The Expert Podcast

So here's a good way to understand the housing market and why it's such an inflating price level industry. Whether it's purchasing a home, renting a home, short-term rental, or leasing—every single category of real estate has increased dramatically in the last year or two, and by dramatically more so than any other time in U.S. history that's been recorded, even more than the housing bubble of 2008. What gives? What's behind it and what can fix it? A lot of people want to predict: is the housing market going to crash?

Is there going to be a decline in value? Is there going to be a reduction in prices? Is it going to continue to climb? People are making important financial decisions about buying a house, selling a house, moving based on a prediction of the market. Having a crystal ball of how and why the market's going to change will help you make that decision.

So let's look at it this way. Let's give a really good analogy. Think about the housing market as a big game of musical chairs. Everybody knows musical chairs—there's a bunch of chairs, people are sitting in it, the music starts playing, they're moving around, and then it stops and everybody sits down. And there's not enough chairs for everybody and some people get kicked out.

Well, the housing market right now doesn't have enough chairs. How many? Well, here's an article from the Wall Street Journal that says the housing market is short more than 5 million houses for people to live in. And that is rental and ownership and all kinds of residential units. It's because construction lagged for two decades, and that's what the problem is.

So how does that relate to musical chairs? Well, just think there are five million people standing up that want to sit in a chair that there's no chair for them to sit in. There's no house for them to move into. So even if somebody is sitting in a chair and wants to sell their house—they're a homeowner—if they stand up by selling their house, where are they going to sit down? Where are they going to go to when that music stops? There's not enough chairs. They don't want to be one of the five million people now outside of home ownership looking in because they were already in a home; they were already a homeowner.

That's how you have to look at it. There are five million households, five million housing groups, family units that want to buy a house that can't because there's not enough houses. How did that happen? Well, two decades of lagging building. How do you fix it? Well, using the same analogy, you might think we'll just build some more chairs—no problem.

Well, a couple reasons why that isn't an instant fix. Obviously, building a house is different than building a chair. You can build a chair in an afternoon in your workshop; a house is a little more complicated of a project. But you would think that you could build houses if it was needed. And you can—general contractors and builders can build houses—that's what they do for a living.

But in order to build a house, first you have to have land, and there's some land available. Then you have to subdivide the land into housing blocks into legal parcels where you can put a separate single-family home on that parcel. Then you have to get permits. Once you get the permits, you have to install utilities—electrical, plumbing, sewer, water, communications—and that takes some time.

Some areas of the country have a lot of regulatory requirements for making a piece of land into a buildable lot. You might just think, well, it's a lot, it's got grass and dirt, you can just build on it. Well, you can, but converting empty land to a buildable legal parcel is actually more complicated than it looks. You can't see it happening by looking at it. The same empty lot is going to look exactly the same once it's done being converted, but it will have legal process changes behind it—permits, approvals, regulatory compliance—all that needs to be done before you can even start scratching the dirt.

That has to happen five million times just to catch up with the current need.

How fast can the building industry, construction industry build an extra 5 million houses? Well, the building industry constructs about 2 million houses a year on average. But not all of those are going to cover the backlog. Many of those cover the new demand that comes out each month, quarter, and year. There's only a certain number of that two million houses that goes to catch up on the backlog.

If it took two decades to get behind five million, how long is it going to take to catch up? Well, if you speed up the process, you might be able to catch up in half that time, maybe catch up in a decade. Let's cut that in half again. Let's say you can get caught up in five years.

What that means is for the next five years, there's still going to be a backlog, which means the prices will at least stay the same. The increase in price of house appreciation will probably stay the same. It may not go up 20% a year but it'll go five percent a year, six percent a year. It's going to go up at least as much as inflation, if not more. Inflation is at five or six percent, maybe seven percent depending on how you measure it.

Real estate values will probably go up higher than inflation because it's a leveraged product, meaning that for every dollar that goes up, it doesn't necessarily reflect a dollar more in mortgage payment because it's leveraged; it's a finance product. So inflation can go up even more on housing value before it starts to put pressure in a negative way on home buyers.

It's not to say that higher prices don't make it difficult for people to buy houses, but there's a difference between a complaint and an objection.

If you're a home buyer and the price is high and your mortgage payment is 400 more than really what you want to pay, that's a complaint. You're still going to buy the house, but you're going to complain about it.

An objection is when the price is so high that you're just not going to do it or you can't do it. You physically can't afford it. It's not that it's inconvenient or it's annoying or you hate it or it's a stretch or it's something you complain about—it's literally, "I just can't do this. I can't afford this payment. I won't do it."

We are now at a complaint level with home buying; we're not at a level of objection because people are still buying homes even though the prices have gone up 20 or 30 percent since this whole thing started. Rates have gone up one or two percent. That has resulted in a net monthly payment increase of four, five, six hundred dollars depending upon what price point you're in.

If you're in a three to four hundred thousand dollar price point, an increase in even if the price of a house goes up a hundred thousand dollars and the rate goes up one percent, that might result in a 500 a month increase in your mortgage payment.

Five hundred a month increasing your mortgage payment 500 more has not stopped the market at all. The prices have still gone up. There's still a demand. There's still a backlog of homes. There's still more people who want to buy houses than there are houses available. So that five or six hundred dollars a month increase in payment for home buyers hasn't put a dent in the marketplace.

And it's because of musical chairs—there's five million more people that need houses than there are houses.

See, this is different than the housing crash or bubble in 2008. In 2008 there were plenty of houses to go around. People weren't buying houses because there was a house shortage; they were buying houses because it was—they're giving them away. The mortgage rates were next to nothing. You didn't have to get approved. You didn't have to have income. You had to have no assets, no down payment, and they were just given houses away. There was actually too many houses back then.

It was a supply-driven bubble—too many houses.

This is a demand-driven bubble. There's a shortage of houses.

A demand-driven bubble doesn't pop; it can't pop because it's driven from underneath—it's got support level underneath.

A supply-driven bubble is pulled from above—it's people pulling it up—and if you don't have that lever lifting up the market, it collapses.

A demand bubble from underneath can't collapse because it's solid underneath; it's got buyers. There's still five million more buyers that want to buy houses that can't. They're not going away. Five million people are not going to leave the country and reduce the housing market.

So even if prices go up another let's say 20 percent—average house is four hundred thousand, 20 percent is eighty thousand more—interest rates go up a point, that'll add another five hundred dollars to monthly payments.

But in this day and age, look, people already have an extra three or four hundred dollars on their budget from inflation of gas and groceries, so there is capacity in the system for additional expense.

It's not going to be easy. No one's going to like it. I'm not saying that this is a comfortable thing, but people can't afford it and there's still a lot of people buying houses with cash. So sometimes they're not even affected by the mortgage interest rate increase or they're putting 50% down.

The price is going to have an effect, but look, if you look at a piece of real estate that you're going to pay a hundred thousand more than it was last year but you know next year it'll be fifty thousand more, it's really a no-brainer. It's not like you're spending a hundred; you're just temporarily taking a hundred thousand from your bank account and putting it in your house account.

This is not going away. You're going to see articles on both sides of the equation now: the housing bubble is going to crash, it's going to keep going up. Everybody's got an opinion.

But look behind the opinion at what the facts are, what the data is that's supporting a person's opinion.

Our opinion officially is, the shortage of houses is going to keep prices high, interest rates are going to keep mortgage payments high, and buyers are going to complain and grumble and shout and make a lot of noise, but they're still going to buy houses.