The Expert Podcast

If you've at all been paying attention to the Home Market or Interest Rate Market, you've seen a lot of crazy stuff happening. You've also seen in our videos what we've talked about with the prediction of 10% mortgages coming, and even a year ago when we predicted 8%, a lot of people didn't think that was going to happen. That's already happened. What is turning into this is what CNN calls the "perfect storm" hitting home buyers, and it's not just interest rates. Look, interest rates were 8% 20 years ago, in the year 2000, but the difference is that a home back then cost 120 grand, and you could still get a mortgage payment of 1,200 bucks a month. Now, the average home price is $400 something—$420,000 to $440,000, depending on who you listen to. At 8.5%, now you're talking almost four grand a month for a mortgage payment for an average house. Incomes did go up, but they didn't go up that much. Incomes back in 2000 were about $40,000, and it only took $38,000 to afford a mortgage of $1,200. Now, incomes have gone up to about $80,000, but it takes $120,000 or $130,000 to buy a home.

So, where does that put you? That puts you in a perfect storm. In spite of that, new home sales jumped, even though mortgage rates went up. More people bought new homes. What does that tell you? It tells you that many people are thinking it’s still a good time to buy a house. What does the press say? Three reasons it could be the right time to buy a house despite high mortgage rates: they're saying it is too, because they think that home prices will still go up. We do too, because there are not enough homes being built to cover the market demand. Interest rates are not going to go down; they may not go up too much, although it's likely they probably will bump up a little bit, but they're not going to go down.

Love him or hate him, even Dave Ramsey, financial advisor guru, whatever you want to call him (and you can disagree with a lot of things about his advice), he says you shouldn’t wait for mortgage rates to go down. Another reason is renting can age you faster than smoking or obesity. Researchers found a lot of it has to do with the stress of having to move every couple of years if the landlord jacks up your rent or they don’t want to rent anymore or whatever happens. If you own a home, your mortgage payment stays the same, it doesn’t go up, and they can't non-renew your lease. You have a mortgage; it’s permanent.

Why do we think that home prices are not going to go down? Well, look at this: the housing gap is widening, defying state efforts to jump-start construction. As much as the states are trying to push home construction and even apartment construction, it’s not happening. There are permit delays, and even when you get a permit, lumber prices and materials costs have gone up. There's not enough labor to build these homes, and there are not enough people in the workforce to build homes. So, the number of people coming into the housing market that need a home—either they’re renting now and want to buy a home, they get married, do household formation, or move out of their parents' house—there aren’t enough homes being produced to satisfy that. So, the gap between the number of homes and the number of people is getting wider.

Interest rates hit 8% for the first time since 2000, but you know, this was back a week and a half ago. Now, they're at like 8.2%. We saw a couple of quotes at 8.6%. It seems high compared to 3%, but 3% was a head fake. 3% was not really what the rate should be. It was an artificially lowered rate because of economic conditions—the Federal Reserve wanted to boost the economy, so they cut interest rates down to almost zero. But that head fake created an artificial bubble in home prices. Home prices went from $120,000 to $440,000 in just a few years—really, in like five years, they quadrupled. Great if you're a homeowner, terrible if you're a renter, terrible if you want to buy a home.

The problem is this bubble’s not going to burst like the last one. It’s a bubble, but it’s going to stay inflated because eventually, that will become the norm. This is the new normal for home prices. Rates can fluctuate, but even with rates, the normal rate for people who want to get a return on their money—that put money into mortgages—you know, you’ve got to get an 8% return, and there’s another 2% or 3% on top of that that the mortgage company needs to make for processing and fulfilling the mortgage. So, seeing rates around 10% is going to be normal. Seeing home prices around $400,000 to $500,000 is going to be normal.

That’s going to mean that anybody buying a home in the future has to budget between $4,000 and $5,000 a month for their house price if they want to be a homeowner. You can probably rent a little cheaper—$3,000 to $3,500 for a two- or three-bedroom house. You can get apartments for $2,000 to $2,500, but for a single-family home, most parts of the country, you're going to have to budget about $4,000 to $5,000 to buy a house, maybe $3,500 to rent one. That’s going to be the new normal.

Don’t take my word for it. It’s not an opinion; it’s just a projection of what the facts are that’s happening. I know you have an opinion about it. Put it in the comments below, and let’s see, let’s look at the calendar two years from now and look back on this video to see if that new normal has established itself. No crash, no reduction of mortgage rates—that’s the new normal.