Dan Kennedy on The Middle Class & Real Estate Investing

Jason Hartman goes through some ideas brought up by Dan Kennedy on market shifts in business and the middle class. He talks about how the past few decades have been an attack on the middle class, which has create huge opportunities for real estate investors.

Investor 0:00

You’re that kind of person and you’ve got the capital and you’re a great negotiator. You’ve got great people skills. You could probably be a successful flipper, but it’s like a job. Right? If you’re not flipping, you’re not making money. And that’s why I prefer income property because you just make money every month.

Announcer 0:17

Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. Now, here’s your host, Jason Hartman with the complete solution for real estate investors.

Jason Hartman 1:07

Welcome to Episode 1200 and 65 1265. Thank you for joining me. I had planned to do this episode quite a while ago. Sadly, and coincidentally, I got some news yesterday, from my friend James Malin, check who you’re going to be hearing more from later. Not in this episode, but later on a future episode. He sent me a note that the author of this book that I want to share with you because I think it’s an important lesson for real estate investors and business people in helping your understanding of how the economy is changing and how the wealth distribution in the US and around the world to various degrees is changing the whole complexion of that this is a book about marketing. And it’s about marketing to the affluent class of people, the growing affluent class. And it’s by a marketing guru, one that I haven’t followed too much, but I’ve been aware of for many, many years. His name is Dan Kennedy, and he passed away. And I just got that news yesterday, as I was, you know, planning for weeks to maybe even a couple of months to record this episode for you and share some insights from his book. He was a copywriter, a marketing guru. And interestingly, I didn’t know he was ill. But he he wrote his own letter, as he was in hospice. It’s just so characteristic of him and he said, I find myself in the unusual position of regretfully announcing my death. Usually people are having to do the opposite, deny rumors of their passage. He says that he was in hospice for 10 days with his family actions and surgical procedures and diabetic and heart conditions. So it’s definitely sad to see him go he had a huge following and had written, I don’t know, a couple of dozen books. And I wanted to share this one too with you because it has big implications for how we think about investing how we think about the asset shortage, the looming asset shortage that I’ve been talking about for years. And I’ve been talking about this hollowing out of the middle class for Gosh, at least 20 years, if not longer, maybe since the mid 90s. Really, when I started following Harry dense work, you know, started noticing what was happening to the middle class. And then later about 10 years after that, and in 2004, Lou Dobbs book had a big influence on me and I’ve shared that with you many times the book entitled war on the middle class, and this change is hugely significant to us as a Real estate investors, because it really speaks to the asset shortage that is looming as we have so many more wealthy people, and the middle class is getting smaller, and the poor, you know, I guess you’d argue that it’s staying kind of as it is not changing that much. big part of that I say is what I call the digital divide. Fortunately, that is lessening, I believe, as more and more poor people around the world have access to online resources, and there are more websites and businesses that cater to them, and will help them find resources. So that’s good news for the poor. But largely being poor is dictated a lot by a set of unlucky circumstances, you know, roll of the genetic dice where you were born, what family you were born into, of course, I save the US S has the best potential to solve that problem. And that’s why every country in the world should imitate the US model. And I don’t mean the the new US model, because the new US model with the rise of socialism, of course, is an absolute disaster. And we’ll create lots of poverty, but it will create lots of wealth for the people in the, as they say, the quenya Shantae. Right, that the inner class that the chosen class that the special elite class, they always find a way to escape the burdens of socialism and benefit from it. You know, we have the rise of that through AOC and Bernie Sanders and all these absolutely idiotic ideas being proposed out there. Fortunately, we don’t have that in the White House. Not that I’m saying the White House is perfect by any means. Lots of issues there. But overall, as far as the economy goes, I think Trump is doing a phenomenal job, all things considered. I’m going to share with you Some parts of this audio book, which really is a book about business, but it has very wide ranging implications for us as investors. I’ll make some comments on it along the way. I think it’d be a good tribute to the author who just passed away. And I just got the news yesterday afternoon about this. Again, here is the book and it’s by Dan Kennedy. So let’s listen in and I’ll have some of my own commentary. Of course, along the way,

Dan Kennedy 6:28

most businesses have historically made themselves for middle income, middle class consumers. This began post World War Two, with the great rise and expansion of the middle class in America. This was the keeping up with the Joneses majority. So it made perfect sense to tailor advertising marketing, businesses, product and services to the move to the suburbs. Get a house with a white picket fence, a new car on view in the driveway crowd,

Jason Hartman 6:50

just so you know, I also have sped this up just a little bit. I’m playing it at 1.25 times speed to get through it a little quicker, because there’s a Quite a bit to cover here. But you know, again, in that post World War Two baby boom generation, we saw all of the marketing geared toward that middle class. And America just set the standard for the rise of the middle class. If you think about how things were before that time, it was very different. Now we did have the roaring 20s, of course, but World War Two, the largest public works project ever, in human history, some would say lifted us out of the Great Depression. I don’t really agree. I think war is a terrible waste of money and resources and lives, of course. But it’s interesting how that interplay and when people came back from World War Two, of course, the baby boom started. And if you think about all of the old advertising, and you look at those old commercials, of course, you can find them online, just type in 1940s 19 while early 1950s of course, because that’s the rise of television, 1950s commercials, but you can 1940s ads and search for that and and just see what they look like and see who who was their audience who were they addressing? It’s very interesting. And of course, the US enjoyed this wonderful stability of large middle class for many years. And sadly, in the last couple of decades, that middle class has really been under attack, and it’s being hollowed out. So this changes things. And our strategy with investment properties, of course, is to buy the properties that are not the super cheap properties that are at the bottom of the scale, but the property is below the middle class level, for example, and this does not directly address what is a middle class property, but it’s a decent indicator. If you look at the median home price in the US, it’s about 229,000 depending on who you ask.

Jason Hartman 8:58

It’s about 229 was the forecast is that will rise by, you know about 2.2% over the next year. Now, of course, I don’t have to explain to you because your regular listeners and you know linear cyclical hybrid markets, cyclical markets, softening, linear markets rising and hybrid markets kind of in between the two. So prices going up or down differently in all these different markets. Obviously, the markets we recommend prices are still going up and inventory is very scarce and there is a huge supply and demand imbalance. That’s great for you once you own the property, but it does make it a little more frustrating to actually acquire the property we understand. So that median price to 29. Interestingly, the median listing price is 289 nine, and this by the way, is according to Zillow, and the median sales price is 235 five. Now, what could confuse you and you would Not the correct if you make an assumption like this is that the seller of the 289 nine home is taking 235,000 upon negotiation, that is not the case. It just means that higher priced homes aren’t selling, okay. And the lower price homes are selling. That’s what that tells you. So that’s kind of interesting. But in going back to this chapter of the book, just notice how businesses need to address their strategy for this mass affluent population. And luxury brands have been doing pretty darn well. In fact, Tiffany’s has, you know, overall been doing great. I’m not gonna say quarter by quarter, I don’t really know. But just the macro trend. There’s been a huge expansion in businesses catering to mass affluent buyers. And it used to be affluent, but now its mass affluent. And in fact, Tiffany’s just launched a jewelry line for men and I looked on their website site and you know, they’ve got 152 men’s jewelry items. You know that’s a sign of mass affluent, right expensive jewelry for men that usually don’t care much about jewelry. You look around. And you see the rise of all these businesses in every city catering to the mass affluent, whether they be luxury apartments, or I always say another sign of it is things like Medi spas, medical spas, they’re very expensive, certainly not a necessity item. And when you start seeing signs like that go up all over and you start seeing all these specialized boutique services, high end restaurants and so forth opening up, you know that there’s just this mass affluent population, all these private jet services. I was a member of one a couple of years ago, then canceled my membership. It’s just kind of amazing, the mass affluent population, so let’s hear more about it.

Dan Kennedy 11:58

And a crowd. It was But in more recent times, while the economic facts of American life went through great changes that hollowed out the middle class business didn’t catch on or catch up to this, essentially continuing to gather around a watering hole that was drying up fast. Everything about the availability of consumer spending capability was changing much faster and much more dramatically than most businesses acknowledged. It wasn’t a difficult prophecy. In 2007. I first showed publicly the new economy pyramid in the first edition of no BS ruthless management of people in profits. A few years before then I began describing it to private clients and talking about it in closed door mastermind meetings and seminars. I forecasted a literal genocide of the American middle class. And I meant genocide, for I view a lot of it as intentional, deliberate and orchestrated by political in certain corporate interests. But without without that the evolutionary disappearance of the middle class was certain. This was not difficult to foresee. The writing was on the wall in big letters and numbers in blood red ink, many refused and still refuse to see it. They were denialist in government in media on Wall Street. There were the ignorant Eyes Wide Shut. But I saw everything there was to see and made my dire prediction. This prophecy came to pass, but it is not yet done. There is a lot more Carnage to come. Temporarily, President Trump has introduced new Dynamics, building the middle class, particularly it’s blue collar members back from the Cliff’s edge. As of this writing, he has an agreement on restructuring NAFTA, pending Congress’s approval, and his otherwise dragging jobs back from Mexico and overseas, releasing manufacturing, drilling and other industries from regulatory burdens, and otherwise restarting a robust domestic industrial economy. More people now have jobs than at any other time in the past 20 years. Wages are up and rising, and the middle classes compelled to say things like 401k accounts have soared. Of course, to some extent, labor shortages, open jobs and competition for workers is inflationary. So much of the gains to those in the middle are only on paper, while gains toward the top or more real because of less impact by inflation. Basically Secondly affluent person, they spend only 5% to 20% of current income on necessities. So a big raise in income actually reduces the percentage of spent on necessities and the inflation becomes a voluntary tax. This ironically liberated spending more on luxury goods, services and experiences, as we’ll discuss, the middle income earner may spend 70% and 90% of his income on necessities or even above 100% by dependence on credit.

Jason Hartman 14:24

So a modest pay raise still goes largely to necessity purchases, where the inflation offsets it very directly. In other words, and that’s why I’ve always talked about how inflation is, you know, if you want to be diabolical about it, designed to hurt the poor. And all of the proposals that come from the left side of the political aisle are designed, at least the result of them, maybe they’re not designed that way. Depends, you know, if you want to think it’s diabolical, maybe it is. Maybe it isn’t. I don’t know, probably both depends who’s saying it, but I They ultimately cause inflation, no question. And that inflation benefits the rich it benefits the mass affluent, it benefits the upper middle class and it hurts the poor the most because they’re spending their personal inflation rate goes toward these necessity items and they don’t have anything left over to invest with and to take advantage of might strategy of inflation induced death destruction. Sadly, they’re, they’re out of the game. They’re just totally hurt by it. And that’s why you must dedicate your spending your money to investment grade assets. Of course income property is the is the chosen one. And it really has to be that benefit from inflation, especially inflation induced debt destruction and all those great multi dimensional characteristics. I’m always talking about

Dan Kennedy 15:53

everything done to rescue and preserve the middle class while an admirable effort within the Make America Great Again, vision camera. alter the fact that it is an endangered species being made to die out more slowly, but dying out Nonetheless, the impact of tech automation and robotization alone guarantees and middle class shrinkage that has to again pick up speed. In the Industrial Revolution, job replacement versus job elimination was close to one to one. Not so with the tech revolution. So now writing the third edition of this book 12 years after the first one, I contend that moving your businesses target range up to mass affluent and better still affluent clientele is all the more important and will soon again also be urgent. The two requirements for your prosperity ultimately to prosper you need an ample supply of customers with two attributes, ability to buy and willingness to buy both as a constant whether the economy continues to expand or reverses and shrinks, whether unemployment holds on to Trump economy all time lows or returns to 10 or 20 year average norms. Whether the middle class is disruption slows to a crawl or resumes a fast pace. No matter what external conditions occur, you need a bastion of consumers with both constant uninterruptible ability and willingness to buy. Such customers can only be found among people of affluence, not just an income, but in their networks and emotional state. organizing a business around any other population is bluntly, self sabotage. A business otherwise organized is always fragile. When heavy rains come, its crops and buildings are washed away. This book is all about building your Bastion to move you from curiosity and half hearted, tentative action on the advice and strategies in this book to wholehearted passionate, courageous, aggressive and urgent action. I want to take a few minutes to summarize the facts of this middle class shrinkage provide some evidence of its impact so far, and try to paint a vivid picture in your mind of this as a present and accelerating reality. We can begin with a few statistics. These are compiled from various authoritative sources.

Dan Kennedy 17:52

How bad did this get? How bad will it get, beginning with the recession that was triggered in 2007 to 2008. And it lasted through two 2013 with the damage accelerating and peaking during the Obama years, the median us household network plummeted by 43%. This manifested in many ways, with the upside down home mortgages being the most visible, and retirement savings accounts 401k the clearest loss to many in these and many other ways, wealth, and with it the ability and willingness to buy things for years, even decades to come, erased. This damage at the top of the economic pyramid while harsh was and is far from devastating. If you have $10 million and lose 43% of it, you still have $5.7 million, it didn’t end doesn’t matter much to the bottom of the pyramid. If you have zero and lose 43% you still have zero, but in the middle, it murdered and is a murderer. There it forcibly moves a middle class consumer to a low class consumer. There it changes a frequent discretionary spender into a buyer only of essential commodities as it slaughtered those in the middle. It suck the very life right out of the economy. More important these lost years of lost wealth and spending capability will never be recovered from by these slaughtered middle income consumers. So in your own business lifetime, you will not see a rebound of their best spending. To add insult to injury, generational replacement spending by millennials is defying historic trends is at a minimum and is concentrated into a few categories. Were the first time homebuyers, Home Furnishings buyers, new insurance customers, etc. They’re renting buried under a stunning $1.5 trillion of college debt in their parents basements. In those years, we saw a drop in net worth in almost all income categories from the top 5% to the near bottom. Only the bottom 25th percentile saw an increase. But that is deceptive because in calculating the government counts the earned income tax credit and food stamps as income and Mr. Obama was the food stamp president. There are profound differences in how people in different income categories react and can react to net worth losses. towards the top. Most high earners have options for amping up their earnings to replace Network losses. Behind six figure income professional can raise fees take on more clients or patients, maybe cut overhead or staff. They have a great deal of control. My own earning capability has a dial like a thermostat on it, that I can adjust by my own hand. I always have options, writing three books in a year instead of to accepting a few more speaking engagements. I now turned down, promoting more and attracting more clients. Some top income earners have reacted that way. Others did not, but didn’t need to, and their discretionary spending capability and willingness still remained intact. They had ample money toward the bottom they traded down in price. There was a bleed from Walmart to dollar stores as examples under economic stress. These consumers cut where they can, they may add a low wage job to the household. They file bankruptcy in large numbers, expunge accumulated debt and start over with some restored spending ability. But by and large, their total spending contribution to us marketers and to the economy as a whole varies only a little because in bad or good times. They are still spending nearly all their income on essentially holding nothing back either saving nor investing. It is in the middle where stagnated and falling wages, loss of one or two jobs in the household and cutting of hours. In part the result of Affordable Care Act threats, uncertainties and realities had its most savage effects. The median income in the 50th percentile went from $98,872 in 2007, to $70,801 in 2009, to $56,335 in 2013. Take $40,000 out of a $90,000 household income and watch everything that happens. It was no surprise that homeownership dropped into a two decade low real estate values were slow to recover. The real estate market was poor and all but a handful of places. Real Estate Agents incomes dropped, the population of active agents shrunk and the mortgage broker and agent industry fast became a sad shadow of its former self. No surprise that roughly one

Jason Hartman 21:54

and he didn’t even mention the construction industry. And that’s why places like My former home state of California, the Socialist Republic of California, was hit especially hard, because so much of that trickle through effect was into the construction industries. So you know, real estate is so important to the economy. That’s good for us because that means politicians will always cater to real estate. You know, they’ll have various plans and ways to do that. But they’ll always cater to real estate because they know there are so many tangential effects, right, you know, the mortgage people, the real estate brokers, the construction people, all the appliance suppliers, I mean, it’s just a massive, massive supply chain.

Dan Kennedy 22:44

Third of middle class households fell out of that category. Ensure Not only did the middle class consumer population shrink, with far more falling down then climbing up, but its remaining population had shrinking buying power, and had to use more and more of its buying power in fewer and fewer categories. Probably excluding you and what you sell. All of this can happen again. Never lose sight of that. The middle class is economic activity has always been what makes and keeps the rich folks rich and growing ever richer, and what creates an uplifting opportunity for the bottom levels to move up. Small Business provides most jobs and most low skill entry level jobs. But most small businesses are started grown and owned by middle class people, who were for nearly 10 years severely limited in their ability to start or grow such businesses. The first year in two decades with a decline in the number of new businesses started was 2013. Middle Class consumer spending is what created and sustained suburbs, shopping malls, and the huge and wide middle of every business category, retail restaurants service providers. Temporarily some of these categories can appear as healthy as ever by simply raising prices on fewer numbers of diehard middle class consumers. movie industry revenues are up even as movie theater attendance has fallen and is falling. But this is the failing condominium towers. Strategy

Jason Hartman 24:00

five move out. What he’s talking about here is the association fees, the HOA dues. In a condominium in this example, I’m not sure if that’s clear. So I just wanted to mention that.

Dan Kennedy 24:11

So monthly dues are raised on the remaining 55 morali dues are raised again. Eventually there’s one side left with a monthly service fee of $50,000. The September 17 2014 issue of The Wall Street Journal included a report headlined incomes in the six year decline, just barely any good news was welcome. But popping champagne corks or even beer can tabs was not called for. In 2014. The time of my writing of the prior edition at this book, there was little reason for anything but a gloomy forecast for at best, a mud uphill slow recovery of the economy and the slowing of Middle Class E ratio. Trump has changed all that to an extent in ways and at a speed few economists could imagine, and for which he gets far too little credit for most media and other observers and beneficiaries. I expected a significant break First of bad fortunes and some sort of boom by Trump, but even I have been pleasantly surprised by all he has wrought. However, it is very dangerous to let this load you into complacency. Macro forces continue their work, all things carefully considered. My forecast is for a brief Indian summer, inevitably followed by a long, long, bitter cold winter for the middle class, and it’s consumerism. If and when liberals get control of the levers of power, they will try warming up the shivering masses with socialism light, which will as it always has, make things worse and lengthen the economic winter until another Trump arrives. So I tell you use this Indian summer and these good days to proactively and creatively recraft your business to move up the ladder of income, net worth and stability of ability and willingness to buy.

Jason Hartman 25:44

And just remember, even though this is a book for business, all of you who are real estate investors, you need to look at your real estate portfolio like a business because that’s what it is like a little side business that is extremely easy to manage company. Are to a regular business, no employees to deal with. And it’s a lot simpler. But think of it like a business. In a business, you would think about price strategy, you would think about positioning, you would think about what market you’re going to serve, what are the demographics and psychographics of your customers? What are their incomes, these are all the things you want to think about. And with our strategy, buying below the median home price, pretty significantly below actually, in most markets, renting this bread and butter housing style. And then having your properties be available later and seeing them increase in price because you’ve got this expansion of the mass affluent population. They’re always increasing the price of your properties as they experienced the asset shortage that I’ve been talking about for 15 years. And that asset shortage is becoming more and more apparent with a mass affluent. And this is not only in the US, this is as Result of globalization. What are we at now maybe 300 350 million people around the world lifted out of poverty due to globalization. So huge, huge difference and in a major change in the complexion of the economic pie of planet Earth. So without further ado, we gotta wrap it up for today. But I’m going to be back next week with more of this because I think it’s so important. I did not mean for it to be a tribute to the author Dan Kennedy. sad to see him pass. He was really a just an incredibly bright, witty person. Again, I was not much of a follower of his work, but I found this book to be very interesting and I just wanted to share it with you so you can go out and get his books and all the usual places online and so forth and and they’re great. Check them out. We’ve got two events coming up. Of course we’ve got our cruise coming up our fall foliage cruise leaving out of New York City that will be in October. Then just a little bit after that, we’ve got our profits in paradise event in late October in Orlando, Orlando, Florida. So you’ve been thinking about that trip to Disney World or Epcot Center or any of the other many attractions in Orlando. Come and visit us for profits in paradise. Again, we don’t have that online yet the registration link, but we will soon just save the date for the weekend of October 26 and seventh for that. You can check out the cruise though right on the front page of Jason Hartman calm. Until next time, happy investing. Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website heart and Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are their own. And if you require specific legal or tax advice or advice in a Any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.

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