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👉 Subscribe for more daily finance videos and updates.
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LifestyleTranscript
00:00What's up you guys, it's Graham here and I gotta say this, I know this is going to be probably one
00:03of the most controversial things I've ever said on the channel and maybe I'm completely incorrect
00:07but please hear me out so I can at least get this off my chest. Based on the numbers, I no longer
00:14think that it makes any financial sense whatsoever for most people to buy a house. In fact, I think
00:20we've all been sold this lie that buying a house is one of the single best investments you'll ever
00:25make. Because sure, even though this did make a lot of sense for the last few decades, at today's
00:30prices, I think this belief is going to mislead a lot of people. So before you click out thinking
00:35I've lost my mind, I'm going to break down the exact numbers behind my thoughts, show you every piece
00:40of data that I could find, and I'll show you by the end of the video why buying a house could be a huge
00:46mistake for a lot of you watching. And also a big thank you to the Gemini credit card for sponsoring
00:50this video, but more on that later. All right, so in terms of buying a house, I'll be the first to say
00:54it. Up until a few years ago, buying a home was the smart financial choice. Like, it's funny,
01:00since 2017, I was showing people exactly how to buy a house here on the channel. I'd break down
01:06exactly how to find a deal that gave you instant equity. I'd describe exactly how to shop around
01:10your rate to save a ton of money. And in 2020, that evolved into me saying that you should refinance
01:16your mortgage if that's going to save you on your monthly payment. But around 2022, give or take,
01:20everything changed. All of a sudden, there was no housing inventory. Home builders got delayed
01:25because of the shutdown. There was a shortage of building materials. What they could get like
01:29lumber shot up in price. And as a result, when a home did come on the market, it was bid up to
01:34brand new record highs because mortgage rates were at 2.75%. Like, think of it this way. When you buy a
01:40home for $100,000 and a 5% mortgage rate with 20% down, your monthly payment's going to come in at
01:46$430 a month. But you know what else is $430 a month? A $130,000 home with a 2.75% interest rate,
01:55essentially suggesting that people are able to spend 30% more for the exact same home overnight
02:00because their monthly payment wouldn't be changing whatsoever. And this, of course, leads to the first
02:05problem. Eventually, those mortgage rates are going to have to go back up, like we've already started
02:10to see. Right now, we have a housing market with the highest mortgage rates since the mid-2000s. We
02:16have some of the lowest inventory ever on record because existing homeowners know that if they were
02:20to sell and buy an identical house down the street, their monthly payment would more than double. And this
02:25is only sustainable for so long until A mortgages return back below 4% or B housing prices decline.
02:33Which happens first? Now, in terms of declining home values, yes, it is true that year over year,
02:39home prices have actually increased by 0.3%. So if you bought a $400,000 home, today it's worth
02:45$401,000 and you've made money, right? Wrong. Like here's what most people do. They look at their
02:51home price on Zillow, they see it trending upwards, and their first thought is, oh wow, great, it's worth
02:56$15,000 more than what I paid. This is incredible. But what they fail to consider is the amount of
03:01property tax, mortgage interest, insurance, repairs, maintenance, and opportunity cost of
03:06their down payment that went in to make that $15,000 of profit. And once you calculate the
03:12entire picture, you'll see a completely different situation emerge. Like let's just take the example
03:17of the median priced home of $410,000. In this case, with 20% down at a 6.2% mortgage rate,
03:24you're spending $19,500 in mortgage interest, $4,100 in property tax, $2,000 in insurance,
03:31$4,000 in maintenance and repairs, and tying up $100,000 that otherwise could have invested
03:37elsewhere at a 4.2% return. This means when you add everything up, you're spending almost $32,000
03:42out of pocket that you're never going to see again to own a home that went up in value $1,200 over the
03:48last year. Now sure, I know some people are going to counter this by saying, but Graham, you have to live
03:52somewhere. And at least with owning a house, it's yours and you're not paying money to a landlord.
03:57This I 100% agree with. But what I find surprising is that today across all 50 states, it's reported
04:04that buying a house is 50% more expensive than renting. And when you break down that monthly
04:09payment, you begin to see just how big of a difference it really is. The same applies even
04:13if you own your home outright. A 0.3% return seems positive until you consider that inflation is 2.7%,
04:21meaning your real rate of return actually declined in terms of purchasing power by 2.4%. Look, I know
04:27I've made these cringy titles in the past because that's what people click on. But for anyone who's
04:32actually watched the content of those videos to the end, this is something I've been saying for
04:36years. The calculated risk blog pointed out that we could be following a very similar trajectory to
04:40real estate prices in the 1970s. During that time, home prices continued going higher in terms of a
04:44dollar amount, but real returns when accounting for inflation fell by 11% over three years, meaning home
04:49prices went up, but the net value declined. So why are rents all of a sudden so much cheaper than
04:54buying? Well, the truth is it's a bit of a double-edged sword because on the one hand, home prices are
04:59still high because of a shortage of inventory. There's still strong buyer demand for homes that are
05:04listed and mortgage rates are still high compared to where they were a few years ago. Well, on the other
05:09hand, rents have become artificially cheap because homeowners don't want to give up their record low
05:13interest rate. So they're able to rent out their home instead at a price that no one else would be able to
05:18compete with because they have such a wide margin of profit. Like here's another example. Imagine
05:22somebody buys a $500,000 house at today's prices that would cost them $3,000 a month with 20% down.
05:29So they'd need to rent for at least $3,000 in rent just to break even. Compare that to their neighbor
05:34next door who bought an identical home four years ago for $400,000 and locked in a 3% mortgage.
05:39Their payment is just $1,765 a month. So they could easily rent their house for $2,000 to make a profit.
05:46Well, today's buyer needs to rent at $3,000 just to avoid losing money. And that is where a lot of
05:51data comes in. Nationally, the chart says that rents are up 3.5% to 4% from a year ago. So this
05:57seems like a clear case that buying is still better, except when you realize that new tenants who switched
06:03housing are actually seeing an 8.8% decrease in their rent once they move. Or in other words,
06:08existing rents are increasing because tenants are often locked into below market rates where landlords
06:13are trying to raise the rent in line with expenses. But new tenants serve as the barometer for where
06:18the market is headed. On top of that, we also have the issue of home affordability. And here's where
06:23I put on my tinfoil hat because this is where things get crazy. Although before we go into that,
06:27I just want to say that one of the most frustrating mistakes I see people make is not paying attention
06:32to the value of their everyday spending. Like think about it. Housing is already expensive.
06:37Buying is almost impossible for a lot of people.
06:39And meanwhile, every dollar you're forced to spend is either sitting there doing nothing,
06:44or it's locked up in points and miles that get devalued every year. That's why I think it makes
06:48sense to earn rewards with long-term potential with something I'd be buying regardless. And that,
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07:56get $200 worth of Bitcoin when you spend $3,000 in the first 90 days. Again, that link is Gemini.com
08:02slash gram with the link down below in the description. Thank you so much. And now let's
08:06get back to the video. All right, now in terms of housing affordability, like I said, this is the
08:10part that gets crazy. In 2000, the median home price is around $120,000, which was roughly 1.7 times
08:18household income. But by 2024, the median single family home was $412,000, equating to almost five times
08:25the median income. This is why for the first time ever in history, homebuyers over the age of 70 now
08:30outnumber those under the age of 35. And this might be by design. Take college as an example. In the
08:361980s, the Department of Education was created. And this streamlined the government's role in allowing
08:40students to borrow money that was backed by the United States. In theory, it was a good concept.
08:46Give people the financial means to go to college, back those loans by the federal government, and the
08:51more educated our society becomes, the better we do as a country. Except there was an unintended
08:57consequence. The more they subsidized student loans, the more college tuition increased. And therefore, the
09:03more they subsidized student loans, even more, which resulted in even higher tuitions. And now we're stuck with
09:08$1.8 trillion worth of student loan debt. On top of that, average earnings of college graduates never actually
09:14increased enough to keep up with the rising tuitions, even from K through 12. Those funds are not used for
09:20students or teachers, but rather spent on administrative staff. Essentially, the more the government subsidizes
09:26education, the more that schools charge. Who would have thought? It's kind of like saying, hey, how much
09:32do you need? And then schools say, how much do you got? Now, why do I say all of this? Well, the reason is
09:38because the government does the exact same thing with housing. Anytime you go and get a conforming mortgage,
09:44which is basically most mortgages out there, they're bundled together and backed by the federal government,
09:50who basically goes and says, if you can't find a buyer on the secondary market for these loans, we'll go ahead
09:56and pick up the tab. This ensures that there's always money out there to get a mortgage and buy a house, as long as you
10:01meet the minimum requirements for a credit score, down payment, and income, regardless of whether or not there's an
10:07investor on the other side to buy those loans. So is this another situation where the government
10:12guarantees larger loans, pressuring higher home prices, resulting in larger loans that pressure
10:18higher home prices? Well, in the UK, it was found that a help to buy program did nothing to fuel more
10:23construction, but it did result in rising prices, exceeding the subsidy amount. Another paper in the
10:29United States found that homes that qualify for government financing see a price increase of $1.17 per
10:35square foot, compared to homes that don't, all things being equal, suggesting that there is some
10:40measurable impact on the market. Or take a look at California. They gave out $300 million in down
10:46payment assistance, and it was completely gone in 11 days. Now on the flip side, I get it. Homeownership
10:51promotes stability. Most people's only means of saving is by paying down a mortgage, and after 30 years,
10:57they hopefully own it outright. That's why it makes sense for the government to want to assist people
11:01in buying a house. But it also serves as an artificial backstop to preserve existing equity,
11:07for better or worse. Although before we talk about when it's a good idea to buy a house,
11:11I want to share a quick message from the US government. Have you or anyone you know been
11:15diagnosed with housing on affordability? Are you sick and tired of starter homes selling more than
11:20you could afford on a salary that hasn't increased in more than five decades? Well, thankfully, it's not
11:25your fault, and we're here to help. Instead of solving the root cause of the issue, including but not
11:29limited to zoning restrictions, constrained supply, asset inflation, excess capital, labor shortage,
11:35and low interest rates, it's easier to ignore everything and just give you a larger loan instead.
11:40How about this $3 million two-bedroom home in Venice Beach that sold for $700,000 a year ago?
11:45Call us. We'll give you a $2.9 million loan, no questions asked. Or what about this overpriced
11:51$1.5 million townhome in San Bernardino that's not worth the seller's asking price? Well, that's not
11:57your problem, as long as you promise to make the payments. We'll give you whatever you need,
12:01backed by the faith and service of the US taxpayer. And best of all, if the payments are too high to
12:06afford on a stagnant wage, we'll give you a 40-year loan instead. That way, your children can deal with
12:11it. Call toll-free 1-800-Subscribe, and we'll send you a completely free, no-obligation DVD on how we plan
12:18to tax the people who make slightly more than you do. Because we live by the motto that if we don't know
12:23what we're doing, the best solution is to raise taxes. Finally, before I talk about the situations
12:28where buying a house actually does make sense, because I've not completely lost my mind, I want
12:33to address this comment. But Graham, what about all the hedge funds and corporations that are buying
12:38up all the houses? Okay, here's the truth. This Wall Street buying homes narrative really seems to have
12:43started with this Twitter thread, which made the claim that BlackRock is buying every single family
12:48house they could find, paying 20-50% above asking price and outbidding normal homebuyers.
12:53However, when you actually go and investigate these unsourced claims, as it turns out, the
12:58neighborhood in question was a purpose-built rental community built by D.R. Horton, and their business
13:03was intended to be a fully-occupied rental community flip. That is how they created a 50% profit margin.
13:09Separate from that, though, we also have plenty of other stories like this. A fifth of California homes are
13:14investor-owned. By the sound of it, this is an absurd number that's surely to blame for high housing
13:19prices, right? Well, not so quite, especially when you realize that those numbers were significantly
13:25higher than they were back in 2004, 2005, and 2011 when investors purchased nearly one in three homes
13:31for sale. Second, the term investor is also extremely broad and very misunderstood. Like, a person buying
13:37their first rental property or inheriting a house from their parents and renting it out
13:41is treated the exact same way as a billion-dollar conglomerate buying a thousand single-family homes
13:46and renting them all out. So let's break down this term a little bit further. Of the 26% of homes
13:51that are currently sold to investors, half are mom-and-pop landlords who own less than nine
13:56properties, and only 11% of that half are mega corporations. This means when you go and buy a
14:01property, 75% of the people that you compete with are other owner-users, 12% are mom-and-pop landlords,
14:08and just 2.8% are corporations who own more than a thousand units, who chances are, are not competing
14:15with you to buy that single-family home, because let's face it, they're not going to make any money
14:19from that deal. The thing is that a lot of people don't think about is that an investor has to make
14:23a profit, and that usually requires them to buy a property that needs a substantial amount of work
14:28to rehabilitate, or at a price that's well below market value, which is usually not at the expense of
14:34negotiating or competing with other owner-users. Investors are usually buying the properties that
14:38require large, substantial renovations, floor plan adjustments, ripping out kitchens and bathrooms,
14:44and spending four to eight months just to make it livable. It makes no sense for an investor to ever
14:49compete on a turnkey property with an owner-user, because even if they did get it, they would end up
14:54losing a lot of money. There's no upside. In fact, when you look at the data today, investor purchases are
14:59actually declining, because it's unprofitable to buy and rent at today's prices. But sure,
15:05maybe it's those landlords who are going and raising the rents and making it unaffordable for
15:09everyone else, right? Well, across the United States, it was found that less than 50% of landlords
15:15raised rent by more than 3%, with the other half raising rents by less or even nothing as the economy
15:21begins to slow down. That's why when you really get down to it, the actual reason housing prices are so
15:26expensive is simply due to a combination of prior, artificially low interest rates,
15:31restrictive zoning that makes it cost prohibitive to build any more units, subsidized loans from
15:36the government to incentivize people to buy a house, and a surplus of demand from everyday people who've
15:41been ingrained to believe that buying a house is the American dream. But fine, even with all that said,
15:46when is buying a house a good financial choice? From my perspective, that really comes down to two
15:51factors. First is emotional. I will admit, there is something nice about owning your own house,
15:56calling it yours, doing whatever you want, and not being at the whims of a landlord who gives you
16:0160 days notice to leave because they want to move back in. You could remodel it however you like. Once
16:06it's paid off, you own it outright, and you could eventually pass it on to your kids. But at today's
16:11prices, you are paying a premium for the privilege of being able to call it yours. But second though,
16:17in terms of buying a house, we also have the finances, where it does make sense. The reality is,
16:22the longer you plan to stay in your home for, the more it makes sense to buy instead of rent.
16:26Like in the past, I usually found the break even point to be about three to five years,
16:31meaning if you plan to live in this house longer than that, it made more sense to buy it than rent
16:36it. But at today's levels, it might take you 15 to 20 years or more to break even between the cost of
16:42buying and renting, once you factor in closing costs and all the overhead expenses associated with
16:48today's prices. In fact, what I found funny is that I plugged in the real numbers for a home that's
16:53right down the street from me in Las Vegas. And this calculator says that buying only becomes cheaper
16:58after 28 years, basically when I've just paid off the house in full. And that's even accounting for
17:033% inflation and 3% rent increases. Now, inevitably, at this point, people will say,
17:09yeah, but mortgages will eventually come back down when the Federal Reserve lowers interest rates,
17:13and then you could refinance to save all the money. Sure, this could certainly happen, but it could
17:18also take a lot longer than you expect. And relying on a refinance to save the day and justify a home
17:23purchase is incredibly risky. Or what do I know? Maybe mortgages go back down to 2%, home buying demand
17:29surges and prices skyrocket again, even higher than they are today. Or baby boomers exit their homes,
17:35helping supply much needed inventory back onto the market by 2035. The reality is home prices move very,
17:41very, very slowly. It's a lot like turning around a large tanker ship where you make a one degree
17:47correction and over time you eventually see it turning. That's why if you are in the market to
17:51buy a home, do so very cautiously and intentionally with the full understanding that your monthly
17:56payment is going to be a lot more than just your mortgage. If you plan to stay there, hunker down,
18:01raise a family and keep it long enough for it to make sense, go ahead, buy a house. If you want to
18:06take the risk that mortgages will eventually come back down and you could refinance in the future to save
18:11the money, go for it, buy a house, as long as it still makes sense either way, no matter what happens.
18:17But if that's not you and you only plan to live in the house for the next five to seven years,
18:22maybe even 10 years, then I'd strongly recommend to compare the cost to that of renting to see which
18:27makes sense for your own specific situation. It used to be years ago where if you bought a house and
18:33you overpaid for it and you had to move, worst case you'd usually be able to rent it out and break
18:38even on your monthly costs. That's just not possible anymore. And today you'd just be stuck with it.
18:44Anyway, that's my rant. No, I don't think national home prices are going to crash. But unless mortgage
18:49rates drastically decline, the math today heavily favors renting to a point that's impossible to
18:55ignore. On top of that, even if the Fed does lower interest rates to 2% next year, mortgages could
19:01still remain above 6% because they're tied more to long-term bonds and investor expectations about
19:08the Fed's short-term interest rates. The reality is if people think inflation is going to be higher
19:12or people lose confidence in the US dollar, lenders will have to keep their rates higher.
19:17And that's why mortgages don't always fall when the Fed cuts rates. This happened from 2000 to 2003
19:23and again from 2010 through 2013. Just saying, our overall economy says a lot more about mortgage
19:29rates than the Federal Reserve does. Or maybe I'm just totally off base here, but let me know down
19:33below in the comments. I just think you should do the math, take everything into consideration,
19:38and then determine what is right for you and your finances. I'll tell you for myself,
19:43unless I get a 30% discount on a home's price, it makes more sense for me to rent than buy. And
19:50that's something I never thought I would say.
20:00you
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