-friendly state in the entire nation. I’m Keith Weinhold and I’m coming back to talk to you about inflation. Again, learn more at GetRichEducation.com/Section8. This is Get Rich Education! _________________ Hey, you’re back inside Get Rich Education. I’m your host, Keith Weinhold. Both the pandemic-driven CARES Act, and whatever other monetary stimulus acts that follow … are injections of trillions of dollars into the economy. In fact, it’s now driven our national debt to nearly $27 trillion dollars. Of course, this has the effect of … money printing. It’s not literal money printing. The more you learn about it, it’s often U.S. government bond issuance. A bond really just means that the government issues an I.O.U. that someone else, like China buys. Those are some of the semantics behind, what we you can really more closely think of as “currency creation” rather than money printing. Will this result in inflation? That’s the big question. Well, longer-term, many think, “yes”. Short-term, “no”. We are in a low demand environment. Of course, as a real estate investor, you want inflation. You might have seen on the Get Rich Education YouTube Channel where, I have visually mapped out how you win “The Inflation Triple Crown”. In fact, if you just Google the three words, “Inflation Triple Crown”, you can probably see me - as the first hit on Google - and you can watch me doing the whiteboard video. As you’ll remember, real estate investors win the Inflation Triple Crown because inflation provides you with: #1 Asset Price Inflation, #2 Debt Debasement and #3 Cash Flow Enhancement - that all works terrifically when you’re leveraged. There are more signs of inflation out there in the economy right now than we’ve seen in the recent past. Though I still expect it to be mild as long as we’re in this pandemic-driven low demand environment … The consumer price index rose six-tenths of one percent last month. That beat the two-tenths expectation that economists had had. Food are prices up substantially, and then, a substantial input to homebuilder pricing and therefore the future value of homes - is lumber - and lumber prices have been soaring higher. Treasury Secretary Steven Mnuchin said that the administration is unfazed with these historically obscenely high levels of government spending … thanks to the nation’s very low interest rates. See, the Fed is less concerned about mounting debt when the interest rate that THEY pay on their debt is low … much like you’re less concerned about your debt when the interest rate is so low - you might be looking to take on more debt now. Of course, YOU’VE got a better deal on your real estate debt than the Federal Government does, because the Federal Government doesn’t have tenants to service their debt for them like you do in an occupied rental property. Could America reach a STAGflationary state again like it did in the 1970s? We haven’t discussed the economic phenomena of stagflation before. Do you know what that is? Stagflation is a stagnant economy with inflation. That’s what it means. OK, usually a more stagnant economy - like we’re in now - is characterized by low inflation due to lower demand not running up the prices of consumer goods and household staples. But again, stagflation means that there’s a stagnant economy WITH high inflation. Could THAT happen this decade? To reinforce your learning here, let’s listen to the audio from this explainer video from One Minute Economics about stagflation. This is less than a minute & a half in length. https://youtu.be/YaC_PNKu_Cg Yes, well, if we get stagflation, meaning again, a stagnant economy that we have high inflation, I don’t know that we’d have another Fed Chief like Paul Voelcker - who, 40 years ago, brazenly raised interest rates so aggressively to combat inflation that mortgage rates were 18% forty years ago. I don’t know that anyone would prevent inflation from running away at that point. But again, that’s STAGFLATION. Now, I know what you might be thinking. Maybe you’re thinking that all of the Fed currency creation to pull us out of 2009’s Great Recession didn’t produce high inflation, so why would it be any different this time, with all these CURRENT cycles of massive dollar creation once again? That would be a valid thing for you to think. At least based on the official government numbers, we’ve only had about 2% monetary inflation in recent years. Well, see. Though high inflation wasn’t the RESULT ten years ago, it might have actually been CREATED and you just didn’t know it. So, here’s what I mean. Say that the expansion of globalization and technological advancement REALLY meant that we had NEGATIVE 5% inflation - another way to say that is that what if we WOULD HAVE had 5 points of deflation if they’re WEREN’T any excess dollar creation?. But yet, all of the dollar creation after the Great Recession caused 7% inflation. Well then, 5 points of DEflation offset by 7% INflation resulted in ... 2% inflation. Think about it that way. Maybe something like that is what really happened … and that is why all of today’s currency creation COULD result in high inflation. We don’t know that it will. But that’s just one reason why it COULD. Now, overall, to pull back and look at the state of housing in this pandemic-driven recession. Housing has been - and continues to be - substantially better off in this recession THAN it was in the 2008 Great Recession - that event - twelve years ago, had a housing COLLAPSE as a driver. People left the keys and walked away from their homes back then. Now, instead, we’ve got bidding wars for housing. I want to temper that with a reminder that the pandemic is not over yet, and it could still take an unforeseen turn. The bad part about this recession is that we’ve got higher unemployment than we did back then. Now, the reasons that real estate is BETTER OFF in this recession compared to the last one is: Housing Demand Exceeds Supply - that was in the OPPOSITE state last recession. Responsible Lending Prevailed - again, that was OPPOSITE of last time. We’ve Got Low Mortgage Rates - lower than they’ve ever been. And We had No “Bubbly” Price Run-up before this recession, unlike what happened in the 2008 Great Recession. They are … the key differences. Coming up on a future episode here - we’re primarily a show about how buy-and-hold residential INVESTMENT property produces wealth for you - and how to avoid mistakes. But so many people are re-evaluating their primary residence situation lately, that, coming up on the show, I’m going to go deep on - “Should You Rent Your Home Or Should You Own Your Home?” There is some counterintuition and paradox here. I’m going to give you a new twist on the fact that - if you pay rent, that is NOT The Same As Throwing Money Away Also, some people seem to think that homeownership is like: "Renting. Except you get to keep it." That is false and that has caused millions of people to buy houses that they later regret. Is your primary residence an investment? Do YOU consider it an investment? Well, in almost EVERY case it is a poor financial investment, but it could be a good lifestyle investment. So, “Should You Rent Your Own Home Or Own Your Own Home that you live in.” That’s coming up on a future show. Well, regardless of your living situation, pandemic-driven unemployment might have made you realize that … you need a durable, long-term 2nd source of income - if you don’t already have one. Even if you aren’t losing your job, circumstances have hit close to home for a lot of people. You can either let other people make money off your money, like the bank paying you 1% on your savings. Or you can make money off OPM (like borrowing at a 5% mortgage to invest at 11% - or hopefully, a lot more than 11% with the (up to) five profit centers that real estate has.) RE is that instrument of arbitrage. As they say, you can either teach a man to fish or give a man a fish. Well, why not do both? That IS the abundance mindset afterall. At GetRichEducation.com, we teach you how to fish. At GREturnkey.com, we give you a fish too. What is going on at GREturnkey? Well, first, get your mortgage pre-approval at a reputable lender that specializes in investment property like Ridge Lending Group. You’ll see at GREturnkey.com that Birmingham and Huntsville, AL have investor-advantaged numbers that work. Pockets of Huntsville may have better appreciation if they’re tied to employment in the space industry. Gosh, love him or hate him, Elon Musk gave us something to actually celebrate in an otherwise tough 2020 as he led the first private company to launch astronauts to space - emblematic of the burgeoning space industry - both Huntsville, AL and Orlando, Florida there at GREturnkey pick up on some of that. We just discussed Chicago here last week. Chicago and Dayton, Ohio are two markets that keep sourcing existing inventory that they beautifully renovate, and both markets have rent-to-price ratios that are typically OVER 1%. When you’re over 1% and mortgage interest rates are this low, it makes your affordability as an investor REALLY advantageous. That’s Chicago and Dayton. Des Moines, Iowa is sourcing a little inventory lately - not as much as some of the other providers. That’s a stable place. Florida is a bright spot for new construction turnkey property - Jacksonville, Tampa, and the aforementioned Orlando all sourcing brand new construction property. When it’s NEW construction, your insurance cost is often really low too. Memphis, Tennessee and Little Rock, Arkansas are both the SAME provider there at GREturnkey - and that provider name is MidSouthHomeBuyers. There you have lower price points and MidSouth Home Buyers is so good with beginners. And then, Oklahoma City - the numbers work and some media outlets have named Oklahoma City as the most recession-resistant market in America. You’re getting a 1% rent-to-price ratio there too. Finally, Richmond, Virginia - I mentioned them earlier. They specialize in knowing the ways and means of how to optimize Section 8 tenancies because they have a great relationship with the housing authority there. Most, or really all of these markets that I mentioned are in the United States Midwest & South. Florida - oddly enough - is not culturally the South - though it’s the most southeastern state there is - their history of net-in migration makes them culturally disparate from what we think of as the south, but … … all these markets I mentioned are in investor-advantaged metros where you generally have more stable prices, and landlord-tenant law that favors your rights moreso than the tenant’s rights. So these markets are hand-chosen pretty carefully for you. Once you’re pre-qualified for a loan, find all those providers & a few more at GREturnkey.com. I am honored because you have given me something … and that is that I have had the privilege of having your time today. Until next week, I’m your host, Keith Weinhold. Don’t Quit Your Daydream!