One of the concepts that Jason often talks about is “Inflation Induced Debt Destruction”. According to Jason, this concept is a good way to produce wealth in real estate without even being aware of it because this happens very subtle behind the scenes.
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Jason Hartman:
One of the topics I talk about is called inflation induced debt destruction. And this concept is a way that people really, really get rich with real estate. And they don’t even know it. They’re not even always aware of this because it happens so subtly behind the scenes. And basically it works like this. People use 30 year fixed rate mortgages, and then as inflation comes along, it devalues that debt. So as real estate investor, we get to pay that debt back in cheaper dollars. Absolutely beautiful thing it’s the hidden wealth creator in real estate that most people don’t even realize is happening. So there’s a lot more about that in the book. This chart shows home prices versus the consumer price index.
The consumer price index is important because it’s the, the most widely used measure of inflation. Now, I think it’s a lie. It’s very understated. It doesn’t reflect real inflation. That is much higher, but it is the official measure of inflation. So let’s just go with it. Let’s just all know that it is understated. And there’s a lot of stuff they’re not telling you in the consumer price index because it’s manipulated. But here, if we look at this, we see that the case Shiller home price index, the most widely used index for home prices largely keeps in step mostly with the consumer price index, except it gets out of sync at times. But the problem is that this index only reports on 20 major Metro areas and 75% of those Metro areas in the index are.
75 percent of the 20 markets. In other words, 15 of them are in cyclical markets, not linear markets. So it’s very, very misleading. You really have to peel back the onion on this stuff and really, really slice and dice. And that’s why you need experts. You need a team. I have way more detail on my podcast. On my YouTube channel. Jay has the same on his podcast, on his YouTube. And this is what experts are for people that live, eat, and breathe this stuff. We’re here to help you with it, to understand it, but just giving you some outlines and ideas today. So we all have this rich uncle and his name is Jerome Powell. He’s the chairman of the federal reserve board. This is the guy that controls the money supply. And just think about this money or really more accurately currency.
The dollar is not really money it’s currency, the Yen, the Euro, the Peso all these other currencies around the world. They’re not really money. They’re just a symbol of what they’re supposed to be money. And so all of these things are basically controlled by governments and central banks. And just think about this. If you ask yourself this question, what makes anything in the world valuable. Anything, it could be an economic unit. It could be a personal relationship. What makes it valuable? Two basic things drive value for anything scarcity and utility. Okay. So the scarcity and utility of lumber are driving up the prices of lumber. The scarcity and utility of your significant other, make them The most valuable person in the world to you.
The scarcity and utility of dollars dictate their value. Last year the experts will tell you that since the beginning of the dollar, last year, between 20 and 35% of all dollars ever created were created last year. What does that do to the value of the dollar? If there are so many additional dollars being created out of thin air, well, naturally it debases or devalues the value of the dollar. And that simply means inflation, because what happens is you have a large supply of dollars going into the economy, chasing a limited supply of goods and services. The sellers of the goods and services see this tidal wave of dollars coming at them and what do they naturally do? They raise the price. They say, Hey, I can’t keep up with the demand. So I got to raise my prices. I got to raise my prices so I can pay my suppliers so I can hire more people to keep up with the demand and fulfill the orders. So I can buy a new factory to manufacture more, whatever we manufacture. That’s what happens. That’s how inflation happens.
So let’s compare home prices, not to dollars. Let’s compare them to gold. Now why gold? Well, gold is the most common measuring stick. It’s the one that’s got the longest history of having intrinsic value for literally five millennia, 5,000 years of history. Now I’m not a gold bug. I want to tell you that, but it is a measuring stick and it’s a very, very popular measuring stick. So in the year 2000, 21 years ago, it took 610 ounces of gold to buy the median price house, 610 ounces. You could buy the median price house. In 2010, after the great recession, as we were kind of, you know, maybe it had bottomed out by then in 2010, it only took 162 ounces of gold to buy the median price house. So the question is, did gold go up in price or did the house go down in price?
Well, I don’t know. Gold in dollars, 10 years earlier was $274 an ounce by 2010, 10 years later, it was $1,373 an ounce, in dollars the median price home in 2000 was $167,000. And in 2010 it was $223,000. I’m rounding off. So the question of what went up or down is it’s not exactly clear, but if we simply use one measuring stick, we are always going to wonder what is happening. That’s why we need to use multiple measuring sticks to really understand the value of anything. What’s going on today? Well, today, if you want to buy the medium price house, it’ll cost you 208 ounces of gold. So compared to 21 years ago, the house today only costs one third of what it used to, it’s cheaper by two thirds. So I want to ask you, this are houses cheap or expensive today?
So, look, if you compare it to gold, housing is cheaper.If you compare it to Bitcoin, housing is super cheap because you know, Bitcoin in 2010, it doesn’t go back much than that. 773,000 Bitcoin to buy a house today, only seven and a half Bitcoin. So there’s that? How about oil? It’s about the same price. Hasn’t changed much in 21 years. Same number of barrels of oil today as back then, approximately will buy you a house. How about how about rice? The most common food in the world? Two thirds of the world survives on rice. Well in rice houses are a little cheaper today, just a tad cheaper than before. How about in the standard and Poor’s the S and P 500 index houses are a lot cheaper compared to the S and P today. It would’ve taken you 1,884 shares of the S and P in 2000 to buy a house.
Do they live only takes you 898 houses are cheaper. So the question here, the point of all of this is it cheaper? Is it expensive? That’s what we’ve got to ask ourselves. How about comparing it to median income? Well, in median income houses are a little bit more expensive than they were 21 years ago, but not nearly as expensive as people would think they are compared to income. How about in hours worked at minimum wage and hours worked at minimum wage and most minimum wage people can’t afford a house. But if you did use that as a metric houses are pretty expensive compared to minimum wage. But it’s not about the price. It’s about the payment. So let me just give you maybe one comparison on payment and we’ll wrap it up. So here is the payment in a, well, let’s not do Bitcoin.
How about this? How about you want the payment now? Orange juice, mortgage, payment hours, minimum wage. Let’s do minimum wage. So here’s the median house prices mortgage payment. Here’s the mortgage payment, not the price of the house. In hours worked at minimum wage. So in minimum wage hours worked to afford the monthly payment. 21 years ago, we would have had to work 192 hours to afford the monthly payment. But today, minimum wage, only 165 hours. The house has gotten cheaper. This is a very real world metric here. This is entirely realistic because this compares what how many hours do you have to work to afford the payment? And here’s at the median income. You only have to work about half of the hours today at the median income to make your house payment houses are cheaper.
So everybody keeps asking, when’s the bubble going to pop? Why is it so expensive? Are you sure it’s expensive? That’s my question for you? What are you using as your measuring stick? What are you comparing it to? So, I’m just going to speed ahead. A couple of slides. I want you to see this in 2020, here’s your mortgage payment last year. It’s about 13, 18 per month. And in 2006, before the last bubble burst, it was 1,532 a month. And guess what? If you adjust that for inflation in 14 years, the housing payment in real dollars got $657 cheaper, not more expensive. Well, everybody is worried that housing prices are too high. I would argue that they’re still pretty cheap, now it’s listen. The bubble will get frothy over frothy at some point, and it will burst. It will not last forever. Nothing goes up indefinitely, but for right now, it’s housing is still looking pretty affordable to me.
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