Are Home Prices Going Up?

Dave Ramsey says home prices are going up. Ramsey believes that housing is going to go up for the next five years. There’s a lot going on in this market and there are doomsdayers saying it’s going to do the exact opposite. I’m going to tell you what I think about the housing market and why. 

It’s fascinating to look at Dave Ramsey’s views and a lot of things that contradict where he believes the market is headed. I’m not going to be a doomsdayer. I’m going to do my best to just be realistic. 

Ramsey’s Take on Real Estate 

Dave says houses are only about supply vs. demand. He’s right. However, the market is very emotional. Right now we have access to more information than we’ve ever had before. As things start to correct, I believe there’s going to be an emotional response. 

We saw this with COVID and how people responded to housing. Through COVID we saw a lot of people do a lot of emotional things when spending their money. It’s more than just supply and demand. 

Ramsey also minimizes what a large role interest rates play in supply and demand. Everyone who would like to buy is still currently in housing already - whether owning or renting. That’s why it’s nice to be a landlord. I think landlords will be protected for the next few years regardless of what the housing market does. If people can’t get into homes, they’ll just continue to rent. If they continue to rent because they don’t have a down payment or can’t get approved for a home loan, landlords will be there renting the properties. 

Prime Home Buyers

Ramsey points out that there are now five million more 35 year olds (prime house buying age) than in 2007. But he doesn’t talk about the status of these 35 year olds. Today’s 35 year old has way more debt on average. They have car debt, credit card debt, student loan debt, all debts have gone up drastically. A lot of potential buyers already have a bad debt to income ratio. 

Also compared to 2007, the average 35 year old’s income has hardly gone up while inflation has gone up astronomically. Everything is more expensive: gas, food, etc. You’re in a housing market that has exploded 15-20%. Yes, demand forced things to go up. But that was a crazy time during COVID. 

We’ve also got to talk about how interest rates have gone through the roof. If you used to be able to afford a $400k house, you now couldn’t even afford a $300k house. Interest rates have gone from 2.5% to over 6% on a personal residence. The statistics Ramsey uses don’t make sense with the big picture. 

He also refers to households needing a home and the supply shortage. But the reality is that they can’t afford to buy in today’s market, and they’re going to be forced to rent. If no one can buy these homes, it’s going to affect the market. When investors are looking at the prices of single family homes and thinking about using them as rentals, the numbers don’t make any sense for them either. So it’s eliminating both investors and buyers who can’t afford homes at these prices. 

There are few buyers in a high interest rate economy. There have to be less buyers than homes for prices to go down. Inventory is at half what it was in 2007 but there are many more buyers looking for homes today. Ramsey argues that every year for the next five we will have fewer houses for sale than buyers wanting to buy them, which will drive the price up. He recommends buying a house now if you can. 

One thing I do agree with Ramsey on: there is a supply and demand issue. When you look at today compared to our normal inventory, it isn’t where it needs to be. When you think about interest rate hikes and how much buying power has gone down. Increasing interest rates has removed the ability of most people to buy a home. 

Inventory is going up. In a lot of markets, you’re seeing price drops and inventory going up by a crazy amount due to interest rates. We are already seeing that in multiple locations. It’s not that the number of potential buyers is going down. It’s that those potential buyers are being priced out of the market. I’m sure they want to buy a house, but interest rates are destroying buying power. 

Inflation matters. Interest rates matter. With how aggressively these things are happening, I see the market leveling out or even taking a dip until interest rates stabilize or decrease. Interest rates aren’t that crazy right now. I think the fear is that they’ll continue going up, and people will continue to respond the same way. With prices and interest rates both at an all time high, people are waiting until something changes before they buy. 

Ultimately Ramsey’s mistake is in thinking that people who want to buy houses actually can buy houses. Saying that the market will increase every year for the next five years is unrealistic. Unless the Fed bends on interest rates or prices start to come down, one of those two has to give. It looks like the Fed is not backing down because of where inflation is. 

If the Fed continues to bump, we’re either going to have tons of inventory, or prices will give, or both. The market has to have some sort of correction because people can’t afford these houses. If you’re a real estate investor, this is a great opportunity to capitalize on. There are still incredible deals out there when it comes to seller financing. There are incredible deals even with current interest rates because people get scared and sell at a massive discount. You can lock in good rates for a good time period. 

When it comes to rents, rents will either hold or go up. Even if they do dip a little bit, it will just be a little bit. If people can’t purchase, then all of Dave’s stats about the home buyers today are going to be beneficial for landlords. There will be more demand for rentals. 

At the end of the day, it seems to me that the market will soften at least a little bit if not a lot. There just isn’t enough buying power right now with how high prices are. It won’t be like 2008, but there has to be a correction. I think it’s unrealistic for Ramsey to assume the market is only going to go up for the next five years, with what the Fed says they’re going to do. Don’t be fearful, just be smart and use the fear in the market to your advantage.