My Response To Dave Ramsey

What's up you guys? It's Grahe here. So I normally don't make response videos here in the channel, but after watching a 1-hour upload from the personal finance host Dave Ramsey, I wanted to dive deeper into one of the most controversial and debated topics of 2022: Is Christine Quinn going to return for season 6 of Selling Sunset? Oh wait, wrong video. Is the housing market about to collapse?

After all, you have incredibly smart people like Patrick B. David making the argument that the housing market is a disaster waiting to happen. The average American is flat out running out of money, and sellers are cutting prices at the fastest pace in years. While others believe that housing prices will continue going higher based on strong demand and limited inventory, not to mention Dave Ramsey provided some incredibly thought-provoking arguments in his video that I think deserve some further discussion.

So that's what we're going to do. Instead of relying on anecdotal stories, he said/she said narratives and gut feelings, I pulled all the factual data that I could possibly find to figure out what's most likely going to happen over these next few years, and then I'm going to leave you to come to your own conclusion. That way, you could see for yourself exactly what's going on.

On today's episode of good old-fashioned Finance YouTuber drama, we argue about property values from behind a computer screen. Although before we start, if you appreciate all the unbiased research that accurately reflects both sides with some immature humor baked in to increase the retention rate, it would mean a lot to me if you hit the like button or subscribed if you haven't done that already. Plus, as a thank you for doing that, here's a picture of a puppy. So thank you guys so much! And now with that said, let's begin.

All right, so in response to Dave Ramsey and his thoughts on the coming real estate collapse, it's probably best you watch his video, which I'll link to down below in the description. But since I know you're probably short on time and you just want the quick answer, I'll summarize the entire video in just a few minutes to bring you up to speed.

Now for those not familiar, Dave Ramsey is a personal finance host who teaches financial literacy, saving money, budgeting, and long-term investing. He also owns several hundred million dollars worth of fully paid-off real estate. He's had his real estate license for over 40 years, he's got his free stock down below in the description because he signed up for public.com using the code GRAND, because that's worth all the way up to $11,000, and he's been heavily involved in almost every aspect of the real estate industry. But that wasn't always the case.

Now, as referenced in Dave Ramsey's video, here's what we know so far: In 2017, home prices increased by 7.1%. In 2018, home prices increased by 5.5%. In 2019, we saw yet another increase of 6.2%. In 2020, home prices skyrocketed by 29%, before going up an additional 18% in 2021. And so far, in just the first few months of 2022, median prices are already $5,000 higher than they were in January. In fact, he notes that experts believe the housing market is likely to continue going higher and higher, with analysts like Zillow expecting another 5.5% increase, Redfin seeing a 3% increase, and Fannie Mae estimating a 10% increase.

Now obviously, that type of price gain is by no means sustainable every single year, but as Dave Ramsey points out, historically, real estate does tend to go up in price by an average of 3.8% a year, meaning over the long term it typically matches the rate of inflation plus 1 to 2%. However, what's happening today isn't so much a matter of housing markets being in a bubble; it's the next 10x opportunity. BlackRock is evil, but instead, a systemic issue of supply and demand.

As Dave points out, since 1983, the number of homes in the market has decreased from its peak of 3.7 million in 2007 to now just under 1 million in 2022, which represents a nearly 75% decrease. The amount of new construction has also decreased from its peak of 2.1 million units back in 2007 to now 1.8 million units, which is still lower than the amount of new construction that we saw back in 2002.

Of course, we also have lumber prices, which saw a huge increase throughout 2020 and 2021, but now we're back to the same price that we saw in 2018, and adjusted for inflation, the cost of lumber is actually cheaper today than it was back in 1978. Let that sink in for a second.

Although it doesn't stop there, because we also have foreclosures. As you could see, beginning in 2006, bank-owned properties became the norm when buyers were unable to afford balloon payments on adjustable-rate mortgages, leading to some of the highest foreclosure rates of all time. But today, foreclosure activity is almost non-existent. Of course, there is the concern that a flood of foreclosures is going to come on the market once banks resume normal operations.

But the fact is, with home prices having risen so incredibly fast, homeowner equity is at an all-time high, and as of the last month, less than 2% of all mortgaged properties were underwater, allowing anyone who can no longer afford their payments to list their property for sale and get out of it with a profit.

So where is all of this excess demand even coming from? Well, when in doubt, blame Millennials! No seriously, as Dave points out, in 2008 there were 55 million Gen Xers in their mid-30s who were the prime age for buying a home, and today that number's increased to 66 million Millennials who fit that exact same category.

Now on screen, Dave Ramsey shows this as a 5 million person difference, whereas I'm counting 11 million. But regardless, when you look at the statistics, there are more Millennials today than any other living generation, and with a higher population means the need for more homes.

On top of that, Dave Ramsey noted that 18% of all homes purchased in the fourth quarter of 2021 were bought by individual and institutional investors, with 75% of those sales being closed with all cash. Now just for reference, in terms of percentage, this was three times higher than we saw back in 2001. And when you already have a real estate shortage, this makes the entire market that much more competitive.

Because of that, Dave Ramsey takes a stance that most likely, real estate will not see a decline simply because the fundamentals of supply and demand will not allow for it. No, sure, he does acknowledge that we are seeing more and more sellers reduce their asking prices. We're seeing more homes coming on the market, and properties are taking longer to sell, but once you zoom out, you'll begin to see that this is only a blip on the radar in terms of how far we need to go to match the levels that we saw a decade ago.

I also find it very interesting that when you look at housing values going all the way back to February of 1953, the only time prices have ever meaningfully dropped was throughout the 2008 mortgage crisis, which was sparked by the issuance of no-money-down adjustable-rate loans. That was it.

However, not everyone agrees, and before we go into my own data, look no further than Patrick B. David. He's another incredibly successful business personality and entrepreneur who makes the point that Dave Ramsey could be right, but this assumes that demand stays high while inventory stays low. And as we all know, that might not be the case.

As Patrick points out, inventory is beginning to increase, and if that number continues at the same pace month over month, then there could very well be a new equilibrium between supply and demand. After all, if sellers begin to see prices flatline, there's the possibility they'll want to list sooner than later, thereby increasing the number of homes in the market in a relatively short amount of time.

If this happens right as we enter a while jobs are lost and interest rates increase, then there might be a possibility that home prices drop more and faster than expected. So to figure out exactly how much they could fall, look no further than the data.

In fact, one of the first major real estate crashes that we should talk about happened in the year of, you guessed it, 1929. Just as the stock market peaked from record high speculation and borrowed money, the real estate market crashed right alongside with everything else. And historically, this was one of the worst real estate crashes in history; home values plummeted by 67%, and it took nearly three decades for home prices to return to their pre-crash levels.

Then again, real estate encountered more difficulty throughout the 1990s. Up until then, real estate continued going up from new lending options, inflation, and a growing population. But the Savings and Loan crisis caused interest rates to rise, new home construction dropped, and housing prices remained flat until the end of 1997.

Then we have the one that almost all of us remember, and that would be the housing collapse of 2008. This was caused by too many people speculating on the value of real estate, fueled by easy access to money with adjustable-rate mortgages that anybody could apply for, as long as they could make the introductory rate payments.

However, once those initial payments were up and homeowners could no longer afford them, they all began to sell at the exact same time, flooding the market with inventory. But once those homes couldn't sell for the same price that they paid for them, that fell back on the banks who didn't have the money to pay back those loans that were bought by investors. And that's when the entire financial system was about to collapse.

Depending on the location, home values fell anywhere from 30 to 62% within a few years. A bailout was put together, and now today, in 2022, prices are again at an all-time high.

However, what I think is the most surprising from all of this is that with the exception of 1929 and 2008, real estate prices have remained fairly stable. Like during and after World War II in the 1940s, housing construction and prices boomed from a surge of demand. Or like during the 1970s stagflation era, where stocks went down but real estate continued going up from increased inflation. During the 1980s recession, real estate remained high and even increased by 42%. The 1990s saw some markets drop, but even the worst hit didn't decline more than 10%. The dot-com bubble also had very little impact on housing sales; in fact, in 2001, home sales climbed to an all-time high.

So in terms of what we might see today, here's my response to Dave Ramsey and what all of the research I could find suggests is going to happen. For example, even if you quadrupled your money from 1970 through 2020, you would actually have been losing net purchasing power when adjusted for inflation.

So once you take this into consideration with home values, you'll begin to see that we've only ever seen one decline in 50 years, with that being in 2010. If anything, home values have actually been shown to have increased during recessions, as seen all the way back through the 1950s.

Now obviously, the one caveat is that interest rates usually decline during a recession, which is good for real estate values, in the complete opposite of what we're seeing today. But home values also tend to mirror that of inflation, and just like home values continue to increase throughout the 1980s during some of the highest interest rates into inflation we have ever seen, that could continue to happen again today.

Of course, the mortgage giant Fannie Mae believes that home prices will eventually return back to their historical norms by the end of 2023 with a 3.2% increase. And Black Knight went so far to say that housing prices in the coming year should parallel inflation rates with modest or no real return.

But with leverage and locked-in mortgages below the inflation rate, homeowners' real net worth is likely to continue to climb. All of that is to say that Dave Ramsey has a point. Even though yes, real wages are down, the share of Millennials who enter the real estate market continues to grow, and with rents having increased nearly 177% year-over-year, that will put more pressure on the housing market during a time where inventory is substantially lower than it once was.

So based on all the information I could possibly find, there is nothing that points to a severe or imminent real estate crash. With the information that we currently have available to me, it's apparent that so many people used real estate as a way to leverage their money with low fixed-rate mortgages, and that continues to be the case even right now. Real rates are still negative, so once you account for inflation, a 5-1/12% mortgage makes you more money than you spend, which of course keeps pushing prices higher.

However, the important distinction here is that real estate is very much location-based, and other factors like local market conditions, demand, inventory, tax deductions, population changes, new construction, and the overall health of the economy play just as big of a role. So even some markets might do incredibly well while others could go down.

So it's impossible to give a one-size-fits-all approach without taking everything into consideration. Now, in terms of my own belief, for whatever that's worth, I fall somewhere in the middle. To me, the only logical solution for all of this is to simply allow for more building and make it easier for homeowners to add on additional units without all the red tape. But until more homes are built, most likely we're going to see a leveling off of prices.

And even though they might not increase by 5 to 10% every single year, a 2 to 4% increase will represent a much healthier and balanced market, long term, that I think frankly is much needed.

So with that said, you guys, thank you so much for watching! Also, feel free to add me on Instagram. Thank you so much, and until next time!