This has created an index to help you measure the true value of the real estate market

by Ana Lopez

Jason Hartman is the CEO of Authorized Investor. He sat down with Jessica Ab to discuss an index he developed to help people better understand the real estate market.

Jessica Abo: Tell us about Empowered Investor.

In 2003, I tried to become a rural real estate investor. It was very difficult without help, and I thought, there are probably a lot of other people who would like to invest nationwide like me, and they would probably want some help. So I founded my company and became the first customer.

What is The Hartman Comparison Index and what problem were you trying to solve when you created it?

So many people have blind spots because, let’s say, they compare the price of real estate with only one thing, and that one thing – what is it? It’s the US dollar, of course, and that’s a false comparison because the US dollar – as we all know now that inflation is spiraling out of control – is a moving target. So why not compare the price of real estate with many things so that we can better understand whether it is cheap or expensive, which is what the HCI or the Hartman Comparison Index does.

What do you want to share about the index?

It is very important that people have a good benchmark when they try to compare things. That’s the key. It’s all about the right gauge. Using only the US dollar as the only comparison will give you a lot of blind spots and make a lot of mistakes. But people also need to understand that there is no such thing as a national housing market in the United States. It is a hugely diverse country and all real estate is local. But to keep it simple, I divide it into three types of markets, linear markets, which are stable, profitable markets that don’t get much attention. Cyclical markets that get all the attention are the roller coaster markets with glorious highs and really ugly lows. And then hybrid markets that are in between the two.

Over the years I have helped thousands of investors buy real estate in linear markets such as Indianapolis, Memphis and many others. These are rather boring (in a good reliable way) linear markets. If you look at a price chart going back to the early 1980s, there are some ups and downs, but they are quite muted and not very significant. I’ve also owned real estate in these markets, reliable boring linear markets. Compare it to where I grew up, Los Angeles, California, which is a cyclical market where the chart is like a rollercoaster. It goes up, down, up, down, up, down, so it’s kind of crazy and unreliable and there’s no cash flow. That’s why I prefer linear and hybrid markets to cyclical markets.

Why is all this important?

We are creatures of comparison. That’s what we humans do all day long with every decision we make. Even if unconsciously, we are constantly comparing things to understand the value and usefulness of something. So we compare houses, we compare potential partners in the dating market. We compare everything when we are in the supermarket. We compare — we compare constantly, and that’s what the HCI does with real estate valuation.

So if you take gold for example, gold has been considered money for thousands of years by billions of people around the world. If you price real estate in gold, it’s not nearly as expensive as people think. In 1970, the median price of a home was $23,000 and it took 654 ounces of gold to buy the home of the median price. Today it only takes 227 ounces of gold. In gold, is it cheap or expensive? It’s not the cheapest it’s ever been, but it’s certainly not very expensive either.

Oil is one of the most important raw materials in the world. If you wanted to buy a mid-priced house in 1970, you would need 6,400 barrels of oil. Today only 4,100 are needed. So priced in oil, it’s cheaper than it was 52 years ago. Same with gold. You could also praise it in rice, the food supply, the basic food supply of three-quarters of humanity. Buying a house priced in rice costs about half of what it was 52 years ago. And I could go on and on and on. I could compare real estate to the S&P 500 index. I could compare it to the average income, which is actually a little more expensive now. I could compare it to copper, I could compare it to alcohol. Okay? hairstyles. I just mean, we can go on and on. We have over 40 items in The Hartman Comparison Index.

And you see that the mortgage burden is not nearly as high as historically. I mean, this is the mortgage payment, the percentage of debt service payments versus disposable income. It may surprise some, but you can see that people are not spending that much on housing compared to their current income. I know people who see this and think, “Jason, are you kidding me?” They compare it to what it was like a year or two ago, which was an anomaly, not a good benchmark. The last Covid-19 era was not a benchmark. It was a fluke, right? We had never had that before, with ultra-low mortgage rates before house prices started to rise.

So if you really dive into the data, you just see that housing is not nearly as expensive as most people think. I’m not saying it’s super cheap either. I’m just saying we need a good perspective. When you back up and look at the big picture, that’s what the Hartman Comparison Index helps people do.

What are some of your predictions for 2023?

I’d say we’re definitely going into a recession and the sales volume will continue to decline. Don’t forget that 25% of the country has a mortgage with a term of 28 to 29 years left, less than 3% interest. 40% of the country has no mortgage at all and 65% of the country has mortgages below 4%. That will lead people to hoard their cheap mortgages and reduce the stock.

So if you want to have a real estate crash and if you plan a real estate crash, you may be disappointed. There are simply no indicators of much more than a softening as buyers and sellers adjust their expectations. Borrower credit scores are now phenomenal. Anyone who has bought a home since the Great Recession knows that it was almost impossible to qualify for a mortgage. The lenders have been very strict with underwriting standards. The market, it’s just not the same as the Great Recession. That was also an anomaly, not a yardstick. 2008 was a once-in-seven-decade event. That was a lifelong event. We hadn’t seen anything like it since the Great Depression of the 1930s.

Finally, Jason, what do you want to say to the person who is thinking about entering the real estate market?

Be careful and underwrite deals appropriately. That’s what we teach people how to do and we help them do it. Don’t go into cyclical markets as they will suffer. Those are the markets with the greatest risk and the cyclical markets are the west coast of the United States. The expensive northeastern markets, Boston, New York, DC and where I live, South Florida, are not good places to invest. They are very risky, but most of the country is a linear market. Low-priced properties with good cash flow, increasing tenant population and very good fundamentals. So I would say look for those good linear markets.

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