The Expert Podcast

One of the most common subjects about the economy and about people's lives right now has to do with housing and housing prices. What's going to happen with the price of real estate? In this video, we're going to talk specifically about single-family homes, not apartments, multi-families, or condos—single-family homes—and what's going to happen to the values and prices of single-family homes. Obviously, there's an instinct or theory that they're going to crash, right? Because they went up too much and now they're going to go down, or because interest rates went up and now they're going to go down. Some of this comes from a recent memory of about 15 years ago, with the 2008 housing crash, and that's obviously something that is on everybody's mind. But here's the problem: if the only reason that you think housing prices are going to crash is because it happened before, that may not be a reason by itself. Housing prices may still crash, but let's look at the reasons why they might or might not.

In 2008, housing prices crashed because people had houses they did not want or couldn't afford, and the housing prices crashed. It's not because they went up. In fact, house prices really didn't go up that much between 2005 and 2008. Yeah, they went up, but not as much as they went up in the last three years, from 2019 to 2022. Housing prices crashed in 2008 and 2009 because there were people who couldn't afford or didn't need the house that they already had. A lot of people bought three or four houses because there were lending policies that gave everybody a mortgage who asked for one. If you could fog a mirror, you got a mortgage. You had no income verification, no job verification, no money down. So people were buying two or three houses, or people were buying one house to live in but they really shouldn't have been in that house. They were probably typically apartment renters or home renters. They had no money down, not enough income, but mortgage brokers put you in a house. That's not the case today. People are not in houses that they don't need, can't afford, or don't want. People who own houses right now are, for the most part, either primary residents—they live in the house, they put a lot of money down, and they were very carefully vetted to be able to afford the house—or they own a house that they're renting out. Do any of these people need to get rid of the house? Probably not. Even when interest rates went up, these rates were not variable mortgages. That's the other problem that happened in 2008. A lot of these homes were variable rate mortgages, so when rates went up, these people all of a sudden had their mortgage payment go from $1,500 a month to $2,500 a month, and they couldn't afford it. Variable rate mortgages were not a thing in the last 10 years because rates were already low, and you didn't have to get a variable rate mortgage.

The other thing is houses are not like stocks. They're not a commodity where you buy it and sell it if their prices go down or prices go up. People aren't buying and selling houses like stocks. It's not liquid like a stock. To sell a house, you have to pay about 10 percent of the price in commissions and fees and filing fees and everything else. So you're not going to just flip houses unless you need to get out of that house. You need to sell it. Most of the people who are in a house right now need that house. You can't sell it and just walk away. It's not even like a car. If you have a car you can't afford, you could sell it and maybe take the bus or have a second car or buy a cheaper car. It's also physically easier to change a car. If you downsize your car, how hard is it to switch from one car to another? You park next to it, you switch over your stuff, and you drive away. A house is a bigger deal. You have to go through two closings, you have to move, and you have to transfer all your utilities. It's not something people do lightly.

Now, let's talk about supply and demand. While there may be a lower demand, prices might be too high for people to afford. Interest rates might be too high for people to afford, but even if nobody can afford to buy a house right now, let's say nobody could afford to buy a house—that's not true, there are plenty of people who can afford to buy a house—but let's say tomorrow it turned out nobody could afford to buy a house. That doesn't mean that the prices have to come down because you need a buyer and a seller. Even if the buyers are only willing to pay X amount of dollars, unless a seller's willing to do it, you don't have a sale. You don't have a market crash unless you have a buyer and a seller. In order for prices to crash, you have to have sellers willing to sell at that lower price. Because if the sellers are not willing to sell at the crash price, they're not going to sell. They're just going to keep it, especially since they already have a roof over their head and a place to live.

So, let's look at the numbers. Here's the volume of detached single-family homes in North America for the last seven years. How much did it go up? 81 million to 84 million. Not a lot. It went up 3 million homes in seven years. That's not a ton. At the same time, the U.S. population went up from 318 million to about 335 million. So the population is going up faster than the number of homes is going up. Even new residential construction, you have building permits of about 1.3 million per year, and not all of those are going for a net new house. You also have some of it that are remodels, or some of that are substantial reconstruction where you tear down a house and put up a new one. So you're adding maybe a million homes per year. The population is going up more than that, and even if there are two or three people per household, it still barely breaks even with the number of houses that are needed for the new population. So what does that mean? Housing prices really can't crash. Sure, they can level out and they can not keep going up, but everybody needs a home to live in. So the fact that all these houses are needed means that nobody's going to sell unless they have to. And one of the reasons somebody would need to get rid of a house: maybe the person died, maybe they're looking to get another house and they've already bought something, but it's not like stocks, which nobody really needs and they just sell it to get the money. When you sell the stock, you're not any worse off in life, right? You now have cash. If you sell an extra car, you're not in worse shape because you can buy a cheaper car. Selling a house is only viable if you don't need the house. If you can't afford it, that's going to be a problem. Because what are your options? For most people who have a house right now, their mortgage is going to be cheaper than renting somewhere else. So if they can't afford it and they sell it, where does that put them? They have to go take another housing unit. It's like musical chairs. If they sell that house, they have to go rent a house, which means somebody renting that house is going to buy a house. So it all comes out even.

Look, housing prices have gone through the roof. Sometimes they're unreasonable. Interest rates are high. The mortgage payment on a house now, on an average house that maybe in 2019, let's say it costs $250,000 for an average house, or $280,000. If you've got a two or three percent mortgage, that mortgage payment might be $2,000. Now, if that same house is $400,000, the average price right now is $416,000, and your interest rate is, let's say, 7 percent, that mortgage payment is going to be over $4,000. It's twice as much. So people who have a house right now, that have a mortgage payment of $2,000 or $2,500 or $3,000, they're not looking to run out and jump into the market and buy a $4,000 or $5,000 mortgage payment.

Everybody needs a house. That's the difference between houses and those prices crashing and other things. Stocks, bonds, even vehicles, those prices can fluctuate more. Housing prices don't crash because people need that commodity. They need that roof over their head, and even the housing prices that crashed in 2008, they very quickly recovered. By 2010 or 2011, they were back up where they were before the crash. Within a few years, and that was an environment when there were too many houses—there were more houses than people needed them. They were building houses left and right. People were buying three or four houses. People had extra houses. So when they sold that extra house or foreclosed on that extra house, they really didn't lose anything because they still had a roof over their head. Or if they went from an apartment to a house they really didn't deserve to have or couldn't afford when they got foreclosed, they went back to an apartment. So the single-family home market was oversaturated. Now, that's not the case. The estimate now is that there's five million fewer homes than there are people who need them.

So certainly, prices may stabilize and the market may come down to a level that's more affordable, but it's not going to crash back down to 2018 because there are still not enough houses to go around for the people who need them. Just like that game of musical chairs, there's more people standing up that need to sit down, but there aren't enough chairs. If a seller pulls their house from the market, they're just going to wait until the prices come up.