462: How Often Do Home Prices Fall? Homeownership Rate, Join Our Live Event

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Home prices fell three times since 1975. We explore the reasons why.

The homeownership rate is 66% today. (The long-term average is 65%.) I expect the homeownership rate to fall due to low affordability, which will increase renter households.

If you have dollars in a savings account that pays 5% interest, I describe why you’re losing prosperit.

Our Investment Coach, Aundrea & I discuss the state of the real estate market.

Then we discuss our upcoming live event for new-build Utah fourplexes. They produce cash flow, have great tenant amenities and come with built-in equity. This area is extremely fast-growing: Register here.

Timestamps:

National Home Prices Fall and Causes [00:00:01]

Discussion on the historical trends of national home prices, the causes of price falls, and the impact of the 2008 global financial crisis.

Housing Affordability Crisis [00:00:50]

Exploration of the current state of housing affordability and the impact of the pandemic on home prices.

Upcoming Real Estate Event [00:01:44]

Announcement of an informative live real estate event that listeners are invited to join.

The current state of housing affordability [00:11:45]

Discussion on the challenges faced by first-time homebuyers due to higher prices, mortgage rates, and lending requirements.

Homeownership rate trends [00:13:11]

Analysis of the historical homeownership rates, including the impact of aging population and low affordability on the rate.

Future outlook for homeownership rate [00:19:40]

Prediction of a decline in the homeownership rate below the current 66% due to poor affordability and increasing number of renters.

Rental Market Overview [00:24:10]

Discussion on the current state of the rental market, including cash flowing properties, stable prices, and limited inventory.

Demand for Investment Opportunities [00:26:14]

Exploration of the demand from investors who are looking to invest their existing equity and the regions they are interested in, such as the Southeast and Midwest.

New Build Income Properties [00:28:14]

Introduction of a provider offering new construction fourplexes in the Intermountain West, discussing the market growth, population demographics, and amenities of the properties.

The opportunity for new build properties in a fast growth area [00:34:59]

Discussion on the benefits of investing in new construction properties in a rapidly growing area with good cash flow.

The role of HOA in maintaining property values [00:36:04]

Explains how the integration of HOA (Homeowners Association) helps maintain uniformity and cleanliness in the rental property investing world.

Details about the upcoming real estate event [00:38:31]

Promotion of a live event where listeners can learn about new construction fourplexes and have their questions answered in real time.

Resources mentioned:

Show Notes:

www.GetRichEducation.com/462

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Complete episode transcript:

 

Welcome to GRE! I’m your host, Keith Weinhold. Historically, just how often DO national home prices fall… and what causes it? 

 

Then, learn more about how TODAY’S housing affordability is absolutely awful. Then, our informative live real estate event that you’re invited to join. All today, on Get Rich Education.

__________

 

Welcome to GRE! From Pennsylvania’s MONongahela River to Mono Lake, CA and across 188 nations worldwide. I’m Keith Weinhold and you are listening to our one big weekly show. This is Get Rich Education.

 

"Real estate never goes down." 

 

Yeah, a handful of people actually told me those five exact words in the mid-2000s decade. “Real estate never goes down.”

 

Of course, 2008's Global Financial Crisis (GFC) and Mortgage Meltdown proved them ALL wrong.

 

And ya know what, I've never heard one single person utter those words since!

 

Late last year, national home prices took just a small dip for a few months on a m-o-m basis. That’s not something that often happens though.

 

So as minor as THAT was, that’s the event that actually precipitated the creation of this segment of our episode.

 

There’s a colorful chart that provides a… terrific visual of the month-over-month shifts in US home prices, per Case-Shiller, dating back to 1975. And if you’re one of our “Don’t Quit Your Daydream” letter subscribers, you got to see it last week.

 

Winston Churchill said, "The farther backward you can look, the farther FORward you can see." 

 

I don’t know that I’ve contributed anything quite that proverbial to the world on that exact subject yet. 

 

I just say that when it comes to future expectations, I favor "history over hunches".

 

So, before we look at WHY home prices historically fall, first of all, why go back to 1975 when we’re looking at a history of home prices. Why that slice of time, 1975 to present?

 

Well, that’s almost 50 years. It’s two generations, so it stops just short of your grandfather’s generation which was back when the dollar was still pegged to gold.

 

Here's what we can we learn from almost 50 years of home price history on a relatively untethered dollar:

Nominal home prices usually rise, but not always. This is NOT inflation-adjusted. That’s the first takeaway. Of the 500 to 600 little rectangles, that’s how many months there have been since 1975, they’re nearly all blue, which means prices rose.

Before we center on the red areas, which is when & where prices dipped…

The next thing I can tell you is that it shows that home prices are remarkably stable.

A SEASONAL fluctuation is quite apparent. Year after year, home price growth is weaker in winter and stronger in summer.

But do you know how many times national home prices have dipped since 1975? Any idea?

It is… three. Three periods of falling prices in the last… 48 years. Those periods were the erstwhile Global Financial Crisis period from 2007 to 2011, then that tiny dip that occurred in the last few months of last year. 

That was due to a late pandemic slowdown.

Before I tell you about the other time, that third time, that so few discuss, let me tell ya, the 2008 GFC went deep red. Most markets had losses of 20% or more.

I WAS an active RE investor at that time.

And that downturn was caused by irresponsible lending, rampant speculation, and an OVERsupply of housing. That’s well documented.

Look around today, and we don’t have any of those conditions today. Today it’s tough lending standards, no wild speculation, and oppositely, as you know, it’s that STARK UNDERsupply of housing.

But few people seem to know about an earlier attrition in prices. It was a mild early '90s downturn. It was really small, just a percent or two per year in a lot of places, but it persisted for more than 5 years.

I think a lot of people DON’T KNOW about that small early ‘90s downturn, that’s why before the Global Financial Crisis, they said what we all know to be false, “Real estate never goes down.”

The start of the ‘90s. That’s before my time - I mean, I was alive but not old enough to be investing, so I had to do some research about what caused prices to circle the drain just a little.

And to boil it down, it occurred for two main reasons - it was from defaults created by high household debt and also, adjustable-rate mortgages kicking in, making those homeowners pay higher rates - and some couldn’t pay it.

So as we look back like Winston Churchill to get lessons from history, I like to look at today’s landscape and see if we have any of those two early ‘90s conditions.

High household debt? Well, rather, really this era’s aberration is the opposite condition. Today it’s households sitting on a lot of cash and equity.

And then the second reason for the early ‘90s price dip - adjustable rate mortgages kicking in. 

Well, that is affecting the commercial space, not the residential side, where homeowners have now been long accustomed to FIXED rate debt. 

Now, before we look into the future of home prices - and I’ve got some good stats there…

To summarize, the top takeaways from 48 years of looking at monthly HP growth are that:

• Prices typically rise, not always

• Prices are remarkably stable

• Prices rise more in the summer than the winter

• And that historically, let’s distill it down to three - three chief culprits for falling prices are an OVERsupply of homes, irresponsible lending, and a distressed borrower

Now, with housing, people tended to use the word “uncertainty” a lot - really, constantly, ever since the pandemic began in 2020. 

Now, I think that we can finally say that the clouds have begun to clear. Though, of course, we never have 100% clairvoyance.

Most everyone is confident that the majority of interest rate hikes are done, inflation has come down, mortgage rates are back at historic NORMS right now actually, and home prices are rising at historic NORMS again too. 

You have all this money sloshing around the economy that is still fueling consumer wealth from the pandemic.

All this money sloshing around AGAINST a low housing supply, and with more economic certainty. 

All this really has a lot of people more bullish than I’ve seen in a couple years.

Homebuilder confidence is really surging right now.

And looking into the next year, more and more analysts are now forecast increasing national home prices.

 

Fannie Mae recently revised their forecast upward to 3.9% appreciation for THIS YEAR.

 

CoreLogic now expects prices 4.3% higher from June of this year to of next year. And Zillow expects 6.3% price appreciation over this same time period.

 

And, our core investor areas have just kept climbing and really didn’t experience last year’s slowdown at all.

 

I guess this isn’t necessarily good news, right? The bad news might be that there’s no price BREAK.

 

Higher RATES still didn’t break the market.

 

Now, I’ve heard some analysts at real estate research firms speculate that if INTEREST RATES fall in the next year with all these other favorable conditions that 10% HPA is possible.

 

I’d say, that’s speculative alright. It’s so hard to predict future interest rates that I’m not willing to do it.

 

And like I’ve shared with you here, which is contrary to what people USED to believe, it’s that:

 

Mortgage rates really don’t have that much to do with home prices!

 

So when it comes to home prices over the next couple years, I think that the most commonsense expectation is slow price growth and stability.

 

Now, just wait until you see what’s happening with the homeownership rate today. I want to share that with you shortly.

 

Before we get back to RE, let’s Zoom out for a moment and look at the broader investing landscape while we’re here at mid-quarter.

 

Bitcoin is getting less volatile than stocks. That’s one trend lately. Another way to say that though, is that bitcoin prices are in a period of historic stagnation.

 

Gold has fallen from the $2,000 an ounce mark that it touched recently.

 

Oil prices have been on a multi-month tear, but you know, when you look at it on an inflation-adjusted basis, which so many people forget to do, oil at under $100 a barrel feels inexpensive.

 

Elsewhere in investing, some online savings accounts have hit the 5% yield mark.

 

That might sound good when you consider that inflation has backed off. 

 

But as most agree that the CPI is understated, if you think that the true diminished purchasing power of the dollar is 5% and your savings account rate is 5%, aren’t you at least treading water?

 

Well, first of all, just treading water means that you aren’t going anywhere or growing. 

 

But you’re not even treading water. Because don’t forget that your interest earnings on savings accounts get taxed. 

 

So it’s good to hold some liquidity - always. But you’re likely underwater with a 5% savings account in this era.

 

Yes, on your interest earnings, you’re taxed at your earned income tax rate, between 10 and 37%. Say that you’re in the 32% tax bracket. 

 

Well then, real inflation is 5% and your 5% savings account only yielded 3.4%. 

 

On an inflation-adjusted basis, even if you happen to have a savings account with a yield that high, your inflation-adjusted return is negative 1.6%.

 

That’s why, here at GRE, we typically invest in vehicles that target returns VASTLY exceeding both inflation and taxes.

 

As much as that might hurt, you know who today’s real estate market is actually really bad for? Even worse for the saver that isn’t even treading water.

 

It is downright AWFUL out there for those wannabe first-time homebuyers.

 

They are looking at this triple-headed monster of higher prices, higher mortgage rates, and stringent lending requirements. And then if they overcome ALL that, they’ve got to compete for that tight supply.

 

It’s made affordability for people in THAT position really awful. 

 

In a lot of markets, a starter home is $400K. With your 20% down payment plus closing costs, that’s $100,000 out of pocket, right upfront, as well as your ongoing monthly payment… all for an asset that doesn’t generate income when it’s your HOME.

 

Well, that’s an insurmountable hurdle for a lot of people.

 

This low affordability moves people out of the homebuyer class and adds them to the ranks of the RENTER class. 

 

Well, there's our opportunity as landlords.

 

You aren’t preying on them. You’re risking your capital to provide good housing for them. 

 

But curiously, the HOMEOWNERSHIP RATE is actually just a touch higher than usual right now, despite souring affordability.

 

So, let’s take a look at this. And then I’ll break down what it means to you as well as where we’re headed.

 

Since 1965, the average homeownership since 65% and currently, it’s 66%, running a little high.

 

BTW, homeownership peaked at 69% in 2004—that's back when you could outright lie about your income, job, and assets, and still get a mortgage. Many people did just that. NINJA loans.

 

When you hear the acronym, NINJA loans, what that stands for is no income, no job, or assets.

 

Well, you either rent your home or you own your home. It’s one or the other. 

 

So then, today's 66% homeownership rate means that everyone else, 34%, are renters. 

 

When the homeownership rate drops, then you’ve got more renters.

 

The low point for homeownership was in 2016 at 63%. 

 

It’s grown since then, and you might wonder… how in the heck is homeownership above average today in the face of this low affordability? How is it 66%.

Well, there’s a few reasons for that and it’s not always intuitive. America’s population keeps AGING. 

And that skews figures… because homeowners tend to BE older.

Secondly, incumbents - those that already GOT their home have really low, affordable payments. They’re not going to lose their home & become renters. 

80% of borrowers have a mortgage rate under 5%. You’re really happy to stay put when your mortgage rate begins with a “4” or less - and you can also keep making the payment. 

It’s a payment amount that does not rise with inflation.

That introduces a lag effect in the stats. It’ll be a little while until this low affordability gets reflected in a lower HO rate.

There’s a low FORECLOSURE rate, under 1%. Americans can afford their payments and they have the motivation to keep making them.

Now, over on YouTube, I shared a great map with you, the Homeownership Rate by state and broke that down. Join us over there. On YouTube, we’re called “Get Rich Education”, of course. I host THAT show and it’s different from THIS show.

What’s the trend here? Well, HO is highest in low cost states like the Midwest and Southeast, and HO is lower in high cost states. 

WV has the highest rate at 78%... because it’s low cost. 

NY has the lowest HO at 54%... because it’s high cost. NYC drags down the number for upstate NY.

 

So where are we headed? In the future, I expect a NATIONAL DROP in the homeownership rate.

 

This is because few expect property prices or mortgage rates to fall significantly. Lending requirements should stay strict. 

 

So it’s the awful FTHB affordability that will continue to take homeownership lower. 

 

See, FTHBers are also exactly the type of people that often have student loan debt repayments to make… if they ever have to begin repaying them. 

 

That’s also going to make it tougher for people to clear that affordability bar. They’re going to keep being your renter.  

 

And that's why I expect the homeownership rate to plummet below 66% where it is now, and then below the long-term average of 65% by 2025 or 2026. That’s where we’re likely headed if market forces prevail.

 

Depending on who our president is in 2025, government relief programs are just about the only thing that I can see getting in the way of a declining HO rate.

 

Household FORMATION is high right now… because you have sooo many Americans between ages 25 and 40.

 

So that question you’ve got to ask is - is that new HH going to be formed as a OO residence or as a rental?

 

Increasingly, it’s gonna be a rental because of that continued poor affordability.

 

See, for a ton of people, if they didn't get their ultra-low rate mortgage the past couple years, then, well, it’s too late. 

 

That era is over and that’s why their affordability ship has sailed. That ship has passed. It’s gone.

 

And that's why more RENTERS are being made every single day.

 

So if you’re a LL, this is expected to both increase your occupancy rate AND the amount of rent that you can charge.

 

Carefully-chosen rental property is really where today’s opportunity is.

 

I’ve got more on that shortly, as I’m about to bring in one of our two Investment Coaches.

 

You know, you’re telling us that you find it so helpful to have free one-on-one coaching with them, either Aundrea or nuh-RAYSH. 

 

Both coaches have their MBAs. When you read their bios on our Coaching Page, they’ve got some impressive international corporate experience.

 

But they both live right here in the USA and they’re active REIs themselves - that’s really how they help get you started and connect you with the right market and property.

 

It’s an in-house conversation with an IC & I straight ahead and we’ll discuss how we can help you.

 

I’m Keith Weinhold. You’re listening to Get Rich Education.

__________________

 

Aundrea talked about cash flow. OK, that exists. Great. Yet, I still think of these as better for appreciation than cash flow over time. She’d probably agree.

 

Maybe you’re thinking a brand new construction duplex in the path of progress IM West could cost $1M or $2M, but no, this builder provides them for less than that. 

 

And then, of course, you’re probably going to finance most of that cost yourself too.

 

And, BTW, Aundrea did smile at my dorky joke about her loving rap music. A big smile that you couldn’t see through the audio-only podcast here. 

 

But, yeah. You didn’t quite hear a laugh. See, one prerequisite to laughing is that a joke actually be funny.

 

In any case, Aundrea and the provider are your two co-hosts on Wednesday.

 

The provider is a powerhouse of knowledge about not just real estate and demographics and fourplexes, but construction and financing too and everything that goes into it in order to optimize the investor experience for you. 

 

HE can answer questions in real-time for you.

 

It is almost time for the Beehive State to shine as Utah is front, center and under the stage lights on GRE’s Live Event in just two days.

 

You are cordially invited to join… as long as you don’t ask Aundrea about rap music. 

 

But, really. When you put this all together - a 4-unit building is the most that you can get with best financing terms, the cash flow, new construction, often this BUILT-IN equity at purchase time too, a fast population growth market, all inside a demographic population in Utah that’s young and has good incomes… it’s really quite remarkable. Quite a confluence.

 

We haven’t had an event for a product type like this before, and I don’t know if we’ll ever have an event quite like this again. 

 

Attend live to get your questions answered and get the first look at the inventory.

 

But if you can’t make it on Wednesday, then sign up anyway and we will effort to get the replay link for you.

 

You can do it all at: GREwebinars.com

 

Until next week, I’m your host, Keith Weinhold. DQYD!