In this three part podcast Jason interviews Chartered Financial Analyst and Finance MBA, Dan Amerman on how to use inflation and create wealth via debt – “Turning Inflation into Wealth” (MortgageSecretPower.com). Dan is the author of several books on mortgage finance, including the recent book “The Secret Power within Your Mortgage.”

Next, Jason talks with Dr. MacVay about how our friends in Washington DC are fooling us about our loss of purchasing power through misleading indexes like the Consumer Price Index (CPI) and the “Core Rate”. Issues discuss are allocation, cost equivalent, substitution, hedonics, taking out “volatile” little things like food and energy – the truth is exposed.

And finally, a brief radio interview where Jason discusses the foreclosure problem in Southern California and provides one method for predicting future real estate prices by utilizing his RV Ratio™ comparing Rent-to-Value.

Annoucer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Newport Beach, California.  During this weekly program, Jason is going to tell you some really exciting things that you probably haven’t thought of before, or a new slant on real estate, fresh new approaches to America’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.  He’s been a successful investor for 20 years and currently owns properties in nine states.  This program will help you follow in Jason’s footsteps on the road to financial freedom through real estate.  You really can do it.  And now, here’s your host, Jason Hartman.

Jason Hartman: Welcome to Podcast No. 29.  This is Jason Hartman at Platinum Properties Investor Network here in Orange County.  We are here to talk to you more about our complete solution for real estate investors, and we’ve got a couple of segments of this podcast today.  It’s a three-part podcast.

First, we will talk to an author, Dan Amerman.  Dan Amerman is a chartered financial analyst, he has a finance MBA, and he’s a former investment banker who’s been involved in structuring real estate financing for almost 25 years.

Dan is the creator of a new free email mini-course entitled “Turning Inflation into Wealth,” which is available through his website at www.mortgagesecretpower.com.  He is the author of several books on mortgage finance, including the recent book, The Secret Power Within Your Mortgage, which, by the way, I must tell you, is a great book.  Be sure you read that one and take advantage of his tips.

After Dan, we will have a return guest, Dr. Mark MacVay, to talk a little bit about purchasing power and how the government calculates CPI, Consumer Price Index and the core rate and a discussion on that and why it’s misleading.  And then we will have a very, very short recent radio interview where I talk about foreclosures and predicting future real estate values.

So a great podcast, but let’s first go to Dan Amerman, and Dan, it is an honor to have you with us today.  Welcome to the show.

Dan Amerman: Oh, thank you so much, Jason.

Jason Hartman: It’s great to have you.  Tell us a little bit about your background before we get into some specific questions.

Dan Amerman: Well, my background with regard to property inflation starts in 1983 when I came out of graduate school, and I financed my first apartment complex a couple months after that.  And it was done at an extremely low cost of borrowing compared to the rates that were out there at the time because it was done with taxes and bonds.

Jason Hartman: Now, that’s interesting you say that because in 1983, probably no one listening thinks the cost of borrowing was low then.  What were the rates, about 16 percent?

Dan Amerman: Because we did taxes and bonds, we managed to finance these apartments for just 13 percent.

Jason Hartman: And now that sounds extraordinarily high too.

Dan Amerman: Absolutely.

Jason Hartman: Okay.

Dan Amerman: So those were my early years was working with rental property financing at that time, and then I got involved in restructuring the victims of our last big round of inflation, which was the savings and loans.

Jason Hartman: Uh huh.

Dan Amerman: So I worked with different savings and loans all around the country in restructuring portfolios of billions of dollars of mortgages that had interest rates on them of 4 percent, 5 percent, 6 percent, when current mortgage rates were more like 14, 15, 16 percent.  So when you look at inflation, there tend to be victims, as well as victors.

Jason Hartman: And what we’re here to talk about today, which is such an exciting topic, is how we can actually be the victor in inflation and win the game through inflation.  In previous podcasts, we’ve talked a lot about how much we just love inflation.  Now, philosophically, I hate to say that because, philosophically, I hate inflation.

Dan Amerman: Uh huh.

Jason Hartman: It’s an evil out there, and it’s a result of bad, irresponsible monetary policy and so forth, but as real estate investors, we can really benefit from it the most.

Now, Dan, you offer a free email mini-course called “Turning Inflation into Wealth,” and the first reading is entitled, “Inflation Pickpocket.”  And by the way, I love the creative title.  Assuming our listeners want to stay out of jail, can you explain how they can be a pickpocket without getting in trouble?

Dan Amerman: Well, there are several reasons that I chose that name, and the first one is that a lot of people have a misunderstanding about inflation.  They think inflation is some negative economic force that takes wealth away from everybody.

Jason Hartman: Yeah, that’s what I think.  I just think there’s a way to win through inflation, but tell me what you mean by that.

Dan Amerman: What inflation is, or we could call it purchasing power instead, is it says the number of symbols; it’s the rate of exchange, kind of, and the number of symbols it takes to buy a real good and service, whether that be gas for your car or an apartment or whatever the case would be.

Jason Hartman: Yeah.  So the number of symbols, when you say symbols, you mean the dollar or whatever the currency happens to be, right?

Dan Amerman: Exactly, with the fiat currency we have right now.  So what inflation does is it changes the number of symbols that it takes to buy wealth, but it doesn’t change the real wealth.

Jason Hartman: Okay.

Dan Amerman: It doesn’t change the economic output of a country directly, typically.  What it does is it rearranges the rights to that.

Jason Hartman: Rearranges the rights to the wealth or to the symbols, right?

Dan Amerman: Exactly.  So when some people lose money, other people are gaining that same money in terms of purchasing power.

Jason Hartman: Okay.  I might ask you to elaborate on that in just a moment, but who’s winning and who’s losing when this happens?

Dan Amerman: Well, classic economics tells you what inflation does is it rearranges purchasing power from creditors to debtors and from retirees to current workers.  So typically, it’s not true of all loans, but typically, if you own bonds or you advanced a loan, you lose purchasing power.  If you owe money on a loan, you’re making money.  You’re coming out ahead.

Jason Hartman: Isn’t that amazing?  We’ve always been taught that debt is bad and saving is good, so when you invest in a bond, you’re essentially just a lender.  You’re loaning money to someone essentially.  When you put money in the bank and save it, you’re basically loaning money to the bank, so saving just doesn’t work.  Yeah, go ahead on that.

Dan Amerman: Well, what you’re getting to is the other reason I called it inflation pickpocket, which is a slightly twisted morality tale.  And the reason for that is that a lot of people, particularly individuals, see debt in moral terms.  We look at a loan and we say, “You owe money?  That’s a bad place to be.”

Jason Hartman: Right.

Dan Amerman: You’re much better off if you’re on the other side of the equation.  And as long as we don’t have inflation, and a dollar’s a dollar, that’s a pretty good perspective.  The problem is when we do have inflation, kind of like Alice in Wonderland and falling down the rabbit hole, everything starts to turn upside down.  And what inflation will do is it will redistribute money from the very prudent savers, the people who are playing by the rules and doing everything right.

Jason Hartman: By the old rules.

Dan Amerman: By the old rules.  It’ll redistribute their wealth to the people who had borrowed that money.

Jason Hartman: Isn’t that amazing, though?  I mean, totally contradictory to what most of us have been brought up to believe.  This just blows up the whole idea, when you borrow money and you have inflation, you pay back less money in the future because you’re paying back in dollars that are constantly depreciating in value.  I mean, that’s a pretty good deal.  It’s like someone loans me a million dollars today and says, “Well, pay me back in ten years, and pay me back less than you borrowed.”

Dan Amerman: Um hm.

Jason Hartman: That’s crazy.  It just seems so contrary to what you would think on the surface of it.  What is the outlook for inflation?  A lot of our strategy – which a lot of mine is certainly depending on inflation – do you think we’ll have inflation as the years go by?  We’ve certainly had a lot of it over the past years and a lot more of it than the government would have us believe by their faulty indexes, the Consumer Price Index and the core rate and so forth.

Dan Amerman: Well, you had asked me how I had gotten onto this subject.

Jason Hartman: Yeah.

Dan Amerman: And I started by telling you about my career back in the inflationary times and the immediate aftermath, but I kind of ended up here more recently almost accidentally.  I was pursuing another problem entirely, which is paying for the retirement of the baby boom, which is enormously expensive.  And if you look at kind of a classic economics example about inflation and how it works, you say, “Well, what would happen if the government gave everybody a million dollars?”  We would all be millionaires instantly, but a million wouldn’t buy what it used to.

Jason Hartman: Millionaire isn’t what it used to be.

Dan Amerman: Well, it’s not right now, compared to, say, 10 or 20 years ago.

Jason Hartman: That’s for sure.

Dan Amerman: But if everyone had a million dollars, all of a sudden it’s $200.00 for dinner, or it’s $2 million for a house, whatever the case may be, and we used to use this, 20 years ago, as being a ridiculous example.

Jason Hartman: Yeah.

Dan Amerman: If you look at what the government has done with the baby boom, we’ve given everyone a million dollars; we just haven’t paid for it yet.

Jason Hartman: So what you’re referring to here is you’re referring to the 80 million or so baby boomers in the United States.

Dan Amerman: Um hm.

Jason Hartman: So the government needs to pay for their retirement, in a sense, through Social Security costs, and that’s a very big burden on the government obviously.

Dan Amerman: And you have the head of the GAO, David Walker, who’s on a nationwide tour trying to tell everyone who will listen that the government cannot possibly pay for the promises that have been made to baby boomers.

Jason Hartman: Okay.

Dan Amerman: There was a USA Today article that came out in May that kind of added up what the total was, and the discrepancy between what the government has promised and what it looks like when you pay for it in taxes is about $59 trillion, present value terms.

Jason Hartman: Ouch, that’s a lot of money.

Dan Amerman: That works out to about half a million per household, which is what USA Today looked at, but I would argue that’s too optimistic because they were including households below the poverty line, and they were including the boomers essentially paying for their own retirement.

If you take those out, it’s more like three‑quarters of a million per household that’ll be required to pay for it, and then if you add in paying for boomer pensions and different things like that, we’re coming up to more like we’re expecting households in the future that are above the poverty line to pay about a million dollars each to fund the baby boom’s retirement.

Jason Hartman: Okay.  So can the government afford to do this?  No is the answer, I would think, right?

Dan Amerman: No.  But you have to look then at what is it going to be.  Is it going to be Option A, or is it going to be Option B?  Option A is the government breaks all their promises, and the major corporations do, as well, and then we have depression.  The baby boomers just don’t get what they were promised.  Option B, and I very much believe by the government’s current actions it’s showing it’s headed down that path, is the government pays the million dollars per household, and more.  In fact, it pays $2 million per household.

Jason Hartman: Because they inflate the value of the dollar away and make the million less meaningful.  Is that what you’re saying?

Dan Amerman: Exactly.  You pay the promises in full, as promised, so the system stays intact.  The government does not default on its debts.  Your local government does not default on its debts.  The corporations do not default on their debts.  It’s just the retirees are getting dollars that are worth far less than they thought.

Jason Hartman: Yeah.  So what a scam that is.  I mean, I call that the insidious hidden tax because inflation is taxing away the value of our dollars all the time.

Dan Amerman: Um hm.

Jason Hartman: And so everybody will still get their check, and the less aware – the people who aren’t listening to this podcast, for example – they won’t realize.  I mean, they sort of do, but they don’t really get it in their gut, where they really see the impact of inflation.  They kind of get it in sort of a minor way, but it’s so much more all‑encompassing than that.  You hear older people, “When I was your age, a candy bar cost 10 cents.”

Dan Amerman: Um hm.

Jason Hartman: So people understand inflation, but I don’t know if they kind of don’t really understand it.  It’s a hard difference to tell.

Dan Amerman: It’s a difficult concept, and that’s why I do this in the form of a mini-course with a 10-to-15-minute reading that arrives every day or two because what you’re working with is a perception that’s in all of our minds that’s very difficult to change, and that is that perception that dollars equals wealth.

Jason Hartman: Yeah.

Dan Amerman: And they don’t.

Jason Hartman: And dollars don’t equal wealth.  What dollars buy equals wealth.

Dan Amerman: Exactly.

Jason Hartman: What you can get for it.

Dan Amerman: But no matter how much we work with the topic, it’s hard to get around that mental shortcut.

Jason Hartman: Okay.  That was Dan Amerman.  Great guest.  We’re going to have him back on either the next podcast or the one after the next one where we’re going to talk about boxing.  We’re going to talk particularly about three boxers and how they box with inflation.  I think you’ll really enjoy it, so join us on that future podcast as well.

He is the author of The Secret Power Within Your Mortgage, and I think he does the best job of anyone explaining how to benefit from inflation in this book.  I highly recommend you get the book and you read it.  It’s called The Secret Power Within Your Mortgage, and in the show notes, we provide a link to his website.

Now, I wanted to bring in another guest who we’ve had on before.  It’s Dr. Mark MacVay to talk a little bit about purchasing power and how inflation is a little bit misleading, so let’s tune in for this, and I will be right back afterwards.

Welcome to another segment of Common Delusions, Uncommon Solutions, and we’ll welcome our guest, Dr. Mark MacVay.  Welcome, Mark.

Mark MacVay: Thanks, Jason.  Thanks for having me.

Jason Hartman: Let’s talk today about purchasing power and the way our dollar is constantly being attacked, our savings is being attacked, our investments are being attacked, through the insidious hidden tax called inflation.  Now, the basic barometer of inflation is –

Mark MacVay: It’s called the Consumer Price Index.

Jason Hartman: Or the CPI, right?

Mark MacVay: The CPI; that’s statistics kept by the government to measure purchasing power on a year-to-year basis.

Jason Hartman: Okay, good.  How is the CPI not accurate?  I mean, really the premise of our discussion today is how the CPI is not an accurate barometer or accurate measure of inflation.  What’s going on there?  What are they doing to make it not accurate?

Mark MacVay: Well, there have been several changes over the last couple decades, statistical changes, to mask the real rate of inflation going on in our society.  And, of course, if you take a step back and think about it, many people have experienced double-digit gains in tuition, healthcare, the cost of gasoline, the cost of a gallon of milk, you can go on and on.

Jason Hartman: Yeah.  And I would say particularly tuition.  I mean, college inflation really literally has a whole separate index, and it’s completely different than the supposed inflation rate running just under 4 percent now supposedly.

Mark MacVay: According to the current government statistics.

Jason Hartman: And so I would say to our listeners, “Does that number just pass the sniff test?”  When you live your daily life, and you spend money going out to dinner or sending your kid to school, does it match what it costs, or would’ve cost three years ago, five years ago, based on just an incremental 4 percent increase every year?  So what are some of the things that the government is doing to mislead us as to what the true Consumer Price Index is?

Mark MacVay: Well, there’s several things.  No. 1, they instituted in the ’90s a substitution policy whereby, say, if the price of beef went up, for example, well, the government statisticians would assume that people would switch to chicken, which tends to be cheaper.

Jason Hartman: But what if I like steak better than chicken?  That’s not fair.

Mark MacVay: Of course, and that’s why the statistics don’t bear out reality.

Jason Hartman: Sure, okay.  So substitution is one of the tools they use to monkey with the Consumer Price Index.

Mark MacVay: And one of the even more curious things they do now is something called hedonics, which means it’s basically an attempt to statistically measure the increased pleasure one gets out of an item year upon year.  I know that sounds a little obtuse, but let me give you an example.  If a TV has a greater screen year upon year but it costs the same, the government statisticians will mark down the price of that TV because of the added pleasure derived from the higher-quality screen.

Jason Hartman: So in other words, they’ll say that the 42″ plasma TV that I just bought today, for example, is actually cheaper than the 27″ TV I bought ten years ago?

Mark MacVay: Even though you’re paying the same price.

Jason Hartman: Well, I’m paying more actually.  I would’ve never paid $4,000.00 for a TV.

Mark MacVay: If you have a 27″ screen TV that increases its quality year upon year but it’s still at the same price, the government assumes that you’re paying less because of the increased pleasure derived from the higher-quality screen.

Jason Hartman: Okay.  All right.  So that’s not really what I’m doing, though.

Mark MacVay: No.

Jason Hartman: I’m really spending more.

Mark MacVay: When you go to Best Buy or Circuit City, you’re paying that full price.

Jason Hartman: Yeah.  I’m actually paying more for these high-end things now.  So they use substitution, hedonics, and what else do they do?

Mark MacVay: Well, here’s something that, especially given what’s going on today and in the last, say, five or six years, real estate has just appreciated massively in most parts of the country.  I mean, that’s asset inflation at its most basic; however, that’s not captured in the government statistics.  They don’t go by real estate costs.  They go by what’s called owners equivalent rent.

Jason Hartman: Owners equivalent rent.

Mark MacVay: OER.

Jason Hartman: Okay.  What does that mean, OER?

Mark MacVay: Well, basically it’s an approximation of what it costs to rent a house rather than what it actually costs to own a house.  As you and I know, there are a lot of ownership costs that aren’t really factored in when one rents a house.

Jason Hartman: Well, and those get way out synch, too, because for people listening now, go back and listen to the podcast on The Three Dimensions of Real Estate where we talk about rents and housing prices, and how they’re actually in many ways counter-cyclical to each other.  So you can have like you had the past few years, where interest rates have been very low, so house prices in most areas have gone through the roof and rents have actually softened.

Mark MacVay: Yes.

Jason Hartman: And so there’s all kinds of oddities that happen there, right?

Mark MacVay: And, therefore, in the statistics, it looks like the overall inflation rate is relatively low, despite the fact that housing has gone through the roof, as you alluded to.

Jason Hartman: Okay.  So substitution, hedonics, and what’s the other one?

Mark MacVay: Just real estate, as an example, using rents as opposed to the actual value of a house.

Jason Hartman: Oh, okay.  What else should we know about this?

Mark MacVay: Well, I think purchasing power is paramount when you’re making financials decisions, and I would encourage your listeners out there to really think about that when they invest and they make their financial decisions.  In a hyperinflationary world, like I think we’re rapidly approaching into, you really need to think twice about traditional financial advice, and I would encourage people to consider the possibility of actually taking on debt in an inflationary environment because you’re paying off that debt in progressively worthless dollars.

Jason Hartman: Yeah.  That’s a great strategy.  And when we calculate ROI, or return on investment, we don’t even count inflation into that calculation, which even makes it better, frankly.  So go back and listen to the podcast called The Great Inflation Payoff for more detail on this.  And what happens when we save money in an inflationary environment?

Mark MacVay: Saving money, it sounds good, but if you rely upon that as your only means of financial security, you’re going to find yourself in a world of hurt down the line, because as you save you’re trying to swim upstream financially.  You’re getting robbed of purchasing power year upon year upon year.

Jason Hartman: Because that savings is constantly being devalued then, right?

Mark MacVay: Sure.

Jason Hartman: So save money only to the extent that you need it for, I’d say, emergency survival and contingencies and backup plans.  So if you need to have six months’ income in the bank or six months’ living expenses in the bank, do that.  That’s just prudent and wise so that you can endure a change in life, if you’re laid off or something like that, but to save as a form of investing is not investing at all, is it?

Mark MacVay: It’s a fallacy because saving in and of itself might work, but that presumes a constant value of the dollar, and the value of the dollar, as you and I know, is worth less and less year upon year.

Jason Hartman: Absolutely.  Okay.  Good stuff.  Well, good to know most people aren’t thinking of this.  The common delusion is what, “Save for a rainy day.”  That’s the thing we were taught, and we were taught that really, Mark, by depression era parents and grandparents of ours.  And back in their day, that was actually good advice, wasn’t it?

Mark MacVay: At the time, back in their day, the dollar was relatively stable, and I use the term relatively specifically.  It’s also what they were taught by their parents before the establishment of the Federal Reserve and central banking, and the huge devaluation of the dollar that has happened since then.

Jason Hartman: Yeah.  So back before 1971, and certainly a long, long time ago, decades ago, back before 1913.  Now, these are some dates, and we’ll discuss later what those dates mean, but saving, actually, it made sense, but now the savings is constantly being attacked by loss of purchasing power.  So that $50,000.00 I have in the bank today in a year is going to be worth less than $50,000.00, and the year after that it’ll be worth even less than that.  What do you think the true rate of inflation is, or the true loss of purchasing power is every year?

Mark MacVay: Well, certainly it’s much higher than what the government states.  If you had to pin me down, I’d say anywhere between 8 and 10 percent.  And for a reference, for those of you that are interested in pursuing more knowledge about this, there’s a great website called www.shadowstats.com by, I believe his name is John Williams, who calculates the CPI the way it was intended to be calculated back in the early ’70s when it came about.  And you can see the gross disparity between what the CPI is as it should’ve been measured and what it currently is.

Jason Hartman: So someone who doesn’t have such an agenda to mislead and malign the statistics.  All right.  Excellent segment.

Well, remember the advice here, the upshot of what we’re talking about, is borrow money to buy assets that historically appreciate at faster than the rate of inflation, but also where someone else is paying the carrying costs or the interest costs for you.  Namely, in our case as real estate investors, our tenants pay that, and then we, or they, in essence, pay back in cheaper depreciated future dollars.

Okay.  Excellent.  Well, we will talk to you next time, and hang on for more of the podcast.

Annoucer: Red, white and Dodger blue, Talk Radio 790KABC.

Al Rantel: The Al Rantel Show.  Thank you for tuning in.  I’m between Bill O’Reilly and Sean Hannity.  After Larry Elder today, from 3:00 to 6:00, we’ll be back from 6:00 until 9:00.  But let me read this to you.  This is really – and I mean the pun – close to home.  This story came out yesterday, too.  Sales of homes and condos in the most populous Southern California counties, including LA, Orange, San Diego, Riverside, San Bernardino, Ventura, the whole thing, fell almost 30 percent from the previous month, and 48.5 percent from a year earlier, the lowest since they began recording the data back in 1988.

And here to opine brilliantly, as he does on these matters for us, because he’s finally back in town, Jason Hartman, who we turn to when we have these problems, who you’ll find at www.jasonhartman.com.  Jason?

Jason Hartman: Hey, Al.  Good to talk to you.

Al Rantel: My God, last night I asked people, because you were out of town, so I’ve been kind of bouncing the story around with listeners, and I said, “How is this affecting you?  What’s going on out there?”  And a lot of people said they think it’s going to get worse because there’s more people in the pipeline.  And I had people calling to tell me that when you’re looking for rentals, it’s getting horrible in price and supply because all of the people that are not in their homes are now renting, and the rents have gone way up.  What’s going on here?

Jason Hartman: Yeah.  Well, what’s interesting is, and I hate to be the bearer of bad news because a lot of this news is bad, but there are some good sides of it, and that’s interesting you point it out.  As an investor, the value of your house is definitely going down in Southern California, but the rents are going up.  These things just got so out of whack when credit was loose and easy and irresponsible, and now we’re seeing credit become more responsible – it’s still fairly loose historically – and so we are seeing rents increase as people cannot afford to buy.  And, unfortunately, many people are losing their homes, so they’re forced back into the renter pool, creating more demand for rentals, but we’re definitely seeing softening prices and we are moving into the worst of it.  We are not in the worst of it yet.

Al Rantel: Yeah.  That’s what a lot of people keep saying.  So we’re not in the worst of it yet?

Jason Hartman: No.

Al Rantel: When do you think – and I know you don’t have a crystal ball, but if anybody trusts your expertise it’s you – when do you think we will see the worst of it, the peak or the depths of it?

Jason Hartman: Well, I think there are two main things that everybody needs to consider, Al.  No. 1 is the adjustable-rate resets which we’ve talked about on your show before, and the worst batch of those will come next March.  The nice thing about that is that it’s really easy to predict because, fortunately, the industry has kept pretty good tabs on what loans they’ve made and when those loans hit their reset point.  We’re now in October, and this month we’re having about $55 billion in mortgages reset themselves across the nation, but next March, which will be the worst month of all, and then it will start to gradually get a little bit better, will be double this number.

Al Rantel: Double?

Jason Hartman: Yeah, $110 billion in loans resetting, so that’s one indicator.  The other indicator, Al, is the rent-to-value ratio, and this is my own metric that I basically use to just evaluate markets around the country.  And right now we see an RV ratio in the greater Southern California area that is about a .35 percent number.

Al Rantel: Now, what does that mean to the average person listening?

Jason Hartman: Well, not everybody listening owns a million-dollar house; some own more, some own less, but it is a nice, round number.

Al Rantel: Okay.

Jason Hartman: So if I may, let’s use a million as the number.

Al Rantel: Why not?

Jason Hartman: Could be $600,000.00, whatever.

Al Rantel: Yeah.  You can cut it in half, right.  Go ahead.

Jason Hartman: Exactly.  But a million’s a nice, round number, so a million-dollar house now in the greater Southern California area rents for about $3,500.00 a month.  And that actually improved, believe it or not.  It used to only rent for about $3,000.00 a month.

Al Rantel: Huh.

Jason Hartman: So it’s gotten better for the investor, worse for the renter, but what we will see, in my prediction, is we will see a continual decline in prices which will probably end hopefully, barring something else happening, in mid 2009.

Al Rantel: Wow, it’s going to be all the way until mid 2009?

Jason Hartman: This is a long hangover.  We’ve had some pretty good times.

Al Rantel: Yeah.

Jason Hartman: We had a big party for several years.

Al Rantel: Yeah.  And I was saying that last night.  When you go out drinking all night, you realize at the end of the night that, boy, tomorrow is going to be a bad day.

Jason Hartman: You’ve got to pay for it.

Al Rantel: Now let me ask you, were you surprised at those numbers, a 30 percent drop in September and a 48.5 percent drop from a year earlier?  Because that’s pretty steep, and a lot of people that depend on the sale of homes, like realtors, for example, and others, have really got to be suffering economically.

Jason Hartman: Yeah.  But, again, we’ve got too many people in the real estate business, and that’s a result of the easy credit era, too, when so many people entered the business.  So all of these factors equalize themselves, and I know it’s tough, and it’s just the way things work.  And if the Fed hadn’t loosened the money supply so much, we wouldn’t have such a big hangover.  It’s like they’re pouring free champagne for everybody and cap it at two or three drinks.

Al Rantel: So if you want to buy, do you still wait?

Jason Hartman: I would definitely wait in Southern California, but there are many good opportunities around the nation that make great sense right now, actually markets that are appreciating.

Al Rantel: Yeah, right.  There is no national real estate market, is there?

Jason Hartman: No.

Al Rantel: It’s all local.

Jason Hartman: Just a bunch of local markets, exactly.

Al Rantel: Yeah.  All right.  So are you still offering the audio and video podcasts for free?

Jason Hartman: Yeah.  Those are all at www.jasonhartman.com, and we’ve got a couple of seminars.  We’ve got one this evening and a GO Zone seminar next week.

Al Rantel: Great.

Jason Hartman: We’d love to have any of your listeners there, Al.

Al Rantel: Okay.

Jason Hartman: And they can call us at 1-800-40-JASON.

Al Rantel: Well, listen Jason, you’re always a big help to our listeners, and I guess the final word of advice is just tough it out, huh?

Jason Hartman: Tough it out.

Al Rantel: Tough it out.  Don’t panic.

Jason Hartman: And rents are going up as prices decline a little bit.

Al Rantel: All right.  But it’s going to get worse before it gets better.  Would that be fair?

Jason Hartman: Unfortunately, yes, it will.

Al Rantel: All right.  Jason Hartman, thank you for the story.  That was a big story yesterday.  It rocked a lot of people in the real estate business, especially those who are worried about either being a buyer or a seller or a renter or whatever, so we thought we’d give you the news, such as it is.  All right.  We are making way for the Sean Hannity show coming up next, then Larry Elder at 3:00, then I’m back at 6:00, KABC.

Jason Hartman: Due to shortened time in that radio interview, I didn’t really get to explain the concept of the RV ratio being a predictor of value, and maybe we’ll have a more detailed podcast on this subject in the future.  But I just wanted to say that this was the example I was trying to convey: the property that was $1 million at the peak of the market just a little while back will depreciate, in my opinion, to about $800,000.00 by the time we see a leveling, and that’ll probably be about 2009, middle of 2009.

So the RV ratio for that house is about a .35.  It was .3 when the market was at the peak, meaning the million-dollar house would only rent for $3,000.00 a month.  Now, it doesn’t matter if it’s a million.  It could be $200,000.00.  It could be $500,000.00.  The point here is the ratio of rent to value; that’s what the RV ratio is.

So I think we’ll see the prices continue to decline, but we will see at the same time the rents continue to increase to the point of equilibrium, which I say will be when the house is worth $800,000.00, the rent will be about $4,000.00 a month.  So you students of mine that have listened to prior podcasts or come to seminars, that means the RV ratio for the $800,000.00 house at $4,000.00 a month, how much will that be?  That’ll be a .5 RV ratio.  That is the point of equilibrium, when the market will start to heal itself and start to recover, so this is a predictor of value, the RV ratio.

Again, we’ll talk more about this in a future podcast, but I just wanted to expand on this point for the radio interview.  Anyway, thanks for listening today, and we look forward to talking to you on the next podcast.  Hang on for some announcements.

I’m here with Senior Area Manager, Karam, and we wanted to talk to you quickly about his recent trip.  He just returned yesterday from Jackson, Mississippi.  Karam, what did you find there?

Karam: Well, Jason, it was a very interesting trip.  Unlike other areas, this is a very unique area in the sense that we live here in California and we go to all these markets, and every market is different.  Jackson, Mississippi, on the other hand, the way it is different from the other areas is they don’t have the apartment complexes like we have in most of our metro areas.

Jason Hartman: Yeah.  So you don’t have that high-density attached housing, huh?

Karam: That’s correct.  So what happens is all these have high demand of rental, and on the rental side there are not too many houses available for rental, so there’s a quick rental and you get the high rents so the cash flow is better.  But you have to drill it down to the micro area, the communities that we want to invest in, by the investment properties.

The first thing we look at is the school system.  Now, if you look at any particular city and suburb, it may have a good school system, or it may not be in the good school system.  Now, one particular city may be half in one county and the other half is in a different county.

Jason Hartman: So that was true of Hattiesburg, right?

Karam: That’s correct, yeah.

Jason Hartman: So if you look at Hattiesburg, you can’t choose by just Hattiesburg.  Some of the area is not so good.

Karam: Not so good.

Jason Hartman: And some is a desirable investment area.

Karam: Right.

Jason Hartman: You were telling me about how they gave you a list of 131 properties that the broker thought would be good for our investors, and the process of you narrowing it down, and what you narrowed it down to.  Why don’t you tell everybody?

Karam: Well, I just narrowed it down to 21 properties.

Jason Hartman: Out of 131?

Karam: Out of 131, and that’s all I would sell from, 21 properties, and they are in a good school system, the good, quality product, looking at the communities, the location of the communities, location of the properties, and that’s all I came up with.

Jason Hartman: Excellent.  So Karam, talk to us about this specific property you’ve got in front of me.  This is one is $179,760.00, so we’ll call it $180,000.00.  It’s almost 1,700 square feet, projected rent is $1,500 a month, and return on investment, Karam?

Karam: Yes, 42 percent, believe it or not.

Jason Hartman: Forty-two percent projected ROI, and if you qualify for all the GO Zone tax benefits, projected first-year ROI is 128 percent.  Don’t try that in the stock market, huh?

Karam: That’s correct.  The reason is these areas, not only the high rent, but the property tax is very, very low.

Jason Hartman: Only $195.00 a month on that property, wow.

Karam: Right.

Jason Hartman: Good stuff.  Okay, Karam.  Anything else you want to talk to us about?  You’ve got one more property.  Maybe this one in Indianapolis, that looks kind of interesting.  There’s some big discounts on this.

Karam: Yes.  Indianapolis really surprised us, that market, and we are getting great deals.

Jason Hartman: Yeah.  We weren’t expecting this one to be so good.

Karam: Yes.  Great deals, and I’ll give you an example of the property that I saw yesterday: 2,101 square feet, four-bedroom, two-and-a-half bath, brand new single-family house, comes with the rent-ready package, meaning washer, dryer, refrigerator, blinds, garage door opener, front and back yard sodded for only $127,000.00.  Do you know what that means, Jason, per square-feet price?

Jason Hartman: Yeah, that’s amazing.  You’re buying like very close to the cost of actual construction here.  How much?

Karam: Yeah, $60.00 per square feet only.

Jason Hartman: Sixty dollars per square foot?

Karam: Yeah.

Jason Hartman: That is unbelievable.  It’s like the downside risk is almost nothing.  Go back and listen to our podcast on risk evaluation.

Karam: And, again, return on investment is 41 percent.

Jason Hartman: So 41 percent projected return on investment, and these are some good properties.  Give us a call or check out our website for more properties, and all the details are listed there, and we will look forward to talking to you on the next podcast.  Thanks.

Hey, I just wanted to announce a couple of quick things for you.  If you are able to come to one of our live events, we would love to see you and meet you in person.  We’ve had people fly in from all over the US for them.  Be sure to join us for our core event, our main event that thousands of people have attended, that’s Creating Wealth 101, on Saturday, November 10.

Join us for the GO Zone Tax Benefit event, the biggest gift the IRS has ever given the American people.  There is still a chance to recoup the taxes you paid in the last five years, so if you paid federal income taxes in 2002, do not miss the GO Zone event.  It’ll be the last one of the year, on Tuesday evening, November 13.  This event is at our office in Newport Beach, California.  Join us, and don’t miss this one.  It’s a very important event, so hopefully you can join us for some of those events.

Also, remember our rental coordinator is here to help with your rental properties.  If you need assistance with your rentals, your property managers, your advertising, remember we’re here to help, and we stay with you through the life of the investment, so feel free to call our office anytime and ask for the rental coordinator for assistance on your rentals.

Also want to remind you, listen to our old podcast.  At least go back to Podcast No. 13 forward and listen to all the podcasts after that.  You’re welcome to listen to all of them.  The ones before No. 13 are older, but they’re also good, but the newer ones, No. 13 and forward, which are really good ones to listen to, so please take advantage of that.

And remember, the overall market commentary right now, due to the mortgage meltdown and the sub-prime issues that are going on out there in the market, is that rents are going up all across the nation.  When people cannot qualify as easily to buy a property, they are forced to rent, so let that work in your favor by accumulating more rental property assets.  And don’t be afraid to ask for more rent and raise your rents.  That’s a good thing to do.

Also if you are interested in career opportunities with us, our company is growing quickly and we would love to talk with you about career opportunities.  We’re in the process of getting approved for franchising.  If you’re interested in a Platinum Properties Investor Network franchise, we’d be happy to talk with you about that and get you set up there once we are finished with our approval process.

Be sure to see appropriate disclaimers and disclosures on our website at www.jasonhartman.com.  Remember that we are not tax or legal advisors.  So give us a call on any of these issues, and remember, we are here to help, and we will look forward to talking to you on the next podcast.

This material is the copyrighted creative work of either Jason Hartman, the Hartman Media Company, Platinum Properties Investor Network, Incorporated or the J. Hartman Company, all rights reserved.

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Duration:  39 minutes