November 18, 2021

JF2634: Is U.S. Real Estate Expensive or Cheap? | Passive Investing


In today’s episode of the Actively Passive Investing Show, Travis discusses the deciding factors of whether real estate is currently expensive or cheap. He talks about what metrics we are using to measure and compare real estate today, how the has dollar devalued over time and how this inflation affects the market, and what new evaluations we use today that we may not have had 10 years ago.

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Travis Watts: Welcome, everybody, to another episode of The Actively Passive Investing Show. I’m your host, Travis Watts. I have a really exciting episode to share with you guys today, and it’s of the conversation, “Is U.S. Real Estate Expensive, or is it Cheap?”  And I think that’s a great question to ask, and of course, the media and the headlines are going to say that real estate’s out of control and prices have skyrocketed, and all these things. And while some of that’s true, I think it’s important to have the greater conversation surrounding the context of all this. Is real estate expensive, compared to what?

So the background here is that most of you guys know I’m a nerd, and I’m a full-time investor, and I do a lot of research, from a lot of different sources all day, all week, all month, all year. That’s just kind of the name of the game. And the benefit to you is, of course, I get to share a lot of that content with you.

I pulled a lot of this data from a really interesting research project by Jason Hartman. So if you guys aren’t familiar, he’s a real estate guy, he does a lot of great in-depth research, and I wanted to highlight a few things. It’s not just solely based off his presentation that Jason did, but other sources as well, which I’ll share with you. But it’s basically what we’re talking about is comparing real estate to other commodities and other things, not just the US dollar, to show you that, well, maybe it is very expensive, or maybe it’s actually cheap.

So without further ado, I’m excited to jump in. I’m excited to share with you this. Please always keep in mind the classic disclaimers – I’m not giving anybody financial advice. I’m not a financial advisor or a CPA, a lawyer, an attorney. So always seek licensed advice, but I am here to provide some educational topics for you to think about and hopefully, help you make better decisions as you go about your investment journey.

So the first thing I want to talk about is that real estate, as we all know, is very local. There is no such thing as ‘THE’ real estate market. There’s – gosh, 400+ markets throughout the US, there’s 3,100 counties, within these counties there are cities and submarkets and different neighborhoods… So when we talk about, is real estate expensive? Is it cheap? It really depends on what real estate we’re talking about.

For example, I was on one of these platforms, I forget what it was – Zillow, Redfin, or something, the other day, and I was looking… I like doing this, because again, I’m a nerd. I like going nationwide and just looking at real estate prices everywhere, and just see what’s happening. So I found a three-bed, two-bath, single-family home in Santa Monica, California, for $2 million. $2 million. Under 2,000 square foot, by the way. Then I was like, “Okay. Well, that’s interesting.” Is that expensive? Is that cheap? I really don’t know without further context.

And then I’ve got some family out in Oklahoma, and I drove out to Muskogee, Oklahoma, and I found a 3-bed, 2-bath, 2000 square foot for $200,000, a single-family home. So again, is it expensive? Is it cheap? It really depends.

And a big part of what it depends on is what we’re using to measure. For example, if you’re using the US dollar, and we look at history, then yeah, housing’s gone up; specifically over the last 12-18 months, it’s really skyrocketed, as the media likes to use that term… But that is only looking at part of the equation. That’s only considering in dollar-denominated terms, if you’re using US cash dollars to purchase the home.

As we all know, and as we talk about a ton on the show, and I think over the last 2-3 episodes we’ve hit heavy on inflation. So I’ll give you an example off the top of my head. My dad’s favorite car is a ’67 Chevy. So I researched “how much was a ’67 Chevy when it was brand new, on the lot, and sold to the general public, in 1967.” It was around $5,000. So my dad and I – well, mostly me – went on a collector car site where people resell their restored and collectible cars. I’ve found a restored 67 Chevy, looked pretty nice, pretty good job on the restoring, selling for $50,000. So same car, relatively speaking, but $5,000 to purchase back then, $50,000 to purchase today. What changed? The dollar has devalued over time.

Now, of course, you could argue that’s a special category or that’s just collector cars and how that works or whatever, but of course, you could take it in the real estate context as well. My wife and I, we used to own a 1932 home, and that home sold for about $5,000 in 1932. And today, it’s $700,000+. Same home, in fact in worse condition, because it’s dilapidating, right? It’s an old brick home. It’s got cracks in it. It’s super old. It’s creaky. But here we are, $5,000 compared to $700,000.

So, let’s dive into what real estate really is. When we say real estate, whether we’re talking a single-family dwelling, whether we’re talking a duplex, we’re talking a 400-unit apartment building, what you’re actually buying is really kind of a basket of commodities. It’s comprised of lumber, steel, glass, concrete, labor, energy, copper, etc. You get the point.  And as we all know, each of these individual commodities, they have their own swings and peaks and valleys. So we all know that lumber’s up right now in price, in as far as dollar terms. It has a lot to do with supply and demand, has a lot to do with inflation, it has a lot to do with a lot of things, but the point has coppers had its volatility where it spikes up super high, and then it drops super low. So it really depends when homes are being built, what the commodity prices are at that time. Generally speaking, today in 2021, commodity prices are quite high in dollar-denominated terms, therefore the price of housing has gone up or skyrocketed.

Break: [06:40] to [08:14]

Travis Watts: One question on everybody’s mind right now is, is this type of inflation that we’re seeing, this massive increase over the last 12-18 months, is that permanent inflation? In other words, are all these commodity prices and everything else going to stay elevated from here moving forward and pretty much forever, or are they what they call transitory, which is another term for temporary? Ao maybe we’re just kind of in this little peak right now and then we trickle back down into a valley, things normalize in a year or two. I really don’t know, and I wish I had a crystal ball, but it is something to consider as we move through this conversation.

I will say this in the context of real estate, one of the biggest things that’s being talked about, one of the biggest metrics to buying and selling real estate is what interest rates are. So we all know that Jerome Powell, the head of the Fed has kept rates very, very low. He’s dropped rates and kept them low, since COVID especially, but even before COVID. So that’s put a lot of interest into buying real estate, I would say, even more so in 2021. And the reason is, you guys, whether we’re talking again, single-family, duplex, 400-unit, if you’re going to go get debt, a mortgage, and you’re going to buy real estate, you’re probably going to have a very, very low-interest rate. Maybe around 3%, for example purposes. And here’s the crazy thing. They’ve already, since April, been releasing the inflation statistics, which we talked about more and more often on the show, but anywhere between 4%, 5%, 6%. Different metrics, different CPIs, different things to go after, but here’s the point… The inflation metrics are all higher than what interest rates are to borrow money.

So here’s my perspective. If you’re able to borrow money at 3% and lock it in long term, I’m talking 10, 15, 30 years, and inflation is higher than that, it’s almost like having free money. Well, instead of saying “free money,” it’s almost like you’re getting paid to borrow money. It’s almost like we have negative interest rates in a sense, right? Because the inflation is devaluing the currency, so it’s cheaper to pay off the debt in the future. It’s just a weird, weird time that we’re in, where we have this imbalance of higher inflation, lower interest rates. Back in the ’80s, when we had really high inflation, we also had really high-interest rates. So it was kind of a different story at that time.

Alright, so let’s dive into the main topic here. The main point of this – is real estate expensive or is it cheap? Let’s look at some actual comparisons that, again, Jason Hartman came up with. And I’m just going to pull a few. He did a beautiful job doing a full-blown presentation. I just want to highlight some of this stuff for you, just to get your mind thinking about it.

So what I’m going to use first are metrics from 2010. So you’ve got to back up a minute and think about 2010. So I was investing in real estate in 2010, as I was in 2009. Generally speaking, nationwide, real estate had corrected; we’re talking about post-2008, 2009, where everything’s falling and collapsing. 2010 was more or less kind of a bottom of the market, and before we started seeing an uptrend and a kickback. So we’re going to start there on those metrics, and I’ll share with you 2021 metrics, and we’re going to compare real estate to other commodities.

Okay, so the first thing to point out was that the median home price in 2010, nationwide, was $222,700 approximately, and the median home price today in 2021, is around $355,000, and some change. So the first thing I want to compare it to is gold.

So in 2010, it would have taken 162 ounces of gold to purchase a home that was within the median range, and today in 2021, it would take 208 ounces of gold. So that’s a total of about a 28% rise in price over an 11 year period. If you break that down, it’s about 2.5% per year. So definitely inflationary. In that regard, real estate’s definitely more expensive today than it was back then, but that’s just one commodity that we’re going to compare it to.

Now, to kind of go out on a limb and use an extreme example, we could say Bitcoin. So in 2010, it would have taken 773,000 Bitcoin to buy a median-priced home. In 2021, only 7.5 Bitcoin, and of course, those prices aren’t completely reflective of when you’re listening here today, as Bitcoin is very volatile, and is up and down… But approximately that. So it takes 99.9% less Bitcoin to buy a home today than it would have in 2010.

Now, let’s compare it to oil. So we’ll use just the standard barrel of oil. In 2010, it would have taken about 2,500 barrels of oil to buy a median-priced home. In 2021, about 5300 barrels of oil. So it’s a total of 112% increase, or about 10% a year appreciation or inflation.

Jason also talks about orange juice. Again, it’s a commodity. It’s things that consumers buy often at the grocery store. So in 2010, you would have had to buy 1,300 pounds of OJ, and in 2021, 3,200 pounds. So 146% increase, about 13.3% inflationary per year.

We’ll talk about rice real quick, one of the main food sources worldwide for human beings. In 2010, it would have taken about 17,400 pounds of rice to buy a median-priced home, and in 2021, about 27,100 pounds of rice. So about a 55% price increase. That’s about 5% inflation per year. Now, you guys, this metric just blows my mind. There’s so much content out there about stocks versus real estate, and “Is the stock market in a bubble? Is real estate in a bubble?” Just hear me out on this. Really let this one sink in…

Comparison to the S&P 500 Index, if you had own shares of the S&P 500 in 2010, keeping in mind, again, this was kind of the bottom of the market, but it was also the bottom of the market for real estate. So it’s kind of a fair comparison to say stocks were depressed, and so was real estate. That was really a real estate crisis. So, it would have taken 2179 shares of an S&P 500 Index to purchase a median-priced home in 2010. And today, only 898 shares. That means that housing, compared to the S&P 500, is 58% cheaper today than it was in 2010. Really interesting, in my opinion.

So now let’s talk about median income. And by the way, Jason did a great job at sourcing all of this. This is all .gov and Federal Reserve data; this is not his opinion. Unfortunately, I don’t have all that here to explain to you verbally. It would make for somewhat of a boring episode; but just know that you can check out his presentations and content if you want the actual links and the sources to all of this.

Median income is usually found through the Federal Reserve or through a .gov. In 2010, it would have taken 4.52 years of median income working to buy a median-priced home. And in 2021, it’s still relatively the same. It’s 4.9 years to be able to afford a median income home. Guys, I think this is a really important metric to think about. When we look at just price, and you say, “God, real estate’s just skyrocketed.” Well, wages have also increased. So that’s the whole name of the game, is how affordable is real estate today when you factor everything in, including people’s income. So the bottom line to that metric is that 8.4% more working that you would have to do to purchase a home. Again, this is assuming that you saved up and you purchased the home in full in cash and didn’t mortgage it. So that’s only 0.76% per year. So that’s hardly inflationary.

Now, let’s take a look at minimum wage. And this one’s kind of unfortunate, because truthfully, if you’re making minimum wage today in 2021, you probably aren’t a homeowner, unless there’s dual-income involved, or you were granted or gifted a home, or maybe in some very inexpensive markets throughout the US, you might be able to afford a home… But generally speaking, minimum wage isn’t going to cut it these days for being a homeowner.

So in 2010, making minimum wage, it would have taken about 30,700 hours to buy a home, and in 2021, 49,059 hours to buy a median-priced home. So a 59% increase of working at a minimum wage level, or about 5.3% a year inflationary.

Break: [17:17] to [20:10]

Travis Watts: So with all that, I’m going to cut it there. There’s so many more examples we can go into. I just don’t want to talk your ear off all day and lose you throughout the episode. So I want to bring some of these points home. So here’s an alternative perspective to think about. It’s not necessarily about the price, it’s about the payment.

Most people, whether we’re talking about buying cars, buying homes, most Americans are looking at the payment, whether a lease payment, a rent payment, a mortgage payment, a car payment… They’re really basing a decision on how much they can afford on a monthly basis. So this is the real key, in my opinion. It’s locking in low-interest rate, fixed debt, long-term, on real estate. This is kind of the name of the game. So assuming you’d played that card, you’d played that strategy, I want to go into these examples, going back to the year 2000 this time. So not even really going to the bottom of the market, but just kind of mid-range within a market cycle.

We’re looking at what your payment would have been in the year 2000. How much of these commodities it would now take to make the same payment on your real estate. So using the comparison back to gold, it would have taken 3.6 ounces of gold to make your mortgage payment in 2000. It would have taken 0.7 ounces to make the same payment today in 2021. Significantly cheaper than it was back then. Barrels of oil would have taken about 32.5 barrels of oil to make your mortgage payment in 2000. About 18 barrels in 2021.

Orange juice surprisingly, is actually about the same. That was 10.7, in the year 2000, pounds of orange juice, and 10.9 in 2021. So pretty much flat on that one.

S&P 500 Index shares – about 11.12 shares. Today, about 3 shares. Drastic difference there. Average amount of hours worked for median income – 69.20 hours to make your payment in 2000. 47.59, today. Minimum wage in the year 2000,  191 hours compared to 165.

So nearly every metric with the exception of orange juice, significantly cheaper, had you just put long-term fixed-rate debt on the real estate and simply held it, even through the Great Recession.

So final thoughts as I kind of extract the data there, and I analyzed that… Perhaps it’s not the price denominated in dollars is so high today and that that’s so scary, it’s that the dollar has lost a lot of value throughout its history, continues losing a lot of value as money continues to be printed, and we just have to accept that we’re in a inflationary period of time. With that data, there’s some commodities and metrics that you could look at where you say, “Real estate’s really not that expensive when compared to X, Y, and Z.” There’s other commodities and metrics that you could look at that say, “It is much more expensive today.”

So it all kind of depends on where you store your money, keeping in mind, you can always convert. There’s no law or rule that says, “You must keep cash in the bank.” You can always be working for a living, collecting cash, and putting that into different mutual funds or ETFs that track indexes, like gold or silver or soybeans or oil. So that is for a much more sophisticated conversation as to all of that.

I’m not going to go down that rabbit hole, because I’m not a financial advisor or a planner, and I don’t want to be giving any kind of advice like that, but basically, you do have a choice, I’ll just put it that way, on how you hold your money… And you listen to folks like Robert Kiyosaki, he’s always talking about how he stores a lot of his cash in gold and oil and stuff like that. So it is an option. I’m not saying it’s right or wrong, good or bad. I’m just saying that’s what he does. That’s an opinion. And as you saw with the price of gold, maybe he can hedge his portfolio a little bit as inflation kicks up, if he’s holding in something like gold, compared to holding in cash.

So what it comes down to is, it’s all about your perspective and speaking of perspective, I haven’t thrown a quote in one of these episodes, in several episodes… One of my favorite things to do. One of my personal favorite quotes is from Roman Emperor Marcus Aurelius, it’s nearly 2000 years old. Marcus said, “Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.” So my quote to kind of follow up on that as always is that, “Everybody has an opinion, but the only opinion that matters is [unintelligible [00:24:46].27]” so always strategize towards your own goals, set your own goals, kind of reverse engineer how you’re going to get there; if you need help, always leverage licensed individuals to help you out.

One final thought before we go close out this episode is that I was on a phone call a couple weeks ago with one of my mentors who’s been an investor for so long, and we were talking about inflation, as kind of the topic of conversation. He was sharing with me how in the ’80s, when he was an investor even then, that interest rates on real estate were around 16%, and at that time, or at least in his market… And he was saying the smart move at that time, in his opinion, was to pay off your home. Because interest rates were so high, it depressed the purchase price of real estate, so the smart thing would be, again, in his opinion, it’d be like having credit card debt today at 16%. The quote unquote “smart move” would be pay off the credit card debt.

Conversely, in today’s world, being that we’re in an inflationary time, but we have artificially low-interest rates, the smart move, in his opinion, is to lock in fixed-rate long-term debt if you’re going to buy real estate, and pay off your debt obligations with cheaper dollars as we move forward. In his opinion, this is how the rich get richer and it’s always been true throughout time; they understand these types of moves and strategies, where most of the general public is not tuning into this kind of message.

So for what it’s worth, I wanted to share that with you guys. These episodes are always tuned to you, the individual investor. I am wholeheartedly in this to help you along your journey, to give you some alternative ways of thinking, share with you advice from my mentors, share with you some data and statistics that may be helpful in making decisions.

So I will wrap it up and quit talking. I’ll see you guys next week on the Actively Passive Show. Have a best ever week. See you later.

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