I’m bullish on the housing market over the next three years. In this article, you will read 16 reasons why the average homeowner will likely be richer by 2024 than poorer.
However, before I share all the reasons why the housing market won’t crash any time soon, let me first share some background so you know where I’m coming from. After all, we all have our biases, and I am positively biased towards housing.
Brief Real Estate Background
Roughly 40% of my net worth is exposed to real estate. If I only owned stocks and real estate, real estate would account for a 60% weighting. My real estate portfolio consists of properties in San Francisco and Lake Tahoe, three publicly traded REITs, and 14 real estate crowdfunding projects across the heartland of America.
These assets generate roughly $150,000 a year in relatively passive income. If it wasn’t for real estate, I’d probably still be working a traditional job.
I’ve been buying real estate since I first came to San Francisco in 2003 because I found valuations to be cheap compared to Manhattan real estate. I had worked in Manhattan from 1999-2001 and never imagined being able to find a 2/2 park-view condo for under $600,000.
I kept buying real estate because I also realized U.S. real estate was, and still is, cheap compared to international real estate. Working in international equities enabled me to explore various countries while working. And I always checked out the various local real estate markets while on business trips. Not only is U.S. real estate cheap on a global context, we also have jobs that make U.S. real estate affordable.
Take a look at the real estate statistics from one of our biggest foreign buyers, Canada. Cities like Vancouver and Toronto are equally as expensive as the most expensive cities in America. Yet, there are hardly any big Canadian companies that come close to paying as much as U.S. companies. Go ahead. Try to name just three Canadian companies that pay new college graduates over $100,000 a year.
At the start of COVID in 2020, I encouraged readers to buy real estate through posts such as:
- How Are Real Estate Prices Impacted When Stocks Decline (March 16, 2020)
- Real Estate Buying Strategies During COVID-19 (April 19, 2020)
- The Best Near-Term Real Estate Buying Opportunity: Your Own City (June 2, 2020)
- It’s Time To Focus On Big City Real Estate Again (Sept 8, 2020)
Finally, I followed my own advice and bought a single family home in 2Q2020. I tend to put my money where my mouth is. Otherwise, there’s no point.
Reasons Why The Housing Market Won’t Crash Any Time Soon
For existing real estate investors, you should feel great about the risks you took to buy. It takes discipline to save up for a down payment. It also takes guts to buy a large asset with debt. My default recommendation for real estate is to hold on for as long as possible.
For new real estate investors, things are a little trickier. With strong demand, low inventory, and higher prices, you need to be careful running with the herd. Good economic times have clearly returned.
However, getting into a bidding war where you’re the only one out of 20 people willing to pay way over ask has its risks. The housing market won’t crash any time soon. But, if you buy a property this way, it might not appreciate for years as the market takes time to catch up to your top bid.
Let’s review some reasons why I believe the housing market will likely continue to stay strong for years. I assign a 90% probability the housing market will not crash (-10% or greater) within the next three years.
I also believe with a 90% probability the housing market will continue to make new highs for the next three years in a row with on average high single-digit YoY gains. If I’m wrong, then I will suffer the consequences as anybody with skin in the game does.
1) Rates Will Stay Low For Longer
We are in a permanently low interest rate environment. Interest rates have been coming down since the 1980s thanks to information efficiency, technology, global coordination, and learnings from previous cycles. Productivity gains have also been massive over the years.
All the economists and lenders who have urged you to take out a 30-year fixed-rate mortgage because rates might go up have been proven wrong. In 10 years, they will be proven wrong again if they continue to encourage a 30-year fixed mortgage. The average duration of homeownership is only about 10 years. There’s no need to pay more interest than you need to.
We all know that inflation is higher than what the government is reporting. Yet, despite record high prices in many asset classes, the 10-year bond yield still remains below 2%. That is an important figure because 2% is also the target inflation rate by the Federal Reserve.
With low interest rates for longer, the potential affordability headwind of rising interest rates won’t come to fruition. Low interest rates will carry the housing market to new highs. To bet that interest rates will suddenly surge to unaffordable levels after 40 years of decline is irrational.
Note: If you haven’t refinanced your mortgage, do so now as rates actually dipped back down in April after very strong retail sales numbers. You can get competitive no-obligation quotes with Credible, my favorite lending marketplace. I locked in a 2.375% 7/1 ARM for a new home purchase before my relationship pricing discount.
2) Inventory Will Remain Depressed For Longer
COVID has permanently increased the intrinsic value of real estate. When billions of people began spending more time at home starting in March 2020, the appreciation for a home’s utility went up. Not only were homes protecting homeowners and their children from COVID, they provided a safe place for millions to play and work as well.
During perilous times, we hold onto what we treasure most. This is why real assets like homes held their value while stocks crashed 32% in March 2020. Unlike a home, you don’t need stocks to survive. Given how much homes have given homeowners since the pandemic began, the tendency is to hold onto our homes for longer. You don’t get rid of things you love and use every day. You cherish them. Besides, what if there’s another pandemic or random disaster?
Homeowners also know that if they sell their home, they will have to compete against other homebuyers who want what they already have. Therefore, it is only logical to hold onto your home for longer. With lower inventory for longer, rising demand will continue to put upward pressure on home prices.
3) Potential Homebuyers Are Much Richer Post-Pandemic
The current potential homebuyer is likely much richer today due to a rise in stocks. The S&P 500 returned 16% in 2020. The NASDAQ returned 43% in 2020. Practically every single stock index went up in 2020. So far, 2021 continues to be another banner year for stocks.
Further, the current potential homebuyer likely held onto their job during the pandemic. As a result, there was little-to-no income disruption as millions of people worked from home or found ways to make money from home.
Take a look at your own stock portfolio and net worth since January 2020. Chances are high you are up at least 10% since the start of the pandemic.
With more wealth from stocks and day job income, the buying power of homeowners has increased. With stocks continuing to go up and unemployment levels continuing to go down, homeowner demand will continue to increase.
4) Domestic And Foreign Institutional Demand Is Increasing
There is a clear increase in demand from institutional real estate investors for rental properties. With a decline in interest rates, investors everywhere are looking for higher-yielding investments. We’re not only seeing investors bid up real estate prices, but dividend stocks, and cash cow online businesses as well.
Technology has also made real estate syndication deals much easier to form. Capital raising is more efficient. Doing research online is easier. Signing documents and transferring funds is no longer a headache. As a result, institutional real estate funds are only going to get bigger, not smaller. More capital brings more competition.
The next uptick in demand will come from foreign institutional investors who buy up cheap American property. COVID helped serve as a throttle in 2020 and 2021. However, that throttle will soon be released. Foreigners are also hungry for yield. They have also experienced record-high stock prices while also amassing pent-up savings.
If Americans don’t buy our own homes, foreigners will for decades to come. Be forewarned. Foreigners will once again start buying up properties in international cities like San Francisco, NYC, Los Angeles, Seattle, and Boston. But they are also getting smarter about heartland real estate as well. Americans have the head start. Be that as it may, foreigners aren’t far behind.
5) The Federal Reserve And Federal Government Are Pro-Homeownership
Never fight the Fed or the Federal Government. If you fight the Fed, you will end up losing a lot of money. If you fight the Federal Government, you will likely get fined or get thrown in jail.
Given the Fed and the Government are pro-homeownership, it is only logical to invest in real estate. The Federal Reserve has already telegraphed it is willing to let inflation run hotter than its normal 2% CPI target to ensure the return of full employment. President Biden and Congress have clearly signaled their willingness to spend an endless amount of money on stimulus spending.
Besides the implicit support from the Fed and the Government, we have favorable real estate laws in place:
- Mortgage interest deduction
- $250K/$500K tax-free profits
- Programs for first-time home buyers
- Mortgage moratoriums
- 1031 Exchange
- Historical bailouts of homeowners and big lenders
If you want to make money in real estate, you must put any negative beliefs aside about the Fed and the Government. Be politically agnostic and face reality.
Most of the time, the people who are most vocal against real estate are the ones who cannot afford to buy property, sold property at the wrong time, or didn’t buy property when they could have. For some reason, some people against real estate aren’t able to accept that people who buy real estate also buy stocks and other assets as well.
6) Demographic Tailwind
Fannie Mae estimates there are 88 million people in the millennial generation. This is the highest number I’ve ever heard reported of people born between 1980 – 1999. The millennial generation definition seems to be getting larger. But, the point is there is a huge population of 22 to 41-year-olds who are in their prime home-buying years. All the previous talk of the millennial generation renting for life is turning out to be BS.
A good life tends to be the same as it ever was for most people – find a partner, own a home, start a family, work hard to provide for your kids, retire with a paid-off home, etc.
Millennials have been late to the home buying trend due to more education, more student debt, delayed unions, and more competition. But for the past 5+ years, millennials have been the largest percentage of buyers. This trend will likely continue for another 10+ years.
As an investor, it’s generally a good idea to invest in long-term trends. Positive demographics are a long-term trend worth riding. Once you invest in a positive trend, you don’t have to worry as much about the minutiae. You just need proper exposure.
Check out how the median age of US homebuyers continues to increase over the past decade. Thankfully, the median life expectancy is also increasing.
7) Multi-Generational Wealth Transfer
The Boomer generation (born 1944 – 1964) is one of the wealthiest generations in history because Boomers have been able to invest in the longest bull market in history. As a result, Boomers have an estimated $30 trillion in wealth they will be transferring to their children when they die.
However, given how rich the Boomer generation is, they will likely transfer more of their wealth while still living in order to enjoy the benefits of their giving. The revocable living trust business is booming with the Boomers! My estate planning lawyer can’t keep up with the demand and now takes forever to respond to my e-mails.
We are seeing an increasing percentage of parents buying homes for their adult children. Now we are seeing parents and grandparents buy homes for their little children or grandchildren decades before they need independent housing.
With the estate tax threshold likely to decline from a record-high $11.7 million per person, more rich parents will spend down their estates to avoid a 40% death tax. Further, more Boomers will start regularly giving $15,000 a year in gift-tax exclusion per person. More GRATs will be set up to avoid estate taxes as well.
The tsunami of inheritance money will inject more capital into real estate, stocks, and other asset classes. Younger people are more motivated to invest. Younger people also want to see what type of wealth they can build on their own. In contrast, older people are more set in their ways, especially when they already have everything they need.
8) Homeowner Equity Cushion Is Massive
Take a look at the homeowner equity and mortgage debt outstanding chart below by the Federal Reserve Board. The data is as of Q32020 and homeowner equity has continued to grow. Homeowner equity was roughly $21 trillion versus $11 trillion in mortgage debt outstanding. With so much homeowner’s equity, there won’t be a housing market crash any time soon.
$21 trillion in homeowner equity with $11 trillion in debt is like having 65% equity in your home and a loan-to-value ratio of only 35%. Most first-time homebuyers put down 10% – 20% for a loan-to-value ratio of 80% – 90%.
If you have 65% equity in your home, your equity buffer is so large that you will likely never have to fire-sale your home through a foreclosure or short sale. You will do everything in your power to find ways to keep paying the mortgage to keep all your home equity from going to the bank.
In fact, with so much home equity, it is more likely the typical homeowner will take out a home equity line of credit (HELOC) to buy more property or consume more goods. Many homeowners are investing in public REITs and private eREITs through Fundrise to take advantage of the real estate trend.
If you have been a homeowner for longer than one year, just ask yourself whether you’d ever sell your home at a discount as the economy opens up. Of course not. You are going to enjoy your property and hold on to it for as long as possible.
Below is a another chart that highlights US owner’s equity in household real estate.
9) Household Debt As A Percentage Of Disposable Income Is Low
As long as a homeowner can service their debt and pay property taxes, the homeowner will never lose their home. Given it’s been much harder to get a mortgage or refinance a mortgage since the Global Financial Crisis, homeowners have had to increase their down payments. As time went on, incomes increased, homeowner’s equity increased, and mortgage debt decreased.
Today, we find ourselves in a scenario where U.S. household debt service as a percent of disposable income is at its lowest level for over 50 years. Part of the decline most certainly has to do with a continued drop in interest rates.
For example, when my wife and I refinanced our old primary residence in 2019, our mortgage payment dropped to about $2,850. Back in 2005, our mortgage payment was $6,500 for another house we owned. If we adjust the mortgage amount to be the same as the mortgage we had in 2005, our mortgage would be about $4,300. Millions of homeowners are now much wealthier since 2009, yet are paying less to service their debt.
10) Inflation Is Picking Up Steam
With the Federal Reserve keeping rates at 0% – 0.25% for longer in the face of a recovering economy, higher inflation is an inevitability. Real estate is one of the best inflation hedges given housing costs are a key part of inflation. Further, inflation whittles down the real cost of debt. This double benefit builds tremendous household wealth over time.
If possible, an inflation investor should go long healthcare, higher education, and real estate. Too bad none of us can buy private colleges that raise tuition by 7% a year! But at least we can buy healthcare stocks that gouge us every month, rental properties, and stocks.
The main reason why most of us work so hard and invest is so that we can afford a comfortable home, provide for our children, and one day retire without financial worry. If you can invest in real estate that not only provides shelter, but also appreciates in value over time, you’re winning. The housing market is going to be a beneficiary of inflation.
11) The Amount Of Funny Money Is Exploding
Every 40+-year-old investor learned his or her lesson from the 2000 dot com bubble. When you’ve had a multi-bagger homerun in names like Tesla, Bitcoin, and more, you convert some of those funny money gains into real assets like real estate. You most certainly do not roundtrip your Pets.com and Webvan stocks to zero!
As the mania for crypto, NFTs, Reddit YOLO stocks, and growth stocks rages on, more money will smartly find its way into the housing market for diversification. At the end of the day, these huge gains will be converted to buy things that improve the quality of an investor’s life. Otherwise, it’s all kind of pointless.
12) Credit Is Still Very Tight
When the dotcom bubble burst in 2000, real estate began to outperform until about 2H2006. That is when the euphoria hit its peak as banks lent to anybody with a pulse. Thankfully, lenders were forced to raise their tier 1 capital ratios and lend much more prudently since the 2008-2009 Global Financial Crisis.
Nowadays, only people with high credit scores and solid financials can get a mortgage. When I refinanced my mortgage in 2019, Citibank and Wells Fargo would only give me the best rate if my credit score was above 800. When I took out a new purchase mortgage in 2020, Wells Fargo required an 800+ credit score again.
During the 2020 crunch, the mortgage industry was very tight. There was a point where HELOCs and jumbo loan refinances were restricted, even to existing customers. Further, going through the underwriting process took a month longer than average.
Take a look at the mortgage originations by credit score chart below. Notice how anybody with under a 660 credit score has essentially been shut out from getting a mortgage or refinancing a mortgage since the GFC. Further, the percentage of borrowers with a 760+ credit score has increased.
It’s hard to see the housing market crash when predominantly high credit score borrowers with huge homeowner’s equity have been buying since 2008. Just look at the 1Q2009 blue bar compared to the latest blue bar. We’re talking a 5-6X difference!
13) Rents Are Rebounding In Big Cities
One of the reasons for housing bubble concerns is that cap rates compressed to unattractive levels. As a result, a lot of capital flocked towards 18-hour cities where cap rates are higher. At the end of the day, a home price cannot keep going up indefinitely without rental price growth.
During the pandemic, we saw rental price compression in some of the most expensive cities in America. However, rent prices are now rebounding and will likely continue to rebound as people come flocking back. A continuous rebound in rent bodes well for home prices.
14) The Cost To Build Housing Is Rising
You may have heard that lumber prices are up 3X in one year as demand outstrips supply. Therefore, framing costs to build a house are up at least 2X as lumber accounts for 70% of framing costs. To build a new 2,000 sqft house, framing costs might be up $70,000 – $100,000. There are supply-chain shortages in many finished products as well. Expect delays.
Then we have a construction labor shortage that is causing wages to rise. My contractor told me he is paying his subcontractors 50% – 100% more per hour than when he did a project for me in 2015. I don’t doubt his word because I’ve been using one of his workers to do some side work for me over the years.
Finally, it is now tougher than ever to get a building permit in some cities due to the rise in home remodeling activity. Planning and Building departments are backed up. I’ve been waiting to get my within-the-envelope permit approved for close to four months now. What a waste of time.
The increase in cost and time to build or remodel a home makes a home more valuable. At the margin, new or newly remodeled homes will likely command a larger premium than fixers.
Note: You should re-shop your homeowner’s insurance policy. With the cost of building a home going up quickly in the past couple of years, your homeowner’s insurance policy is likely not enough. Check and compare the latest rates with PolicyGenius for free. Not only might you save money on your policy, you’ll rest easier knowing you are properly covered.
15) Selling Costs Are Still Too High
If the cost to sell a home dropped to $0 like stock trading, I’m certain there would be a lot more supply of homes for sale. However, many realtors are still able to charge a 5% – 6% commission to sell a home despite the internet. Therefore, the real estate industry is self-throttling, which is actually beneficial for homeowners who never sell.
In addition to high real estate selling commissions, there is also the cost to prepare the home for sale. Potential costs include painting, refinishing floors, painting, changing fixtures, repair, and staging. Then there are transfer taxes, recording taxes, and potentially capital gains taxes to pay. Here’s a sample table of the cost to sell a home.
It took the previous owners of our home four months and ~$150,000 to get the home ready for sale. They put on a new roof, finished all the floors, painted the inside and outside of the house, changed many windows, replaced a couple decks, fixed a leak, re-did a ceiling and a wall, and landscaped. As a buyer and experienced home remodeler, I loved knowing this and seeing the before and after pictures. It meant I didn’t have to go through any of that.
Given all the costs and time required to sell a home, you have to be really motivated if you want to sell. Selling during a pandemic is just another hurdle. Therefore, perhaps pent-up supply is coming once there is herd immunity. However, unless selling costs go down, the vast majority of homeowners would rather hold on.
The cost and time required to sell a house makes panic-selling much harder. Therefore, the likelihood of a housing market crash is also lower.
16) Potential Long-Term Capital Gains Tax Hike
President Biden wants to raise the long-term capital gains tax rate from 20% to 39.6% for households who make over $1 million. If you are a long-time homeowner sitting on more than $1 million in capital gains beyond the $250K/$500K tax-free profit exclusion, then you may end up holding onto your home for longer. As a result, home inventory should decline.
It’s already difficult enough to move out of a home you’ve lived in for 40+ years. Why would you then sell it to pay a 43.4% capital gains tax (includes the 3.8% Net Investment Income Tax)? Instead, it’s best to hold onto your gold mine forever and pass it down to your children when you die.
With lower housing inventory due to a higher capital gains tax rate, housing prices should continue to stay elevated.
Best Time To Get Into The Housing Market
With all the bullish reasons to get long the housing market, when is the best time to enter the housing market? I can think of four situations:
1) When You Can Afford To
I’ve made a case the best time to buy property is when you can afford it. In my opinion, you can only comfortably afford property if you follow my 30/30/3 rule. For those of you in more expensive metropolitan areas, you can stretch to buy a home equal to 5X your household income, but no more.
If you do stretch to 5X, you had better be bullish about your career. If not, you will likely have some sleepless nights for the first couple of years.
2) During The Winter
If you’re looking for the best time to buy property during the year, the answer is during winter. Sellers who list their homes during bad weather and holidays months are usually more motivated.
3) When The Moratoriums End
The other potentially good time to buy property is when the mortgage and rent moratoriums end sometime in late 2H2021. The idea is many homeowners who are behind on their mortgages may have to foreclose or short-sale because they cannot afford all the back pay.
If banks are smart, they will simply tack on the back pay to the overall mortgage balance. This way, the homeowner gets to pay only a slightly higher mortgage amount each month. The lender also still gets paid with interest. Everybody wins. But, investors need to prepare for illogical legislation or moves by lenders by building up a cash hoard now.
However, I’m assuming institutional investors and retail investors are also waiting for such an opportunity. Hence, competition will likely continue to be fierce.
4) As Soon As Economies Open Fully: The Summer
Perhaps the best opportunity to enter the housing market is during the summer, when people start traveling in droves. Everybody, including myself, wants to travel again. With more people traveling, there should be less competition.
The reality is that there are always good real estate opportunities if you look hard enough. Some properties are mis-priced and go stale-fish. Some properties are listed by an out-of-town agent without the proper marketing skills and connections.
You might also be able to get a deal if you send a real estate love letter or knock on a home that’s looking to be prepped for sale. That’s what I did in 2019 and it worked like a charm.
Real Estate Will Always Be A Core Holding
To get over your real estate buying fears, think in generations. What will your kids and grandkids say about the property you buy today? Chances are high that in 20-40 years they will be amazed at what a good deal you got. Inflation is too powerful of a force to combat. It tends to sneak up on you.
A savvy investor rides the inflation wave. Just like how it’s not a good idea to short the S&P 500 long-term, it’s not a good idea to short the housing market by renting long-term.
I don’t care what your favorite financial guru says about the negatives of owning real estate. There’s a reason why the net worth of the average homeowner is more than 40X the net worth of the average renter. Just the forced savings each month alone keeps a homeowner disciplined.
What If There Is A Housing Crash?
If the housing market does crash one day, you will probably make out just fine if you bought responsibly and keep paying your mortgage, if any. Real estate is not like stocks. With stocks, you may go through daily heart attacks as their value disintegrates during a bear market.
During the 2008-2009 crash, my primary residence likely went down from $1,700,000 to at worst $1,400,000 (- 17%). But I refinanced the mortgage when rates declined to boost cash flow. Then, I happily kept living in my home until I found a new place in 2014 and turned our old home into a rental.
When my son was born, I sold the rental property for a lot more. Then I rolled $550,000 of the proceeds into stocks, muni bonds, and commercial real estate. When new opportunities arose in 2019 and 2020, I bought more single family homes.
Relatively Easier To Forecast A Future Slowdown
Unlike stocks, it can take years for the housing market to turn. Therefore, I’ll let you know when I start to get a sense that it does. After all, to be a successful investor, we must practice predicting the future.
Housing price growth rates must decelerate over the coming years due to the law of large numbers. However, I expect the housing market to stay strong for at least three more years.
I won’t have the capital to buy another single family home for a while. However, I do have the capital to buy publicly-traded REITs, private eREITs, and individual private real estate investments for more tactical exposure.
Best of luck in your real estate hunt! Stay disciplined. Run the numbers. Forecast worst case scenarios and only buy if you can survive them. I truly believe the housing market will stay strong for years to come.
Readers, what do you think of the housing market’s future? Are you long or short? Are you planning on buying property over the next couple years or sell into strength? What could derail the housing boom?
Note: One more bullish real estate scenario to think about. If the stock market corrects, bond yields move lower. When stocks sell off, capital tends to flow to the safety of real estate. This happened before in 2000 when the dotcom bubble burst. This also happened in March 2020.