The Expert Podcast

Here's another reason why home prices aren't going to go down significantly in the near future or maybe ever. So as a home buyer or as home buyers are out there, many people are saying, "Well, I'm going to wait for prices to come back down," or "I'm going to wait for interest rates to come back down." And the reason why a potential home buyer has that perspective is because they've been conditioned to see home prices at a different level. They've been conditioned to see interest rates at a different level, right?

So if a home buyer is out there shopping for a home, they're going to think, "Well, in 2019, I saw prices at X amount of dollars for this type of house. I saw this neighborhood was selling for this much money." And they're going to say, "Well, I saw interest rates were four percent or three percent, so I'm gonna wait for it to go to that level." They've imprinted that amount in their mind as what they're looking for. They're waiting for it to come back down. They think if they go up, they must come back down. So that's the home buyers' mentality.

Home buyers and a lot of analysts are forgetting that the imprinting works both ways. The homeowners who might become sellers—they don't have to become sellers—also have an imprint on their mind. They're saying, "I remember when prices were here. I saw my neighbor sold his house for 700,000. I saw this neighborhood had this listing array," and they see lots of houses in that range in 2021, 2022, 2020. They saw the market values at a certain level, so they're imprinted too. Most people need to buy a house more than they need to sell a house.

Over the last 10 years, home mortgage underwriting was very strict. It wasn't like in 2002, 2003, when they were just giving loans to anybody with no money down. Because of the economic crash in 2008, underwriting was lunatic. You almost couldn't get a mortgage unless you had 20% down, debt-to-income ratio, good credit, and the underwriting was very strict. So most people own homes. It's unlikely that they're going to need to unload them, that they're going to need to sell them.

Because they have equity, they have income, they don't have financial problems, so the percentage of people that need to sell a house desperately is going to be much lower. So remember that imprinting works both ways. As sellers, they're going to say, "Wait a minute, I saw my house or my neighborhood selling for in the six to seven hundred thousand dollar range. Why am I going to give it away for 500?" They have that same expectation in their head of the past. It's just that the buyers are thinking farther in the past than the sellers. They're thinking, "Well, in 2018, it was this price. 2018, it was this interest rate." The sellers have printing that's a little bit more recent.

And the battle between the two—somebody who doesn't own a home that's trying to buy a house has a more desperate need than somebody who currently owns a home that maybe wants to sell it. Maybe they want to upgrade, maybe they want to move to a different city—who knows what—but there's fewer desperate sellers than there are desperate buyers.

There's more people that are dying to get into a house as a homeowner and not be a renter than there are people who currently own a home, sitting pretty fat with a low mortgage rate that wants to dump their house. Are there exceptions? Certainly. Somebody might have filed bankruptcy, somebody might lose their job, somebody might have financial problems, but the number of people that fit that category is much smaller. Even as the economy has inflation and there's some job losses, more than likely that's less of an issue.

Plus, look, if you have somebody who has a mortgage that was originated in the last 10 years—somebody bought a house from, let's say, 2010 until now—they have a rate that is probably in the 3 to 4 percent range, more than likely. And the cost basis of their house, what they paid for it, was in, let's say, 2017 or 2018. So a median price home in 2018 might have been, let's say, $300,000 to $350,000. You have a 4% mortgage. You got a mortgage payment that's maybe $2,000, maybe $1,800 really for your mortgage payment.

So if you're in financial distress right now, what's your alternative? You're not going to get anything less than that, even if you rent. Even if you sell your house and rent, you're not going to find anything for less than $2,000. So you're not gaining anything by selling your house, by dumping your house. You might as well just stay there.

So the number of desperate sellers is never going to be more than the desperate buyers. There's lots of people who are renting and their rent went from $2,500 to $3,000 to $3,200 to $3,800, and the rent keeps going up, and they have no equity, and they're seeing the market run away from them and the interest rates run away from them. So at some point they become more and more urgent, more and more desperate. And as they constantly wait to see, "Well, I'll wait for prices to go down. I'll wait for interest rates to go down."

Look, there's been four or five events in the last three years that everybody said, "Well, this is it. This is why prices will go down." We had a pandemic, we had lockdowns, we had interest rates go up, we had many things happen—and the real estate crash didn't happen. Certainly the rate of increase in prices has stopped. People aren't making their prices go higher, but they're also not really coming down.

You may see some discounts of listing prices, but the listing price was probably marked up to begin with. It's kind of like when you go to a jewelry store and they say it's 30% off, but the jewelry was already marked up 50%, right? Same thing with real estate.

You're not going to see houses sell back into the 2018 or 2019 range anytime soon because all those buyers that were waiting in line, bidding up houses, had multiple offers on the house—they're still out there. They still want a house. Now, some of them physically can't afford the payments on a house that's now maybe $600,000 with an 8% mortgage rate versus $300,000 with a 4% rate, but it doesn't change the fact that they need a house.

And there's not many sellers that really need to dump their house. In fact, many sellers are taking their houses off the market because, "I don't need to sell. If nobody wants to pay this price that's imprinted in my brain from 2021, then I'm staying put. I have a nice low rate, nice low payment, I got equity, I don't need to do anything." Plus, if I sell my house, I'd have to buy another one at the inflated prices—so why bother?

The market having a higher price and maybe less demand isn't going to undo the fact that current owners who may become sellers aren't going to be in any huge numbers or any huge numbers of people that are desperate, at least anytime soon.