The Expert Podcast

Here are five charts which prove that home prices are not going to go back down and will likely continue the same rate of increase as they have been on a trajectory for the last two or three years. Also, don't let the fact that you think that homes might be unaffordable to people throw you off—that at some point home values are not sustainable. Home values are sustainable at a higher value than they are today. Even the housing crash of 2005 and 2007 wasn't about houses not being affordable. It was about people being overextended on their houses. The vast majority of people ended up keeping their houses. The problem was people who bought houses that were unaffordable from day one, meaning that they're on adjustable rates or interest-only, and those became unaffordable because something changed in this market. People who buy a house with a fixed rate—it's never going to change.

So here are the five charts. The first one may not seem like it relates to real estate, but this is a price-to-earnings ratio chart of stocks. This is the Fortune 500 or the S&P 500 showing the price-to-earnings ratio. The price-to-earnings ratio is the price of the stock compared to how much it makes. And all throughout—even going back earlier than the last 20 years—P/E ratios were in the 20s or under 20. So if you bought a stock, the value of the stock was 15 or 18 or 20 times what it earns. Well, sometime in around 2016, about five years ago, the P/E ratios went above 20 and they've basically been above 20 since then. What that means is the valuation of that asset, of stocks, was recalculated in terms of what the market is willing to pay.

And the reason for it is stocks became a more valuable asset. Consumers and retail buyers started buying stocks in higher percentages, and the transparency of companies became greater—meaning that people were able to understand behind the scenes of stocks more than they were before. So in the 16–15 range of P/E ratios, there was some hedge built in, some caution built in, because of the fact that the true identity of that stock was not really known. And once that transparency became more prominent, the P/E ratios went up 20 plus—and that’s where they are today, in the 20 P/E ratio range. So that just shows that an asset does not always need to be traded at a certain value compared to its underlying intrinsic value. For example: appraisal values, cost of lumber, income—those aren’t etched in stone. So P/E ratio is a historical model of something that always was in a lower range and all of a sudden became higher and was permanent.

Let’s take a look at the next chart.

This next one is mortgage rates. And of course, we realize that mortgage rates affect the real estate market. But the common-sense wisdom is that mortgage rates going up will lower house prices. Well, that's if you're thinking in one-dimensional checkers mentality. Real estate is three-dimensional chess. Here’s why: Here’s a historical mortgage rate chart going back to the 1980s. And if you notice, mortgage rates have always been in the 8–9–10 percent range. In the early ’80s, it was 17–18 percent and then gradually went down—but still 8, 9, 10 percent in 1990. It didn't really get even below 8 percent until the 2000s, and gradually went down from there. And if you notice, even 10 years ago it was at 5 percent.

So from 10 years ago until now, it’s been 5 percent or below. And now it’s back up to 5 percent. What does that mean? That means everybody who's purchased a house in the last 10 years has an interest rate lower than what it is today. It’s either they bought the house and they had, you know, 5 percent interest, or they bought a house with 4–5 percent interest and refinanced it in the last couple of years when it was down in the 2 percent range. So most homes that come into the marketplace available for sale are resale homes. Only about 20 or 30 percent of the homes that come into the marketplace are new homes built by a builder. Most of the inventory that comes in for people to buy are resale—somebody selling their house to buy a new house.

So what will higher mortgage rates mean for resales? Well, if you think of all the people that bought houses from here in 2012 to 2022—the last 10 years—everybody has an interest rate lower than what it is today. Most of them are probably in the 2 percent range. Because even if you got a mortgage in 2018 at 4.5 percent, when it was down at 2.7, you probably refinanced. You probably refinanced your loan if you're smart. So the vast majority of current homeowners have interest rates in the 2s or maybe 3s. Well, now that rates are at 5 and going up fast—they're going to be 6 or 7 very soon—these homeowners are not going to sell their house.

Because when you sell your house, not only are you getting rid of your old house, you're getting rid of your old mortgage. So whatever great rate you had, that’s out the window. You have to start over at the current rates. Well, even if you bought the same house—same price as what you have now—at a mortgage rate of 6 versus 2.8, your payment is going to be five or six or seven hundred dollars higher, maybe a thousand dollars higher. So if you want to step up in house, even if you have the extra cash because your current house has equity or you saved up some money, you're going to be jumping up in payment because of the interest rate.

And quite frankly, most people would rather cling to their existing 2 percent rate—even if it’s not the ideal house—than try to buy a dream house and jump up in mortgage rate. Most people. So what that means is: millions and millions of potential home sellers who would have houses that they could put into the marketplace for people to buy are not going anywhere. They’re not going to sell those houses because they have a nice, safe, low interest rate—2 point something percent. That’s going to lock out new inventory from coming into the marketplace for home buyers that want a resale home.

And that rate’s not going anywhere. If you notice, most of the time, the interest rates were a thing. Even if you take out this spike here in the ’80s, most of the time it was between 7.5 and 10 percent. Even going back here, this whole range is in the 7–8 percent range. Even if you come up to 2009, it’s 6 or close to it. That’s where rates are gonna fall. That’s what they’re gonna stabilize: 5.5, 6.5, 7 maybe—maybe spike up to 8 and settle at 7. Well, the difference in payment between 7 percent and 2.5 percent is huge on a median price house. So nobody’s going to sell their house. And that inventory is going to be locked up for a long, long time.

Let’s look at the next chart. This next chart is lumber prices. We’ve all heard about lumber prices and what’s going on with inflation with lumber. Well, how does that affect used home prices? Used homes are already built—they don’t really need lumber. Well, that’s true. But lumber prices affect new home values and prices and cost. Resale homes generally track the price changes of new homes. So whatever new homes sell for, a typical similar resale home is probably going to sell for about 25 percent less, maybe 30 percent less, than the new home. So if new homes go up in value because of lumber prices, then resale will also go up for that reason among other things.

Resale homes are going up for many other reasons: inflation and use of homes. But lumber is affecting it. Well, what’s going to happen with lumber? Well, if you notice going back—let’s go back 25 years—lumber prices have always traded in this very, very narrow range: in between 200 (if you notice the numbers) and 500. It’s always been in that range. Only in 2018 did it hit over 500 just briefly and went back down. And that was before—that was 2018—that was before any kind of pandemic or lockdown or inflation or anything. There was this little spike here, but that meant something. Other than that spike, it was always between this trading range of 200–300. In fact, the highest point here was 440. Never really went over 500—except for here.

Well, now once this spike happened in 2020—about two years ago—it never went down below that. The two troughs of these valleys, this chart, was right around 500. It never went back below that trading range. What that means is that the new trading range is here. It’s between 500 and 1500. Why is it going to stay there? Well, a few reasons. First of all, the lumber industry has changed. The timber harvest in British Columbia, in Canada, in Oregon, in a lot of the lumber-producing states has changed. The availability of labor, regulations, procedures for harvesting lumber, and the market—now that the industry knows that the market can withstand 500 to 1500—it never has to go back below 500.

Because even at a thousand dollars—and this number represents dollars per thousand board feet—even at a thousand dollars, there was still a huge demand. They sold every stick of lumber they could sell. So the lumber industry has no reason, no incentive, to drop back down below 500. Even if they wanted to, it’d be tough because of the new realities of the marketplace. Labor costs are up now, insurance is up, a lot of other costs—intrinsic costs—are higher. So they have to be in that range. Plus now it’s been proven that the market will withstand it and it will absorb it, and they’ll price it into the new homes or additions or remodels. This lumber trading range is not going anywhere. This is where it is. This is the new reality. Just like P/E ratios that we looked at. Just like interest rates. This is the new reality. And all these are related to one another.

Let’s take a look at the next thing that will permanently ratchet home prices into its current high rate. Well, here are the median home prices. And even though it seems like there’s a big spike here from 2020 to 2021—which there is a spike—if you just look at this spike it seems big. But if you look at historical trends and the slope of this chart, from this high point to this high point to this high point—it’s almost a straight line from 1991 to 2007 to 2021. These high points—if you chart them—they almost go in a straight line. Sure, there were some troughs in between, but this is the general trend of real estate.

Even if you track this all the way back from here to here to here, it’s almost a straight line. This is how much real estate naturally appreciates. This spike is nothing more than a catch-up. This lower rate in 2018–19 and the housing crash of 2008 or 2009 was an artificial depression of house prices—it wasn’t normal. If you did this chart normally and forget about the housing crash, it would have gone up exactly how it did, and it would have connected this dot. This lower trough is an anomaly. What made that lower—that won’t happen again.

Well, the drop-off in home prices in 2008–2007 had nothing to do with the natural ability and demand of people to want to buy houses. It had to do with a very...