EP191: The Biggest Lies You’ve Been Told About Real Estate
This one fact about real estate has created generational wealth over the last 100 years and everybody is ignoring it – we don’t think you should.
- “Real Estate Market at Rock Bottom,” The New York Times (1933)
- “Real Estate Bubble About to Burst,” Time Magazine (1973)
- “Foreclosures Skyrocket,” The Associated Press (1991)
- “Real Estate Market in Jeopardy,” Time Magazine (2001)
- “Real Estate Bubble Bursts,” The New York Times (2007)
- “Real Estate Market Crashes,” Time Magazine (2020)
These headlines are pretty stark. 😣😣
Well, what if we told you that these headlines aren’t from 2023, in fact, these headlines are from as early as 1933, into the 70s, 90,2000s, the Great Recession, and 2020.
This may be a surprising fact for most of you, and so in this episode, we will dive into statistical data so that you can draw your own conclusion about what this really means without allowing talking heads like us to stir you one way or the other.
How we can use our newfound understanding of the housing market historical data to our financial advantage, and what pitfalls to avoid in the short term.
According to economic data from the St Louis Fed, The US Median home price in 1933 was $3,900 and it was $17,800 in the 1960s by 1973 it grew to $34,000 fast forward to today and we are now at $430,300.
Juxtaposed this with the doomsday headlines from yesteryears and one thing stands extremely clearly, the housing market always preserves. So, if the historical data paints a more stable picture of the housing market, what gives? Why all the near-term hysteria?
To understand this, let us tell you a short fable, called “The Blind Men and the Elephant.”
A group of blind men encounter an elephant 🐘 for the first time and try to learn about it by touching different parts of the animal. Each man feels a different part of the elephant: one the trunk, another the leg, another the tail, and so forth. As a result, they come to wildly different conclusions about what an elephant is like.
The man who feels the trunk believes an elephant is like a snake. The one who touches the leg insists it’s like a tree. The one who feels the tail says it’s like a rope. And so on.
When they compare notes and realize their understandings are in complete disagreement, they start to argue and fight, each believing he is correct and the others are wrong. The parable concludes with the moral that we may be blind and ignorant (like the blind men), and we might fail to see the ‘whole truth’ or ‘whole reality’, often leading to misinterpretation and conflict.
This fable illustrates how people may get a skewed or incomplete picture of the real estate market based on limited or selective information.
Much like the blind men in the story, investors might focus on one aspect of the market (like a downturn or a bubble) and believe it represents the entire picture. This narrow view can lead to misunderstandings, panic, and poor decision-making.
Encouraging a holistic understanding of the market, considering both its challenges and opportunities, can provide a more accurate and empowering perspective for investors.
Now having said this, we are not saying that everything is jolly rancher with real estate. We definitely see short-term issues facing some investors.
High-Interest Mortgage Rate
No doubt we are in an extremely high-interest rate environment, but did you know that we are considered extremely spoiled by the baby boomers who were buying properties back in the 1980s? 🤓🤓
According to the US World and News Report, the mortgage rate hit the highest rate ever recorded at 18.63% in 1981! And here we are bemoaning over 6, 7 or 8%. Many people will say, hey, the home prices are much higher today than they were then and they will be right, but do you realize that most real estate in the US is on a fixed rate loan, and most were not purchased from March 2022 to the present.
For context, according to Bankrate.com over 70% of mortgages are on a 30-year fixed rate, 9% are on a 15-year fixed rate, and 1% are on a 5-year ARM or adjustable rate mortgage.
So why is everyone freaking out about the real estate market crashing?
They do understand that unlike the stock market, real estate investors don’t need to track the property’s value daily, since it has 0 impact on their rental returns, their tax depreciation, and their future value.
Because the only three times the property’s value matters are (1) when you buy, (2) when you refinance, and (3) when you sell. The market temporary decline is only a blip on the graph that is shooting sky-high.
Go Shopping When Things Are on Sell
Think about it like this… on Amazon Prime Day. 🎁
Oh, the enchanting siren call of Amazon Prime Day, a bonanza of “bargains” that entices consumers with the irresistible allure of savings supposedly too grand to ignore!
Watch as sensible folks get lured in, hypnotized by the flashing lights of “unbelievable deals” and “one-time offers”.
With every click, they’re convinced they’ve outsmarted the system, snagging treasures at laughable prices.
In every other aspect of our lives, we love a great bargain, we even buy things we don’t even need for the love of a good discount. 😂😂
I mean, why else would I have bought these multiple-blade kitchen scissors unless it was 50% off?
I don’t even really cook! However, when it comes to real estate, we become paralyzed by these gloomy headlines, resisting the urge to swoop in and seize available bargains logically.
👉 Here’s the deal, everyone: while interest rates are higher than we’d like, that doesn’t necessarily matter.
If we meticulously factor these rates into our investment analyses, ensuring we can easily cover expenses— including the mortgage, insurance, property taxes, etc.— and still enjoy a healthy cash flow, then the actual cost of money becomes a non-issue.
Housing Shortages is a Real Thing
Our anxiety over housing market crashes can be likened to the blind men who perceive only a portion of an elephant; meanwhile, the undeniable truth is the U.S. faces a significant housing shortage.
The 2023 State of the Nation’s Housing report by Habitat for Humanity indicates a surge in homeownership costs in 2022, pushing 2.4 million would-be renters out of the market. This spike has led to unprecedented housing cost burdens.
With the supply of homes for sale scarce, nearly at record lows, the home rental market is expected to stay strong.
Forbes reports, “The housing stock is alarmingly low, hitting near-historic levels, with entry-level homes being especially scarce. This shortage keeps demand high and home prices inflated. Adding to the predicament, the recent weeks saw a decline in new home construction, which had previously alleviated some pressure. Jack Macdowell, the Chief Investment Officer and Co-Founder at Palisades Group notes that the current inventory is about 46% beneath the historical average since 1999. He anticipates that resolving the inventory issue in 2023 is highly improbable.”
In wrapping up today’s episode, by now we hope we have helped you demystify and draw a clear line between unfounded fears and the reality of real estate investing.
While doom-laden headlines may lead you to believe that the sky is falling, remember, the real estate market has stood resilient against time, providing generational wealth, much like a steadfast elephant unfazed by surrounding chaos.
Economic cycles, with their ebbs and flows, are inevitable, but history shows us that real estate value tends to increase over the long term.
Yes, though the current high-interest rates are real, they should be navigated with strategic thinking rather than fear. With meticulous planning and analysis, it’s entirely feasible to secure investments that not only cover your costs but also provide healthy cash flows, even in today’s market.
So, when gloomy headlines try to sow doubt, remember to take a step back, look at the whole elephant 🐘 , and invest wisely with a long-term perspective.
GET ME ON THE KITTI FREEDOM CLUB
Rate, Review & Follow!
“I love Cashflow Multipliers.” ◀️ If that sounds like you, please consider >> rating and reviewing our show! This helps us support more people — just like you — move toward the financial futures that they desire. Click here to let us know what you loved most about the episode!
Also, if you haven’t done so already, follow the podcast. We’re sharing the best tips, tricks, and secrets in owning your own time so achieving financial freedom early and permanently becomes easier. Follow now!