The Expert Podcast

It might seem like the housing market is inflated or is overpriced but in actuality the changes in price that have happened in the last 18 to 24 months might simply be the market playing catch-up and there's a good article we'll get into in a minute but as an example this compound interest calculator shows where property values may actually just be catching up to a moderate increase in value let's suppose that you had a house that in 2008 was worth 300 000 and in 2008 we're just coming out of the housing crash and 300 000 was about the median price of a house an average house was about 300 thousand there were plenty of houses in the hundreds and two hundreds and there were some houses in the fours and fives but a three hundred thousand dollar house it was a pretty significant house uh but it wasn't top of the line so let's say that was 2008 would have been about 14 years ago that the property value went up five percent per year estimated interest rate let's say five percent per year compounded annually that same house if it went up five percent a year for 14 years would have a current value of almost six hundred thousand dollars basically a double so in fourteen years if you go up five percent you double the value of your house the house is six hundred thousand well here's the thing look at a house that was three hundred thousand in 2008 it might not even be at six hundred thousand yet it might be at five might be at 520 might be at 480 depending on the market you're in and that might seem like a big jump but in reality what happened was not so much that the house went up in the last two years it may have been artificially depressed for the for the first 10 years from maybe 2008 to 2018.
Because what happened was after the 2008 housing crash people were very gun shy about houses a lot of people were foreclosed out of the market they were scared of buying property because of people that they knew that had um they got upside down in their house or that were not able to sell their house because their mortgage was too high and people were scared of the market so the price didn't go up that much from 2008 to 2015 or 16 and prices started to gradually drift up about five percent a year from that point the problem is that pain memory of the 2005 six and seven housing crash kept a lot of people from putting a lot of money into the real estate market so it was artificially depressed the prices didn't go up that much and then in 2018 there started to be a little bit opening up in the market and it jumped up a little bit maybe that 300 house was up at 350 at that point 360 maybe and you might think well that's a 20 increase 360 that's a big jump it's not really that big a jump if you count all the years that it didn't go up that five percent.
Now all of a sudden you get into 2020 and you have a completely different fundamental shift of how real estate and properties are looked at not only are you going to play catch up and get to that six hundred thousand value but you're also now going to say well the use of a house that was contemplated in 2008 is different now in 2022. people are looking at their house as their castle they're not looking to move around a lot they're not looking to be outside the house as much they're not going out to eat as much going to the movies as much traveling as much so their house is much more important and people that may not have considered that they want to get them a house so inflation yeah that may be a part of it rising inflation but you know what even if inflation is only five percent or the price went up five percent it's still going to get you to 600 000 on a 300 house so any increase inflation in 2020 even if inflation was 10 that's only one year's worth however now there's a shift to a new use of a house.
2015 there was a lower net earnings which eliminated the incentive to move and left americans in stagnant towns fast forward to present day the u.s economy recovers rents are rising but there's another geographic pattern people are moving to places where they want to be rather than where they have to be there are places like nashville tennessee going through the roof idaho prices are more than double in the last 10 years these are skewing the numbers and putting people in places where the prices of houses aren't even in line what they were four or five years ago because the use of the house is fundamentally different the thinking about how that house is a part of their life is different.
If you take somebody who would spend even fifty dollars a day on eating out cut that in half twenty five dollars a day eating out doesn't seem like a lot of money but if you eat out 20 days a month that's 500 a month eating out as a budget and that's a low budget if you take that 500 000 i'm sorry that 500 put it towards a mortgage on a bigger house that's like an extra hundred thousand dollars worth of house if you take entertainment another three four hundred dollars a month uh movies concerts a gym all of a sudden you have an extra thousand dollars a month in your budget that gives you an extra two hundred thousand dollars of buying power which is part of what that fundamental shift is.
And according to bloomberg this is long lasting implications for the us economy we expect that houses are going to be looked at much differently than they have been in the last 20 30 years the percentage of income that people want to spend is going to be higher and there's going to be a catch up from that jump in price that didn't happen from 2008 to 2015 or 16 that's going to play catch-up and then some on top of that where that house that was 300 000 in 2008 might be 650 in 2023.