The Expert Podcast

Real estate prices have gone up, and now interest rates are rising. Of course, everybody expects that there will be a crash because the prices have skyrocketed like a bubble and now interest rates are high, so people are expecting prices to come down. Well, that's not going to happen, and here's the reason why that everybody just glosses right over and skips over. For the last two-plus years, people have tried to buy houses, and many people have been shut out of buying a house to the point where MSN published an article saying that renters in the U.S. are losing hope of homeownership. Now, this is something that's not a statement to be taken lightly. People are losing hope about homeownership to the extent that buying a home has turned into a demoralizing experience.

Here’s a story about one particular person in Dallas. They put in seven bids, and every bid was over asking. Sometimes they put in a bid without ever seeing the house, but their offers were rejected and never even close. They ended up going $60,000 over for a house built in the seventies. So, what happened to all those people you remember seeing in articles and news stories? Dozens of people were waiting outside a house for an open house, people who were rejected on 10, 15, or 20 different offers on a house, finding that a house might have had 10 or 15 offers on it. Well, that house only sold one time. What happened to those other 15 people? They're still out there. They're still lurking, feeling desperation, demoralized, and hopeless.

Now, what’s going to happen over the next eight to 12 months, in the balance of 2022, is that more inventory will be coming into the market, but it will be quickly absorbed by all those people who are still out there as non-buyers. Most of the people who did not buy a home in 2020 and 2021 were not rejected because they didn’t try. They tried to buy a house. Most of them didn’t fail because they weren’t approved for their mortgage. Most people already had mortgage pre-approval. Most didn’t fail because they couldn’t afford it. Look at that last article—the people were offering $60,000 over the asking price and still didn’t get the house. Those people are still out there.

So now, if that same house or a similar house comes on the market, and it’s priced $50,000 over what it was a year ago, those people will snap it up. They’re still feeling hopeless and demoralized. This extra inventory, the extra inventory, is not going to dilute and lower the price. It will simply be a way for people who are willing to overpay to be able to do it. Because in the last two years, there were thousands, tens of thousands, maybe even a million people willing to overpay for a house—paying over the asking price, over the listing price—and they didn’t succeed because somebody else paid more, or they offered all cash, no mortgage, or they offered no contingencies. So, the remaining people who needed to get a mortgage or couldn’t pay $60,000 or $70,000 over will now find inventory available for them to buy successfully. That’s what everybody forgets. Those people are still out there.

The crowds of people who wanted to buy a house for the last two years are still out there. You might say, “Well, the interest rates are higher, so the payment’s going to be higher.” Yeah, that’s true, but what’s their option? Their rent is already higher wherever they live now. If they’re not a homeowner, if they’re in a rental, an apartment, or a rental home, sometime in the last year or year and a half, their rent already went up because all rents are going up. Rent increases. And unlike a home, which the interest rate may affect what somebody’s willing to pay, the rental market doesn’t care about interest rates. It just cares about what the market is willing to pay. So, if you’re a landlord and you have properties that are renting for $1,700 to $1,800, and you raise it to $2,400 and people still rent, why not do it? That’s going to put more pressure on these buyers to act quickly.

Look, there’s no reason for these renters to stay in the apartment a year later if they were trying to buy a house in 2021 and failed. There’s no less reason to want to buy a house in 2022. Their rent’s probably higher, they’re already paying more money, and they’re already seeing the real estate market go up, so it’s not going to slow down their urgency to buy a house. It’s not going to dilute their demand for a house. In fact, interest rates are a little bit of a factor for buyers, but for renters, they’re not a factor at all because the property itself isn’t affected by interest rates.

Now, the owner might want to raise the rent because their expenses are up, but that owner already has a mortgage, their interest rate is already set. Even if interest rates go up, the owner is not going to need to raise the rent to cover interest. They’re going to need to raise rent to cover the market. So, supply and demand is only affecting the rental market on the demand side, not the supply side.

For the purchase of homes, that buyer is still out there. They’re already paying a higher monthly budget for their rent, so paying more because the interest rate went up is a no-brainer. In fact, how much the property payment went up on a mortgage is probably less than how much the rent already went up in the last year. A few percentage points on a mortgage might raise your mortgage payment on a typical house by $400 to $450. For many people coming out of a rental, their monthly rent payment went up at least that much. These aren’t people renting a $1,000 or $1,200 apartment or house. People who are looking to become homeowners are probably renting a house at the higher end of the market—$2,000, $2,500. Even a 20% increase in rent, which is not unheard of, would be $500 to $600. We’re seeing rental rates go up 30-40% in some markets.

That’s the key. The demand is still there. Those thousands, or millions, of people who tried to buy a house in 2020 or 2021 and failed still want to buy a house. They may have temporarily backed off only because the reason for their failure was inventory. It wasn’t cost. It wasn’t price. They were willing to pay over. Everybody’s willing to pay over. They were bidding over listing, bidding over asking price. Maybe they had to get a mortgage contingency because they didn’t have all cash, maybe somebody else swooped in with all cash. But those buyers are still out there, and there’s probably more of them now because in the last year, new household formations happened, and when rents went up, there were probably even more people wanting to buy a house.

The only people that didn’t change are the people at the lower end of the market. They couldn’t buy a house anyways because of credit or down payment. That really didn’t change. The people in the mid to upper end of the market, with incomes approaching six figures and credit scores over 650, still want to buy a house. They always did. The interest rates are not going to stop them. The price is not going to stop them. They were already willing to pay above market. That factor will ensure that housing prices are not going to go down. They may pause a little bit, but they’re not going to go down. Any discounts are going to be from an inflated amount, not from a market price.