WEBVTT 00:00:00.000 --> 00:00:02.319 Welcome back to the Deep Dive. Today, we are 00:00:02.319 --> 00:00:05.620 turning our attention to the single largest asset 00:00:05.620 --> 00:00:08.500 class in the entire world. It's a big one. It's 00:00:08.500 --> 00:00:10.939 a huge one. It's a topic that really sits at 00:00:10.939 --> 00:00:13.820 the intersection of your personal net worth, 00:00:13.939 --> 00:00:16.359 the global economy, and the physical environment 00:00:16.359 --> 00:00:19.100 itself. We were talking about real estate. But 00:00:19.100 --> 00:00:21.079 before you tune out thinking this is just going 00:00:21.079 --> 00:00:23.859 to be about... mortgage rates or how to flip 00:00:23.859 --> 00:00:26.839 a duplex. Which it is not. It is not. I want 00:00:26.839 --> 00:00:29.019 to be really clear about our mission today. We 00:00:29.019 --> 00:00:32.560 are not looking at the market in the Zillow scrolling 00:00:32.560 --> 00:00:35.179 sense. We are looking at the machinery. Exactly. 00:00:35.539 --> 00:00:38.119 I think the term real estate is so ubiquitous 00:00:38.119 --> 00:00:40.460 that it's kind of lost its weight. We just see 00:00:40.460 --> 00:00:42.600 it as a transaction, buying a house, renting 00:00:42.600 --> 00:00:45.939 an apartment. But if you zoom out. Real estate 00:00:45.939 --> 00:00:49.259 is, and I mean this literally, the stage upon 00:00:49.259 --> 00:00:51.719 which all human history plays out. That's a great 00:00:51.719 --> 00:00:53.799 way to put it. It is the ground beneath our feet, 00:00:53.880 --> 00:00:57.679 yes, but it is also this, this legal fiction 00:00:57.679 --> 00:01:01.259 that allows us to claim we own a piece of the 00:01:01.259 --> 00:01:03.679 planet. That is the part that always trips me 00:01:03.679 --> 00:01:05.620 up. The idea that you can just draw a line in 00:01:05.620 --> 00:01:08.040 the dirt and say, okay, everything inside this 00:01:08.040 --> 00:01:10.400 square is mine and everything outside is yours. 00:01:10.599 --> 00:01:12.920 Right. That's actually a pretty modern invention. 00:01:13.500 --> 00:01:15.579 in the grand scheme of things. And it's an invention 00:01:15.579 --> 00:01:19.379 that, well, it requires a massive amount of legal 00:01:19.379 --> 00:01:21.640 and economic infrastructure just to maintain 00:01:21.640 --> 00:01:25.180 it. It's the ultimate universal asset. And it's 00:01:25.180 --> 00:01:29.609 defined by one very specific legal concept. Right. 00:01:30.010 --> 00:01:33.030 Unlike, you know, stocks, bonds or gold bars, 00:01:33.230 --> 00:01:35.129 you can't put it in your pocket. You can't move 00:01:35.129 --> 00:01:37.730 it. It's fixed. And because it's fixed, it becomes 00:01:37.730 --> 00:01:40.450 the foundation pun definitely intended for the 00:01:40.450 --> 00:01:42.810 entire concept of the nation state and the modern 00:01:42.810 --> 00:01:44.829 economy. So, OK, let's peel back the layers. 00:01:44.930 --> 00:01:46.670 We have a stack of research here. And I mean, 00:01:46.670 --> 00:01:50.069 yeah, that covers everything from Roman law to 00:01:50.069 --> 00:01:52.439 the carbon footprint of concrete. It's a lot. 00:01:52.700 --> 00:01:54.640 It is. We're going to look at how land became 00:01:54.640 --> 00:01:57.900 property, the very specific economic disasters 00:01:57.900 --> 00:02:00.840 that invented the 30 -year mortgage. Which is 00:02:00.840 --> 00:02:03.359 a surprisingly recent invention. It really is. 00:02:03.459 --> 00:02:05.379 And we're going to touch on the darker side of 00:02:05.379 --> 00:02:07.599 the industry from, you know, money laundering 00:02:07.599 --> 00:02:11.000 all the way to environmental degradation. And 00:02:11.000 --> 00:02:12.539 I think we should probably start with that core 00:02:12.539 --> 00:02:16.150 definition, immovable property. Because in the 00:02:16.150 --> 00:02:18.710 legal world, the distinction between real estate 00:02:18.710 --> 00:02:21.770 and, well, everything else is the most fundamental 00:02:21.770 --> 00:02:24.830 line in the sand. Right. Okay. So this is the 00:02:24.830 --> 00:02:27.569 big one. Real property versus personal property. 00:02:27.949 --> 00:02:31.250 I think most people sort of intuitively get this. 00:02:31.349 --> 00:02:33.189 You know, my car is personal property. My house 00:02:33.189 --> 00:02:36.289 is real property. But the legal implications 00:02:36.289 --> 00:02:39.870 are huge. It's not just about what you can carry. 00:02:40.169 --> 00:02:42.449 It's about something called the bundle of rights. 00:02:43.129 --> 00:02:45.849 That is the key phrase, the bundle of rights. 00:02:46.569 --> 00:02:49.009 When you buy a piece of real estate, you aren't 00:02:49.009 --> 00:02:51.270 just buying the dirt in the wood. You are buying 00:02:51.270 --> 00:02:53.789 a bundle of legal privileges. Okay, so what's 00:02:53.789 --> 00:02:55.569 in the bundle? You've got the right of possession, 00:02:55.789 --> 00:02:58.789 so you can occupy it. The right of control, you 00:02:58.789 --> 00:03:01.270 can use it as you like within the law, of course. 00:03:01.389 --> 00:03:03.569 The right of exclusion. Keeping people off your 00:03:03.569 --> 00:03:06.449 lawn. Exactly. Keeping others off. The right 00:03:06.449 --> 00:03:10.659 of enjoyment, using it in any legal manner. Crucially, 00:03:10.699 --> 00:03:13.439 the right of disposition. Meaning you can sell 00:03:13.439 --> 00:03:15.639 it. You can sell it, lease it, give it away. 00:03:15.819 --> 00:03:18.319 But as you said, that bundle can be unbundled, 00:03:18.379 --> 00:03:20.240 which is where it gets really interesting. This 00:03:20.240 --> 00:03:23.419 is what blows my mind. I can sell the land, but 00:03:23.419 --> 00:03:26.219 keep the mineral rights under the ground. You 00:03:26.219 --> 00:03:28.759 can. Or you can sell the building, but lease 00:03:28.759 --> 00:03:30.460 the land underneath it. It's called a ground 00:03:30.460 --> 00:03:33.300 lease. Or you can sell the air rights, which 00:03:33.300 --> 00:03:35.860 is how we get those, you know, those super skinny 00:03:35.860 --> 00:03:38.240 skyscrapers in midtown Manhattan that seem to 00:03:38.240 --> 00:03:41.180 just hover over old, smaller buildings. Precisely. 00:03:41.219 --> 00:03:44.000 In a place like New York, air rights are a tradable 00:03:44.000 --> 00:03:47.419 commodity. You can literally buy the empty space 00:03:47.419 --> 00:03:49.939 above a historic church and stack it on top of 00:03:49.939 --> 00:03:52.780 your new luxury condo tower a block away. That 00:03:52.780 --> 00:03:55.000 is just wild. It's turning three dimensional 00:03:55.000 --> 00:03:58.870 space into a financial asset. But going back 00:03:58.870 --> 00:04:01.129 to that basic definition, this distinction between 00:04:01.129 --> 00:04:03.770 real and personal property can get really tricky, 00:04:03.930 --> 00:04:06.370 especially in the commercial world. We have this 00:04:06.370 --> 00:04:10.250 concept of fixtures. The famous shake test. I've 00:04:10.250 --> 00:04:12.610 heard of this. The shake test, yeah. If you could 00:04:12.610 --> 00:04:14.469 theoretically pick the building up and shake 00:04:14.469 --> 00:04:18.269 it, whatever falls out is personal property. 00:04:18.569 --> 00:04:21.149 Whatever stays attached is real estate. That's 00:04:21.149 --> 00:04:23.750 the shorthand, yeah. And it's a good one. But 00:04:23.750 --> 00:04:25.970 legally, it's a little more nuanced than that. 00:04:26.089 --> 00:04:29.790 For example, if I own a factory and I bolt a 00:04:29.790 --> 00:04:33.529 massive 10 ton printing press to the concrete 00:04:33.529 --> 00:04:36.709 floor, is that real estate? Well, according to 00:04:36.709 --> 00:04:38.509 the shake test, it is. It's bolted down. It's 00:04:38.509 --> 00:04:41.329 not falling out. Right. But in most cases, that 00:04:41.329 --> 00:04:43.750 would be considered a trade fixture. It's personal 00:04:43.750 --> 00:04:46.110 property that's used for business. The intent 00:04:46.110 --> 00:04:48.610 is that when I move my factory, I'm taking my 00:04:48.610 --> 00:04:51.209 press with me. OK, so intent matters. Intent 00:04:51.209 --> 00:04:55.269 is huge. Whereas if you bolt a big crystal chandelier 00:04:55.269 --> 00:04:57.149 to the ceiling of your dining room. That sting. 00:04:57.350 --> 00:04:59.509 That becomes part of the house. It's a fixture. 00:04:59.629 --> 00:05:01.629 You sell the house, you're selling the chandelier. 00:05:01.629 --> 00:05:03.509 And unless you specifically exclude it in the 00:05:03.509 --> 00:05:05.509 contract. So it's about the relationship of the 00:05:05.509 --> 00:05:08.110 object to the property and the intent behind 00:05:08.110 --> 00:05:11.410 it. Exactly. And this gets even wilder when you 00:05:11.410 --> 00:05:14.170 look at natural resources. The definition of 00:05:14.170 --> 00:05:16.689 real estate includes the trees, the water on 00:05:16.689 --> 00:05:19.589 the land, the minerals underneath. But what about, 00:05:19.730 --> 00:05:23.769 say, the wildlife? I found this absolutely fascinating 00:05:23.769 --> 00:05:27.490 in the research. The legal concept of What was 00:05:27.490 --> 00:05:30.389 it, ferre naturae? Yes, wild animals. It's Latin. 00:05:30.790 --> 00:05:33.709 Under common law, generally, wild animals are 00:05:33.709 --> 00:05:35.810 considered part of the natural resource of the 00:05:35.810 --> 00:05:38.550 land, but only in a very specific sense. Wait, 00:05:38.589 --> 00:05:40.990 so you don't own the deer walking across your 00:05:40.990 --> 00:05:42.949 property in the same way you own the tree it's 00:05:42.949 --> 00:05:44.970 standing next to? You don't. You have the right 00:05:44.970 --> 00:05:46.990 to hunt it on your land, subject to state and 00:05:46.990 --> 00:05:49.529 federal laws, of course, but until you capture 00:05:49.529 --> 00:05:51.610 or kill it, it technically belongs to no one, 00:05:51.629 --> 00:05:53.829 or, some would argue, it belongs to the state 00:05:53.829 --> 00:05:56.379 in trust for the public. So the deer is kind 00:05:56.379 --> 00:05:59.379 of a free agent until it interacts with my bundle 00:05:59.379 --> 00:06:01.699 of rights in a very final way. In a way, yes. 00:06:01.939 --> 00:06:04.560 But the tree, the tree is real estate. It's attached 00:06:04.560 --> 00:06:07.220 to the land. It's immovable. Until you cut it 00:06:07.220 --> 00:06:09.480 down, the moment your chainsaw severs it from 00:06:09.480 --> 00:06:11.920 the stump, it undergoes a legal transformation. 00:06:12.519 --> 00:06:15.060 It's no longer real property. It becomes personal 00:06:15.060 --> 00:06:17.779 property. It's lumber. So you can have a magical 00:06:17.779 --> 00:06:20.019 transformation of asset classes just by starting 00:06:20.019 --> 00:06:22.439 up a chainsaw. That is the machinery we're talking 00:06:22.439 --> 00:06:24.319 about. These are the invisible rules that govern 00:06:24.319 --> 00:06:26.639 everything. And this machinery didn't just appear 00:06:26.639 --> 00:06:29.600 out of thin air. It evolved over centuries. And 00:06:29.600 --> 00:06:33.500 the very word real estate is itself an etymological 00:06:33.500 --> 00:06:37.389 clue, right? Real. Doesn't mean genuine or authentic 00:06:37.389 --> 00:06:39.949 in this context. No, not at all. It comes from 00:06:39.949 --> 00:06:42.810 the Latin word res, which just means thing or 00:06:42.810 --> 00:06:46.569 matter. In old law, it referred to a real action, 00:06:46.750 --> 00:06:48.930 a lawsuit that was about recovering the thing 00:06:48.930 --> 00:06:51.129 itself, the land, as opposed to just getting 00:06:51.129 --> 00:06:53.949 monetary damages. And estate. Estate comes from 00:06:53.949 --> 00:06:57.050 status. It refers to the nature and extent of 00:06:57.050 --> 00:06:59.910 your interest in that land, your status in relation 00:06:59.910 --> 00:07:02.550 to the thing. So when we say real estate, we 00:07:02.550 --> 00:07:04.980 are effectively saying. The status of your interest 00:07:04.980 --> 00:07:06.839 in the thing. You could absolutely say that. 00:07:06.939 --> 00:07:10.139 It's a very precise legal term. It defines the 00:07:10.139 --> 00:07:12.319 relationship between a person and a piece of 00:07:12.319 --> 00:07:15.819 land. Are you a feudal tenant paying tribute 00:07:15.819 --> 00:07:19.180 to a lord? Do you have a fee simple interest? 00:07:19.319 --> 00:07:22.370 Which is the one we think of today. Total ownership. 00:07:22.589 --> 00:07:25.589 Right. Absolute ownership. Or do you have a life 00:07:25.589 --> 00:07:28.269 estate where you own it only until you die and 00:07:28.269 --> 00:07:30.009 then it automatically reverts to someone else? 00:07:30.029 --> 00:07:32.310 All of those are different types of estate. Fee 00:07:32.310 --> 00:07:34.050 simple is the gold standard, though. That's what 00:07:34.050 --> 00:07:35.870 you want when you buy a house. That is the goal. 00:07:35.990 --> 00:07:38.550 Total ownership, transferable to your heirs, 00:07:38.550 --> 00:07:42.209 in theory, forever. But that concept that a single 00:07:42.209 --> 00:07:44.790 individual can hold fee -simple dominion over 00:07:44.790 --> 00:07:47.350 a slice of the earth is a very specific product 00:07:47.350 --> 00:07:50.050 of history. It's not a universal human constant. 00:07:50.269 --> 00:07:51.910 Which takes us back to the roots. We usually 00:07:51.910 --> 00:07:54.670 just nod to Roman law here and move on. But I 00:07:54.670 --> 00:07:57.410 want to dig into the philosophical shift that 00:07:57.410 --> 00:07:59.949 had to happen later, the idea of natural law. 00:08:00.300 --> 00:08:03.379 This is absolutely crucial. In the 15th, 16th, 00:08:03.379 --> 00:08:05.819 17th centuries, you have European thinkers who 00:08:05.819 --> 00:08:07.639 were trying to justify the concept of ownership, 00:08:07.860 --> 00:08:10.660 especially as they start exploring and colonizing 00:08:10.660 --> 00:08:13.480 the rest of the world. They needed a theory that 00:08:13.480 --> 00:08:15.800 could travel. A portable justification. And a 00:08:15.800 --> 00:08:19.120 big name here is Emmerich de Vittel. De Vittel. 00:08:19.279 --> 00:08:22.420 His book, The Law of Nations, from 1758. Yes. 00:08:23.259 --> 00:08:25.959 Vattel was a Swiss jurist, and his work basically 00:08:25.959 --> 00:08:27.959 became the handbook for international relations 00:08:27.959 --> 00:08:31.000 for centuries. He argued that private property 00:08:31.000 --> 00:08:33.639 ownership was a natural right, that it was essential 00:08:33.639 --> 00:08:35.440 for the cultivation of the earth and for the 00:08:35.440 --> 00:08:38.399 advancement of society. And this was, well, it 00:08:38.399 --> 00:08:40.080 was a very convenient argument, right? Because 00:08:40.080 --> 00:08:42.000 if you land on a continent where the indigenous 00:08:42.000 --> 00:08:44.980 population doesn't have fences and deeds and 00:08:44.980 --> 00:08:47.990 property records. You can use Vettel's logic 00:08:47.990 --> 00:08:50.090 to say, well, they aren't improving the land 00:08:50.090 --> 00:08:52.929 in a way that we recognize. Therefore, it's basically 00:08:52.929 --> 00:08:55.509 vacant. It's up for grabs. It provided the legal 00:08:55.509 --> 00:08:58.570 and, in their view, moral cover for colonization. 00:08:59.149 --> 00:09:01.409 Vettel argued that if land wasn't being used 00:09:01.409 --> 00:09:04.129 for agriculture, if it was just, say, hunting 00:09:04.129 --> 00:09:06.289 grounds, it wasn't really being used at all, 00:09:06.309 --> 00:09:08.629 and thus it wasn't fully owned in the natural 00:09:08.629 --> 00:09:11.330 law sense. That's a powerful idea. It's an idea 00:09:11.330 --> 00:09:14.440 that shaped the world. This thinking underpinned 00:09:14.440 --> 00:09:17.539 the expansion of European powers, and eventually 00:09:17.539 --> 00:09:20.399 it was baked into the DNA of the United States. 00:09:20.679 --> 00:09:22.679 So you really can't separate the history of real 00:09:22.679 --> 00:09:24.779 estate from the history of conquest. You absolutely 00:09:24.779 --> 00:09:28.000 cannot. The surveyor's chain followed the soldier's 00:09:28.000 --> 00:09:31.000 musket almost every time. Speaking of surveyors, 00:09:31.080 --> 00:09:33.100 we should give a little nod to the profession 00:09:33.100 --> 00:09:34.740 itself. You know, we see them on the side of 00:09:34.740 --> 00:09:38.120 the road with their tripods or their... Total 00:09:38.120 --> 00:09:40.179 stations, I guess they're called now. But back 00:09:40.179 --> 00:09:43.019 in the 1500s and 1600s, this was high -tech, 00:09:43.080 --> 00:09:45.620 cutting -edge work. It was the data science of 00:09:45.620 --> 00:09:48.610 its day. You had surveying in England, which 00:09:48.610 --> 00:09:51.649 was this broad profession of measuring, mapping, 00:09:51.730 --> 00:09:54.789 and managing land. But in North America, we kind 00:09:54.789 --> 00:09:57.509 of split the job in two. How so? We developed 00:09:57.509 --> 00:09:59.590 surveyors, who were the people who measured the 00:09:59.590 --> 00:10:02.090 boundaries, drew the lines on the map, and we 00:10:02.090 --> 00:10:04.029 developed appraisers, who were the people who 00:10:04.029 --> 00:10:06.230 determined the value of what was inside those 00:10:06.230 --> 00:10:08.669 lines. And that split kind of makes sense in 00:10:08.669 --> 00:10:10.409 the context of the American frontier, doesn't 00:10:10.409 --> 00:10:13.549 it? Yeah. You had these vast, unmapped, unvalued 00:10:13.549 --> 00:10:16.679 territories. Exactly. You needed the surveyor 00:10:16.679 --> 00:10:19.320 first just to tell you what was there. Then the 00:10:19.320 --> 00:10:20.940 appraiser could come in and say what it was worth. 00:10:21.159 --> 00:10:23.519 And that profession is older than you'd think. 00:10:24.039 --> 00:10:27.000 The oldest continuously operating real estate 00:10:27.000 --> 00:10:29.659 brokerage firm. I saw this fact. It's Baird and 00:10:29.659 --> 00:10:31.879 Warner, right? Baird and Warner. Established 00:10:31.879 --> 00:10:34.659 in Chicago in 1855, it was originally called 00:10:34.659 --> 00:10:38.120 L .D. Olmsted & Co. So, you know, this business 00:10:38.120 --> 00:10:40.980 of buying and selling land has been a formal 00:10:40.980 --> 00:10:43.820 industry for a very long time. And all of that 00:10:43.820 --> 00:10:46.259 surveying and appraising and selling leads us 00:10:46.259 --> 00:10:48.559 to the biggest real estate deal in the history 00:10:48.559 --> 00:10:52.440 of the world. The Louisiana Purchase, 1803. This 00:10:52.440 --> 00:10:54.799 is the moment where the scale of American real 00:10:54.799 --> 00:10:58.220 estate goes from, I don't know. colonial to continental. 00:10:58.419 --> 00:11:00.279 It's hard to overstate the magnitude of this 00:11:00.279 --> 00:11:02.759 deal. The U .S. acquired the Louisiana Territory 00:11:02.759 --> 00:11:04.980 from Napoleonic France. We're talking over 800 00:11:04.980 --> 00:11:08.399 ,000 square miles of land. It doubled the size 00:11:08.399 --> 00:11:10.700 of the country overnight. For a price of $15 00:11:10.700 --> 00:11:13.779 million. $15 million. I've seen the math on this 00:11:13.779 --> 00:11:15.399 and it's just staggering. It comes out to something 00:11:15.399 --> 00:11:17.679 like four cents an acre. Roughly four cents an 00:11:17.679 --> 00:11:20.490 acre. It's an unbelievable number, but we have 00:11:20.490 --> 00:11:23.250 to be really careful with how we interpret that 00:11:23.250 --> 00:11:25.269 number. Right, because this goes right back to 00:11:25.269 --> 00:11:27.269 what we just said about Vittel and natural law. 00:11:27.529 --> 00:11:30.909 The U .S. didn't pay France for the fee -simple 00:11:30.909 --> 00:11:33.950 ownership of every single acre. No, France didn't 00:11:33.950 --> 00:11:36.210 own the backyard of a Sioux family living in 00:11:36.210 --> 00:11:40.230 the Dakotas. What the U .S. bought was the preemptive 00:11:40.230 --> 00:11:42.690 right. The preemptive right. What did that mean? 00:11:42.870 --> 00:11:45.429 It means they bought the sovereignty from a European 00:11:45.429 --> 00:11:48.470 perspective. They bought the exclusive right 00:11:48.470 --> 00:11:51.929 to be the ones to negotiate with, or more often, 00:11:52.090 --> 00:11:54.629 conquer the indigenous peoples who were actually 00:11:54.629 --> 00:11:57.029 living there. They bought the right to acquire 00:11:57.029 --> 00:11:59.809 that land without interference from Spain or 00:11:59.809 --> 00:12:02.090 Britain. So the four cents an acre was just the 00:12:02.090 --> 00:12:04.460 entry fee. It was the entry fee, the actual cost 00:12:04.460 --> 00:12:06.919 of acquiring that land in terms of wars, broken 00:12:06.919 --> 00:12:09.940 treaties, displacement and payments was vastly 00:12:09.940 --> 00:12:12.539 higher over the next century. But from a purely 00:12:12.539 --> 00:12:15.480 economic perspective, that deal just flooded 00:12:15.480 --> 00:12:18.100 the American market with land. It created this 00:12:18.100 --> 00:12:20.779 national ethos that land was basically infinite. 00:12:21.039 --> 00:12:25.220 And cheap. It set off a century of rampant speculation. 00:12:26.320 --> 00:12:28.899 When land is that abundant, people don't just 00:12:28.899 --> 00:12:31.899 buy it to use it. They buy it to flip it. This 00:12:31.899 --> 00:12:33.799 is where the American obsession with real estate 00:12:33.799 --> 00:12:36.139 speculation really begins. Absolutely. You had 00:12:36.139 --> 00:12:38.879 the canal booms, the railroad booms. Everyone 00:12:38.879 --> 00:12:41.220 was trying to buy the empty plot of land where 00:12:41.220 --> 00:12:43.379 they thought the next town or the next train 00:12:43.379 --> 00:12:46.080 station would be built. And speculation, as we 00:12:46.080 --> 00:12:49.840 know, inevitably leads to bubbles, which in turn 00:12:49.840 --> 00:12:52.519 leads to busts. The biggest of them all. Which 00:12:52.519 --> 00:12:55.539 brings us to the Great Depression. I feel like 00:12:55.539 --> 00:12:58.480 when we learn about the 1929 crash in school, 00:12:58.659 --> 00:13:01.299 we focus so much on the stock market. We see 00:13:01.299 --> 00:13:03.440 the images of the ticker tape. We don't talk 00:13:03.440 --> 00:13:05.299 enough about the real estate crash that followed. 00:13:05.399 --> 00:13:08.620 The real estate crash was arguably more devastating 00:13:08.620 --> 00:13:11.580 for the average American family. And to understand 00:13:11.580 --> 00:13:13.779 why, you have to understand what a mortgage looked 00:13:13.779 --> 00:13:17.820 like in, say, 1928. It wasn't the 30 -year fixed 00:13:17.820 --> 00:13:20.200 -rate loan that we think of as normal today. 00:13:20.399 --> 00:13:22.519 Not even close. It was a totally different animal. 00:13:22.580 --> 00:13:24.779 Back then, a typical mortgage was a short -term 00:13:24.779 --> 00:13:27.460 loan, maybe three to five years. That's it. That's 00:13:27.460 --> 00:13:31.480 it. And you usually had to put 50 % down, a huge 00:13:31.480 --> 00:13:34.460 barrier to entry. Then, for those three to five 00:13:34.460 --> 00:13:37.360 years, you paid interest only. So your payments 00:13:37.360 --> 00:13:39.419 weren't even touching the principal. Not a dime. 00:13:39.899 --> 00:13:42.279 And then at the end of the term, a massive balloon 00:13:42.279 --> 00:13:44.600 payment was due for the entire principal amount 00:13:44.600 --> 00:13:47.440 all at once. Wow. So every three to five years, 00:13:47.559 --> 00:13:49.539 you had to either have enough cash to pay off 00:13:49.539 --> 00:13:52.639 the entire house or you had to find a bank that 00:13:52.639 --> 00:13:54.840 was willing to refinance you into a new loan. 00:13:55.259 --> 00:13:58.220 Exactly. And that system works OK, I guess, as 00:13:58.220 --> 00:14:00.539 long as property values are steadily rising and 00:14:00.539 --> 00:14:03.000 banks are liquid and happy to lend. But in 1930. 00:14:03.470 --> 00:14:06.490 In 1930, the music stopped. The banks had failed. 00:14:06.750 --> 00:14:09.570 There was no money to lend. Property values had 00:14:09.570 --> 00:14:12.889 dropped by 50 percent in just four years. So 00:14:12.889 --> 00:14:14.970 even if you still had your job and you were making 00:14:14.970 --> 00:14:17.610 your interest payments on time, when that balloon 00:14:17.610 --> 00:14:19.990 payment hit. You were out. Your bank couldn't 00:14:19.990 --> 00:14:21.570 refinance you because they didn't have the cash. 00:14:21.809 --> 00:14:23.809 And you couldn't sell the house to cover the 00:14:23.809 --> 00:14:25.730 loan because it was now worth less than what 00:14:25.730 --> 00:14:27.690 you owed on it. You were underwater. It was a 00:14:27.690 --> 00:14:31.120 systemic collapse. A total meltdown. Foreclosures 00:14:31.120 --> 00:14:33.159 were happening at a rate of a thousand per day 00:14:33.159 --> 00:14:37.820 in 1933. A thousand families a day losing their 00:14:37.820 --> 00:14:40.460 homes. So the government has to step in. And 00:14:40.460 --> 00:14:42.340 this is where the alphabet soup of the New Deal 00:14:42.340 --> 00:14:45.580 doesn't just save the economy, it actually changes 00:14:45.580 --> 00:14:47.360 the fundamental structure of the American dream. 00:14:47.480 --> 00:14:50.120 They had to reinvent the entire market from the 00:14:50.120 --> 00:14:53.970 ground up. First you get the HOLC. The Homeowners 00:14:53.970 --> 00:14:56.610 Loan Corporation. What did they do? Their job 00:14:56.610 --> 00:14:59.950 was to go out and buy up all these toxic, defaulted 00:14:59.950 --> 00:15:02.850 mortgages from the banks. And then they reinstated 00:15:02.850 --> 00:15:05.490 them with new terms for the homeowner. They stretched 00:15:05.490 --> 00:15:08.509 the payments out to 15, then 20 years. And crucially, 00:15:08.629 --> 00:15:11.370 they introduced this new idea of amortization. 00:15:11.769 --> 00:15:14.840 Yes. This was the birth of amortization on a 00:15:14.840 --> 00:15:17.259 mass scale. The idea that each monthly payment 00:15:17.259 --> 00:15:19.460 would include both interest and a little bit 00:15:19.460 --> 00:15:21.580 of principal so that over the life of the loan, 00:15:21.679 --> 00:15:23.779 you're slowly but surely paying it down. That 00:15:23.779 --> 00:15:26.340 seems so obvious now, but it was a radical idea 00:15:26.340 --> 00:15:28.799 at the time. It was a game changer, but it created 00:15:28.799 --> 00:15:31.639 a new problem. Banks were terrified of lending 00:15:31.639 --> 00:15:34.320 money for that long. 20 or 30 years is a huge 00:15:34.320 --> 00:15:36.259 risk for a lender. So how did the government 00:15:36.259 --> 00:15:39.620 solve that? They created the FHA, the Federal 00:15:39.620 --> 00:15:42.100 Housing Administration, with the National Housing 00:15:42.100 --> 00:15:46.259 Act of 1934. The FHA basically went to the banks 00:15:46.259 --> 00:15:48.080 and made them an offer they couldn't refuse. 00:15:48.399 --> 00:15:50.940 Which was? You lend the money to the home buyer 00:15:50.940 --> 00:15:54.340 for 30 years with a low down payment, and we, 00:15:54.399 --> 00:15:56.279 the federal government, will insure that loan. 00:15:56.679 --> 00:15:59.759 If the borrower defaults, we will pay you back. 00:16:00.320 --> 00:16:02.779 So it completely de -risked the entire system 00:16:02.779 --> 00:16:05.139 for the banks. Completely. And it unleashed a 00:16:05.139 --> 00:16:07.919 torrent of capital into the housing market. Suddenly, 00:16:07.980 --> 00:16:10.000 you didn't need 50 percent down. You could buy 00:16:10.000 --> 00:16:13.500 a home with 10 or 20 percent down. Then to complete 00:16:13.500 --> 00:16:16.740 the picture, they created Fannie Mae in 1938. 00:16:16.879 --> 00:16:19.940 To create a secondary market. Exactly. Fannie 00:16:19.940 --> 00:16:22.519 Mae would buy the FHA insured mortgages from 00:16:22.519 --> 00:16:24.500 the banks, which gave the banks their cash back 00:16:24.500 --> 00:16:26.740 immediately so they could go out and fund new 00:16:26.740 --> 00:16:29.379 homes. It created a perpetual motion machine 00:16:29.379 --> 00:16:31.779 for. housing finance. But we have to pause here 00:16:31.779 --> 00:16:34.179 because while this new system saved the housing 00:16:34.179 --> 00:16:36.399 market and built the American middle class, it 00:16:36.399 --> 00:16:39.779 also codified segregation. This was not a rising 00:16:39.779 --> 00:16:42.679 tide that lifted all boats. No, it absolutely 00:16:42.679 --> 00:16:46.360 was not. The FHA had to decide which loans it 00:16:46.360 --> 00:16:49.519 was going to insure. And to do that, they created 00:16:49.519 --> 00:16:52.620 these elaborate maps to assess the risk of lending 00:16:52.620 --> 00:16:55.399 in every neighborhood in America. And they explicitly 00:16:55.399 --> 00:16:58.320 graded those neighborhoods based on racial composition. 00:16:58.799 --> 00:17:01.519 Explicitly. This is the origin of the term redlining. 00:17:01.679 --> 00:17:04.339 Explain that. The FHA appraisers would literally 00:17:04.339 --> 00:17:08.220 draw lines on maps. Green areas were the new 00:17:08.220 --> 00:17:11.519 homogenous white suburbs. They were deemed the 00:17:11.519 --> 00:17:15.279 best credit risks. Blue areas were still desirable. 00:17:15.579 --> 00:17:18.519 Yellow areas were definitely declining. And red 00:17:18.519 --> 00:17:21.059 areas were hazardous. And the red areas were? 00:17:21.220 --> 00:17:23.480 The red areas were almost always the neighborhoods 00:17:23.480 --> 00:17:25.859 where African -Americans and other minority groups 00:17:25.859 --> 00:17:29.119 lived. The FHA would not. insure mortgages in 00:17:29.119 --> 00:17:32.200 those redlined areas, period. So this meant that 00:17:32.200 --> 00:17:34.160 while white families were getting these government 00:17:34.160 --> 00:17:36.579 subsidized, low interest wealth building loans 00:17:36.579 --> 00:17:39.660 to move to the suburbs and buy new houses. Black 00:17:39.660 --> 00:17:42.000 families were completely locked out of the formal 00:17:42.000 --> 00:17:44.000 mortgage market. They couldn't get loans to buy 00:17:44.000 --> 00:17:45.339 in their own neighborhoods and they couldn't 00:17:45.339 --> 00:17:47.299 get loans to move to the new suburbs. They were 00:17:47.299 --> 00:17:50.259 trapped. And because real estate is the primary 00:17:50.259 --> 00:17:53.289 way. that middle -class families build generational 00:17:53.289 --> 00:17:56.589 wealth in America, this one policy created a 00:17:56.589 --> 00:17:59.269 racial wealth gap that we are still dealing with 00:17:59.269 --> 00:18:01.849 today. Precisely. This wasn't just about the 00:18:01.849 --> 00:18:04.910 personal prejudice of some banker. This was official 00:18:04.910 --> 00:18:07.650 federal policy, written down in black and white 00:18:07.650 --> 00:18:10.329 in the FHA's underwriting manuals. And it wasn't 00:18:10.329 --> 00:18:12.549 until the Civil Rights Era. It wasn't until the 00:18:12.549 --> 00:18:15.410 Fair Housing Act of 1968, which was Title VIII 00:18:15.410 --> 00:18:17.430 of the Civil Rights Act, that this was finally 00:18:17.430 --> 00:18:20.589 made illegal. But by then, 60 years of damage 00:18:20.650 --> 00:18:23.349 had been done. The suburbs were built, the equity 00:18:23.349 --> 00:18:25.809 was generated, and the economic patterns were 00:18:25.809 --> 00:18:28.289 set in stone. It's a really sobering reminder 00:18:28.289 --> 00:18:31.569 that this machinery of real estate isn't neutral. 00:18:31.990 --> 00:18:34.990 It can be and has been tuned to include some 00:18:34.990 --> 00:18:36.730 and exclude others. And that machinery keeps 00:18:36.730 --> 00:18:38.990 evolving. Let's fast forward a bit. Jump to 1999, 00:18:39.349 --> 00:18:41.670 the World Wide Web. Ah, the internet arrives. 00:18:42.710 --> 00:18:45.539 Zillow. Redfin, the democratization of data. 00:18:45.720 --> 00:18:48.380 It completely changed the information asymmetry 00:18:48.380 --> 00:18:50.339 in the market. Before the internet, your real 00:18:50.339 --> 00:18:52.319 estate broker held all the cards. They had the 00:18:52.319 --> 00:18:54.559 big book of listings, the multiple listing service. 00:18:54.799 --> 00:18:57.460 The MLS. Yeah. You as a consumer had no access 00:18:57.460 --> 00:19:00.059 to it. Now you can sit on your couch and see 00:19:00.059 --> 00:19:02.039 the price history of every house on your block, 00:19:02.240 --> 00:19:04.759 the tax assessment, the school ratings, everything. 00:19:05.220 --> 00:19:07.940 It turned real estate into the spectator sport 00:19:07.940 --> 00:19:10.059 we were talking about earlier. But even with 00:19:10.059 --> 00:19:14.519 all that data at our fingertips. The actual ownership 00:19:14.519 --> 00:19:16.380 structures can still be incredibly confusing. 00:19:17.000 --> 00:19:19.940 We tend to gloss over this, but let's really 00:19:19.940 --> 00:19:22.319 drill down into the difference between a condominium 00:19:22.319 --> 00:19:25.200 and a co -op. Because if you're trying to buy 00:19:25.200 --> 00:19:27.460 an apartment in a city like New York, or if you're 00:19:27.460 --> 00:19:30.000 even looking at international markets, this distinction 00:19:30.000 --> 00:19:32.720 is legally massive. It's the difference between 00:19:32.720 --> 00:19:34.799 owning a piece of real estate and owning a piece 00:19:34.799 --> 00:19:37.259 of a business. Okay, walk us through it. Let's 00:19:37.259 --> 00:19:39.680 start with a condo. A condominium is real property. 00:19:40.140 --> 00:19:42.920 It's fee simple. You own your unit, that box 00:19:42.920 --> 00:19:45.099 of air and everything inside it is yours. You 00:19:45.099 --> 00:19:47.779 get a deed for it. You pay property taxes on 00:19:47.779 --> 00:19:49.599 that specific unit. And I can sell it to pretty 00:19:49.599 --> 00:19:51.759 much anyone I want. Generally speaking, yes. 00:19:51.900 --> 00:19:54.259 The condo association might have a right of first 00:19:54.259 --> 00:19:57.079 refusal, but they can't just arbitrarily tell 00:19:57.079 --> 00:20:00.039 you who you can and can't sell to. Okay, so that's 00:20:00.039 --> 00:20:02.619 a condo. Now, a co -op. A housing cooperative 00:20:02.619 --> 00:20:05.359 is a totally different legal structure. In a 00:20:05.359 --> 00:20:08.299 co -op, a corporation owns the entire building, 00:20:08.440 --> 00:20:11.160 the land, the bricks, everything. The whole thing 00:20:11.160 --> 00:20:14.059 is one asset. One asset owned by one corporation. 00:20:14.759 --> 00:20:17.880 You, as a buyer, do not buy your apartment. You 00:20:17.880 --> 00:20:20.200 buy shares of stock in the corporation that owns 00:20:20.200 --> 00:20:22.779 the building. So I'm not a homeowner. I'm a stock 00:20:22.779 --> 00:20:25.220 investor. You're a shareholder. And along with 00:20:25.220 --> 00:20:27.599 your shares comes a document called a proprietary 00:20:27.599 --> 00:20:30.700 lease, which gives you the right to live in apartment 00:20:30.700 --> 00:20:33.259 4B. Okay, but why does that matter so much in 00:20:33.259 --> 00:20:36.079 practice? It matters because you are going into 00:20:36.079 --> 00:20:37.880 business with all the other shareholders in the 00:20:37.880 --> 00:20:39.720 building. And because you're business partners, 00:20:39.920 --> 00:20:42.740 they have a legal right to decide who they want 00:20:42.740 --> 00:20:44.500 to do business with. This is why co -op boards 00:20:44.500 --> 00:20:47.400 are so notorious. They can reject you for almost 00:20:47.400 --> 00:20:50.049 any reason. Any reason that doesn't violate fair 00:20:50.049 --> 00:20:53.029 housing laws? Yes. They can look at your finances 00:20:53.029 --> 00:20:55.130 and decide your income isn't stable enough. They 00:20:55.130 --> 00:20:56.930 can reject you because they don't like that you 00:20:56.930 --> 00:21:00.390 play the drums. In a condo, your neighbor can't 00:21:00.390 --> 00:21:03.069 stop you from buying the unit next door. In a 00:21:03.069 --> 00:21:05.509 co -op, that neighbor is on the board and they 00:21:05.509 --> 00:21:07.529 are interviewing you to be their new business 00:21:07.529 --> 00:21:10.190 partner. And this model isn't just a weird New 00:21:10.190 --> 00:21:12.690 York thing. We saw notes in the source material 00:21:12.690 --> 00:21:15.420 on similar structures globally. That's right. 00:21:15.519 --> 00:21:18.519 In India, for example, particularly in big metro 00:21:18.519 --> 00:21:21.140 cities like Mumbai, the Cooperative Housing Society 00:21:21.140 --> 00:21:23.460 is a very common model. It allows for collective 00:21:23.460 --> 00:21:26.400 management and ownership of these really high 00:21:26.400 --> 00:21:28.279 -density residential buildings. And speaking 00:21:28.279 --> 00:21:31.240 of Mumbai, the research also highlighted a type 00:21:31.240 --> 00:21:34.559 of housing called chawls. Yes. These are fascinating. 00:21:34.640 --> 00:21:37.339 They often get described in English as just tenements. 00:21:37.559 --> 00:21:39.940 But they seem to have a unique social structure. 00:21:40.279 --> 00:21:42.680 They really do. A chal typically consists of 00:21:42.680 --> 00:21:45.920 many small one or two room private units for 00:21:45.920 --> 00:21:49.200 families, but they all open onto a shared long 00:21:49.200 --> 00:21:52.319 corridor or veranda and they often share sanitation 00:21:52.319 --> 00:21:54.619 facilities. So there's this forced interaction. 00:21:54.740 --> 00:21:57.940 An intense communal social fabric is created. 00:21:58.259 --> 00:22:01.960 The chal culture is a recognized social phenomenon 00:22:01.960 --> 00:22:05.140 in Mumbai literature and cinema. It's high density 00:22:05.140 --> 00:22:07.559 living where the boundaries between public and 00:22:07.559 --> 00:22:11.460 private space are incredible. It really challenges 00:22:11.460 --> 00:22:14.680 that American ideal of the white picket fence 00:22:14.680 --> 00:22:18.200 and the isolated single family home. Completely. 00:22:18.339 --> 00:22:20.059 And then on the other end of the spectrum in 00:22:20.059 --> 00:22:22.640 South Asia, you have the Havelis. These are the 00:22:22.640 --> 00:22:25.140 traditional mansions often built around an internal 00:22:25.140 --> 00:22:28.279 courtyard. They were designed for large, multi 00:22:28.279 --> 00:22:31.220 -generational families and also for climate control 00:22:31.220 --> 00:22:34.099 in very hot weather. The architecture of real 00:22:34.099 --> 00:22:36.400 estate is always a reflection of a culture's 00:22:36.400 --> 00:22:38.700 family structure and climate. Which brings us 00:22:38.700 --> 00:22:40.480 to the structure of our future, or maybe the 00:22:40.480 --> 00:22:43.140 crisis of our future. We can't have this conversation 00:22:43.140 --> 00:22:45.480 in the 21st century without talking about the 00:22:45.480 --> 00:22:48.099 environment. And not just, you know, planting 00:22:48.099 --> 00:22:50.660 some trees in the front yard. No. We need to 00:22:50.660 --> 00:22:52.579 talk about what some people are calling the carbon 00:22:52.579 --> 00:22:55.339 bomb of the built environment. The central statistic 00:22:55.339 --> 00:22:59.819 that everyone needs to know is 39%. 39%. Real 00:22:59.819 --> 00:23:03.579 estate buildings and their construction is responsible 00:23:03.579 --> 00:23:06.880 for roughly 39 % of global carbon emissions. 00:23:07.039 --> 00:23:09.640 It is a staggering number. It's more than transportation. 00:23:09.660 --> 00:23:12.509 It's more than industry. And we need to break 00:23:12.509 --> 00:23:14.109 that down because it comes from two different 00:23:14.109 --> 00:23:17.470 places. About 28 % of that total is what we call 00:23:17.470 --> 00:23:19.750 operational carbon. That's the energy to run 00:23:19.750 --> 00:23:21.309 the building, right? The lights, the heating, 00:23:21.369 --> 00:23:23.769 the air conditioning. Exactly. And that's the 00:23:23.769 --> 00:23:25.569 part we're getting better at fixing. We can add 00:23:25.569 --> 00:23:27.930 solar panels. We can install heat pumps, better 00:23:27.930 --> 00:23:30.529 insulation. We have a roadmap for that. But the 00:23:30.529 --> 00:23:33.890 other 11%, that's the hard part. That's embodied 00:23:33.890 --> 00:23:36.309 carbon. This is the carbon footprint of the materials 00:23:36.309 --> 00:23:38.869 themselves, the concrete, the steel, the glass. 00:23:39.519 --> 00:23:41.740 The process of making cement, which is the key 00:23:41.740 --> 00:23:44.299 ingredient in concrete, is responsible for something 00:23:44.299 --> 00:23:47.819 like 8 % of all global CO2 emissions by itself. 00:23:48.019 --> 00:23:50.839 Wow. You cannot build a modern skyscraper without 00:23:50.839 --> 00:23:53.920 a massive upfront carbon footprint, no matter 00:23:53.920 --> 00:23:56.000 how many solar panels you eventually put on the 00:23:56.000 --> 00:23:58.259 roof. The damage is done before anyone even moves 00:23:58.259 --> 00:24:00.819 in. So when we hear about green development or 00:24:00.819 --> 00:24:04.240 buildings with LE certification, is that actually 00:24:04.240 --> 00:24:07.440 solving the problem? Or is some of it just, you 00:24:07.440 --> 00:24:10.769 know, marketing? It's a bit of both. LED, which 00:24:10.769 --> 00:24:12.670 is the Leadership in Energy and Environmental 00:24:12.670 --> 00:24:15.829 Design certification, has definitely raised the 00:24:15.829 --> 00:24:18.490 baseline for the industry. It forces developers 00:24:18.490 --> 00:24:22.490 to think about water efficiency, material sourcing, 00:24:22.490 --> 00:24:25.250 and indoor air quality. Which is all good. It's 00:24:25.250 --> 00:24:27.529 all good, but there's a valid critique that it 00:24:27.529 --> 00:24:30.190 can be gamified. You can get points for putting 00:24:30.190 --> 00:24:32.490 in a bike rack or using bamboo floors, which 00:24:32.490 --> 00:24:35.130 is great, but that doesn't really offset the 00:24:35.130 --> 00:24:37.369 thousands of tons of concrete you just poured 00:24:37.369 --> 00:24:39.789 into the foundation. The real pressure for change, 00:24:39.869 --> 00:24:41.750 though, it seems like it isn't coming from the 00:24:41.750 --> 00:24:43.490 plaque they put in the lobby. It's starting to 00:24:43.490 --> 00:24:45.289 come from the insurance companies. This is where 00:24:45.289 --> 00:24:47.190 the rubber meets the road. This is where climate 00:24:47.190 --> 00:24:49.730 change stops being an abstract concept and starts 00:24:49.730 --> 00:24:52.730 having a price tag. We are now seeing a major 00:24:52.730 --> 00:24:56.410 retreat of insurance carriers from entire markets. 00:24:56.470 --> 00:24:59.140 Like Florida and California. Florida because 00:24:59.140 --> 00:25:01.579 of hurricanes and flooding. California because 00:25:01.579 --> 00:25:04.039 of wildfires. The risk models are telling these 00:25:04.039 --> 00:25:07.079 companies that some areas are becoming uninsurable 00:25:07.079 --> 00:25:09.880 at any price. Yet if you can't get homeowners 00:25:09.880 --> 00:25:12.460 insurance. You can't get a mortgage. The bank 00:25:12.460 --> 00:25:14.759 will not lend you hundreds of thousands of dollars 00:25:14.759 --> 00:25:17.599 on an asset that could be wiped out in an afternoon 00:25:17.599 --> 00:25:20.299 with no insurance to cover the loss. So if you 00:25:20.299 --> 00:25:22.579 can't get a mortgage, the value of that real 00:25:22.579 --> 00:25:26.420 estate. Goes to zero or close to it. We are facing 00:25:26.420 --> 00:25:29.359 a potential climate correction in real estate 00:25:29.359 --> 00:25:32.359 values that the market has not fully priced in 00:25:32.359 --> 00:25:35.000 yet. The fact that some of this land might be 00:25:35.000 --> 00:25:37.900 underwater or uninsurable in 20 or 30 years is 00:25:37.900 --> 00:25:40.940 a huge looming financial risk. So the old mantra 00:25:40.940 --> 00:25:44.259 of location, location, location is being replaced. 00:25:44.460 --> 00:25:45.920 It's being replaced by environment, environment, 00:25:46.119 --> 00:25:48.279 environment. The location doesn't matter if the 00:25:48.279 --> 00:25:50.599 environment becomes hostile. OK, let's pivot 00:25:50.599 --> 00:25:53.200 now to the money. Because for all the talk of 00:25:53.200 --> 00:25:55.839 homes and habitats and carbon, for a certain 00:25:55.839 --> 00:25:58.779 segment of the global population, real estate 00:25:58.779 --> 00:26:01.619 is purely a financial instrument. And this brings 00:26:01.619 --> 00:26:04.579 us to, well, the dark side. The world of ultra 00:26:04.579 --> 00:26:07.140 high end real estate, anonymous shell companies 00:26:07.140 --> 00:26:10.200 and money laundering. I think people have a vague 00:26:10.200 --> 00:26:12.619 sense of this. You know, the trope of the Russian 00:26:12.619 --> 00:26:15.019 oligarch in the London penthouse. But how does 00:26:15.019 --> 00:26:17.420 it actually work? How do you use a condo to wash 00:26:17.420 --> 00:26:20.680 dirty money? It works through one key vulnerability. 00:26:22.039 --> 00:26:24.500 Anonymity. In the U .S., for a very long time, 00:26:24.539 --> 00:26:27.119 it was incredibly easy. You could form an LLC, 00:26:27.559 --> 00:26:30.140 a limited liability company in a state like Delaware 00:26:30.140 --> 00:26:32.700 with almost no disclosure. And then the LLC buys 00:26:32.700 --> 00:26:35.759 the property. You could buy a $50 million penthouse 00:26:35.759 --> 00:26:38.200 in New York City, and the public deed would just 00:26:38.200 --> 00:26:42.460 say the owner is 123 Park Avenue, LLC. No one 00:26:42.460 --> 00:26:45.680 had any idea who the actual human being, beneficial 00:26:45.680 --> 00:26:48.400 owner behind that company was. So let's say I'm 00:26:48.400 --> 00:26:50.339 a corrupt foreign official from a country with 00:26:50.339 --> 00:26:52.720 a weak rule of law. And I've just siphoned off 00:26:52.720 --> 00:26:55.940 $50 million in bribes. I can move that money 00:26:55.940 --> 00:26:58.319 into the U .S. banking system, use it to buy 00:26:58.319 --> 00:27:00.940 a penthouse through an anonymous LLC, and my 00:27:00.940 --> 00:27:03.500 money is now parked in a stable U .S. dollar 00:27:03.500 --> 00:27:07.200 denominated asset. It's clean. Precisely. It's 00:27:07.200 --> 00:27:09.599 often described as a safety deposit box in the 00:27:09.599 --> 00:27:12.349 sky. You aren't buying the apartment to live 00:27:12.349 --> 00:27:14.849 in it or even to rent it out. You are buying 00:27:14.849 --> 00:27:17.569 it simply to store value in a stable jurisdiction, 00:27:17.930 --> 00:27:20.509 the United States, where it's protected by strong 00:27:20.509 --> 00:27:23.049 property laws from being seized back home. And 00:27:23.049 --> 00:27:26.380 so the apartment just sits there empty. towers. 00:27:26.519 --> 00:27:29.640 You walk past these ultra luxury new developments 00:27:29.640 --> 00:27:32.319 at night and there are almost no lights on. And 00:27:32.319 --> 00:27:34.220 this contributes to the housing crisis in these 00:27:34.220 --> 00:27:36.539 cities because all this capital isn't building 00:27:36.539 --> 00:27:38.420 housing for people who actually live and work 00:27:38.420 --> 00:27:41.460 there. It's building high end storage units for 00:27:41.460 --> 00:27:43.599 global capital. Is the government doing anything 00:27:43.599 --> 00:27:46.279 to stop this? They are trying to. The Treasury 00:27:46.279 --> 00:27:49.519 Department, through FinCEN, has started using 00:27:49.519 --> 00:27:51.740 something called geographic targeting orders, 00:27:51.859 --> 00:27:55.059 or GTOs. What's that? In certain high -risk markets 00:27:55.059 --> 00:27:57.799 like Manhattan, Miami, Los Angeles, they now 00:27:57.799 --> 00:28:00.200 require title insurance companies to identify 00:28:00.200 --> 00:28:03.039 and report the actual human being behind any 00:28:03.039 --> 00:28:06.200 all -cash purchase of luxury real estate made 00:28:06.200 --> 00:28:08.059 through a shawl company. So they're trying to 00:28:08.059 --> 00:28:10.680 peel back that corporate veil. They are, slowly. 00:28:11.440 --> 00:28:14.140 But the money is like water. It always tries 00:28:14.140 --> 00:28:16.099 to find the cracks in the system. Now, for the 00:28:16.099 --> 00:28:18.000 investors listening who are not laundering money 00:28:18.000 --> 00:28:19.859 but are just looking for a legitimate return, 00:28:20.079 --> 00:28:22.519 we need to talk about how money is actually made. 00:28:22.619 --> 00:28:25.420 Because there is this pervasive myth that real 00:28:25.420 --> 00:28:27.980 estate always goes up. That is a very dangerous 00:28:27.980 --> 00:28:31.079 lie. The land under the building usually appreciates 00:28:31.079 --> 00:28:33.680 because supply is fixed and population and demand 00:28:33.680 --> 00:28:37.329 tend to grow. But the structure itself. The house. 00:28:37.490 --> 00:28:40.569 That is a depreciating asset. This is the concept 00:28:40.569 --> 00:28:42.529 you see in a phrasal called hedonic regression. 00:28:42.930 --> 00:28:45.349 It sounds fancy, but it just means things rot. 00:28:45.549 --> 00:28:49.750 Roofs leak. Pipes burst. HVAC systems fail. Styles 00:28:49.750 --> 00:28:52.089 change. If you don't constantly put money into 00:28:52.089 --> 00:28:54.769 the house, what investors call capital expenditures 00:28:54.769 --> 00:28:57.809 or capex, the value of that physical structure 00:28:57.809 --> 00:29:00.170 goes to zero over time. So when you see a house 00:29:00.170 --> 00:29:02.690 sell for a big profit 20 years after it was bought, 00:29:02.849 --> 00:29:05.089 it's really the value of the land carrying all 00:29:05.089 --> 00:29:07.289 the weight and overcome. the natural decay of 00:29:07.289 --> 00:29:10.130 the building itself. Correct. Or the owner has 00:29:10.130 --> 00:29:12.630 spent a fortune on maintenance and upgrades over 00:29:12.630 --> 00:29:15.250 those 20 years that they aren't properly factoring 00:29:15.250 --> 00:29:18.049 into their so -called profit. Okay. So let's 00:29:18.049 --> 00:29:20.750 break down the risk profiles for a serious investor. 00:29:21.069 --> 00:29:23.769 If I'm an institutional fund, I'm not just buying 00:29:23.769 --> 00:29:27.049 a building. I'm buying a specific risk strategy. 00:29:27.349 --> 00:29:30.349 That's right. In the industry, we generally categorize 00:29:30.349 --> 00:29:33.369 them into three main buckets, core, value -add, 00:29:33.490 --> 00:29:36.230 and opportunistic. OK, start with core. What's 00:29:36.230 --> 00:29:38.829 a core investment? Core is the bonds of the real 00:29:38.829 --> 00:29:42.069 estate world. It's low risk, low return. Think 00:29:42.069 --> 00:29:44.529 of a brand new, fully leased apartment building 00:29:44.529 --> 00:29:46.930 in a great neighborhood in Chicago with high 00:29:46.930 --> 00:29:49.890 credit tenants on long term leases. It's steady, 00:29:50.049 --> 00:29:52.529 predictable. Very predictable. It generates stable 00:29:52.529 --> 00:29:54.809 cash flow from day one. You're not expecting 00:29:54.809 --> 00:29:57.529 huge appreciation. You're buying it to preserve 00:29:57.529 --> 00:29:59.789 your capital and get a steady dividend. OK, so 00:29:59.789 --> 00:30:02.369 that's core. What's value add? Value add is the 00:30:02.369 --> 00:30:05.009 fixer upper on a corporate scale. an office building 00:30:05.009 --> 00:30:08.269 that is maybe only 70 % occupied. The lobby is 00:30:08.269 --> 00:30:11.309 from the 1980s and looks tired. The rents are 00:30:11.309 --> 00:30:13.369 below market rate. So there's potential there. 00:30:13.529 --> 00:30:15.930 There's potential to add value. You put capital 00:30:15.930 --> 00:30:18.190 in, you renovate the lobby, you upgrade the common 00:30:18.190 --> 00:30:21.150 areas, you bring in a new leasing team to get 00:30:21.150 --> 00:30:24.049 it up to 95 % occupancy with higher rents, and 00:30:24.049 --> 00:30:26.250 then you sell it. You are actively manufacturing 00:30:26.250 --> 00:30:29.890 appreciation. It's more risk, but a higher potential 00:30:29.890 --> 00:30:34.009 return. And finally, opportunistic. Opportunistic 00:30:34.009 --> 00:30:37.240 is high risk, high reward. This is often ground 00:30:37.240 --> 00:30:39.819 up development. You're buying a dirt lot and 00:30:39.819 --> 00:30:42.119 betting that in the three years it takes to get 00:30:42.119 --> 00:30:44.400 permits and build the thing, the market will 00:30:44.400 --> 00:30:47.359 still want what you built. Or you're buying a 00:30:47.359 --> 00:30:50.140 truly distressed asset, a hotel in foreclosure, 00:30:50.259 --> 00:30:53.000 a shopping mall that's half empty. You're betting 00:30:53.000 --> 00:30:54.900 you can turn it around, but there's a real chance 00:30:54.900 --> 00:30:57.400 it could go to zero. So it's not one monolithic 00:30:57.400 --> 00:30:59.740 asset class. It's a whole spectrum of gambling. 00:30:59.920 --> 00:31:02.160 It really is. From the safest bet on the board 00:31:02.160 --> 00:31:05.000 to the wildest moonshot. Speaking of moonshots. 00:31:05.500 --> 00:31:07.720 I want to end with the ultimate real estate speculation. 00:31:08.160 --> 00:31:10.019 We'd spent this whole time talking about owning 00:31:10.019 --> 00:31:12.920 the Earth. But what about owning, well, not the 00:31:12.920 --> 00:31:15.480 Earth. Extraterrestrial real estate. I saw this 00:31:15.480 --> 00:31:17.220 in the see also section of the source material 00:31:17.220 --> 00:31:20.039 and I went at a complete rabbit hole. We have 00:31:20.039 --> 00:31:23.259 the Outer Space Treaty of 1967. Yes, which is 00:31:23.259 --> 00:31:26.200 the foundational document of space law. And it 00:31:26.200 --> 00:31:28.900 states very clearly that no nation can claim 00:31:28.900 --> 00:31:31.940 sovereignty over a celestial body. The U .S. 00:31:31.940 --> 00:31:33.720 government can't plant a flag on the moon and 00:31:33.720 --> 00:31:37.319 say this is the 51st state now. But the treaty 00:31:37.319 --> 00:31:39.799 is conspicuously silent on the rights of private 00:31:39.799 --> 00:31:42.799 individuals and corporations. That is the perceived 00:31:42.799 --> 00:31:45.519 loophole. And you have the U .S. Space Act of 00:31:45.519 --> 00:31:47.940 2015, which goes a step further and says that 00:31:47.940 --> 00:31:50.319 American citizens are entitled to own and sell 00:31:50.319 --> 00:31:53.599 resources they extract from space -like minerals 00:31:53.599 --> 00:31:56.460 from an asteroid. But owning the land itself, 00:31:56.660 --> 00:31:59.579 that is a gray area the size of the galaxy. So 00:31:59.579 --> 00:32:02.359 if a private company like SpaceX actually builds 00:32:02.359 --> 00:32:05.519 a self -sustaining city on Mars. Who is the landlord? 00:32:05.599 --> 00:32:08.200 Who makes the rules? Do U .S. property laws apply 00:32:08.200 --> 00:32:11.059 on Mars? If I buy a condo in Musqueville and 00:32:11.059 --> 00:32:13.559 he decides to change the locks, what court do 00:32:13.559 --> 00:32:16.059 I go to to enforce my property rights? It brings 00:32:16.059 --> 00:32:18.000 us right back to the very beginning of our conversation, 00:32:18.220 --> 00:32:20.799 back to the tell and the law of nations. We're 00:32:20.799 --> 00:32:23.220 going to need a law of planets. We will because 00:32:23.220 --> 00:32:25.319 real estate at the end of the day is a social 00:32:25.319 --> 00:32:27.980 and legal construct. It's a system of human agreement. 00:32:28.160 --> 00:32:30.440 If we all agree that you own that piece of land, 00:32:30.599 --> 00:32:32.559 then you own it. If we don't, then you just have 00:32:32.559 --> 00:32:35.019 a very expensive piece of dirt or I guess moon 00:32:35.019 --> 00:32:38.660 dust. So we have gone from the Roman Forum all 00:32:38.660 --> 00:32:40.920 the way to the surface of Mars. We've looked 00:32:40.920 --> 00:32:43.579 at the four cent acre and the 50 million dollar 00:32:43.579 --> 00:32:47.259 penthouse. It is a massive, complicated and deeply 00:32:47.259 --> 00:32:49.869 human machine. I think the biggest takeaway for 00:32:49.869 --> 00:32:52.309 me is that real estate isn't just a passive backdrop 00:32:52.309 --> 00:32:54.930 for our lives. It is an active participant in 00:32:54.930 --> 00:32:57.750 the economy and social justice and the climate 00:32:57.750 --> 00:33:00.269 crisis. It's the most tangible thing most of 00:33:00.269 --> 00:33:02.970 us will ever own. And yet its value is driven 00:33:02.970 --> 00:33:05.430 by these powerful invisible forces, interest 00:33:05.430 --> 00:33:09.150 rates, zoning laws, carbon targets and centuries 00:33:09.150 --> 00:33:11.650 of legal theory. That's really well said. Next 00:33:11.650 --> 00:33:14.170 time you walk down the street, look at the buildings 00:33:14.170 --> 00:33:16.990 around you. Don't just see bricks and glass. 00:33:17.690 --> 00:33:20.369 See the zoning laws that dictated their height. 00:33:20.549 --> 00:33:22.990 See the carbon emissions from their concrete. 00:33:23.430 --> 00:33:26.069 See the global mortgage markets that finance 00:33:26.069 --> 00:33:28.970 them. And see the centuries of legal history 00:33:28.970 --> 00:33:31.849 that allows someone to say, that building is 00:33:31.849 --> 00:33:34.230 mine. That's a wrap for this deep dive. Thanks 00:33:34.230 --> 00:33:36.029 for exploring the ground beneath our feet with 00:33:36.029 --> 00:33:38.089 us. Thanks for listening. We'll catch you on 00:33:38.089 --> 00:33:38.509 the next one.