The Expert Podcast

So the real estate market has gone up great deal in value. So tell me something I don't know, right? Everybody knows this already. So what are the effects of this that go beyond just buying a house? What if you already own a home that has gone up in value? Is it good for you or bad for you? There are some reasons why this might be bad for you. If you don't own a home and you're looking to buy a house, are there reasons why this might be a benefit to you, even though you think it might be bad because it's harder to buy?

How might this help you? Well, let's take a look at a couple of those maybe counter-intuitive answers and see where that leads. According to Insider Magazine, the pandemic housing boom has increased home values by six trillion dollars—with a T—six trillion dollars just in the last couple of years. The average American now has access to $185,000 in equity that can help them build more wealth. And we'll talk about that in a minute. What does equity mean? Obviously, that's not $185,000 cash in your bank account.

Equity means certain things. Renters don't have that wealth and face even steeper barriers to buying a house. Well, barriers compared to what? It may be steeper than what it was a year or two ago, but there may be reasons why this could be a good thing for renters in the near future about buying a house. Article goes on to say if you own a home in the U.S., chances are your net worth has gone up in the last two years, and you could tap into equity to get extra cash. Tap into equity—what does that mean?

So here's the deal. Let's suppose you had a house that you purchased in 2014, and at the time it was worth $325,000. And seven years later, eight years later, maybe now it's worth maybe $600,000, maybe $650,000—not unheard of. Some parts of the country, it's almost a triple since 2014. We've done other videos about this. You've seen in the past of houses that were worth $250,000 or $300,000 just seven years ago are now worth $800,000. So what do you do? You've got a house that's worth $800,000. You look at Zillow's Zestimate, and it says $810,000 on your house. That's great. But a Zestimate is not the same as a bank account with $810,000 in it. That cash is represented by the four walls and roof over your head. You can't write a check from it. You can't withdraw it. You can't sell it off. Even if you sell off $100,000, it's not like you can sell one wall and keep the rest. Your house doesn't exist without the complete package.

Well, I know what you're saying—I could take out a home equity loan. You could, if you have equity. You could take out a home equity—keyword is loan. Loan, loan, loan. You owe money. What that means is you have now spent part of your house. What are you going to spend that loan on? You're going to buy a boat? You're going to buy a better car? You're going to maybe take a vacation? Now you're exchanging part of your house for that other object. Take out a home equity loan for $100,000. You buy a $100,000 boat. You now traded part of your house for that boat. You don't own your whole house anymore because the bank owns $100,000 of your house—$100,000 more than they did before. You may already have a first mortgage. You're trading some of the equity for a boat. Now, you may want to do that. But just be aware what you're doing. You're not taking somebody else's money or your own cash and just spending it that you had in the bank. You're actually taking it from your house.

And when you do that, a couple things happen. First of all, now the clock starts running on interest. You have to pay interest. There's a cost on that. It's not free money that you can just access like writing a check from a bank. The interest rate could be five, six, seven percent on some of these equity loans. Let's say it's six percent. That means you're going to spend close to $500 a month just in interest in order to have that boat. $500 a month in interest. Is it tax deductible? Yeah, it is. But you have to pay. You have to pay the interest first to get the tax deduction. So maybe you want to do that, maybe you don't. But as long as you understand exactly what you're doing, that's what it entails.

In addition to that $500 a month, you also have more expense that you might not even be aware of. If your house went from $320,000 to $700,000 or $750,000, you're also going to—whether you take out equity or not—you're going to spend more money in taxes and insurance. Your property tax will be reassessed, reappraised. The appraisal value of your house, the assessed value of your house by your tax collector—and what that's going to do is going to raise your taxes. Whether you want to take out equity or not, your taxes went up. Your house didn't change. Your house didn't get any better. But now your taxes are higher. So if your tax-assessed value is, let's say, $250,000—it's usually less than what you actually, what the value is—now if your assessed value is $480,000, your taxes almost double. So your taxes might go from $2,200 a year to $4,400 a year. So now you have another $2,000 a year in taxes. That's another $200 a month on average.

Your insurance is based on the house value, replacement cost, repair cost. So as your assessed value goes up—boom—your insurance premium goes up as well. So that might cost you an extra $800–$900 a year. So now all of a sudden you have $300 a month in tax and insurance. You have another $500 a month for your equity that you didn't even take out the whole amount. All of a sudden you're maybe talking about $1,000 a month or $12,000 a year for that privilege of that boat. The boat's going to depreciate and need expenses. That's a whole other issue. So really think about what that means when the value goes up.

The bottom line is that you can't take that equity of anything of use unless you pay interest on it or you sell your house. Sure, if you sell your house, you have the equity in cash. But now you need a place to live. And any place you buy is going to have also gone up in value. Which—that's not going to be too much of a benefit unless you do arbitrage and buy a place in an area that's not quite as desirable as yours. But now you're trading money for less desirable place to live.

Equity in a house is good until you look at the expense. If you want to use it, it'll cost money. Even if you don't use it, it'll cost money for tax and insurance. Better that it goes up than goes down, probably. But if all the houses go up or down, it doesn't really make a difference to you if you're going to sell the house someday.

What about if you're a renter and you want to buy a house, and these prices are going up, skyrocketing—does that help you? Well, maybe not compared to two years ago. If you had bought a house then, you would have been in better shape. But that didn't happen. You didn't buy a house in 2019 or 2020. It's now 2022. The question is, are you better off buying a house now for the next five years, or not buying a house now for the next five years? Doesn't matter what happened last three years. It matters what's going to be better off for you right now. And there's three factors in that. Number one, are the values going to go up or go down? And are you better off renting or buying? Those are the only two questions. And obviously, can you afford it and get approved for a mortgage? That's a whole different story.

Well, the fact that the house market and values went up in the way that they did go up in terms of non-leveraged—not a lot of mortgages, not a lot of speculative borrowing—there's not a lot of interest-only loans, bad credit loans. It's all solid cash buyers, high down payments, fixed rate. That indicates that the housing market is strong. Just because it went up fast, there's nothing about that by itself that means it's going to go down fast—or down at all, for that matter.

The housing market did have a spike in 2006 and 2007, and then it kind of had a crash in 2008 and 2009. A lot of people think, well, since that happened, if it goes up now, it's going to happen again. It doesn't mean the same thing. It doesn't automatically lead to a crash. Just because the last guy you saw with the red shirt was a jerk doesn't mean everybody you see with a red shirt is a jerk. The housing market going up doesn't necessarily mean it's going to crash. The reason that it crashed in 2007 and 2008 and 2009 is not the same as it is today. There's not speculative borrowing. There's not bad credit lending. There's not financial institutions that are in trouble for the most part. And the reason for people buying homes is different. It's not speculative investment—I want to buy another house to maybe flip. Remember those shows? Flip This House, Flip That House? You don't see those shows anymore.

There were also people that really didn't want to own a house. They just said, well, you know, I'm a taxi driver, I see everybody buying houses, I'll buy two or three houses. Everybody saw the movie The Big Short. There were all kinds of people—taxi drivers, strippers, waitresses—buying houses when they really hadn't thought about owning a home before. It was lender-driven. The lenders were begging people to take out mortgages, handing money out hand over fist. That's not what's happening now.

What's happening now is the buyers are driving the market. People are driving the market. In fact, it's not even seller driven. Sellers don't even really want to sell when they see the prices. Sometimes they're convinced, well, might as well. The problem is inventory. Look—the same number of houses exist today as existed in 2006. In fact, there's probably way more houses. They've built more houses since then. There are fewer houses on the market today than there was in 2006. Less people want to sell. There's also more buyers now than there was in 2006. More people want to buy.

And that's because it's driven by lifestyle demand. People want to work from home. They want to be able to be settled down. They don't want to be displaced from their house.

Now, let's talk about renting and landlord and tenant and rent increases and evictions. What's happening is, as rental property owners—single-family, apartment complexes, duplexes—see the market going up, they look at raising their rent. Part of the reason is necessity. Their taxes went up too. Remember we talked about tax and insurance? Their taxes went up. Their insurance went up. Their cost of materials for repairs went up.

Remember when you own a rental property, you don't just sit there and don't spend any money on it. You have to repair things—the roof, the gutters, the drains. All the things have to be repaired. Even if you don't see those repairs being made every day, you have to put away reserves for those. Because if you just make a very thin profit for 15 years and all of a sudden you need a $30,000 roof and you did not reserve for it, you lost money.

It's going to need a roof. It's going to need new windows, siding, paint. And as a property owner who's renting, you have to reserve for those items. Otherwise, you're an idiot and you're going to lose money. So as you see, well, in the future, the roof that used to cost $14,000 is going to cost $31,000—I better raise my rent to cover that. Most landlords are not price gouging. They're preparing for the future. That's the difference between landlord and tenant. Landlord has a forward-thinking time horizon. They're thinking two, three, ten years down the...