Announcer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Costa Mesa, California. During this program, Jason is going to tell you some really exciting things that you probably havenâ€™t thought of before and a new slant on investing, fresh new approaches to Americaâ€™s best investment that will enable you to create more wealth and happiness than you ever thought possible.
Jason is a genuine self-made multimillionaire, who not only talks the talk, but walks the walk. Heâ€™s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jasonâ€™s footsteps on the road to financial freedom. You really can do it. And now, hereâ€™s your host, Jason Hartman, with the Complete Solution for Real Estate Investorsâ„¢.
Jason Hartman: Hello and welcome to Show No. 105. This is Jason Hartman and this is the Creating Wealth Show. Weâ€™re glad to be with you today. We have got a very analytical show for you today. Boy, if you are an analytical person, youâ€™re going to like this one because weâ€™re going to talk about econometrics and competitive analytics. Our guest is a very analytical person â€“ actually, our two guests. Although, one didnâ€™t say too much, the other said more. You wouldnâ€™t believe the chart that they brought in for us. Itâ€™s pretty interesting the process these guys are using to time markets and predict markets and evaluate markets. So, I think youâ€™ll like that when we get to the interview section of the show. If you are not an analytical person, again, please keep listening to these shows because this show is definitely different than most of them. So some people will love it and some people, well, you may not be as analytical, may not be as interested in this. But we try to give you a variety of stuff.
Weâ€™ve got some great upcoming shows â€“ some really exciting upcoming shows. Our next show I think weâ€™re going to have Addison Wiggin, who is one of the publishers of The Daily Reckoning at Agora Financial, very famous company, very famous newsletter. I just recorded Show No. 110 today with Bonner Paddock, who climbed a 19,340 ft mountain. Yes, Kilimanjaro, the tallest free-standing mountain in the world. And the amazing thing about it is he is the first person on Earth with cerebral palsy to accomplish that feat. Itâ€™s a pretty amazing story. And I think youâ€™ll be very, very inspired by it, about goal setting, overcoming obstacles, etc.
Show No. 107, weâ€™re planning to have Larry Parks. Weâ€™re going to talk about monetary policy, predictions of the future, and all kinds of good stuff. Show No. 108, weâ€™re going to be talking about another very interesting rehab opportunity where you can get in for low down. And the interesting thing about these properties is theyâ€™re on huge parcels of land. And huge, just keep in mind Iâ€™m saying that from California, so itâ€™s all relative. But theyâ€™re big to us. Then on Show 109, weâ€™re going to have Linda Hollander with the Wealthy Bag Lady and I think youâ€™ll find what she has to say interesting. And in these shows, some of them arenâ€™t very long interviews, so we may be mixing in another guest as well on each of those shows.
I also wanted to remind you of our Creating Wealth event here in Southern California in Orange County on August 15th. Make sure you come to that. Weâ€™ve had quite a few people register far in advance for that. And go to www.JasonHartman.com/Events and also, while youâ€™re there pick up a copy of our Loan Modification Kit, our Do-It-Yourself Loan Modification Kit, where you can save $2,953 on fees in modifying your loans by yourself. Iâ€™ve now modified ten of my own loans. I think last time I talked to you about loan modification I had only accomplished eight of them. But now Iâ€™ve got ten of them modified and Iâ€™ve been pretty lucky with it. Iâ€™ve been pretty good at it, so check in for that. And you can get that at www.JasonHartman.com or at www.TheDIYLoanModification.com for more details about it.
And our Masters Weekend is coming up in October, so be sure to register for that. Thatâ€™s only a twice yearly kind of rare special event and weâ€™d love to have you there. We have a new newsletter. Youâ€™ve got to get a copy of this newsletter. Weâ€™re very proud of it. The second edition just came out, the July issue, and you can get a copy for free. This is a subscription-based service, but we are giving away free copies at the beginning. And you can go to www.JasonHartman.com, click on the Members Only section. You have to spend about 30 seconds just joining. Itâ€™s no big deal, itâ€™s totally free.
But in the Members Only section you can get our news letter in three great formats. There is an audio edition, if youâ€™re sick of listening to my voice. We had this one professionally produced by two professional voice-over artists. And they did a great job â€“ a male and a female voice and itâ€™s very interesting to listen to. Itâ€™s about an hour long and itâ€™s just reading the articles in the newsletter to you. We also have a PDF copy, full color. You can print that out; you can email it to other people, etc. And we also have a really unique technology, a turning page magazine copy of the newsletter. And if nothing else, I think youâ€™ll be very impressed by the technology of that. Thatâ€™s all at www.JasonHartman.com, Members Only section, all totally free, and there are a lot of other great resources there as well. So take advantage of that.
Also, I want to remind you our Atlanta properties that we had on show â€“ I believe that was Show 101, are selling like hotcakes. Theyâ€™re selling very fast. And weâ€™ve been fortunate. We ran out of inventory for a while, but we have scooped up some new inventory for you to see. Itâ€™s on our website at www.JasonHartman.com/properties. These are probably some of the very best deals weâ€™ve ever had, and if youâ€™ve been listening to the last 104 shows, have I ever said that before? I donâ€™t think so. So, when I say that pay close attention because these are incredibly good deals. I think youâ€™ll be very impressed.
Also, weâ€™ve got some good stuff in Dallas nowadays too, so check that out on the website as well. And we have only one new property, but itâ€™s sort of an interesting deal in Phoenix. Phoenix is a market we have not recommended for several years. And the prices have basically been cut in half in Phoenix, Arizona. That marketâ€™s looking pretty attractive again. So, check all that out at www.JasonHartman.com/properties.
Alright, one of our clients and loyal listeners, Jeff â€“ Hi Jeff! Iâ€™m sure youâ€™re probably listening now. Thanks for submitting this question. Without reading the exact question, before we get into the interview, Jeff had asked about a friend of his, who is doing a non-profit organization where they basically do rehabilitation and transitional living, helping men overcome drug and alcohol habits. They do like a 12-step program and they need properties to do this. And so heâ€™s kind of asking, â€œShould I buy these properties as investments and then rent them out to the organization?â€? They need a couple of small properties where they can have the men live while theyâ€™re going through the treatment program and so on and so forth.
And you know, Jeff, people have made money in that. I remember I met a person and hung out with him quite a bit in Germany at a Young Entrepreneurs Organization event where his whole business was built around doing drug and alcohol rehab homes. He would invest in the real estate. He would run the homes and he would kind of make money on the business side of it, and then also make money on the real estate investment side of it.
And I would just say to you that that is a sort of specialized thing. Itâ€™s a more complex thing. I donâ€™t know a lot about it. I havenâ€™t done it before. Iâ€™m sure it could be lucrative, but again, I like simplicity. And I just think sometimes in life we all tend to over-complicate things and sometimes simplicity is best. And when you look at something like this, certainly, Iâ€™m sure thereâ€™s opportunity there. But you might let the sort of uniqueness of the deal drive the investment, which I wouldnâ€™t necessarily say is the best thing. The other thing that can happen on this kind of deal and Iâ€™ve seen it happen before here in Newport Beach, where the residents wonâ€™t like these homes being in their neighborhoods. And they will gang up on the owners or the institutions that are running these rehab homes. And theyâ€™ll circulate petitions and theyâ€™ll try to get them out of the neighborhood and all kinds of stuff like that.
So there are more complex things going on here and I would just urge you to proceed with a lot of caution. I have heard a little bit about it. You asked me my thoughts. Those are my thoughts without knowing more and certainly, youâ€™re welcome to give us a call and talk to us about it as well.
Also you said youâ€™re curious as to my thoughts on mobile home park investing. I believe that was Show No. 99, where we interviewed my friend Corey. And I think thereâ€™s a lot of opportunity there. Stay tuned, we will present opportunities like that as they come available. Theyâ€™re much harder to find, much more work, much more complex, but certainly lots of opportunity there as well. Again, for most investors, I think the best thing to do is just buy some single family homes, buy some duplexes, four-plexes, apartment buildings; start there, but a lot of opportunity in a lot of different areas of the real estate and income property investment world. And of course, weâ€™ve talked about those on the last 104 shows and will continue to talk about them more in future shows.
Letâ€™s go into the interview now. Make sure everybody listening, youâ€™d better go to www.JasonHartman.com, click on Members Only, and get a copy of our newsletter â€“ audio or printed copy, whichever you like. Itâ€™s totally free. And I think you will really, really be pleased with the newsletter. A lot of good content there â€“16 pages of really hot content. So check that out. And letâ€™s go to the interview — econometrics and competitive analytics. Again, this is analytical. Pay attention and get in on it. Here we go to the interview.
Interview with David Savlowitz, Head of Competitive Analytics (CA) and Michael Pontin.
Jason Hartman: Itâ€™s my pleasure to welcome Competitive Analytics, LLC, Michael Pontin and David Savlowitz. Welcome guys.
Guys (together): Thank you.
Jason Hartman: Great to have you here. Today we are really going to go into the fine detail and if all of you listeners saw what I was looking at right now, you would either think itâ€™s really cool, really pretty, really colorful, or really darn complicated. These guys pride themselves on being very, very analytical looking at just a boatload of detail in terms of the economy and forecasting things. So I think youâ€™ll find today to be a very interesting show. Tell us a little bit about what you do?
David Savlowitz: Well, Competitive Analytics is a niche market research company based out of Costa Mesa, California and our clients consist of upper tier companies such as Boeing Realty, City of Anaheim, City of Ontario, The Irvine Company, and so forth. And what makes us very different, to say the least, is that we really focus on applied mathematics, kind of metric modeling, and some very heavy duty forecasting. And of course, we also do some primary research as well, the classic focus groups and surveys because thatâ€™s all part of the process of comprehensive and precision market-research. So thatâ€™s a very quick and dirty explanation of what Competitive Analytics does. But probably the other element to our company which is so different is that 85 percent of what we do is created and invented in-house like the chart that you see in front of you. We pretty much create things to a completely different level, and then our clients see that and say, â€œOh, we have to have that.â€?
Jason Hartman: Right. Yeah, and I tell you folks, if youâ€™re an engineer, or youâ€™re an economist listening, or youâ€™re into detail and numbers and stuff like that, youâ€™re going to love this show because Iâ€™m with two really, really smart guys. I feel like Iâ€™m in a university session here looking at stuff. Tell us about this amazing chart that youâ€™ve got printed on a big sheet of paper here and it goes back from 1921 on up to January of 2009, showing cycles in the economy. Give us a tutorial on that.
David Savlowitz: This page came out of frustration from looking at a lot of the charts and trends that are out there and the media and other companies provide. The A+, B-, C+, 0 to 10 scales â€“ the really simplified indexes, if you will, that to us just really didnâ€™t tell anything and was very misleading. So we came up with what we call the TPSI, which stands for the thousand-point strength index. And itâ€™s a 0 to 1,000 scale where we have benchmarked 500 as equilibrium or a stabilized level. So the thousand-point strength index, if I may give you an analogy to baseball, the difference between a batter hitting 265 versus a 305 thatâ€™s 40 points worth of batting average. How much do you think thatâ€™s worth in salary?
Jason Hartman: Itâ€™s a big difference Iâ€™m sure. But give us in terms of a percentage rather than an amount of money because I donâ€™t know what the delta is there.
David Savlowitz: The delta is about $1.6 million worth of salary for those different hypothetical players. And you know that comes out to probably about a 25 percent, 30 percent increase in salary.
Jason Hartman: Yeah, very significant.
David Savlowitz: Extremely significant.
Jason Hartman: And then it translates into endorsement deals and a whole bunch of other revenue, too, for the player.
David Savlowitz: Correct. So the bottom line for us is that you look at baseball, and you look at one baseball player making that much more in variance and then you have to wonder why arenâ€™t organizations or industries, or large cities looking at their analytics in this way. So thatâ€™s one of the major reasons why we wanted to come up with a far more comprehensive and precision-based index and I think we did something and created something that does that. And here you see this chart and it goes back from 1921 all the way to current February of 2009. And what it shows is that right now, just to give the listeners a little bit of context, is that the Great Depression started in 1929, the lowest level it got on this index was 200.4, the lowest ever. And right now, current levels show a TPSI rating of 238.0. So 238 is a bit higher obviously than the 200.4 and obviously far below 500 which is â€“
Jason Hartman: The equilibrium.
David Savlowitz: –which is normal, correct. And so our forecast right now, we come out with this every month â€“ we update this â€“ weâ€™re calling for a trough or the index to continue to go down and then stop at October of 2009.
Jason Hartman: And thatâ€™ll be the bottom in terms of the economy. But it doesnâ€™t say that weâ€™re having a recovery then? It just means, youâ€™re forecasting thatâ€™ll be the bottom.
David Savlowitz: Thatâ€™ll be what we call technically the trough.
Jason Hartman: October, 2009?
David Savlowitz: And we heard Ben Bernanke on 60 Minutes, about a week and a half ago, claim that weâ€™re going to hit the bottom some time later in 2009. That was commensurate with what the TPSI is saying. And there are several other forecasters that are calling for the so-called bottom in late 2009. The other supplemental forecast of this is the fact that we are going to see the first U-shaped trough in over 76 years because the last U-shaped trough we had was back in the 1929 â€“ 1933 time period. And if you look at the TPSI and look at every single recovery weâ€™ve had, since then, theyâ€™ve all been V-shaped. And thatâ€™s mathematically been proven, but for the first time, this recent trough cycle is going to perform somewhat on a small scale, somewhat like the Great Depression of the early 1930â€™s.
Jason Hartman: So, what does that mean if itâ€™s a U versus a V? I mean what does that mean to everybodyâ€™s life?
David Savlowitz: It means that weâ€™re still going to have a longer time down in the lower echelons of economic activity, meaning itâ€™s not going to get much better for most people for a little bit longer.
Jason Hartman: Okay. Good. Michael, do you want to tell us a little bit about what the TPSI includes, and any other thoughts you have to add to Davidâ€™s thoughts?
Michael Pontin: Yeah, definitely. There are actually several different sectors, or buckets are what we call them, that include over 100 plus indicators. We have like a banking bucket, a housing bucket, interest rate bucket, and we look at several different indicators. This oneâ€™s on a national basis. We do these for cities and counties as well.
Jason Hartman: Oh, so you do it on a local basis as well?
Michael Pontin: Yeah, we do it on a local basis.
Jason Hartman: And you know that my listeners know that I think that all real estate is local, so thatâ€™s good.
Michael Pontin: Yes, we do this on a local basis and we actually do it for individual industries as well. The national one has over, like I said, 100 plus indicators. And what we do is we analyze each one of those indicators, all their historical entries. And what we do is we index every individual indicator based on its history. And then we take all the individual indexes and we create a consolidated index which you see on this chart here. And itâ€™s based on our proprietary econometric models. But we also let our clients do â€œwhat ifâ€? and â€œsensitivityâ€? analysis with this as well. So they can weight the indicators, or we can do it in-house. We can weight them anyway we like to.
Jason Hartman: Okay. So what would be an example of like a â€œwhat ifâ€? scenario, David?
David Savlowitz: Letâ€™s imagine that you want to see what the real estate market is like in Sacramento and letâ€™s just say further that you want to see a specific type of house. Youâ€™re looking at single-family, detached, 8,000 square-foot lot, and so forth and so on. And you want to find the demand and supply and forecast the prices for that type of housing product in Sacramento. We would craft and design a TPSI, a Thousand-Point Strength Index specifically for that geo-submarket for Sacramento, and then we would overlay the specific product. In this case, a home with an 8,000 square foot lot, with these types of metrics and this type of profile.
And what you would see is not only the TPSI, but an overlay of your product, the demand for that product, and whatâ€™s very, very instructive about that is that the TPSI typically leads pretty much any product or indicator that weâ€™ve overlain with it, including, say the DOW Jones or the SNP500, which has been proven that the TPSI has about a 6 â€“ 7 month lead on stock indexes. And so this is a practical case where an investor, or a city council or an investor or a bank wants to really see whatâ€™s happening in their market. And furthermore, overlaying the business cycle itself because you would actually be able to see which phase of the business cycle youâ€™re actually in and, of course, how far below or above 500 you are, and in essence the relative strength or weakness of the market at any given time.
And then what the TPSI will also allow you to do is forecast and say, â€œWhat if mortgage rates do this?â€? And they go to X. And the yield curve does Y and Employment does Z. You can actually run forecasted â€œwhat ifâ€? scenarios of any of the drivers you want to see and how you see them and how you believe that these indicators will be driven over the future and the TPSI and your Sacramento housing market index will automatically recalculate and recalibrate.
Jason Hartman: So it has commodity prices in it and you look at the fluctuations in those things, you look at interest rates, you look at so many factors.
David Savlowitz: Hereâ€™s why.
Jason Hartman: Do you look at the value of a dollar?
David Savlowitz: Absolutely. And hereâ€™s why we use a myriad of different indicators. First of all, people say weâ€™re insane and weâ€™re probably overloading this.
Jason Hartman: It must be some spreadsheet youâ€™ve got thatâ€™s behind this chart.
David Savlowitz: Hereâ€™s why. It would be arrogant for anybody and ignorant, I guess, for anybody to presume that weâ€™re going to know what the next key drivers will be over the next five years. Like for instance, 15 years ago, nobody was looking at foreclosures. Okay? Five years ago, no one was looking at credit default swaps. So our theory, our take is that we load this with everything but possibly the kitchen sink, and then run a multitude of scenarios because weâ€™re not going to sit here and tell you what the next key drivers will be three years from now or five years from now. But by running multiple scenarios we can actually cull that forecast up and be able to tell clients, â€œIf this happens, or this happens, X or Y, weâ€™ll be able to run a series of sensitivity analyses in order to forecast a bandwidth, if you will, of what may or may not happen.â€?
Thatâ€™s not what has happened in the past. Whatâ€™s happened in the past is that many people use what we call 100-year old technology. You know? Theyâ€™ll use a handful of indicators. Theyâ€™ll use a simple average or a weighted average, and then theyâ€™ll come up with an index and call it A+ B- C+. And we believe that by getting really down and digging down deep and using a myriad of drivers and running advanced mathematical approaches, we sort of leave no stone unturned, if you will.
Jason Hartman: You know, itâ€™s been said the science of economics was invented to make astrology look respectable. One of the things about this that Iâ€™d just like you to address â€“ and I know you take into account qualitative and quantitative things â€“ is that people donâ€™t act rationally. And when you look at just pure data, how does the irrational behavior of human beings that are in the market place come into account?
David Savlowitz: Well, if I knew the exact answer to that, we would probably be in Las Vegas.
Jason Hartman: You did say before we started recording that you were getting your PhD in Psychology.
David Savlowitz: Yes. Yes, starting this fall, in-depth Psychology. We truly believe that the behavioral economics, if you will, of the populous is extremely important and thatâ€™s why we have a lot of qualitative drivers, such as consumer confidence and a lot of primary research type drivers. Itâ€™s very hard, but itâ€™s not impossible and we do try to incorporate a lot of these drivers in the TPSI. Typically â€“ and we just talked about this while we were off the air before we went on â€“ is that all information is contextual. And based on the situation going back to say that scenario in Sacramento, to be able to incorporate what the home-buyers in Sacramento would be extremely important to say a TPSI for that. So, in essence what we would advocate is some type of survey-based analysis that goes hand in hand with say a very, very deep analytical process.
You canâ€™t, and weâ€™re not, advocating just going out and driving a lot of numbers and calculating all these numbers in a cave. You have to go out there and talk to people. And you have to assess the qualitative, behavioral aspect. That is a very large part of any analysis. And we do the best we can by incorporating that into the TPSI.
Jason Hartman: Yeah, thatâ€™s great. Give us some of your predictions, if you would? Youâ€™re a forecaster and everybody wants to know what the future holds. What does the future hold for certain things, certain regions of the country, certain markets maybe? Most of your business, if I understand correctly, is local right, here in Orange County, or Southern California?
David Savlowitz: No. We actually have done work in Florida, Washington, DC, and Utah, so, all over the country. A lionâ€™s share of it is Southern California, Northern California. As far as predictions, I would say that, again, weâ€™re going to hit trough macro-economically October of 2009. And then right now, our forecasts call for an over 50 percent chance weâ€™re going to see the first U-shaped six-month trough coming obviously the latter part of this year. And our forecast calls for us getting back to normalcy, which obviously indicates in our model as being at the 500 level, at 4Q, or fourth quarter of 2011.
Jason Hartman: For the broad national economy.
David Savlowitz: For the broad national economy. Now, as far as geographic sub-markets â€“
Jason Hartman: So, we could see, for example, if the nation is going to hit the trough in October of 2009, which is coming up pretty quickly. Before we know it, itâ€™ll be here. Thatâ€™s my birthday month and they always come too fast. So, Iâ€™m a Libra, just so you know.
David Savlowitz: So am I.
Michael Pontin: And I am too. Three Libras.
Jason Hartman: See, these hard analytical guys â€“ you know the astrology.
David Savlowitz: Isnâ€™t the scale the symbol?
Jason Hartman: The scales yes, the balance. Weâ€™re the balance. So all three of us, huh? Thatâ€™s amazing. Well, no wonder we get along so well.
David Savlowitz: The first in radio history.
Jason Hartman: There you go. But you know, so that could mean that a market like California, or Florida, or some of the harder-hit markets or Michigan, dare I say, could be much longer. They could still be facing a down trend post-October 2009, right?
David Savlowitz: Much longer, in fact. Thereâ€™s an overlay â€“ we love the term overlay â€“ thereâ€™s an overlay chart in which we take a look at the TPSI and we take a look at the number of loans that will be reset over the next three, four, five years.
Jason Hartman: The adjustable rate mortgage reset.
David Savlowitz: Correct; the old days and all that. And obviously everybody knows about the second wave of resets that are going to occur. And if you look at the Credit Suisse chart, which is kind of a famous chart now that a lot people are looking at it that calculated the billions of dollars of resets over the next couple of years, you see that that second wave starts to diminish around mid to late 2011, early 2012. Thatâ€™s not to say that the government policies may have an obviously positive effect on some of those, this second wave. But if you look at that, weâ€™re looking at again this fourth quarter 2011 nationally. How that is impacted geographically does differ. And for instance, take a Charlotte, North Carolina, for example.
Jason Hartman: Thatâ€™s one of our markets. We recommend Charlotte.
David Savlowitz: That is probably one of the markets that will, of course, recover much faster than say a more high beta market that we call â€“
Jason Hartman: San Diego.
David Savlowitz: San Diego, very good example. And when you look at â€“
Jason Hartman: Or Miami.
David Savlowitz: Correct. The approach we take, of course, is weâ€™ll look at some of these markets and weâ€™ll calculate a wavelength, if you will, a business cycle, and weâ€™ll look at the amplitude and the length of the business cycle for all these geographic sub-markets. And Charlotte, North Carolina, is what we call a very low beta, low amplitude market, where it doesnâ€™t go up as high as some of the markets, but it will not go down as far as and as drastically as these other markets.
So yes, we do look at many many different markets on CMA level, on a zip code level, on a city level, you name it. If you actually go to our website, we have a listing of how we define 30 different types of geographic submarkets. If you go to www.CompeitiveAnalytics.com â€“ just like the two words are spelled, first, if you have any questions for us and you hit the info@CompetitiveAnalytcs.com link at the bottom left of our website, weâ€™ll be happy to answer any questions, and if you want a copy of our TPSI, just let us know.
Jason Hartman: Can we put a copy of this on our website?
David Savlowitz: Absolutely.
Jason Hartman: Youâ€™ll send us an electronic version?
David Savlowitz: Yeah.
Jason Hartman: Oh, great.
David Savlowitz: What weâ€™re going to do is give you actually a keynote presentation of one of our latest forecast presentations.
Jason Hartman: Oh, excellent!
David Savlowitz: And we can put that up on your website as well.
Jason Hartman: Excellent; so everybody, thatâ€™ll be in the Members Only section at www.JasonHartman.com. And let me say, I really appreciate that because they showed me some of the slides, everybody, and they were really, really fascinating. So weâ€™ll look forward to seeing that.
David Savlowitz: And thatâ€™s only because weâ€™re Libras, thatâ€™s the only reason weâ€™re doing that.
Jason Hartman: And weâ€™re givers. Weâ€™re just all givers, yeah. So, submarkets â€“ weâ€™re just waiting with baited breath. You know, like you have these 30 markets, you said, divided into?
David Savlowitz: Well, no, there are 30 different definitions.
Jason Hartman: Oh, okay.
David Savlowitz: But we look at an infinite series of different markets from County level to State to City to zip code. But I have to tell you that a lot of the geographic submarket analysis that we do â€“ and I was talking about this with Michael before we went on the air â€“ is that itâ€™s all proprietary and confidential and a lot of our clients have commissioned us to do specific submarket analyses. So, itâ€™s very difficult for me to tell you which of the â€œhotâ€? markets and â€œcoldâ€? markets that are going to occur over the next five years because weâ€™ve already done so much of this analysis for our clients. But what I can tell you is that obviously the Southern California market is a very high beta market.
Jason Hartman: And beta means volatility?
David Savlowitz: Volatility.
Jason Hartman: Yeah.
David Savlowitz: So youâ€™re not going to see those markets recover as quickly as say the nation as a whole or say examples such as Charlotte, North Carolina, Dallas, Texas, some of the Midwestern submarkets, and so forth and so on.
Jason Hartman: Yeah. Now, I assume that the recovery â€“ well, the downturn and the recovery is obviously going to affect different industries differently. And so you look at Michigan as obviously a pretty easy target, and you look at the auto industry, the American auto industry. Then you look at the foreign auto industry which takes place in the southern states and the mid-Atlantic and the right-to-work states. Any forecast â€“ I mean certainly if we want to see a good real estate market, we look for better employment prospects and employment recovery. And we look at what kind of employers are in a market. Do you have any thoughts on that? I know itâ€™s very general. Itâ€™s a big country. Thereâ€™s a lot to think about, but just kind of generally?
David Savlowitz: When we talk about employment â€“ and hereâ€™s just a couple of, I guess, tips for lack of a better word right now â€“ you think about employment and you instantly think about unemployment. And the unemployment rate gets a lot of press, a lot of media, a lot of attention. And in and of itself, and I know these are brazen words, but itâ€™s a very vacuous misleading indicator. The unemployment rate is right now 8.1 percent and it climbed from 4 to 5 percent say, and in and of itself, thatâ€™s not a tremendous increase. But what is important is the rate of change of the unemployment rate. And a lot of people donâ€™t realize that and thatâ€™s not given a lot of press. And it has such a huge mathematical impact on economies, not just nationally, but locally and regionally as well.
So tip No. 1, if youâ€™re out there and you really want to pay attention to the hot markets, I would take a look at historical rates of unemployment and look at the variance and how fast it changes and how much it changes. So thatâ€™s kind of a tip on unemployment.
Employment â€“ aggregate employment, total employment, if you will, is extremely important. Right now, I believe our forecasts call for a loss of close to four million jobs by the end of 2009. And we do see employment improving in 2010 and 2011 â€“ the latter part of 2010 and into 2011. But itâ€™s going to be quite a while before we see positive employment growth. And I know a lot of forecasters out there are calling for next year positive employment. We just donâ€™t see that as of now. I mean that could change over the next couple of months as our forecasts change every month. But right now, we do not see that happening. Itâ€™s going to be a very low probability of seeing positive employment. And that just doesnâ€™t go for the nation; that goes for many many different geographic submarkets as well. I guess you can call that tip No. 2. Those are two very key employment metrics to look at.
Jason Hartman: Yeah and just to add a couple things to that â€“ itâ€™s very interesting that you say that. The rate of change is the most important thing because people do that with interest rates. They think, well â€“ I mean the rates are so darn low itâ€™s crazy right now. But you know they say, â€œWell, if I postpone a decision, to lock in a three decade long fixed-rate mortgage and say the rate goes up 1 percent, itâ€™s just 1 percent.â€? No itâ€™s not 1 percent. Itâ€™s 20 percent, or 25 percent. Thatâ€™s the differential in the rate. You know thereâ€™s a lot of wrong thinking about California. I mean look at the problem with our budget, the tax increases that are coming our way. They talk about, â€œWell, the state tax can go from 9 to 12 percent â€“ itâ€™s only 3 percent.â€? No. Itâ€™s not 3 percent. Itâ€™s 30 percent almost, you know?
David Savlowitz: That is an excellent observation. And in our shop, we regularly look at the difference between a percentage gain or loss and a percentage point gain or loss.
Jason Hartman: Right.
David Savlowitz: And those are universally different. And if you can understand that difference, you as an investor out there will be miles ahead of everyone else.
Jason Hartman: I agree with you totally. Now, another thing, though, since weâ€™re talking about employment and unemployment, the problem is the doggone government keeps changing the way the math is done. And so, you know, back under Clinton they changed the index to not count discouraged workers that had been unemployed for over a year. And now theyâ€™re not counted. So the unemployment rate looks artificially a little lower. I donâ€™t think this is a giant difference, but it does look artificially a little lower than it used to be. In other words, better than it used to be.
David Savlowitz: Okay.
Jason Hartman: And also it doesnâ€™t count independent contractors. In my old real estate company, I would have real estate agents that would struggle and not really make much or any money and they might go a year and just make very little money, but they donâ€™t count as unemployed. They donâ€™t hit the rolls. So, I think thatâ€™s a little misleading. And then one more thing is the under-employed issue. So you look at the guy that used to be a mortgage broker and was rightly or wrongly â€“ I think wrongly â€“ making $40,000 a month, driving a Ferrari, and now is working at Starbucks or whatever. You hear stories like this about the mid-level manager, whoâ€™s now a janitor just trying to support his family and the guy has a college degree. Whatâ€™s he doing being a janitor, right? So, there are things that donâ€™t show up in raw data like that, right?
David Savlowitz: Yes and no.
Jason Hartman: Go ahead.
David Savlowitz: And hereâ€™s why. Mostly, a lot of companies, organizations, investors, what have you, banks included obviously, when they gather data and they finally get a metric, theyâ€™ll stick to one source. And here I could call this tip No. 3. What you need to do is gather as many different disparate sources of information. So, when youâ€™re looking at unemployment, or employment, or employment by wage â€“ which is something that you just mentioned â€“ the hamburger flipper versus the rocket scientists, if you will.
Jason Hartman: Oh, those rocket scientists donâ€™t get paid enough. Our engineers are underpaid.
David Savlowitz: So you need to look at a variety of different data sources. I think whatâ€™s happened in the mindset of many Americans and again, this is brazen comment No. 2 â€“ is that they want the easy way out. Theyâ€™ll go to the census, theyâ€™ll go to a couple of websites, theyâ€™ll download a couple of pieces of information and voila! Okay, now Iâ€™m going to stick it in a graph and there you go. You really have to spend time working at the data sources.
What we do, just as an example, because I guess a lot of people call us insane and weâ€™re a bunch of lunatics here â€“ is that we will literally be more like archaeologists. We will dig and dig and dig and unearth many different data sources, coming from different organizations. And we will interpolate, extrapolate, and then weâ€™ll reconcile and do a heck of a lot of filtering and screening. Now what that does is it takes out all the noise, if you will. And so when you see data that doesnâ€™t make sense, you throw up your arms usually and say, â€œWell, this doesnâ€™t make any sense.â€? And itâ€™s because youâ€™re probably, most likely, using one singular data source. And what we find is that by using multiple data sources, you can triangulate. Thatâ€™s a word we throw around in our shop quite a bit. But when you do that, you throw out a lot of the noise and a lot of the outliers start to dissipate.
Itâ€™s very simple in concept, but yet it takes time and it takes a lot of work. But when you do that, a lot of this contextual knowledge, if you will, intelligence floats right up to the surface. And often when we do this, we have these â€œahaâ€? moments in the shop and we say, â€œWow, we could have never known this if we didnâ€™t gather these ten different sources of employment and extrapolate and analyze this in what we believe is the appropriate way.â€?
Jason Hartman: Letâ€™s talk a little bit about the international environment for a moment. Peter Schiff, who was on my show before, he proposed this theory that China was going to decouple from the United States. And the U.S. has just been basically been riding on this honeymoon where other countries are willing to sweat, while we think and live in luxury over here and design. The iPhone is designed here, but manufactured over there, and they do all of the kind of hard work. Then thereâ€™s good old Thomas Friedman, who wrote the famous book The World is Flat. I donâ€™t know, the world seems to be getting a little rounder lately, but itâ€™s also flat at the same time. Give us your thoughts on the big, big macro picture. I mean we talked about the national economy; what about the global economy and international trade and stuff like that?
David Savlowitz: Well, a couple of things. There was an economist back in 1982 who said that the most significant event in the macro economy is something that had not occurred and that was the Great Depression. And he said that back in 1982, since World War II he was referring back to the Great Depression in 1930. And 25 years hence, we still havenâ€™t had that Depression. So, in some economistsâ€™ minds, not going through a global depression has been an aberration. Now, another global point I definitely want â€“
Jason Hartman: But wasnâ€™t the Federal Reserve supposed to even everything out?
David Savlowitz: Right.
Jason Hartman: And we werenâ€™t going to have these crazy cycles and just live at the 500 TPSI level.
David Savlowitz: Going back to human behavior, weâ€™re still humans. The other point and I believe this was culled from an Economist article several months back, but itâ€™s something that nobody has been really focusing on and talking about. And thatâ€™s that not only our trade deficit, but the surplus with emerging economies and emerging countries. And imagine a graph where the emerging economiesâ€™ trade balance is going up, okay? And you see the U.S. going down ever since 1996 and that variance has gotten so great that what happened â€“ and Iâ€™ll try to explain this kind of quickly in laymanâ€™s terms â€“ is that all these emerging economies that had all this surplus of cash needed to do something with it. And where were they going to put it? The United States. And so they started flooding the U.S. with cash.
Jason Hartman: What year are you talking about?
David Savlowitz: From 1996 to 2008, roughly.
Jason Hartman: Yeah, right. So the U.S. has always been sort of viewed as the Brinks Truck, the safe place, politically stable, etc. to put your money, but then when you look at whatâ€™s been done to the dollar, I donâ€™t know if thatâ€™s so true.
David Savlowitz: Well, what happened is that all this money came flooding in and what did we do? The money was cheap. Mortgage rates were low.
Jason Hartman: We created a bunch of bubbles.
David Savlowitz: We needed to do something with it. Now, you know you brought up the depth of psychology, so here I go. Our mindset as Americans over the last 100 years has been production is good. Consumption is good. Growth is good. Now, thereâ€™s going to be listeners out there that are not going to like what I have to say here next, but growth for growthâ€™s sake is the cancer cell.
Jason Hartman: Yeah. Good point.
David Savlowitz: Growth is not healthy just for growthâ€™s sake. In the last 100 years, our economy has based our happiness and our success on GDP growth and consumption and production. And that is not healthy. And so, now getting back to my story here, all this money comes in, floods into the U.S. Itâ€™s very cheap. What are we going to do? What are our organizations going to do? Theyâ€™re going to make us spend as much as possible. So the family thatâ€™s making $50,000 a year goes out and buys a $300,000 home.
Jason Hartman: When they should be buying a $150,000 home. The general rule is three times your income.
David Savlowitz: Exactly. And the way that ratio is evolved, it was two and a half to one back when my parents were buying a house. It crept up to three, three and a half in the â€˜70â€™s and â€˜80â€™s and then it increased over four in the mid â€˜80â€™s and â€˜90â€™s. And like a geographic submarket, like LA and Orange County, it shot up to 9.5 to one over 18 months ago.
Jason Hartman: And wow. Folks, do you see why we need a correction? Thatâ€™s amazing. But whatâ€™s interesting about that is when you look at the concept of all real estate being local, you know, it didnâ€™t really do that in Dallas or Charlotte very much. I mean, you know there was a little bit of froth during the high times, but not like Florida, California, all the bubble markets. I mean, wow.
David Savlowitz: We have a mantra that every single geographic submarket is different. But anyway, I just want to make a final point about this global cash floating around. So, the United States, what did we do? We spent as much as we possibly could. And what happened was â€“ and I draw this analogy to the fact that if I had a thousand boxes of chocolate sitting here and I was going to sell them for a penny a piece, what would you do? Well, I would guarantee, probably 99 percent probability, people would come in and buy as much as they possibly could. They would go home and they would eat every single box.
What Iâ€™m saying is that this was part and parcel of the problem, psychologically, that we got into as a country â€“ that production and consumption were good. And it was good to get that mortgage and to buy that $400,000, $500,000, $600,000 when you were only making $50,000, $60,000, $100,000 in compensation.
And obviously, weâ€™ve now hit the reset button and with a whole host of problems with it that we have to hit that reset button. Weâ€™re going to have to change our psychological paradigm here in this country. This is a huge point and I know those investors out there are thinking well, what am I going to invest in next? One of the things I could say and emphasize is just examine what it is your life goals are because now youâ€™re talking about quality of life and a whole host of other issues and people are saying, â€œWell, what does that have to do with investment decisions?â€? It has everything to do with your investment decision because if you donâ€™t know what you really want out of life and youâ€™re still in this production/consumption paradigm, youâ€™re not going to be very happy.
Jason Hartman: Youâ€™re right in what youâ€™re saying. But do you think it would really happen? I mean human nature is covetous. Thatâ€™s been the history of the human race. You know if it was back to the cave man days, and you could fish and get one fish, youâ€™d rather have two. Human nature is just â€“ thatâ€™s the way it is. Itâ€™s good and bad, but to some extent, that Gordon Gecko â€œgreed is goodâ€? philosophy â€“ it creates progress, or what we think to be progress. I wonâ€™t call it progress necessarily.
David Savlowitz: I am absolutely a capitalist. Ayn Rand, who wrote Atlas Shrugged, is â€“
Jason Hartman: Who is John Galt?
David Savlowitz: Yeah, exactly.
Jason Hartman: My favorite.
David Savlowitz: — is one of my favorite books. But what Iâ€™m saying is we went way to the other extreme. The Gordon Gekko myth, the Gordon Gekko archetype was absolutely blown way out of proportion in everybodyâ€™s lives. And all Iâ€™m saying now is that we need to hit the reset button and we need to reflect and look back and say, â€œYou know what? Greed is good, but greed isnâ€™t great.â€? What Iâ€™m saying is that we need to take a step back and look at other factors. Just like all the different drivers in the TPSI, you just canâ€™t look at one or two things in your life and say, â€œConsumption is good. Production is good. And then Iâ€™m going to be happy.â€? There are so many other things to look at and we havenâ€™t done that as a nation in quite a while.
Jason Hartman: David, what would you like people to know in closing?
David Savlowitz: I think that there is a very, very powerful story in the power of collaborative diversity. And I want to tell your listeners just a very quick story of what happened with Winston Churchill during World War II. Albert Einstein said that the definition of insanity is doing the same thing over and over again and expecting a different result.
Now Winston Churchill learned this lesson. When the allied forces in Britain were trying to crack the secret codes that were passed along by the German forces through the enigma machine, the famous code machine, Winston Churchill had many of the famous mathematicians and code-breakers holed up in a house trying to break these codes and they couldnâ€™t do it. So Winston Churchill decided you know we need to do something a bit different â€“ a lot different. And he decided to set up at Bletchley Park in the U.K. a series of huts and he invited not just code breakers and mathematicians, but he sent poets, school teachers, biochemists, a whole host of different vocations to come up there and help crack the codes. And the first thing you would think of is, well, a poet? What would a poet do to help crack a code? But the whole idea was to provide a new paradigm of collaborative diversity, meaning the more diversified you could be in your thinking the better the results. The famous huts at Bletchley Park ended up breaking the enigma machine codes three times.
Itâ€™s a very powerful story and a lesson. And what I believe the investors should do out there when theyâ€™re looking at data, or analysis, or reading reports, or listening to advice is to be as diversified as possible, to not just look at one data source, as we talked about before in the show. Itâ€™s to look at many different data sources, to look at many different approaches, to talk to many different people, and then reconcile your answers. This is an extremely important lesson. Itâ€™s not done very often. Believe it or not, if you try to find business examples of collaborative diversity, you will find it very difficult. But I think itâ€™s a very rich area in which many, many new insights and innovative ideas can come from it. So thatâ€™s I think a very important story and something that everybody should definitely investigate.
Jason Hartman: Good stuff. Where can they find out more about you?
David Savlowitz: You can find out more about our company Competitive Analytics at www.CompetitiveAnalytics.com, just like the two words are spelled, and if you wish to ask a question for Michael or myself, you could go to the bottom left hand corner of our website. Thereâ€™s a little address that says info@CompetitiveAnalytics.com. They can just hit that and request a copy of the TPSI or ask us any questions and weâ€™ll be happy to try to provide some type of direction for you.
Jason Hartman: Fantastic and again, we will have the TPSI, which is just this huge chart. Youâ€™ll really dig it. Itâ€™s got a lot of data on it, as well as a fantastic presentation on our website at www.JasonHartman.com in the Members Only section. Michael and David, thank you so much for joining us today. Really a great show. Very interesting.
David Savlowitz: Youâ€™re welcome and thank you, too.
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Duration: 52 minutes