Podcast Archives - Jay Garvens

To begin, if you haven’t checked out the comically delightful talking animal videos, you must. I allude to them several times throughout the show—Nighttime…daytime!. Nighttime…daytime! Part time…full time!—and without the key context of knowing what I’m talking about I just sound, well, weird.

Anyway, the first hour of this week’s show focused on supply and demand—period. These are, I believe, the two defining factors of any economy: the demand for goods—and the quantity, qualities, and composition of these goods—and the supply. I spent time last week reviewing the profound effects generational differences have on an economy’s supply/demand equilibrium, but that was fairly abstract. This week I used my own experience in the residential real estate market to illustrate these effects.

Throughout the early 2000s, I had acquired five properties: four rentals and one primary. They had been providing decent cash-flows and had gained equity. But in 2008, my instincts told me to get rid of them, and one buy one I sold the rental properties off. In fact, I very nearly sold my primary residence. Having been in the mortgage industry for several years, and having acquired a fairly proficient grasp of supply/demand equilibriums, I knew the domestic real estate market was in severe disequilibrium.

Over the next few years, as I began to study demographics and economics, I was able to start articulating the rationale behind my instinctive behavior. I had reacted to the effects of some cause, but until I understood demographics I could not have understood that cause. And the cause was this: the Baby Boomer generation was, as of 2006, entering retirement. Their productive capacity was beginning to wane, and their demand for new durable goods like cars, homes, and furniture and appliances for those homes, followed suit. One of the largest generations in US history was, and still is, cutting back on their consumption, and the younger generations that had previously produced goods for their consumption are now seeing a diminishing level of demand. This is an effect seen throughout the economy, as even Wal-mart struggles, restaurants go out of business, and car companies modify their products to meet the new demands of a new economy that consumes less, eats out less, and buys smaller, more efficient cars.

We were, as always, blessed to have Bill McAfee on the show this week to offer his monthly update on the real estate market. I strongly encourage everyone to go to the archives and listen to at least his segment. He reiterated that 2013 was a blistering year for real estate in the first three quarters but had slowed down toward the end. My suspicion, which will either be dispelled or proven as more economic data is released over the coming months, is that the investor-driven price rise in the housing market in the first three quarters of 2013 was not sustainable since household income has remained flat.

The price mechanism works to put supply and demand into equilibrium; we had a residential supply glut for several years so prices were low, and as homes become more scarce their prices rise. But the rise was too quick—probably driven by investor speculation—and the broader demand economy outside the investing class cannot afford homes at these inflated prices.

With prices having risen about 12% this past year, homeownership was pushed slightly out of reach for many people. But it wasn’t pushed that far out of reach. A part-time job can easily put this dream within reach for most families. The question is always: Is it worth it? Is a part-time effort worth the effort at all?

My answer is a resounding ‘yes!’ My early efforts in both the mortgage and radio industries were part-time efforts. It’s an ideal way to venture into new industries, gain experience, and supplement the income of your primary occupation. If your ventures prove fruitless, you at least haven’t invested all your energies and capital into ...

Since 2008’s housing crisis and subsequent recession, the prevalence of homeowners going through foreclosure or short-sale on their homes has grown exponentially. Confusion remains, however, on the difference between foreclosure and short-sales, and the effects of each on one’s credit. The first hour of this week’s show aimed to address the distinction between the two and clarify the effects of each on one’s credit. The second hour continued with a more thorough discussion of credit scores as they pertain to the mortgage industry.

Many consumers, and even industry professionals, use “foreclosure” and “short-sale” interchangeably, when in fact they are two distinct things. The confusion stems from the fact that most homes going through foreclosure will eventually go through a short-sale. A homeowner can, however, short-sell their property without going into foreclosure. Foreclosure occurs when the homeowner is late on their mortgage payments; the lender exercises its right to call the loan balance due; and, barring the owner’s ability to repay the loan balance, the lender re-claims possession of the property’s title. The lender will then sell the property. If the sales price is less than the outstanding balance of the loan, this is a short-sale. Foreclosure is the disposition of the property; the short-sale is the process of selling the property.

As far as the homeowner is concerned, the primary difference between foreclosure versus a mere short-sale is that foreclosure typically releases the homeowner from the liability of paying off the full balance of the mortgage whereas a short-sale does not. If a homeowner elects to sell their home for less than the balance of their mortgage, they are liable for covering the difference. This difference is called the deficiency.

As far as creditors are concerned, there is virtually no difference between the two. A foreclosure and short-sale will have the same effect on a consumer’s access to future credit, particularly for home loans. Specifically. this means most lenders will not extend credit for a new home for another four years.

There are, however, ways to shorten this waiting period. Government loans such as FHA or VA, for example, require only three and two year waiting periods, respectively. For conventional loans, a down payment of 20% will shorten this period to two years, since the likely deficiency brought by foreclosure will be covered by that 20% down payment. In addition, the FHA adopted its “Back to Work Extenuating Circumstances” program in August of 2013 which provides foreclosure forgiveness for homeowners who can a) prove their foreclosure was the result of extenuating circumstances or hardships, such as job loss or severe market depreciation in their neighborhood, and b) show these extenuating circumstances have been remedied.

If you have gone through foreclosure or a short-sale in the last few years, it’s imperative that you understand your options so you’re better able to plan for the near- to mid-term future, and to take advantage of today’s unique market opportunities. As I’ve stressed in past shows, 2014 will likely be the last year in which it is cheaper to own a home than to rent. Further, you must assess your current credit profile so that you’re in the best possible position when it’s time to buy your next home.

Your first step should be to acquire a copy of your credit report from the three major credit bureaus: Equifax, Experian, and Trans-Union. These reports will show everything a creditor will see, such as delinquencies, accounts in forbearance, and dates of bankruptcies or foreclosures. It will also allow you to dispute any factual errors in these reports. These reports are available for free from the major credit bureaus; however, it’s recommended you pay for a report that will also provide your credit scores. The various bureaus use different models to derive a consumer’s credit score—using such data as length of e...

If you’re like most Americans, the last several years have not been kind to your coffers. Wages have stagnated, unemployment has remained stubbornly high, and economic growth has been anemic. Many individuals and families have seen their once-immaculate credit profiles severely tarnished, while those who once had average to good credit now find credit far more expensive than before—if it’s even accessible at all. All too frequently, however, this damage is less the result of changing economic circumstances as it is the result of individuals refusing to adapt to these changes. That is, your credit profile is almost always within your control.

No matter what your current credit profile looks like, it can always be improved. Whether you’ve never had spectacular credit or it has just been damaged over the last few years, repairing your credit profile is not difficult. It merely seems difficult because most people don’t understand how the underlying models that build an individual’s profile work. So individuals will fixate on minute items that have only a marginal effect on their profile while ignoring more substantial items.

As an example, people will obsess over keeping the number of inquiries on their credit report low. This means they’ll visit only one or two car dealerships for fear that excess inquiries will impact their score. In fact, inquiries, and more importantly the type of inquiries, make up only 10% of one’s credit profile. And most scoring models will treat up to four inquiries made over a 72-hour period as a single inquiry.

As another example, people will close credit accounts, such as credit cards, once the balance is paid since they believe more open credit lines means a lower credit score. In fact, the scoring models prefer seeing more available credit than less. If a borrower has several credit lines open with small balances, it means they’re responsible enough not to abuse their access to credit. The quality of one’s credit lines accounts for 10% of their credit profile. Further, a full 15% of their credit profile is informed by the length of time the borrower’s accounts have been open. Closing a ten-year-old, zero-balance account can have a substantial effect on your credit score versus leaving it open.

People often ask what an ideal credit profile looks like. My advice is to have five open, active credit lines composed of 1 mortgage, 1 auto loan, and 3 other trade lines—personal loan, credit card, store card, etc. Most models prefer to see a 20-25% balance on the last three accounts, although lower balances are preferable to higher balances. And, of course, you must be sure to pay all your bills on time. Any delinquencies showing on a credit report will raise questions with creditors.

Over the last few years, there has been a small but growing movement arguing that individuals should disregard their credit profile. Their argument—one to which I’m mostly sympathetic, by the way—is that individuals should live without depending on credit. That is, everything from household staples to cars should be paid in cash. Although I largely agree, I believe savvy individuals can use credit as a tool to improve their financial situation, if used responsibly. Instead of saving for an automobile and paying in cash, they can direct these savings toward investment vehicles whose returns exceed the interest rate on the loan. And as nice as it would be to pay for a house in cash, this is far beyond the realm of possibility for most people.

While credit is not a necessity, it is a high-value tool that most people can and should use. Having a poor credit profile, however, makes the use of these tools very expensive. Many creditors will not even lend to borrowers below a certain FICO score, while virtually all creditors penalize borrowers will low scores. As an example, a low credit score can mean a manual underwrite on a mortgage. This not only costs about a half-point up front on the loan,

NEW HOME BUYER CLASS MARCH 25, 2014

 

FROM 6:30-8:00 PM

If you are interested in learning more about deciding to buy a house, how to prepare to buy a house and what is the process of buying a house! Then join us on Tuesday March. 25 at Garvens Mortgage Group for THE NEW HOME BUYER SEMINAR, an informative evening designed to give you the answers you want and need! Call us to make a reservation.

719.633.8483

3-8-14 Home Buyers Show 1

3-8-14 Home Buyers Show 2

For the past several years, the greatest fear of policy-makers, investors, and bankers has been inflation. With the Federal Reserve’s unprecedented QE programs, and its massive printing of money to purchase debt, many worried whether this excess of dollars would spark a similarly unprecedented inflationary cycle. This, however, has not come to pass. Rather, there is now fear of a more pronounced, and more prolonged, deflationary cycle in the American and global economy.

The pedantic definition of deflation is: A reduction in the general level of prices in an economy. This means, for example, that a gallon of milk or gas will cost less next week than this week. A humorous indicator of deflation is: When an economy sells more adult diapers than baby diapers. That is, when an economy’s population is weighted more toward the elderly than the young, deflationary pressure will exist.

I believe we are soon entering a deflationary period. As Baby Boomers retire and downsize their lives, our economy will lose the single-greatest productive demographic it has ever seen. There will be less demand for homes, cars, furniture, and electronics, and there will be a marked shift in demand away from tangible goods and toward services. With decreasing demand, the general price level will fall.

One negative effect of a falling price level is that the real value of debt increases. Borrowers will owe more in real terms for any debt taken out when their loan comes due. This makes borrowers less likely to acquire debt, which, in turn, means fewer loans, less investment, and slower business growth. The worst-case, and not-uncommon, scenario is a deflationary spiral. The negative effects of a decrease in the utilization of debt cannot be overstated.

Japan, for example, has been in a deflationary spiral for nearly 25 years. After tremendous growth through the 1970s and 1980s, their economy went into recession in the early 1990s. They had acquired massive levels of debt, particularly in global real estate, but were unable to service this debt. Changes in demographics—namely, they weren’t having children and their population was rapidly aging—created an absence of inflationary pressure. Domestic demand was falling along with the general price level. To keep their exports competitive, Japan pursued one stimulus program after another throughout the 1990s and 2000s to keep their currency low. Their debt, while increasing in real terms, was being serviced with yen that were falling in nominal terms.

Japan’s error—which, unfortunately, is the prescription every advanced economy pursues during every recession—was to attempt to fight the natural business cycle. After a spectacular rise throughout the 1970s and 1980s, Japan was destined for a spectacular correction. The Bank of Japan’s actions in the subsequent 25 years attempted to soften this correction, but ultimately prevented organic market corrections from materializing. They essentially condemned themselves to this period of deflation rather than risk a quick but acute period of economic hardship.

With the latest financial crisis, I fear the US has pursued a similarly faulty course. We have embarked on a series of programs, from the stimulus to several rounds of quantitative easing, that were meant to keep the market from naturally correcting itself. But as history shows time and again, you cannot alter the business cycle; you can only prolong it. We have condemned ourselves to a prolonged period of low growth and high unemployment rather than endure a quicker, but more severe, course.

To prepare for this deflationary period, I advise people to do three things. First, if you’re planning to buy a new home or downsize to a smaller one, do so this year. This will be the last year that interest rates are this low, and as interest rates and deflationary pressure both increase, the value of a home’s debt will increase astronomically in both real and nominal terms.

There is something unique about the American home. In no other country or culture is the home—a mere structure—imbued with such meaning as in America. We project our hopes and dreams onto it; we depend on it for security; we leverage it to pursue our goals. We take for granted the ease with which anyone can own a home in this country; we forget that America, and America alone, has the perfect combination of ownership laws and free-market financing by which anyone can not only purchase a home but own the land beneath it. Especially in the last five years, the reputation of the American home has been tarnished. It was my hope this week to rehabilitate its reputation by speaking on its behalf.

In 2008, the American housing industry was a victim of its own success. It had promised the possibility of homeownership to virtually every American. Private banks were anxious to lend, and generous government programs ensured practically anyone, regardless or credit-worthiness, could qualify for almost any home they wanted. But, as I’ve said before: although everyone should be able to own a home, not everyone actually should. Too many people who lacked the discipline to own a home had bought one (or two or three), and eventually the entire system collapsed.

The 30 year fixed mortgage is essentially unique to America, as is the opportunity to actually own the land beneath your home. Throughout Europe and Asia, the most common mortgage products are 10-15 year adjustable rate mortgages. In many European countries, homes are purchased under leasehold agreements: the buyers owns the structure, but the land beneath the home is leased from its own, typically for 99 year terms. These facts explain why homeownership rates in the United States are far higher than in any other industrialized, modern nation. Our laws give you the opportunity to own your land, and our financial culture allows you to afford it.

In the years preceding the 2008 housing crisis, lending laws and practices were relaxed far beyond reason. Borrowers were placed into exceptionally risky products, or lent far more than they could afford. Today, people generally feel it’s homeownership itself that is risky! They have lost faith in the promise and potential of homeownership, and have instead chosen the less-risky, but less-rewarding, practice of renting.

I have taken thousands of mortgage applications throughout my career. I’ve met hundreds of past, present, and future homeowners who have shared their financial dreams, financial aspirations, and even their financial fears with me. I understand the deep distrust people have for the housing and mortgage industries. Most of that distrust is, unfortunately, well deserved. But I believe their distrust is misplaced. The financial institutions, real estate agents, and homebuilders who were responsible for the housing crisis merit most of this mistrust; and, fortunately, most of these institutions, agents, and builders are no longer in business.

I understand this mistrust and the reasons people have it. I also understand trust and the benefits people reap for placing it in the right people. I have sat through loan applications with clients in which people display the whole gamut of human emotion: worry, fear, joy, excitement. They worry about the present—about the late mortgage payments and dwindling financial reserves. They fear the future—the imminent foreclosure and the prospect of losing their home. They feel joy at the possibility of refinancing their mortgage and restructuring their debt to free up money and save their home. And, in the best cases—which also happen to be most cases—they’re excited about their new future and their brightened prospects.

These emotions only appear when dealing with a home. Few apartments can invoke such emotion. Homes can because they are significant enough to warrant such emotion. People truly put their hopes in their homes.

Staying in the Basement: The Spending & Borrowing of the Millennials and the Slight Edge

For a parent, the only thing worse than a grown child leaving home is a grown child not leaving home. It’s natural that children, once matured, leave the nest to build nests of their own. Today’s economic conditions, however, have kept many young adults living at home well into their twenties. This, in turn, has left both the economy and parents everywhere depressed. We spent this week’s show discussing this phenomenon, its causes, and its effects.

In 2012, according to Pew Research, 36% of Millennials were living with their parents (aged 18-31 ). This is up 4% from 2007. Of these Millennials living at home, 61% had either some college or a bachelor’s degree, and a full 50% were not in the labor force. The dismal job market, particularly for young adults, drives both these numbers. Few can find a satisfying job, and those who can’t stop searching. They either remain out of the labor force or go to college in hopes of bettering their prospects.

Unfortunately, the return on investment for college degrees has been diminishing for years. The disparity in earnings between those with and without college degrees has started to close, and the bulk of the difference can be attributed to differences in temperament rather than in the benefits of a degree; that is, an individual who would pursue a degree is one who is naturally driven, disciplined, and hard-working. They would likely make better money than their undisciplined counterparts even without a college degree.

These facts have not discouraged individuals from pursuing degrees, however. Nor has it stemmed the tide of individuals going severely into debt to pay for them. Student loan debt has increased 300% in the last 10 years. It is now worth $1 trillion and continues to grow exponentially. Student loans are the fastest-growing sector of debt in the country, and tuition has increased along with it. We are now in an inflationary spiral in which tuition increases to lower demand while student loans increase to increase supply.

Once students attain a degree and enter the workforce—or not—they are burdened with massive debt. Many cannot afford rent, let alone a mortgage, because of high debt servicing payments. And unlike other forms of debt, the US government has ensured that student loans cannot be discharged in bankruptcy. Students are committed to decades of payments.

At Garvens Mortgage Group, we see instances of this every week. Individuals either looking to buy their first home or refinance one they’ve had for years find themselves unable to qualify because of their student loans. Loan servicing can easily consume 10-15% of their gross income. Homes, cars, clothes, virtually all consumables are unattainable because of the cost of these loans. Resources are being diverted from the productive economy to colleges and loan servicers—which, increasingly, means the federal government. The quality of economic growth provided by colleges and the federal government for the broader economy is not high.

After school, with so few job prospects, Millennials increasingly take advantage of the free or low rent offered by their parents to pay down their student loans, often with wages far below what’s needed to successfully support themselves and their loans. The mythology surrounding college degrees convinced them that any degree—from political science to mime studies—will provide lucrative job opportunities after graduation, when this truly is not the case. They not only have high debt and a worthless degree, but they have forfeited 4 to 6 years that could have been spent gaining desirable skills.

Granted, many of those Millennials living at home do so not out of desperation but to build a strong financial foundation for their future. Many are paying cash for college, working part- or even fill-time, and saving money so that when they do leave home...

If you’re reading this, great news: You’re wealthy! Or you’re on your way to being wealthy. At the very least, you have wealthy thinking versus poor thinking, a wealthy person’s temperament, which is the first step toward being wealthy. By virtue of reading this educational—and I might add highly edifying—blog post, you are exhibiting a trait that sharply separates the wealthy from the poor: reading educational material, which 88% of wealthy people do versus just 2% of poor people.

You may remember this statistic from a previous show that explored disparities in habits between the rich and the poor. As a brief recap, here are a few of the previously discussed habits, and a breakdown in the percentages of wealthy people versus poor people that practice them:

Focus on accomplishing single goal; 80% of wealthy versus 10% of poor

Exercise aerobically 4+ days a week; 75% of wealthy versus 23% of poor

Maintain a to-do list: 81% of wealthy versus 19% of poor

Believe they create good luck for themselves: 84% of wealthy versus 4% of poor

But there are some categories in which poor people excel:

Say what’s on their mind: 6% of wealthy versus 69% of poor

Watch reality TV: 6% of wealthy versus 78% of poor

This selection of habits illustrates the temperamental difference between the wealthy and the poor. This is not to suggest that if poor people exercised more and maintained a to-do list they would magically be wealthy. Rather, it suggests that one who is naturally the kind of person who would exercise and watch less reality TV is also the kind of person who would be wealthy. Wealth, along with exercising, efficiently prioritizing time, and being disciplined enough to not always says what’s on one’s mind, are all the result of thinking about the world in a certain way.

On this week’s show, we delved deeper into the thinking patterns of wealthy and poor people. By understanding how these two groups see the world, it is easy to understand why each group adopts different habits, and how these habits ultimately determine their financial fortunes. Consider the below examples of Rich Thinking versus Poor Thinking:

I create my life vs. Life happens to me

I play the money game to win vs. I play to not lose

I am committed to being rich vs. I want to be rich

I focus on opportunities vs. I focus on obstacles

I admire rich and successful people vs. I resent rich and successful people

I am willing to promote myself and my values vs. I think negatively about selling and promoting anything

I am bigger than my problems vs. I am smaller than my problems

I gladly receive constructive criticism vs. I do not accept criticism of any kind

I choose to get paid based on the results of my work vs. I choose to get paid on the time I spend on my work

I focus on my net worth vs. I focus on my working income

I can always learn something new vs. I already know everything I need to know

The differences in these modes of thinking demonstrate key personality differences between rich people and poor people. Primarily, it is the difference between being confident yet humble on one hand and insecure yet stubborn on the other. Rich people are optimistic about their potential to thrive in the world; poor people are pessimistic, and believe outside factors inhibit their potential.

These differences affect not only where these groups are but where they’re going. If your general outlook is that the odds are already against you, and you refuse to learn new things or acquire new skills—like investing skills—because you believe you know all there is to know, you have prevented yourself from not only discovering but pursuing new opportunities. You have lost the game before you even tried playing.

In the second hour of this week’s show, I used the example of renters versus owners to illustrate the differences between rich thinking and poor...

If everything you know about residential real estate comes from playing Monopoly, this week’s show is for you. As a game, Monopoly contains illustrative parallels with the real estate market, even though the game itself has little practical relevance to the real world—although I did once win second place in a beauty contest. The first hour of today’s show uses Monopoly to explore the world of residential real estate, and the second hour explores how you can win in the real world playing Real Estate Monopoly.

First, consider what a Colorado Springs Edition of Monopoly might look like. You have the Broadmoor instead of Boardwalk, Powers instead of Indiana Avenue. I won’t risk offending anyone in the audience by renaming Mediterranean and Baltic Avenues, but you get the point.

The first thing to consider is why Oriental Avenue is so cheap while one night in a hotel at the Broadmoor might bankrupt most people. Disparities in price are largely driven by demographics: As people mature, they work their ways from Baltic Avenue to St. Charles Place to Pacific Avenue and so on. The younger generations with less disposable income will cluster at the start of the board, while the established generations will cluster toward the end.

On a city level, this has subtle but noticeable affects. Certain qualities or amenities offered by certain neighborhoods will appeal to different demographics at different times, and real estate prices will adjust accordingly. In the 1960s, when families were large, neighborhoods with an abundance of split-level homes and nearby schools were in far higher demand. Today, with people having fewer children, and having them later in life, these formerly hot neighborhoods are seeing prices drop while older neighborhoods with more spacious floor plans and fewer rooms are in higher demand.

On a national level, this has stark and profound effects. Localized real estate bubbles in San Francisco, Washington D.C., and Seattle reflect an influx of young, wealthy professionals, causing formerly lower-middle and middle class neighborhoods to gentrify into high-income neighborhood and house values to skyrocket. You can think of the national real estate market is a bag of popcorn: each kernel, or local market, heats and pops independently of all others. Different factors cause different kernels to expand and explode quickly, slowly, or not at all.

There is a strong correlation between the demographic composition of a market and its general health. Places like Utah and Texas have very young populations and generally healthy real estate markets; Florida, on the other hand, is home to the oldest population in America and, as a result, has found it difficult to recover from its turbulent housing collapse.

These and other factors show how real estate is like Monopoly. Now the question is: How do you win? I offered three suggestions on this week’s show to help you get started and ultimately succeed.

To win at Real Estate Monopoly, you have to understand how it differs from the game, which is what Rule #1 concerns. The key difference between the two is this: Life isn’t about luck. In the real world, people don’t start out with exactly $1,500 a piece; they don’t take turns; they don’t roll dice. Each individual chooses when to move, where to stop, what to buy, how many amenities to add, and so on. Everyone starts with the exact same credit score, which is a great indicator of their general access to credit, and the choices they make in life determine whether they will continue to have this access. With credit, nobody is forced out into the cold, but plenty of people choose to end up there.

The second rule is, incidentally, my approach to both Real Estate Monopoly and regular Monopoly: start the purchase process as soon as you can. I got into real estate early and have bought higher-value homes as I go along. Few people start by buying Park Place; more often they start on Oriental Aven...

If everything you know about residential real estate comes from playing Monopoly, this week’s show is for you. As a game, Monopoly contains illustrative parallels with the real estate market, even though the game itself has little practical relevance to the real world—although I did once win second place in a beauty contest. The first hour of today’s show uses Monopoly to explore the world of residential real estate, and the second hour explores how you can win in the real world playing Real Estate Monopoly.

First, consider what a Colorado Springs Edition of Monopoly might look like. You have the Broadmoor instead of Boardwalk, Powers instead of Indiana Avenue. I won’t risk offending anyone in the audience by renaming Mediterranean and Baltic Avenues, but you get the point.

The first thing to consider is why Oriental Avenue is so cheap while one night in a hotel at the Broadmoor might bankrupt most people. Disparities in price are largely driven by demographics: As people mature, they work their ways from Baltic Avenue to St. Charles Place to Pacific Avenue and so on. The younger generations with less disposable income will cluster at the start of the board, while the established generations will cluster toward the end.

On a city level, this has subtle but noticeable affects. Certain qualities or amenities offered by certain neighborhoods will appeal to different demographics at different times, and real estate prices will adjust accordingly. In the 1960s, when families were large, neighborhoods with an abundance of split-level homes and nearby schools were in far higher demand. Today, with people having fewer children, and having them later in life, these formerly hot neighborhoods are seeing prices drop while older neighborhoods with more spacious floor plans and fewer rooms are in higher demand.

On a national level, this has stark and profound effects. Localized real estate bubbles in San Francisco, Washington D.C., and Seattle reflect an influx of young, wealthy professionals, causing formerly lower-middle and middle class neighborhoods to gentrify into high-income neighborhood and house values to skyrocket. You can think of the national real estate market is a bag of popcorn: each kernel, or local market, heats and pops independently of all others. Different factors cause different kernels to expand and explode quickly, slowly, or not at all.

There is a strong correlation between the demographic composition of a market and its general health. Places like Utah and Texas have very young populations and generally healthy real estate markets; Florida, on the other hand, is home to the oldest population in America and, as a result, has found it difficult to recover from its turbulent housing collapse.

These and other factors show how real estate is like Monopoly. Now the question is: How do you win? I offered three suggestions on this week’s show to help you get started and ultimately succeed.

To win at Real Estate Monopoly, you have to understand how it differs from the game, which is what Rule #1 concerns. The key difference between the two is this: Life isn’t about luck. In the real world, people don’t start out with exactly $1,500 a piece; they don’t take turns; they don’t roll dice. Each individual chooses when to move, where to stop, what to buy, how many amenities to add, and so on. Everyone starts with the exact same credit score, which is a great indicator of their general access to credit, and the choices they make in life determine whether they will continue to have this access. With credit, nobody is forced out into the cold, but plenty of people choose to end up there.

The second rule is, incidentally, my approach to both Real Estate Monopoly and regular Monopoly: start the purchase process as soon as you can. I got into real estate early and have bought higher-value homes as I go along. Few people start by buying Park Place; more often they start on Oriental Aven...