The Expert Podcast

Are you still waiting for house prices to go down? I wouldn't, and here's why. It's not a matter of opinion, it's not a matter of having a guess whether or not there's going to be a housing crash or not. Everybody's going to have their opinion. You'll see news stories that'll say house prices are ready to crash. Some will say they're going to keep going up. But let's look at the facts. Here's an article today from the Wall Street Journal—this is the very end of April 2022—and if you're watching this later, it doesn't matter. This information is still relevant.

It says home price growth accelerated in February. It rose 19.8 percent—the highest rate since August. So in 2021, home prices went up. But even after interest rates are increasing, home prices still went up through the winter. This is January, February we're talking about. We're not even into the spring market, so it accelerated. Well, you might have said, well, you know, other places will tell you—here, CNBC—that a slowdown might be coming. A slowdown might be coming.

So home prices went up, but a slowdown might be coming. This is April 26, 2022. Slowdown might be coming. Well, guess what? Five months ago in December, they said home price growth is decelerating and it's just the start. They were saying in December that it was going down and it's going to keep going down. Well, obviously that's not the case if home price accelerated in February. Why is it going up? If you see two different opinions about the same subject, you can't just flip a coin and pick one. Only one can be right.

How do you tell which one is right and which one is wrong? How do you determine that? Let's take a look at some facts. One is a record number of home buyers are looking to relocate. This is also April. A third of users of this real estate site are looking to move to a different metro area in the first quarter. Skyrocketing home prices have made relocating difficult—the only valuable option for some home buyers.

Meaning that there's people who live in certain areas who want to move. Now these aren't homeowners. These are Redfin users that are seeing skyrocketing home prices and rising mortgage rates want to relocate to a more affordable area. This means you're not currently a homeowner, because if you are currently a homeowner, skyrocketing home prices and rising mortgage rates are not going to affect you. You're already in an affordable area—your house price is already set in stone. Home buyers are moving away from pricey coastal areas.

Right, so these users we're talking about are looking to move to a different area. Why is that important? It's important because the home buyer market is made up largely of consumers looking to buy a house when they're currently renting. They're looking to purchase a home when they're currently in a rental. Now, they may not be first-time buyers. They may have owned a home before and then went to rental and now going back—or they could be a first-time buyer. But most people are looking to move to a different area because of interest rate and pricing.

Now, in order for that home buyer to purchase a house, they have to find a house where somebody's willing to sell the house. Here's the problem—with interest rates going up, fewer people are going to want to sell a house. If the market accelerated in February 19 and interest rates have gone up, will there be more or less houses for sale after February—in March and April and May? Well, the trick question—the answer is less, because people who are looking to sell a house and get rid of their house also have to get rid of their mortgage.

So if somebody has a house that they have a mortgage of two and a half or three percent, buying a new house is going to put them right now at six point something percent—almost seven percent is the mortgage rate. So it's almost double. So a person currently a homeowner living in a house with a two and a half or three percent mortgage is very quickly going to discover that there's no valuable reason to sell that house and get rid of their cheap mortgage, even if they make a lot of equity on their home.

Because of course that equity has to go into their new home. What they can't bring from their old house to their new house is their interest rate. Their interest rate is gone forever. That cheap interest rate is worth big money. A savings of three percent interest on a four hundred thousand dollar house equates to roughly fifty thousand dollars over just a few years time.

So by staying in a house for an extra three or four years, the homeowner, the borrower, the mortgage holder is going to save fifty thousand dollars on interest—not counting the fact they have to pay commission on the sale, closing costs, moving costs. Forget all that. Just the interest alone on the same house is gonna cost fifty thousand dollars more.

So you have to look at it this way—a seller of a house is staring in the face of a fifty thousand dollar penalty just by selling their house. By moving, built into their mortgage and into their house is like a fifty thousand dollar lottery ticket. That is a value in their current ownership. By selling their house and moving, they're throwing away that fifty thousand dollar lottery ticket.

And up until December, January, February really—that wasn't a factor, and already prices went up 20 percent. Now, after that Case-Shiller report came out—which is through February—that's when the interest rates went up. The rates started to go up a little bit at the beginning of the year, but really didn't dramatically go up until February or March.

So what's that going to do for future months? Well, you might think, well, if interest rates are higher, home prices have to come down. They don't have to come down. They're only going to come down if there's not enough buyers to buy the houses that are for sale. If there's no houses for sale, the buyers are gonna have to pay whatever the seller wants to pay and pay the rate.

Now, are the interest rates too high? Well, most of the last 20 or 30 years, a five percent or six percent interest was considered low. In the 1990s, if you had a five percent mortgage, you were in great shape. Interest rates were seven, eight, nine, ten percent on mortgages. So five percent mortgage historically is actually a low interest rate. That five or six percent may not affect the home values. If it gets up to eight or nine or ten, maybe.

But even then, if there's no houses for sale, how is a buyer gonna try to negotiate the price? You have to buy a house. You have to have a place to live. Everybody needs a roof over your head. Whether you rent it or buy it, you have to have a roof over your head. And if you're renting and you see your rental monthly payment go up every year—$500 this year, $800 next year—we're seeing rental increases of a thousand dollars a month from a lease renewal.

Eventually those people are going to say, "I'm tired of renting. I want to buy a house so my rent doesn't go up every year. Or I don't get kicked out of my house. Or my landlord decides to rent to somebody else or sell the property." Eventually they're going to say, "I got to bite the bullet and buy a house." Now they look—and nobody's selling because everybody has a two or three percent interest rate.

Look, here's the thing. People who took out a 5 percent interest mortgage in December or January of 21 to 22 are going to be considered low interest rates just in a few years. In 2023, when interest rates are seven and a half or eight percent, you're gonna be glad that you have a five percent mortgage. And now those people aren't going to want to sell.

The musical chair game of home inventory is only going to get worse. Sure, the rate of sales may go down, the number of houses sold might reduce, but the market demand is not going anywhere. People are still going to need houses in 2022, 23, 24. There's not going to be automatically magically fewer people out there looking to buy a house. Everybody still needs one.

There will be magically less houses on the market. Because they're building some—but nowhere near fast enough. How do we know? We also are a licensed general contractor. So we know what the building industry is building. They're building as fast as they can, but with supply chain, labor, materials, cost—it's not anywhere near fast enough. That's the subject for another time.

So if you're in the housing market any way you can—fast forward, slash and burn—get yourself into a house. It's very likely that's going to save you tens of thousands of dollars than waiting six months or eight months or a year when interest rates are higher and prices are higher, because prices are going to continue to go up.

Another hidden cost of waiting to own a home is that somebody who's on the fence about selling—who may or may not be selling in the next year or two or three—is not going to do their maintenance on their house. Especially since prices for contractors are higher. So that deferred maintenance—you know, not replacing a gutter or a soffit or fascia board in 2021—might only cost you four or five hundred or a thousand dollars. Probably more than that. But let's just use the thousand dollars.

If that sits for two or three years with water damage, mold, rot, deterioration—now it's gonna cost five thousand because you have to replace more than just the fascia boards. You have to go back into the sheathing on the roof or the trusses—and that's going to be on you, the buyer. So buying something sooner, before the deterioration sets in, will put you on a path to not getting shut out of a house on price, locked into a mortgage that's eight percent, or buying a house that needs ten thousand dollars worth of maintenance that's been deferred and not paid for.

Again, sound opinion and fact. If it was up to us, we would love to see home prices go down. Because home prices going up doesn't help anybody—even the homeowner. Because if you have a house that you bought for $300,000 in 2015 or 16 and it goes up to $700,000, you might think, "Well, great, this is a big windfall. I love this. My house is worth 700." But that $400,000 in equity—it's not cash you can spend. It's not like income that you can use. That's just trapped value in your house.

There's only two ways you can take that money out. One is selling your house. Well, if you sell your house, now you're in that game of musical chairs—you don't have a place to live. You have to buy another house and pay somebody else their equity. So it's an even trade. You're not gaining anything.

You can also take a home equity loan or refinance. Well, first of all, now that the interest rates are six percent, seven percent, it may not be that great of a thing to do. Second of all, if you just take an equity loan to spend the money on consumable goods, you're taking part of your house value and throwing it away on a car, clothes, vacations, whatever. You're not gaining anything.

That $200,000 you're actually squandering instead of retaining it and owning it and having it as part of your personal net worth or your value—you're now disposing of it. So that's not going to work. Most people wouldn't do that anyway. So you might say, "Well, I'm just going to stand pat and my house will be worth 700 and I won't waste the money." That's true.

But you will have to spend some of it, because when your house is re-appraised by the tax assessor at $700,000, your taxes...