[RWS #718] Economy: Harry Dent with a Surprise Forecast on Housing

Picture of Microphone for Real Wealth Show Podcast Episode #718

August has been a volatile month for the global economy and for stock investors. Nearly every news channel is screaming that a recession is around the corner, and some European investors are accepting negative returns for bonds. 

Should real estate investors be panicking? Should we be mining for gold?

Today’s guest has been predicting a financial reckoning for some time now. He has been recently associated as the voice of doom and gloom, but I think he’s really pointing out the inevitable — that people can’t go into debt forever and expect a positive outcome.

But at the same time, there is always a positive and a negative to any headline news. If you know what’s coming, you can make money or at least protect your money by being prepared. 

Our guest today studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of his chosen profession that he turned his back on it. Instead, he threw himself into the burgeoning new science of finance where identifying and studying demographic, technological, consumer and many, many other trends empowered him to forecast economic changes.

Since then, he’s spoken to executives, financial advisors and investors around the world. He’s appeared on “Good Morning America,” PBS, CNBC and CNN/Fox News. He’s been featured in Barron’s, Investor’s Business Daily, Entrepreneur, Fortune, Success, U.S. News and World Report, Business Week, The Wall Street Journal, American Demographics and Omni. He is a regular guest on Fox Business’s “America’s Nightly Scorecard” and author of Zero Hour: Turn the Greatest Political and Financial Upheaval in Modern History to Your Advantage.

For more information on our guest or to sign up for his free newsletter, visit HarryDent.com.

Podcast Transcript

Kathy Fettke: Harry Dent, welcome back. It’s great to have you here.

Harry Dent: Nice to be back, Kathy.

Kathy: It’s a great week to have you back because it’s been another crazy week. I know at one time you said that you didn’t think investing in gold was a good idea because values will go down. Last week they went up. Do you still feel that way, or do you agree with Peter Schiff that this has changed your mind? [laughs]

Harry: Well, it has changed my mind short term. We did forecast this bounce back when it hit 1050. Gold was oversold. We see this as what I call a bear market bounce, but it went higher. My projection was $1430 bucks. I told Peter the last time I talked to him, “Look, it’s $1525. It breaks that then it’s going higher.” I think gold could go to $1800. That’s about as high as I see it because I still see in the end we get a downturn in the economy, deflationary trends. Like in 2008, when it got like that, gold caved in. I like gold long term. I like it very short term, like maybe in the next three, six months, but for the next two years after that, I do not like it.

Kathy: Even in a deflationary environment, you don’t think people would be running to the safety of gold?

Harry: No. What they did last time when Lehman Brothers went down and things got at their worst in the second half of 2008, gold went down 33%, silver went down 50%, and the good old US dollar went up 27%. That was the safe haven when deflation hit. People have to realize gold is somewhat of a crisis hedge, but it is way more an inflation hedge. It was the best place to be in the ’70s when we had a long off-and-on recession and rising inflation. Gold correlates with inflation 100% long term and even highly short term. It is not a deflation hedge. That’s what people don’t get because we haven’t seen deflation since the 1930s. Even back then you can’t measure it because they froze the price of gold. 2008 does prove. Gold went up in anticipation of the crisis but when it turned deflationary, gold went down.

Kathy: I always say it’s good to have a little bit of gold, a little bit of silver, just in case, but I would much rather have an asset that cash flows, which is why we are bullish on real estate. I know that you just spoke at Brad Sumrok’s event, and you came out with a blog about that, that you noticed some trends that you did not expect, which is seniors renting more. Is that new information or is that something you already knew about?

Harry: Well, it was new to more people than I would have thought because that’s a sophisticated audience of apartments. People invest in apartment buildings. It was newer to me because I’ve been preaching apartment rentals for many years now because the millennials had been moving into that space until… People rent more apartments until they get married. It used to be 26, now it’s more like 28. That’s just normally naturally picking now, but I see number one for the millennials, a downturn in the next two to three years when this bubble finally bursts in everything, and that’s going to extend the whole rental cycle. There’s going to be more people renting and fewer people being able to buy.

We know a lot of millennials have held back buying compared to the boomers and Xers before them. I think rentals are going to hold up the best of any real estate. They’re not going to go down appreciably when most real estate deflates again like it did in 2006 to 2012. You get cash flow. Then, like you say, unlike gold. Now real estate also is an inflation hedge long term and did very well in the 1970s. Yes, I like that but what was new to me when I really started digging in and said, “Oh, my gosh, there is this new trend, over the last 10 years 43% growth in owners over 60, versus only 17% in 35 to 39. Of course, the prime renters under 34, only 7% and that’s only because millennials have been picking up.

The biggest thing I saw was the projections. You’re looking at 2017 where RENTCafé, they had the best data. The over 60 group, 9.4 million renters. Well, that’s projected to double by 2035, the next 18 years, to 18.6 million, whereas the under-34 renters are only going to grow from 14.9 to 16.1. Yes, Millennials are peaking the baby boomers. What’s happening here, Kathy, is that boomers are retiring in mass, and I always say follow the boomers because they’re such a big weight compared to the millennials after them or the Bob Hope generation before them.

Unlike a lot of generations, they didn’t save much money. They grew up in good times, and so they’re back on their whole retirement savings and now all of a sudden, they’re looking at a suburban home, often a McMansion, saying “Okay, we don’t need four or five bedrooms anymore. Let’s get a two-bedroom condo downtown or in the suburbs.” Instead of saying, “Oh, we’ll just cash out of the McMansion and buy a condo.” Wait a minute. The best way for us to catch up on our retirement savings is why don’t we take this profit from our McMansion and put it on our retirement account and then we’ll lease, we’ll rent a home in the suburbs or the city?” Of course, more in the suburbs. Now they’re becoming renters.

It’s not everybody but just 10% or 20% baby boomers will decide all of a sudden start renting when old people never rent except when they get really old. This is a new trend, and again, when I look at it, it is the number one trend by far in the apartment rentals market. That means people who invest in apartments need to say, “Gosh, higher end’s better than lower end for these more affluent older people. They want conveniences and dog sitting and plant watering and blah blah blah. They want to be closer to walk these things and stop in town and shopping and stuff. One story, they don’t want to go upstairs, the older they get.

It means that type of apartments you buy could shift. Of course, the best is if you can find apartments in the type of areas that both millennials and aging baby boomers want because, again, the first time in history you’ve got the downsizing of an older generation in large numbers combining with the emergence into the economy of a younger generation. There’s never been an older generation that’s larger than the young ones to make. Oh my gosh, the new trend is even stronger for older renters than younger renters. That’s never happened before.

Kathy: What about single-family rentals? I see that trend increasing as well. You don’t think the seniors will want a yard so much as living in an apartment?

Harry: Well, they don’t want a big yard. Portable single families do appeal to both, especially in the right area. I just wouldn’t want a big yard. I’d want to place with smaller yards and lower maintenance. In 2008– and I also thought this was a notable trend– a lot of hedge funds and sophisticated institutional investors started buying single-family homes because, of course, they went down. Multi-family held its value and single-family homes went down, so they started buying single-family homes in large numbers and renting them out during the recession and afterwards.

It’s another thing I introduced at Brad Sumrock’s conferences, that the best deals are going to become on larger homes. Another trend with millennials is that since they are waiting until maybe their mid-30s to actually buy instead of their late 20s or early 30s, when they finally do, they sometimes just make the jump. “Okay, I’m not going to buy a two-bedroom starter home, I’m going to buy a three- four-bedroom larger home and just move right to my long-term home and skip starter home thing.” Another thing that real estate investors can do, buy McMansions, rent those out. Fine, you make them attractive, but you’re going to get a much better deal.

Then you can position those single-family, more affordable, smaller homes or the larger ones for people to rent now and then buy as the economy comes back. A couple years after the bottom and the economy starts coming, then you can sell it to them and create a lot of cash-flow profits and then reinvest that in rentals if you want to again. Lot of opportunities. If you’re looking at single-family homes rather than apartment buildings, yes. Don’t overlook really good deals on McMansions.

I’m speaking for another person in October who shows people how to turn larger suburban McMansions into assisted-living facilities with 10,000 a month cash-flow and stuff. There’s an option there. Now, that’s a tough business for me, but there are people at Brad’s conference that are doing that, that are making money in assisted living. Small assisted living facilities that might just take 7, 8, 9 people. People are paying at nursing homes $8,000 to $10,000 a month.

Kathy: Definitely an opportunity there, but even buying a larger home and renting out the rooms individually to nurses. There’s a whole lot of need for the ability to just rent out a room, which is something my daughter’s doing right now. She did exactly what you said. She’s right on target with everything you’re saying. Getting married at 28, renting a big house, Airbnb some of the rooms so that they can enjoy the amenities of the larger home.

Harry: Exactly. This generation had to get more creative and they also, unlike the boomers, we were taught, people my age, we grew up in the ’60s. We never saw a serious recession and even when it got difficult in the ’70s, it was nothing like we’ve seen in recent times or when people saw in the ’30s. They don’t have this thing. “The dream is buying a home and becoming a millionaire on your home.” Those days are over.

There’s another important leg of my research that only came about seven or eight years ago. I was scratching my head for many years because I was the guy that predicted the Japan bust in the late ’80s when people thought they were going to take over the world and be what people see China today and U.S. was going to fall. I said the opposite for the ’90s. U.S. and Europe were going to boom like crazy. Japan was going to fall. It’s been totally different direction. Now, I’m seeing all different opportunities because these aging boomers are acting different.

The thing that’s so different about the millennials, they don’t just assume, “Oh my gosh, you’ve got to buy a home or you’re not going to get rich.” No. What I’ve found is that I had to subtract the dying people from the buyers or peak buyers. Normally I would take a segment like apartments and lag the birth index by 28 years for starter homes, 34 now, or for trade-up homes, 42. What I had to do in Japan and what I’ve done since in the US, I have to take peak buyers, let’s say at 42, but subtract the dyers at 78 to 80 because dyers are sellers, and we have so many older baby boomers dying for the first time. That’s a big influence. The appreciation for buying homes, even in the recovery ahead is not going to be like we saw in the ’80s, ’90s, and 2000s.

There’s downside for owning. There’s not as much upside long-term, so I would not be surprised to see more people, millennials, growing up and they may decide, like you said, buy a bigger house and rent part of it out or just rent a bigger house. What’s the big deal? Things are changing.

Kathy: Are you saying that because there are going to be more dyers from the baby boomers, I know you said this before, that there will be a surplus of homes? Do you still think that’s the case or do you think there will be an equilibrium?

Harry: It’s more like a balance. In Japan, there’s a surplus. There’s 8 million empty homes heading towards 15 million. That’s happening in Germany and a lot of countries in southern and central Europe. The U.S. demographics, the millennial generation is much stronger, even though it’s not the same growth wave as the baby boomers were, it’s stronger. Japan, it’s weak. In Europe, it’s almost nonexistent. That’s the difference. The U.S., we just get a slowdown, slower net sales and a little bit of negative down the road. There’s countries that have negative for decades, but it still takes pressure off.

In other words, homes may go up modestly in the next boom, but they’re not going to go up anything like we saw in the ’80s and ’90s and early 2000s. That will not happen again in our lifetimes in developed countries. The U.S. will be a better market than Europe or Japan or East Asia or the other developed countries, but it will not be what it was. Basically, I always tell people, what did we learn in monopoly? Do you get rewarded for the appreciation of Park Place and Boardwalk or for the rents? You get rewarded for the rents.

Robert Shiller proved this over 120 years. He looked at single-family housing adjusted for inflation. Although it goes above and below, it averages the rate of inflation, which means real estate is a great inflation hedge, but it’s also a zero return adjusted for inflation. The difference between real estate and gold, you said right at the beginning, you can rent real estate for income and that can be very profitable if you’re in the right market. I have an issue way back. I said real estate will never be the same in developed countries. Doesn’t mean it won’t go up. In some places, it won’t. In some places, it may continue to go down and there’ll be a big surplus.

There’s not going to be a surplus of homes in the United States, but the growth is going to be much slower in the necessary new homes. There’s not going to be this demand outstripping supply thing like there was in the past. Bigger homes unless you know otherwise will grow with inflation in the future and that’s okay, but it’s great if you can rent it out. It’s good positive cash-flow return. That’s why I think the people who invest in real estate for the income and rentals are going to be the long-term winners in the future. The people who have been speculating, who had been the big winners in the past. That’s the shift I see, from speculation to the biggest profits in real estate, to the real estate that has the best rental and income values.

Kathy: Just time to come back to the fundamentals. I see proformas that are just ridiculous. I mean, are you saying with inflation, are we talking like 2%, 3% or zero?

Harry: Yes. Developed world, we’re not going to see… We saw inflation at 12%, 16% in the ’70s. That will never ever happen in our lifetime. It won’t even happen in India, from what I see, because even population growth there’s slim. You’ll see modest inflation, kind of 1%, 2%, 3%. You’re not going to see high inflation. You’re not going to see high appreciation in real estate. Again, that puts more emphasis on income rather than appreciation as well.

Kathy: The leverage of having your tenants pay off your debt for you. I mean there’s tax benefits. There’s a lot of reasons to buy real estate, just not for appreciation.

Harry: Exactly. That’s the new game. That’s what the smart people are going to be doing. I hate to say that sadly, the dumbest people on Earth right now are the richest people who think that the most expensive real estate and the most expensive cities like London, San Francisco, New York, Singapore, Sydney, Australia cannot go down because rich people always buy there. They don’t realize rich people lose the most money in a deflationary crash like the 1930s or what’s coming now in Manhattan, who was the Shanghai, the up-and-coming greatest city in the world back in the ’20s, took the biggest hit in real estate and took 25 years to get even. The rich people have become the dumb money in real estate, corporate FT500 managers have become the dumb money because they’re buying their own highly-inflated stocks in a bubble, taking their cash flow. That money’s going to disappear at the speed of light when we get a 29 to 32 light crash. I’ve never seen the dumb money be the richest people before, but this bubble has made it that way. It’s really unusual.

Kathy: It makes sense because it was easy money just investing in a stock market that went up, investing in properties that went up. There wasn’t much more than sitting around and watching the bubble grow, but absolutely, it makes sense. Whereas even in the last recession, the great recession, that was housing, there were certain markets that were not affected, and it was the higher-price markets that certainly were or those that just didn’t make sense.

Harry: The greater the bubble, the greater the burst. That’s true in real estate, stocks, everything. Again, multi-family rentals, since rentals are favored in any downturn, those whole value the best as well as generate income. Rents generally hold up, and so do prices because that’s the only properties that are good in a downturn like that and a deflationary downturn.

Kathy: You really sound like you’re certain that a downturn is coming. I think most of us realize that’s true. Are you thinking two years, one year, probably not this year?

Harry: Here’s my thing. It’s going to happen between 2020 and ’22 for stocks and maybe 2023 for the economy and a little longer for real estate. If it doesn’t happen by then, it’s not going to happen. I mean, we’ve all died and gone to heaven and then we’ll never see a recession again. You know what I think about that. I think it’s going to start for stocks and the economy. I think we’ll fall into recession early to mid next year, but you know who is going to start to talk about cutting payroll taxes, which is a direct cash gift to everyday people for the first time. It’s possible the Donald can hold this thing up in the next year. I tell you, it doesn’t. By 2021 we’re going down or I’m quitting my business and moving to Australia and being a limo driver in the Gold Coast. That’s what I’m going to do.

Kathy: It’s been very difficult to predict, hasn’t it? Because there have been some things politically that… We have a president like we’ve never had in the past.

Harry: The biggest thing, Kathy, when you print money and create an artificial economy, then… I’ve studied natural cycles and nobody’s studied them more than I have and farther back from every angle. We don’t have a natural economy now. It’s totally artificial. They’re just creating, they’re keeping the economy going by keeping financial assets, real estate, stocks and things bubbling up to keep enough going to keep the banking system and economy from crashing. They’re just creating a bubble that’s going to burst bigger. You can’t do that forever.

This isn’t going to last, but everything I have, the worst of all of my cycles here together between 2020 and ’22. That’s why I say if we don’t see it crack by then, then there’s some magic being created here, and I might as well quit my business.

Kathy: [laughs] I know you’ve got to go, but to prepare for that, obviously cash flow real estate, that’s in markets with job growth, jobs of the future. That’s one place we are still positive about. Where else can people protect their money in 2020 to 2022?

Harry: Very, very clear. There’s nothing wrong with cash because the value of cash goes up when everything else drops. There’s one investment sector in general that actually goes up. This was true in the 1930s for the whole decade. The worst decade in history and the biggest deflationary crisis. High-quality bonds. 10 and 30-year Treasury bonds and 20-year triple-A corporate bonds basically doubled counting their yields. Doubled in value for investors in the worst decade in history when stocks went down as much as 90% and real estate went down as much as 30% to 40% and New York went down 62%, Manhattan.

That’s the thing. Being in high-quality long term bonds that benefit from the deflationary trend interest rates going down. They will go lower. You will see 0% to 1% in 10-year treasury bonds and then you get rid of them. Bond yields are going lower. That means the value of those bonds go up in addition to the fact that they’re going to pay you 2%, maybe 3% interest, which is going to look good in such a downturn. Cash-flow real estate, and high-quality long-term bonds are the two places to be. Unfortunately, and this is what I call the winter season, there aren’t many places to diversify into because stocks, basic most real estate, and commodities all go down.

Kathy: Good stuff. All right. Harry Dent, thank you so much for joining me here on the Real Wealth Show.

Harry: Thank you, Kathy.

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