The Expert Podcast

The decision to purchase or not for single-family residential is kind of a no-win situation right now. If you're a potential home buyer looking to buy a house, there's almost no good answer. If you don't buy a house right now, you'll probably be losing out on potential upside in equity and really just savings on inflation. But if you do buy a house right now, depending on the house you buy, you could miss out on some short-term price drops. The problem is the current price level could stay stable for two or three years, maybe even four years.

It's not about the real estate market per se. The real estate metrics and fundamentals are not going to be what changes the values of homes; it's the overall economy, basically employment. Part of the reason that the current price bubble or spike is different than 2008 is because, in 2008, there were a lot of people in houses that were just barely financially able to maintain the ownership of that house. There were people that were lent money, given mortgages, who really had no business having a mortgage. They had no job or very little income, or they had five or six houses with interest-only loans. As a homeowner, they were not financially secure in that house.

Lenders for the last 10 years have not lent to people who are financially risky or fragile. They had good jobs, good down payments, good incomes, and their debt-to-income ratio was low. The underwriting was solid. So, the people who are in homes right now have a lot more financial security, and they have low interest rates—two, three, maybe four percent. The homeowners are doing fine.

The people who are homeowners, for the most part, also navigated the pandemic pretty well. Their jobs were secure, and they maintained their income. Some people had mortgage forbearance and could pause their payments, which helped. The people who are on the margins, renters on the other hand, were more likely to have financial problems because of the pandemic, especially service workers. During that time, there was also a great deal of demand and less supply, so the house price average spiked up.

Is that spike a bubble? Is it going to crash down? Well, it's unlikely that's going to crash down. It may level out; it may dip down a little bit in the short run. By short run, I mean two or three years. What could make it crash is not the fact that it went up; it's the fact that people don't have jobs. If a large percentage of homeowners are suddenly out of work, have less income, or have to spend more money on food, gas, and insurance—things subject to inflation—then home ownership could be at risk for foreclosure. Even if you had the same job with the same income, if you all of a sudden have five or six hundred dollars more a month in expenses due to inflation, you might have to foreclose.

However, there's a little bit of a built-in safety net to that. If you lose your house because you can't pay the mortgage, you're not going to be able to pay rent because rents are not less than mortgage payments right now. In fact, rents have spiked up and had more inflation than many other segments of the economy. Gasoline, food, and everything else—rents have gone up even more than those. So, unless a person literally can't afford to pay the mortgage, they're not going to get foreclosed on. They're going to find a way to stay in that house, and they're not going to sell it to try to save money on rent because you're not going to save any money.

Plus, a lot of people who own homes—if you bought it in 2019 and earlier—have a lot of equity. You can get a home equity loan that might carry you through for some cash for the next few years. If you have any kind of a house, you might have $100,000 or $200,000 in equity. The average right now is $207,000 in equity. Even if you have half that, you can borrow $50,000 or so. If you need to take $2,000 a month to cover your expenses, that'll last you two years. Many people will do that to stay in their house.

There's probably not a lot of downward pressure on housing prices. There will be more inventory available because more people who were on the sidelines thinking about selling their house as the prices were zooming up are now seeing it level off or are afraid of it going down and maybe trying to sell. So, there might be more houses available, but the price point is not going to crash down. People might be a little more realistic about their selling point, but look—they've had two years, almost three years, to see higher prices become the norm.

2019 is when the prices started to go up at the end of 2019. By 2020 and 2021, we're well into 2022—two and a half years, almost three years of people seeing these higher price points. It's very unlikely that sellers and even buyers are going to expect prices to go back to where they were in 2018 and 2019 because they've seen it for so long. A seller is not going to want to sell unless their back is against the wall or they have no choice. Buyers are going to understand that that's what the prices are. They may not be willing to pay projected 2023 prices, but they'll probably understand that, yes, this is what the price point is, and they can afford it even with higher interest rates.

A six percent mortgage on a $400,000 house is still a little less than $3,000. It's going to be very difficult to rent anything for that. The only obstacle is going to be credit and down payment. So, anybody with any kind of credit and an income—if you have a down payment—they're going to see that the math works for buying a house. Now, if you physically can't buy one because you have no credit, no income, or don't have the down payment, that's a different story. Now you're stuck renting.

The absorption of homes from those people isn't going to happen anyway. There are still a lot of people out there who have credit, have down payments, and were trying to buy a house for the last year and a half but got shut out because of no inventory or competing bids on properties. Those people are now seeing properties available. They might be holding back a little bit, thinking the prices are going to drop, but after four, five, or six months of seeing prices not crash down, they will step back into the marketplace. That's what we predict.

All those people who were out there—hundreds of thousands, millions of people—who were trying to buy a house in 2021 and didn't get one because there was no inventory or they were outbid or overbid, they still have their hearts set on buying a house instead of renting. They were just looking for the opportunity. Now, there are houses available. You can look on Zillow or Redfin and see houses available.

Another factor pushing them to buy a house is that in the last year, their rent probably went up again—$200, $400, $500. That's another pressure pushing them towards buying. There might be a little hesitation because they might be seeing news articles saying, "Prices are going to crash; home values will go down." But once they absorb that emotionally and psychologically and see that it's really not crashing—whether it's later this year or in 2023—they'll step back in and maintain the level of the market from crashing. Or, if it starts to go down a little bit, people will jump in thinking it's a deal. Don't expect 30% or 20% discounts. You might see prices come back down to 2020 or 2021 levels, but they're not going to go back below that.