A caller asks Scott and Pat what the trends are in the real estate market. Should you be concerned?
Pat: Let's talk to Rex. Rex, thanks for joining Hanson McClain.
Rex: Hi, Scott and Pat. I've enjoyed you guys talking about the housing markets, and, you know, leading up to 2008 and 2009, talking about affordability index. And then like 2010, 2011, talking about how it was a great time because of cash flow and prices. And wondering where you think we are now?
Pat: We measure for all investment asset classes. There's lots of different indices that you can look at; that will give you an idea of affordability. And so basic ones in equities are if you look at the stocks is what's called a “P/E ratio.” But in real estate, it was the affordability index.
And in 2006 and 2007, we were doing this show and even into 2008, we had lots of people calling and saying, "I'm going to buy real estate. I'm going to buy real estate. I'm going to buy."
Scott: People with those questions would call and say, "How long do I need to own a house before I get the $250,000 exclusion?" We'd say, "What makes you think it's gonna go up to $250,000?"
Pat: And they’d say, "Because it has already."
Scott: The challenge during the 2000s, we saw real estate prices rise without the rents rising. So the value of any sort of security or real estate is really based upon what the future anticipated cash flows of that is going to be from then.
Pat: Any investment.
Scott: Yeah. So if we saw the stock market rise without the underlying earnings of the companies rise for a long period time, it would cause us some concern. Which is a bit of concern frankly since the financial crisis because stock prices have risen faster than the earnings.
And then so the real estate that's clearly what we saw during the 2000s. We saw the financial crisis, stock real estate prices got hammered. I mean particularly in smaller markets.
Pat: And Rex, as you pointed, back then in 2010 and 2011, we were very, very bullish on residential. Actually almost any real estate at that point in time. So thank you for remembering that, and thanks for being a longtime listener.
Pat: And thanks, you should...we should remember this always. We should remember this always, because this was a classic bubble in the marketplace.
Scott: No question.
Pat: So the question now is...
Scott: Driven by easy finance.
Pat: Easy money. So right before we went on the air today, I said to Scott, "Does this real estate market kind of remind you of anything?’" This market is eerily similar to what we saw in ’06 and ‘07.
Scott: Well, I wouldn’t
Pat: Eerily similar because we've seen prices...
Scott: I don’t well, I don’t compare it to where it was then.
Pat: Eerily similar. Not identical. Eerily similar.
Scott: That's a subjective term, okay. Can you define the term? Okay.
Pat: So because we haven't seen wage growth move up that fast. And we've seen home prices, real estate prices across much of America.
Pat: …move at significant rates.
Scott: But well in large part, this is driven because interest rates are so low.
Scott: So interest rates if you can afford $2,000 a month for a house. The more interest rates decline, the more mortgage you can afford.
Pat: So are you looking for your own primary residence or for a rental? Or do you have rentals that you're thinking of getting rid of? What is your...the genesis of the question?
Rex: Yeah, my interest is I'm renting now but feeling that things are a bit overheated. And you know the past two or three years, we've had the big impetus for buying real estate. Whereas interest rates are going up, buy now before, you know, the rates go up and then you won't be able to afford as much. But...
Scott: Which would then probably put a downward.
Scott: Which could then put a downward pressure on the prices.
Pat: So are you renting now?
Rex: I am.
Pat: And can you afford to buy a home?
Rex: Depending on the price point, I could.
Pat: So if I was looking at a primary residence, that I thought I was going to live in for, let's call it, 10 plus years. With today's low interest rates.
Scott: Yes, makes sense. If you…
Pat: …verses rentals. I would say yes.
Scott: Yes. If it's at least five years, yes. If it's less than five years, then it's anyone's guess.
Pat: I would say yes. Would I be If I was an investor, would I be loading up on rentals? The answer is I don't know; I don't know. I wouldn't be loading up.
Scott: Well if you know an astute home builder in Northern California that's built huge tracks of homes. After the financial crisis, when the building wasn't happening, he bought lots of rentals hundreds.
Scott: And then has been systematically unloading those.
Pat: Correct, correct. And he's pretty astute. So for primary…
Scott: Unlike us.
Pat: We always point to someone that we can't even talk to.
Pat: But no, I think as a primary residence if you can afford it, I think it's a great time to buy. I'd get a fixed rate 30-year mortgage with as low down as possible.
Rex: Okay. Well thanks for the advice, guys.
Scott: But it could still fall tomorrow.
Pat: Yes, yeah. But we're talking 10 plus years.