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Since October 2016, the median price of a single-family home in America has increased by 77%, from $202,000 to nearly $358,000, according to the Zillow Home Value Index. What was once an achievable American dream has now turned into a nightmare for most young Americans. Now add to this the rising stakes, and this nightmare becomes even more clear and powerful.
Here you could get a typical 3.5% mortgage on a reasonably priced home and pay less than $1,000 a month. Today, with rates hovering around 7 %, that typical payment has risen to nearly $2,340 per month. This depressing reality is problematic not only financially. It literally changes the fabric of society, shifting cultural norms, demographics, and standards of acceptable behavior.
For many young families, the only way to purchase a home today is to receive significant assistance from their parents. Take, for example, this scenario. If you use Dave Ramsey's calculator that shows how much a home costs, you'll see that to afford a typical home today, which Zillow says is $357,000, you'd need to put down about $71,000 and you'd need to earn about $12,000 a month in after- tax pay.
This may seem crazy, because it really is crazy. According to most sources, only about 5 % of American households earn that much. And when you consider the typical age of home purchase, that number drops to about 3%. So, according to this reality, average American homes were essentially reserved for doctors, successful lawyers, business executives, and most importantly, people with large inheritances.
To afford housing under the Ramsey rules, you essentially need to be wealthy or have financial support from wealthy parents. Or maybe we all just need to wait for the right time. Since 2009, the real estate market has been experiencing an almost continuous upward trend, fueling speculation that we are in a huge bubble .
Many believe that this bubble is about to burst, potentially leading to a decline in both house prices and interest rates. We know that last time, when housing prices started to spiral out of control, this is exactly what happened. Housing prices in many areas have fallen sharply. For example, in the Las Vegas area, home prices fell by an average of more than 60 %, and some areas suffered even greater losses.
While the recession has devastated many financially, it has also opened the door for young families to purchase affordable housing in some of America's most promising cities. So the main question on everyone's mind, especially after the hype of 2020, is should I wait to buy? Will this happen again? Well, to answer that question in today's video , we turn to Warren Buffett.
Warren rarely comments on housing, but during a conference in Berkshire in 2002, he had this to say about the market. In terms of historical context, the housing market in 2002 was in a somewhat similar position to today. Prices were rising, and many believed a bubble was brewing. Listen. I'm Bob Klein from Los Angeles.
I wonder if you could tell us about your investment process, your approach to looking at a particular industry. And I'm wondering if you could use real estate as an example. I know that real estate hasn't been a big part of Bergshire's portfolio for many years. And I wonder if it's because you view real estate as a commodity business, or maybe the cash flows from real estate tend to be more predictable than maybe some other industries, and so, uh, it's less prone to mispricing and therefore less likely to have great deals in the real estate market.
Boldly. So, just wondering, could we, uh, watch a discussion between you and Charlie where you discuss the merits of real estate, how would that go? Well, it would go like all our other conversations. He would refuse for about 15 minutes. And I would judge how emotionally he put it on his nose, whether he really liked the deal or not.
Uh, we both had a lot of experience in real estate, and Charlie made his first money in real estate. Uh, the second point, and it's more important: real estate is not a commodity, but I think its valuation, particularly in highly developed real estate, is determined more precisely for the most part .
In the real-time era, when there were a huge number of transactions , and the owner didn't want to be an owner on a large scale, and he didn't know what the hell he owned, and all that. I mean, there were a lot of miscalculations back then, and I know a few people in this room who made a lot of money off of it.
But under most conditions, it is difficult to find a property whose valuation is truly incorrect. But sometimes there were times when , you know, there could have been bigger opportunities in this field. But if they exist , it will definitely be because for one reason or another there will be a lot of chaos in real estate financing.
We've already been in real estate financing, and, uh, you need the money to be pretty heavily capped to get any major mispricing. You know, it's entirely possible, but, uh, it's unlikely. So, Warren said some very important things that we need to consider. First, real estate is not a commodity. He believes that its price is usually set accurately , for the most part, under most conditions.
He says it's hard to find a property that's priced incorrectly. And he also argues that for any large mispricing, the financial flow needs to be shut down to some extent . So, essentially, according to Munger and Buffett, the real estate market is mostly always priced correctly, even if it seems high.
And in fact, the only thing that can cause major fluctuations in deals is financing. He is essentially saying that for housing prices to significantly decline, access to financing must become more restricted. The vast majority of homes in the United States are purchased with a mortgage. According to most sources, almost 80% of all home purchases involve this type of financing.
Looking back to 2002, we see that banks began to loosen their financial restrictions, allowing almost everyone to get a mortgage. However, when financial conditions tightened significantly in 2008, it put enormous downward pressure on housing prices . This dynamic is evident when looking at mortgage loans, which represent the total amount of US dollar loans approved each quarter.
For example, in the third quarter of 2007, the volume of mortgage loans reached almost 71 billion. By 2009, this figure had fallen sharply by 57%, accurately reflecting the sharp decline in housing prices over the same period. Now we can compare this to 2021 and argue that we observed a similar, if not more dramatic, situation.
Approximately $1.2 trillion in mortgage loans were approved in the second quarter of 2021. But by the first quarter of 2023, that figure had crossed the mark. However, we did not see a corresponding shock in housing prices. One key reason is that banks have maintained disciplined lending practices. Unlike the early 2000s, banks learned from the 2008 recession and maintained strict housing lending standards throughout the 2020s, despite significant fluctuations in lending volumes .
They did not relax their criteria to accommodate the needs of borrowers with low credit ratings and high risk, which helped maintain low default rates and market stability. As a result, even with a significant drop in mortgage lending volumes, housing prices remained stable. Today, while it may seem implausible, the market remains relatively fair in price, largely because lenders have maintained their discipline.
For a significant crash, we would need a combination of softer lending practices and increased speculation . Without these factors, the market is likely to remain stable. Even if we experienced a crash similar to 2008, with prices falling by 28% , current valuations would still be higher than pre-2020 levels.
This highlights how significant growth has occurred in recent years. Expecting a return to prices by 2020 is becoming increasingly unrealistic as market growth is far outpacing any scenario that would make such a weight worthwhile. Thank you for watching. As always, please hit the Like and Subscribe button if you enjoyed it, and let me know how you feel about the housing market in your city in the comments below.
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