Are we in a REAL ESTATE BUBBLE?!

What's up you guys? It's Graham here. So first off, I want to say this is a bit of a technical video. It might be a little bit more in-depth than the other videos I've done, but for those that are into that sort of stuff, I think you guys are really going to enjoy it.

This is a topic that gets brought up all the time on my channel, mostly from people who just have no idea what they're talking about, and it is, "Real estate is about to crash. The market's about to go down. Don't invest in real estate. Real estate, it's a bubble." And that drives me crazy that people say real estate is a bubble. So I thought this is worth analyzing from a technical standpoint to determine whether or not real estate is actually a bubble.

We also have to acknowledge that we are in one of the longest-running bull markets in American history, lasting just over nine years. So, is the market about to crash? Let's find out.

Before anyone says something really stupid like, "He's a real estate agent. Of course he's not gonna say that real estate's a bubble because he wants to sell houses," first of all, I invest in real estate as well, and I probably made just as much money investing in real estate as I actually have selling real estate as a real estate agent. Secondly, I do YouTube a hundred percent for fun, and I have zero reason to try to trick anybody. Plus, I'm actually putting my money where my mouth is by continuing to invest in real estate. Even in these competitive markets today, I'm still buying properties.

So these are my thoughts and experiences firsthand, and with any video like this, I don't get into politics. I don't take sides; I just look at the facts and analyze them from my own perspective. And finally, in case anybody was unaware, this is not financial advice. This is purely for entertainment purposes only, so no one tries to sue me for giving my opinion on what is going on with the real estate market.

So let's begin here. Why do people think the real estate market is a bubble and it's about to crash? Well, these are a few of the reasons why and my thoughts relating to these reasons.

The first point is that stocks are artificially inflated by low interest rates. When interest rates go up, the stock market is going to crash, bringing down everything else with it. Honestly, for the way I see it, this is a valid point. In 2009, the Fed reduced the interest rate to historically low levels to try to stimulate the economy. By lowering interest rates, this creates cheap money for people and businesses to borrow from. I don't disagree with this. Lower interest rates can artificially increase prices beyond what's capable with a higher interest rate. But my only defense to this is that we cannot expect interest rates to rise to insane levels overnight. That would just crash everything; it's not going to happen.

The way I see it is that it might be a little bit more like letting out the air from an overinflated tire, where it's just going to be a very gradual process rather than just someone popping the tire altogether and it just explodes. With this, interest rates are going to rise little by little, and just like gas prices—which have been going up steadily by small little increases over time—people just get used to it. That becomes the norm. Any small increase after that just becomes a little bit more expensive, but it's not that much more expensive than a few months ago. But oh well, it's not that big of a deal.

So from that perspective, I can't see any reason why interest rates would change that dramatically just to put the economy in a downward tailspin. Now, the second reason that people often mention is growing government debt. We are reaching the highest level of debt that's estimated to be 24 trillion dollars by the end of 2018. When debt grows too much, it limits the government's capacity to keep the economy on course.

Now, with low interest rates like we have today, it's actually pretty manageable. But as debt becomes more expensive, it becomes more expensive to borrow money, which could have an ill impact on the economy as the government raises taxes and also raises interest rates to help pay for those debts. Now, this might sound super spooky, but here's how I interpret that: about two-thirds of our national debt is owned between corporations and U.S. citizens. Half is owned by the U.S., and a large part of that is basically just made up of Social Security. But ultimately, what matters the most is our debt in relation to the Gross Domestic Product (GDP) the U.S. brings in. Right now, we're hovering just over a hundred percent, which is overall pretty healthy for the U.S.

Now ultimately, the U.S. taking on more debt is a little bit risky, but it isn't the debt itself that impacts real estate prices; it is however the interest rate of that debt. If it becomes too expensive, the government is going to have to raise interest rates elsewhere to offset the cost of their debt. But my argument here is that even if interest rates double—and right now they're at 2.27 percent, which is insanely cheap—even if it doubles, it's still well under what's normal for the U.S.

Keep in mind, in the '90s, our debt interest rate was at six percent, and if we compare ourselves to Japan, where their debt is in excess of 200 percent of their GDP, the U.S. on the other hand is looking pretty good in comparison. So from this perspective, yes, taking on a little bit more debt is a bit of a worry, but there's no reason that this would cause an immediate impact on real estate prices.

Now, the third thing that people say when it comes to real estate prices crashing is that we're in a student loan bubble. Such a bubble right now. The student loan debt has risen from about 500 billion dollars in 2007 to 1.4 trillion dollars today, and I gotta say that's absolutely ridiculous. That is such a high number, and college is costing way too much money. The ROI, in my opinion, usually isn't there for people to go to college, and people should really consider whether or not a degree is worth it. Going in that much debt is really going to benefit them long-term.

I do see this as a disastrous problem for individuals that graduate college with a ton of debt and then don't get a job that pays enough to pay back that debt. But I don't see this impacting real estate prices. The biggest problem I see with this is that having debt lowers the amount that a person can qualify for when it comes to buying real estate, and it’s said that on average, for every $10,000 in debt somebody has, they're 5 percent less likely to purchase a property.

It also means that more money spent on loans is less money that's funneling back into the economy. So this means that less people are buying real estate because they have more debt, and that means the real estate prices should be going down because fewer people are buying. Is that true?

The answer is not really—kind of, but not really. With the low supply of homes like there are today, there's simply not enough property to meet the demand right now. But let's just take this a step further and say, "Okay, a large percentage of the Millennial population is not going to buy real estate." Is that going to tank real estate prices?

The answer, for the way I see it, is no. Because if they're not buying, they're renting instead. When you have a large surplus of people renting instead of buying, it creates much more rental demand, which ends up increasing prices. This therefore makes it way more of an attractive investment for investors to own rental real estate. So it really doesn't matter whether or not they buy or rent; real estate is an attractive investment. If they end up buying, real estate prices go up. So either way, you kind of win by investing in real estate.

But unlike the title of this screenshot here, from the way I see it, student loan debt is not hurting the real estate market; they’re just not adding to the sales numbers as buyers, which are already at record highs, even accounting for all the people that have insane amounts of student debt that aren't buying. But I agree, student loan debt is not a good thing. People shouldn't really be spending a ton of money on college if they're not gonna be getting the ROI for that. But that should not have any direct impact on real estate prices.

Also, I think this is very much just a generational thing. I think our kids are gonna be seeing that we've graduated with an insane amount of debt, and they're gonna look at education a little bit differently. So I think that, unfortunately, our current generation is getting screwed, but I think younger generations now are gonna be seeing this and focus on learning a trade—focusing on things that really just don't require a college degree.

Now finally, the fourth thing that people mention is wage increases. They say that wage increases haven't been as high as real estate increases, therefore the prices are unsustainable for real estate, and they have to come crashing down. Real estate prices went up 16% in the last 12 months; wages did not go up 16%. Now, this does have some truth to it. Wages overall have not gone up as much as real estate prices have. But wages have gone up dramatically for highly skilled workers in populated cities, and these are the areas seeing a huge boom in housing prices.

The wage increases have been significant among tech, big law, engineering, and executives. Because of this high concentration of growth in these cities, money begins pouring in, just further increasing the demand. So yes, for low-skilled workers, it'll be a tough one to go up against, and real estate prices are exceeding low-end wage growth. But saying wage increases aren't increasing as fast as real estate prices is a bit misleading, because yes, they are increasing, but for highly skilled workers.

The flip side to this—and this is a really good point—is that interest rates are much lower than they were, even though wage growth hasn't gone up dramatically overall. Therefore, in theory, it should balance out in terms of affordability on a home between lower interest rates and lower wages. So even though prices are higher right now, the true cost of ownership, when factoring in what you're paying for interest, remains about the same.

So now that that's out of the way, let's talk about what I see firsthand. In 2008, the market crashed from subprime lending on variable rate interest loans with people who are on stated income who were relying on the housing prices to continue going up for that to be sustainable. Obviously, that was not sustainable, and the market couldn't handle that. Eventually, the bubble does have to pop, and it did.

Now, people are buying with 20% down, and they're extremely well-qualified. They have the assets, they have the verifiable income, and they have the credit to actually purchase a property in the first place. A 2008-like crash is just not feasible under those conditions, where people are putting that much equity into a property, have the credit, have the income, and they're taking out fifteen- to thirty-year loans at extremely low interest rates. These are not the type of people who are going to be foreclosing on their properties.

So with subprime lending like that out of the way, here's what I see now. What's interesting here is that, first of all, we're 14 to 20 percent below our pre-recession peaks, adjusted for inflation. This leads me to think that we still have some upward room for growth. Even though we've hit our all-time highs, we haven't really, when you adjust for inflation. That really does end up putting it in perspective.

Now the second thing I see is that interest rates are still at historic lows. Even though we all know interest rates are going to be going up at some point, there's a huge long-term advantage right now of buying and locking in a low interest rate. This creates a huge sense of urgency to buy real estate now, like we haven't really seen before, which should end up bolstering real estate prices even higher.

Now, one thing I actually found really interesting—and this actually blew my mind—I didn't fully grasp this until I started doing a lot of research on this. For a video like this, I spent hours putting this together, but I actually found that interest rates do not have a direct correlation with the price of real estate. Typically, when rates go up, the economy is doing better as a whole, which generally means that housing prices go up with the economy. When interest rates are low, real estate becomes a more attractive investment because it costs less to buy. Therefore, real estate tends to do well with low interest rates. Rates don't go up unless the economy is going up at the same time.

As long as you just buy a property that's within your means, or you're buying a property that cash flows with enough equity in it, you should be okay, and your interest rate really shouldn't make all that big of a difference. But from the way I see it, obviously lower interest rates to me are just a little bit better long-term.

The third thing that I see from my perspective is limited supply. We just don't have enough people selling, and the number one reason why people are not selling is that they don't want to become buyers themselves. Because of this, they don't sell, and because of that, it just heightens the effect of the shortage of supply.

Now, another reason that people aren't selling is that they don't want to give up their historically low interest rate. There are a lot of people out there who refinanced or who bought a property with a low three percent mortgage on a thirty-year loan. You will never see rates like that ever again. They don't want to give that up, and therefore they don't want to sell.

I’m in the same boat as that. I took out a thirty-year mortgage at 3.375 percent. I am never going to sell that property just because the cost of borrowing money on that is so unbelievably cheap. Basically, with that, it's a free loan when you account for inflation and all the write-offs.

Finally, number four: the reason why real estate prices are not going to come crashing down is that there's a huge shortage of inventory. There's just simply not enough to go around. Current builders can't keep up with demand, and many larger cities have really strict code enforcement that limit the amount that you can build on, therefore just significantly limiting the current supply.

While many other areas are just starting to develop more housing, it's still not enough, and we are a long ways away from there being an oversupply of property. This in and of itself has the ability to keep real estate prices high, just from limited supply.

So for the way I see it, I don't see any indication that real estate is a bubble or that real estate is gonna come crashing down anytime soon. While I believe there are some things that maybe could be done a little bit better, I do believe that anytime in history there are things that could be done a little bit differently, and there's never gonna be a point in time where things are 100% perfect.

There are always gonna be some concerns for some issues that could be rising up, but again, for the way I see it, I don't see a smoking gun that we can point at and be like, "You know what? This is 100% a bubble. This is going to crash." Because frankly, I don't see it.

So, as always you guys, thank you so much for watching. I seriously, seriously appreciate it. Now really quick, a video like this does take hours for me to put together, and a lot of research is done on my own to make sure I don't sound like an idiot when I make a video like this talking about real estate. I can't cite direct numbers or sources.

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