The Expert Podcast

So how do we know this is not a housing bubble and how do we prepare for what's going to happen next? First of all, let me tell you a story about how I personally avoided catastrophe in the housing bubble of 2005 and why it's very clear that this is different. So here's a story and if you're bored by stories fast forward a few minutes until we talk about the current environment but this story helps understand why this is not a housing bubble. It's very important to know that if you're making personal life plans based on your belief that this is a housing bubble, those plans might not serve you, or at least maybe you can hedge a little bit but proceed with the right information.

So in 2005, 2000 yeah 2005, I was living in south Florida and at the time I was involved with purchasing and selling real estate. I would buy houses and improve them, make them more valuable, and then sell them at a later date. Some people call it flipping, sort of was flipping but it wasn't flipping in the traditional sense, and at any given time I have one or two houses and I would and I lived a lot of these houses. I would buy a house, live in it while I was fixing it. When I got to the end of being done I would buy another house so I could move out of the house that was going to come for sale and that way when I moved out I could fine tune all the little details, finish everything up, clean it up good so when somebody went to look at it it wasn't a live-in house, it looked like a speck house brand new and then I would kind of move on to the next one and it would almost be like musical chairs.

So this started in about 1999 2000 and in 2002 I started to get a little bit ambitious and said well why don't I do two houses at a time and then have one that's for sale. So I would, I own three houses at a time, lived in one, fixing one, the other one is like in the pipeline and then when the first one was sold I'd move into the other one, buy another one in the pipeline, right? And for reference, all of these houses were very lucrative in terms of the profits, tens of thousands, hundreds of thousands profits on these houses and to be fair these are pretty reasonable houses. These weren't million dollar houses, there were two three hundred thousand houses, the most expensive house I ever bought was four hundred thousand dollars, most of them are twos and threes.

And at one point in 2004 I went to the mortgage broker that I was working with for these houses and he said look Dave, this market is going crazy, you can get more mortgages, why don't you just buy a few houses? You've made money and all the ones you bought. I don't know, I don't know it's, I, I, I'm not sure I want to get into all that, I can only do so much. So at the time I had three houses. One is my primary residence I was living in, one was a house but it was in a zoned commercial neighborhood that I was using for my office, the other one was a home that I had just purchased, it was actually a buy owner property I just purchased that didn't need much work, it was just a little bit of a fix up. The person that owned it for 40 years hadn't updated anything, just some cosmetic type things and all of them were intended to, you know, do my normal minor cosmetic things, make the house more valuable and then resell it.

And right around that time a house came available in a neighborhood of million dollar homes on the water but this one was just one block or one lot off the water and it should have been worth, you know, six or seven but I think it was for sale for like 3.25 so I bought that house. Now I'm up to four houses, uh, Adam, altogether it's, you know, million and a half worth of houses in value. I wasn't worried about the values, I wasn't worried about the overpriced, um, you know, being overpriced but I still had four houses. Now for some people having four houses is nothing, there's some flippers and investors that have 10 offices at a time, 20 houses at a time, but for me at the time four houses was a big, um, obligation for me. Three of them had mortgages on, one of them didn't.

And so here's what happened. Right around that time it was I believe a Friday afternoon or Saturday, whatever day it was, and I had taken my truck, I had a, um, a Ford F250, it was, I had it for about three months, it was brand new, and I brought it to the car dealership, the Ford dealership, to get its first oil change, break in oil change, and I brought it to the store and it was only going to take a little while and I was waiting in the customer waiting area of the Ford dealership, a nice little lounge with TVs and coffee machines and couches, it was really nice.

And about a week or three four days before this, Hurricane Katrina had come through Florida. Fortunately it hadn't hit the area where I lived in south Florida, had gone farther north through Orlando, but it was a pretty serious storm even in Florida but it wasn't catastrophic. Well the night before, Katrina had crossed the Gulf and then hit, as we all now know, the city of New Orleans, and the city of New Orleans was devastated by Hurricane Katrina. And so at night it was hard to tell what's going on because the news couldn't get there. Well the next morning, sun comes up and the news choppers are flying around looking over this devastation. The streets are flooded, the, um, their dome, I forget what it's called in New Orleans, um, was ripped to shreds, people were, bodies were floating in the road, there was chaos, there was riots, and I'm figuring well no problem, pretty soon national guard will be there, they'll be rescuing people, there'll be boats, there'll be planes, there'll be all this kind of stuff, and I'm watching.

There's no national guard, there's no boats, there's no planes, there's no rescue. The government doesn't have this, they don't have control over this. I mean, we do national recoveries in other countries for wars, for natural disasters, and we don't have like the, the people are not swooping in to solve this problem. I'm thinking that doesn't sound right, maybe they're not that organized at the government level, far for me to think that in the first place, maybe they don't have this as organized as I think we did, as I thought we did.
Well it got me thinking. At the time in 2005, the only reason that the real estate market had gone up as much as it did was because of government intervention, low interest rates, mortgage-backed securities, lacks regulations at the government level about who can get a mortgage, who can borrow money, no oversight, and they did it intentionally. The Federal Reserve and the housing administration had all done this to get more people into homes. Back in the mid 90s they had passed laws that said we want more people to be in homes, don't worry we got this, we know how to take care of this. And I recognize that the reason that there was a lot of people that were buying houses that really shouldn't be buying houses, they didn't have the income, didn't have the down payment, didn't have the credit, was because of government support and intervention. And so I figured well the government must know what they're doing, they have this figured out, they got this, and I started thinking, well, and that's what, that's what jacked up all the house prices, right? People that really should be in a hundred to 120,000 house we're buying a 400,000 house and it jacked up all the prices.

So I'm thinking, well if they can't keep this thing organized with people dying in the street in Hurricane Katrina, maybe they don't know what they are doing with the real estate market, with the lending criteria, with the financial regulations, and I got scared because now I got 1.6, 1 points whatever was million worth of house, houses that I was on hook for. So I waited until after the weekend and the same thing happened, it was, as you remember, anybody who knows about Katrina, the experts were not swooping into Katrina, they didn't come in and save the day. I said no, if they don't, if they can't figure out this, then I'm questioning if they know what they're doing with this real estate market.

So on that Monday I called up my real estate broker who I had done business with and I told them, look, put every house for sale, I'm selling them all. "You're crazy, you're going to lose so much money, you keep these, it's going to go up, don't." I said just sell them, and I priced them aggressively, not at a loss but not at the highest level that they could have gotten, and a couple of them I didn't finish all the, the cosmetic fixes that could have got even more money because it was going to take a month or two or a few months to do it. I want to get these houses sold. I was probably a little bit more urgent in selling these houses than I had to, I probably needed to cut them loose that fast. Had I stayed in them a little longer I could have probably made some more money, water under the bridge, that's part of decision making, but I got them all sold within three months, maybe four months, one at a time, and so at the end of 2005 I did not own any real estate at all.

Well we all know what happened in 2006 and seven, the real estate market crashed. Had I still been involved with buying and selling real estate I would have been wiped out. In fact, it probably would have been worse because when the real estate market actually crashed in 2007, is when it started, six or seven, I wouldn't have owned any of those four houses, they would have been sold by then, but I would have owned more houses, in different houses, I might have been up to five, maybe if four was good, five is better, six is even better, maybe I would have been one of those people with six houses. If I had six houses all with mortgages in 2007, I would have went bankrupt, I would have been game over. So it was that one little thing that made me question what's underneath the housing market, what is underneath the support for real estate prices.

So how does that relate to today? Well today, the real estate market is different. It is not being supported by artificial government incentives. It's not being supported by lending criteria that if you can fog a mirror you get a mortgage, if you're a cab driver you can buy two houses. That's not how it works anymore. Now you have to prove income and not only have to prove it with pay stubs, they check it out, they get transcripts from the tax, from the IRS, they verify and they verify it again the day you do your closing. Even if you're approved two months ago when you did your contract, the day of your closing they re-verify everything. If you lost your job in the meantime, too bad, no house.

So the government is not pulling up the real estate industry from above, they're not pulling it up by lacks lending guidelines, by low down payments, by bad credit, they're not pulling it up by, um, making the lending process easier to get more people in houses. What's lifting it up is from below, it's from the demand side where people want to buy a house without any government, I guess, motivation, incentive. Look, many people in two thousand two or three or four that are buying houses never had the idea of buying a house until all of a sudden they get something in the mail that says from a mortgage company, hey you can buy a house, we'll give you a mortgage, I can, well why not? Many of the people who bought houses never had the idea of buying a house until their mortgage company said we'll give you a loan, anybody's approved. So that demand was false.

Now it's the opposite. There's people who want to buy a house who can't because they can't get approved for a mortgage, they don't have the credit. There's people who want to buy a house but can't because the price is too high. There's people who want to buy a house but can't because there's no house available, there's no inventory. So the support for this market is from below, that's holding it up, not pulling it up.

The other difference is huge difference. Right now anybody who owns a house and who's buying a house can actually afford the true monthly payment on the house. What does that mean? Well if you buy a house now, first of all it's a fixed rate, it's not going to go up. Second of all, it's not any kind of interest only or artificial teaser rate. Third, the income ratio, debt to income ratio, is highly scrutinized by the government, meaning that if your payment is two thousand dollars, they want to make sure you make four times that, you want to make sure you make seven or eight thousand dollars. If you don't make two or three times or at least double your mortgage payment, you're not going to get approved.

Back in the day, 2002 2003, they didn't care what your income was. You could be making two thousand a month and have a three thousand dollar mortgage, they don't care, they would prove you anyways. So that was one of the reasons why real estate went down, is because people couldn't afford the houses and they had to foreclose them or get rid of them. There are very few people in this market that can't afford the true actual payment on the house. Back in 2002 2003, there were some people who could afford the payment they were currently paying, but then when the interest rates reset or their variable mortgage went up, then they couldn't afford it anymore because that's the real payment now, the payment they started with was a fake rebate payment, now it's the real one. 2022, most people to buy a house can afford the real payment.

Why did I say most people? Well the people who can't afford the real payment, it was a trick question, they don't have a payment. Mo, many of the purchases are being made with cash. Cash can't get foreclosed, cash can't not afford a payment. So that's where the market supported from below, holding it up, rather than pulling it up from 2002. This is different. This is not held up by the government. This is being lifted up by demand from the actual consumers.

Sure, we can debate whether or not the real estate's a good investment, is it going to go up, is it going to go down, but in reality it's pretty clear that the reason for this rise in price that happened recently is completely different from 2002. What about worst case scenario? If you had purchased a house at the height of the bubble in 2008, worst timing ever, if you were just the unluckiest person in the world and bought a house at the top of the bubble and the market crashed, you'd actually be back in the black four years later. Houses didn't go down for good, they went down when, while the, the foreclosures worked out of the system and the new lending came back in, but by 2011 2012, maybe 2013 in some markets, the prices were back right where they were in 2008.

So even in a market that was artificially inflated, buyers really didn't lose that much money if you held on to the house, if you could hold on to the house. If you panicked and sold or got foreclosed, yep, you lost money, but those people were under capitalized. In this market, the prices are up, are they inflated, is it a bubble, who knows, right? But the reason for it being up are different, and even if it is a bubble and it pops, in four years, historically speaking, it's going to be right back at the same place.

So if you're buying a house for the right reasons, for a place to live and for an investment, if you're planning on being there for some period of time, not just trying to flip it or buying three houses, you're probably going to be okay. And if buying a house is a good decision for your finances because it'll be less than rent, you're not throwing away money to a landlord, you get appreciation when that, when the market goes up, you get tax benefits, then being worried about a bubble is going to hurt you in the long run.

In fact, everybody who in 2019 2020 saw prices going up and said this is a bubble, I'm going to wait, they're probably regretting that. The average increase of a home for median home in 2021 was 72,000, average increase for a median home. So if you bought a house in 2020 thinking, you know, if you didn't buy a house in 2020 thinking it was going to be a bubble, you missed out on 72,000 in increase and now you have to buy a house that's going to be at least that much more.

So food for thought. Look, we're not giving you legal advice, we're not financial advisors, we're just trying to go with history, experience, and realistic observations about the world. It's not even really an opinion, it's just looking at what the facts are. You have to make your own decision obviously, but we just want to give you a point of view that has rational, realistic, reasonable premises behind them, not based on just a feeling or a thought or, well that was a bubble so this must be a bubble, prices went up before, went up again, right?

So real estate has always been a long-term beneficial investment. Like the guy said a long time ago, they ain't making any more real estate, is what it is. Certainly there's something to be worried about by losing if you buy a house, it's very unlikely you're going to lose. Now if it's not a good idea for you to buy a house financially right now, different story, but you can even watch some videos that you could probably make it work anyways. You'll probably get a decent house with a mortgage tax insurance for right around a thousand bucks, which would make it a good financial decision unless you can't afford a thousand bucks. It's not a bubble, doesn't look like it, obviously got to make your own decision, but it's one way of looking at the world that might be beneficial.