The Expert Podcast

So whether you buy a two hundred thousand dollar house or a five hundred thousand dollar house or a one million dollar house, the question on everyone's mind is: Is the value going to decrease? Is there going to be a housing crash? Are prices going to plummet? And there's a lot of news facts that make people fear house price declines—things like mortgage rates going up, things like inflation hurting the economy, things like even wars happening. Reality: those are all legitimate facts that have an effect on real estate prices.

But the bigger factor that trumps all of this is supply and demand. The market is still short 5 million homes versus what's needed right now—versus the number of people that want to be in a house. That's why there's bidding wars on these houses. Think about it: the rates went up a little bit over the last two years, they stayed about the same, and values of houses went up 30–35% in some markets. So even if the rates go up a little bit, home prices are gonna at least hold their value and probably go up more.

And here's why: an interest rate increase doesn't have as much of an effect on the mortgage payments as you might think. We did a video last week where an interest rate increase of one whole percent—which is pretty big if it goes from four to five or five to six, it's pretty big—might only affect the average mortgage payment by a few hundred dollars. Now, a few hundred dollars is nothing to sneeze at, that's real money, but a few hundred dollars is what your rent might go up next year. So locking in a mortgage right now at a reasonably good rate—four percent, even five percent, even six percent—is going to put you ahead of the game.

What about values? Well, here's an article from Business Insider where they interviewed a couple real estate experts: Are home prices going to crash? And the expert says prices could grow faster than we can get a handle on. And this gets back to supply and demand. There are millions of people in the demographics that are becoming first-time homebuyers. They're millennials that are looking to get into their first home. Some of this has been pent up for the last couple years, or even going back six, seven years because of the effects of the economic crash of 2008.

So these people are looking to get into homes. They don't want to be roommates anymore. They don't want to live with their parents anymore. That demand is not going away. Even if all of a sudden homebuilders drop everything and they build houses faster than anybody could predict, it takes a long time to get large volumes of homes to the market.

Think about it: from the time the builder does land acquisition—you know, they buy a 10 to 15 acre parcel, they plot out the subdivision, they get the permits, they put together the funding, they get their subcontractors, they do the architectural renderings, floor plans, marketing—it may be three to four to five years from the time that they start a project until homes are ready to sell. And it can't happen all at once. Builders can only do so many projects.

Even if there's oversupply in 10, 15, 20 years, inflation and that demand is going to overwhelm that oversupply. And the way that the author of this article mentions is: look, if you have oversupply in 20 years, he said even if you buy a $500,000 house today and it goes up to $2 million in 20 years and then oversupply cuts it in half, it's still worth a million.

So these factors—interest rates, economy, corona, anything else—can affect the market, but the biggest elephant in the room is supply and demand. There are many fewer houses than are needed. And a lot of the houses that are out there now are older. There was a big house construction boom in the '70s and '80s into the '90s, and then once you got into the 2000s, from 2005 or '06 until now, there was no huge house building volume.

So let's say the last volume was—let's call it 2008, right? That's 15 years ago. So the last batch of houses were 15 years old. Certainly there's exceptions to that: parts of the North Dallas metro, there's huge new subdivisions built in the last five to six to seven years, some other metro markets that grew a lot, somewhere in South Florida had some building happen. But the vast majority of large volume home construction is more than 10, 15, 20 years old.

So these houses may not have the layout, floor plans, upgraded fixtures that people want. So that's going to also hurt supply and demand. They may not be the size people want. Take a small percentage increase in home values—take five percent increase in home values. If you multiply that and do compounding on five percent increase, that's a double in seven or eight years—double of value.

And you have to remember: you don't have to put that money in, it's all financed. You're having a mortgage that leverages your investment. So if you have a $200,000 house, you keep it for seven years, now it's worth, let's say, $450K. Your mortgage payment is going to be no more than you would have paid in rent. And instead of having zero equity, you now have a house that you owe probably $150K on that's worth $450K. So you've accumulated $300,000 in personal net worth—in equity—simply by buying a $200,000 house and paying $1,100 in mortgage versus keeping your apartment for $1,400 or $1,500 a month and having no equity.

What's the trade-off? Well, the trade-off is: there is more maintenance you have to do on a house. You gotta clean the gutters, sink breaks—you gotta fix it. Can't call the guy. You can't call up landlord guy. But that trade-off is going to be worth $300,000 over the course of 10 years—seven years.

So if somebody said to you, “Hey look, you can stay in your apartment. Would you be willing to do your own maintenance on your apartment if I pay you $300,000 at the end of seven years?” Sure, I think most people would do that. Small price to pay.

And when you purchase a house versus an apartment, you have a yard, you have usually a garage, you have a space to accumulate things. Now, you don't want to be a hoarder and pack up all kind of junk you don't need. However, some things that you can have space for will also help you financially.

For example, if you have a larger cupboard or a pantry, and when something goes on sale, you can buy, you know, years' worth of flour or two bags of rice or something like that—where you don't have room in an apartment—that can save you $700–800 a year hedging inflation. If you have a car in a garage versus on the street, that car is gonna last longer. If you have tools to fix things, you're able to do more things yourself rather than have to pay a service to do it.

If you have your own washer and dryer, you may not have to buy as much laundry detergent, go down to the laundry room, or pay a cleaning company. There's a lot of advantages to having a little more elbow room. Even without that—that's just a bonus, that's icing on the cake.

The big advantage is you are creating equity in your home. Residential expense: you're going to pay something every month no matter what. Would you rather pay to a landlord that just takes your money and doesn't really give anything other than four walls? Or would you rather own the property that you're in and have that accumulation—that appreciation—accrue to you, not to somebody else?

And even if the appreciation isn't that much, the money you're paying is reducing your mortgage. Sure, at first, a lot of it's interest. But at some point it catches up to where now you're paying your principal, you're reducing your principal, and you have the opportunity—if interest rates go down at some point—you can refinance and capture lower interest rates. Although even 4 or 5 percent—it's not high rates. It's high compared to what it was a few years ago, but look back into the '80s—there were rates up in the 10 to 12% range.

So the consensus is: prices are going to go up. If the fear of buying a house has to do with worry that the price is not going to stay where it is—that's very unlikely. If the fear is that it's not going to go up as much—well, it might not go up as much, but it's probably going to keep going up. It's probably not going to go down.

But if you're using those reasons as justification for not buying a house, really look inside to see: what is the real reason you don't want to buy a house? Are you afraid? Are you afraid of losing your house because it's foreclosure? Are you afraid of having the obligation of a mortgage for $200,000? Are you afraid of buying a house—maybe that's not your dream house? Think about really where the fears come from.

If you can overcome those—those fears might be getting in the way of you having $300,000 in your pocket in seven years.