The Expert Podcast

When it comes to real estate, the normal laws of supply and demand aren't always the major factors or the only factors that go into buying and selling a home. Notice that in the law of supply and demand, there's no mention of the word price, and there's no mention of the word requirement. What do we mean by requirement? Well, when you buy a TV, a car, or gas for your car, or even groceries, those items aren't requirements. Yes, you need gas for your car, but you can cut back. You may need groceries, but you can also cut back. Many things are luxuries; eating out is a luxury, clothes for the most part are a luxury beyond what you already have. Real estate, however, is a necessity. You have to have a roof over your head, period. You can't live out in the cold, although many people are doing that now. More people are doing that, but if you're a normal person and you want to have a roof over your head, you're going to either buy a house or maybe rent a property. But that's going to be just one step removed because somebody owns that house.

The price is almost immaterial; you have to pay whatever you have to pay to live in a house. The only time you're going to be homeless is if you literally cannot pay whatever the market will bear. The market's not going to come down to meet you. Are you seeing that? Put your comments below and let us know what you think. Homelessness is proof that the market does not come down to meet demand or the price. Everybody who's homeless could pay something for a place to live, even if it's a hundred dollars a month. Many people can afford to pay eight, nine hundred, or even a thousand dollars. There are people who are living in hotels that can pay a thousand dollars a month, but there are no apartments for that. There's no homes for that. Supply and demand does not apply to something as crucial as a roof over your head, and the fact that real estate prices are not coming down to meet that demand is proof of that. People are desperate for a place to live. Everybody needs a house and wants a house. They will pay whatever they have to.

There is a term in the real estate industry called "house burdened" or "home burdened," where if you're spending more than 30 percent of your income on your residence every month, you're house burdened. Well, people do it all the time. There are some parts of the country where 80-90 percent of the population is spending 50 percent of their income on their home, their mortgage, or their rent. So, obviously, people will pay whatever they have to for a place to live. It's not supply and demand, that if the price of gas goes up, I'll just drive less. If the price of steak goes up, I won't buy a steak, I'll eat beans. You can't do that with a house; you have to have a place to live. So supply and demand, even though it's kind of a ubiquitous financial law of the land, doesn't apply 100% to real estate. It doesn't apply 100% to houses because people have to have a house. When there aren't enough houses, people become homeless or they do other things.

Now, for the last couple of years, some of this crisis has been not necessarily averted but just delayed or diluted because you had pandemic money, stimulus money, moratoriums on evictions, and rent controls. Now that that's all being removed and unburdened, that dismantling of those safety nets is creating a more urgent conflict between what people can pay and what the market says. The supply and demand is not going to come in and save that. Even if we have a recession, even if we have a depression or financial crisis, the cost of residents is still not going to go down because there are still five million more people that need homes than exist. We're behind on the number of houses. It happened very quickly over the course of 24 to 36 months, this reversion of the housing market. And whoever's in a house now is going to pay whatever they have to to keep it. If you're paying 50% of your income, you're going to keep paying it if you can, to keep your house. And if for some reason you can't and you get kicked out of your house because you can't pay, say, $3,000 a month anymore, there's somebody else that will come right behind you and pay it.

The owner of the house that's renting it or the seller of the house that's selling it is not going to have to reduce their cost because of supply and demand just to find a buyer. The demand is there. There's more than enough demand to swallow up all the supply, even at the current price levels. Do you agree with that? Do you see the same thing? It's not wishful thinking that you want it to go down, but do you see that even if 20 or 30 percent of the people who are in homes right now either non-renew their lease, get evicted, or sell their house, there's still the same number of people willing to step in and pay the money? All those people that were in bidding wars on houses, 20 or 30 people trying to buy a house, they're still out there. They're still looking for a house. All the people that are looking for an apartment at a high price, it's not that they couldn't pay the price. Somebody else got to it before they could. They're still out there. That pent-up demand market is like a tidal wave, pressing against the seawall, so to speak. And if the current residents or occupants of homes somehow can't pay, there's somebody willing to step in to fill their shoes.

Sure, in some areas, there might be a little bit of easing, or there might be just a reduction in how fast it goes up, or there might be a plateau. It's not going to go back to where it was in 2017 or 2018. It never does. Even if you look at the housing crash of 2008-2009, the prices that spiked up to in 2005 and 2006, they backed off a little bit for a short period of time—about a year and a half or two years. But go ahead and look at the average price of a house and rents—they went right back up to that level within a couple of years. By 2011 or 2012, boom, they were right back there. So even if we get a little bit of a blip, it might go down a little bit, but there's still fewer homes. The biggest difference is that in 2005 and 2006, they overbuilt. There were too many homes. For the last 15 years, home building has been very conservative. There hasn't been an overbuilding of homes. So, the population still went up, and now you have a shortage of homes. That shortage of homes can't get fixed quickly. In fact, now with inflation, supply chain issues, and labor for construction, you can't build them that fast at all. Even if you wanted to go back and build the volume that they did in 2002 through 2005, there's not the employment, labor, or workmanship to be able to build those houses, and there's not the materials to build them. You might be able to find the lumber for the framing, but all the interior fixtures and appliances are in shortage, and the prices are much higher.

Let us know what you think. Does this seem real to you? Are you seeing this in your daily life? And even if, like I said, it's not wishful thinking, imagine if five people in your apartment building couldn't pay their rent. Do you know that there's five people that would step right in and pay that higher rent or even more, if they have the availability to do it? A lot of people still have jobs; they still have income. Some people may lose that, but there's still going to be plenty more that can replace that lost tenant for a landlord that has to evict.