S2E38 – Does Homeownership Really Build Wealth?

A typical homeowner’s net worth is 40 times higher than that of a renter build does homeownership really build wealth? Homeownership promotes wealth building by acting as a forced savings mechanism and through home value appreciation over time. At the same time, there is a study that says owning a home may help you save money, but it won’t help you make money and that households are better off taking control of their finances than relying on fluctuating home values. In this episode, we discuss the idea of homeownership and why we believe it’s cruical in helping you create generational wealth as we help you become The Educated HomeBuyer.

✅ – Want to get connected with us or to a local expert in your market, please reach out at http://www.theeducatedhomebuyer.com/expert

Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith

Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: josh@buywisemortgage.com ➡I N S T A G R A M ➳ https://www.instagram.com/joshlewiscmc ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart

📩 – info@theeducatedhomebuyer.com

For Show Notes, See Below 👇

[00:00:00] Jeb Smith, Huntington Beach Realtor: 

Does home ownership really build wealth? That’s what we’re gonna dive into in today’s episode. Josh and I came across a recent video of someone that we both respect talking about the idea of home ownership being more of a liability and how it doesn’t really create generational wealth. 

And there’s some things in the video that we need to touch on that we both agree with. And there’s some things that we don’t necessarily agree with. And actually what we’ll do, Josh, is we’ll link to the video. If you’re watching this on YouTube, we’ll link to the video below. It’s Minority Mindset, someone we both respect. Really good content. 

But again, you don’t have to agree with everything someone says to like them or dislike them. And that’s really what we want to talk about because we’re a podcast on home ownership and helping those that want to become homeowners understand it and how to go about it. I thought it was important to to dive into this topic in a little bit more detail, Josh. 

[00:01:09] Josh Lewis, Certified Mortgage Consultant: Absolutely. And there’s nothing in that video that you or I looked at and said, that’s insane, that’s crazy. That’s wrong. It’s almost just looking at it from a different angle. And the reason why we thought this was a good topic to cover is, because first time home ownership, becoming a homeowner, is so difficult right now with low affordability due to high prices, high interest rates, you see a proliferation of content around saying home ownership is not all that it’s cracked up to be. 

Some of you are probably tired of hearing that homeowners have 40 times greater net worth than renters, but the important part in the context of today’s show is that 50% of that net worth is in home equity. 

So that is wealth. That is an asset. It is different from other assets and types of wealth. So we’re gonna go through that. But also an important thing to note, we keep referencing that 40 times figure. The last time the Census Bureau did the Survey Of Consumer Finances was 2020. 

So you guys probably remember we had a little event in 2020 that caused interest rates to go down home, prices to skyrocket. So home prices are up about 40% since that time. So we get a new survey every three years. I believe the 2023 report is being done, will be out early 2024.

And that number is gonna be significantly higher than 40 times. So what I would like to say is you all heard that past performance is not a guarantee of future returns, but what we can say is the experiment has been done.

Over 60, 70, 80 years of home ownership in the United States homeowners are massively wealthier with a much greater net worth. And the majority of that is in home equity. So there’s really no question that it is a core piece of becoming financially secure, whether you want to call that wealth, [00:03:00] comfort, financial security, it is a key element. 

So we’re gonna touch on all of the points here today and walk through them, where he wasn’t wrong, but just a different view or a different angle and what you need to consider when you are thinking of becoming a homeowner or continuing as a homeowner. 

[00:03:15] Jeb Smith, Huntington Beach Realtor: Yeah and Josh we often talk about, we use the word wealth. And wealth might not be the right word because for wealth it means different things to different people. A lot of people when they say wealth or think about wealthy people, they’re thinking people that are uber rich, the Jeb Bezos of the world, that’s wealth to them. 

For some people that’s not what it means. Wealth is just like you said, having some sort of financial security at the end of the day. Maybe it is just having that home paid off, so that at retirement there’s something there. Maybe it’s passing it along to kids having something that, hey, I was a blue collar worker, didn’t really have a 401k, didn’t really have a lot, was able to just get by monthly.

But I’ve paid off my home and now I can give my home to my kids and that allows them to have a home or use that home in other ways to create wealth in whatever that means to them. So understand the word wealth is gonna mean different things to different people. In the context here it’s really about creating something out of owning a home.

Something that you have to do one way or another, right? You don’t have to own a home, but you have to pay either a landlord, maybe you’re living with a family member, oftentimes you’re gonna have to pay them. Or in some cases you’re, using this show, buying a home, becoming a homeowner. And that’s what we’re talking about here. 

[00:04:32] Josh Lewis, Certified Mortgage Consultant: Here, let’s look at a couple things. A few weeks back in the budgeting episode, we made a reference to several ideas that Morgan Housel came up with in the psychology of money. The distinction that he draws is rich is someone with a high income. Wealth is someone with a lot of assets.

A home with a large amount of equity is clearly an asset. We’re gonna go through that. People like to call it a liability, but we’re gonna roll through that. But I think where Jaspreet from Minority Mindset was coming from is in these definitions. 

So a simple definition from the dictionary is wealth is an abundance of valuable possessions or money. So clearly home equity, a home, is not money. But it’s a valuable possession. Another option here is a plentiful supply of a particular desirable thing. All of you listening think a home is desirable. So having that is good.

But where he was coming from is I really like this definition here, the abundance of valuable financial assets or physical possessions. Here’s the key part, which can be converted into a form that can be used for transactions. 

And this is where your residence fails that test. Absent borrowing more money and converting it into more of a liability, either through a new forward mortgage or a new reverse mortgage or selling the property, it can’t really be converted into wealth.

And that’s where I think some people are led astray. But it is important to note that distinction there and that difference. What I like to tell people is that the big [00:06:00] benefit there is not in your ability to translate it into money in the future. It’s the ability to eliminate the majority of your shelter cost.

So over 30 years, if you buy and don’t take equity out and don’t refinance to a longer term, you will arrive near retirement with no mortgage costs. So you still have taxes, you still have insurance, you still have maintenance, but that will be massively lower than rent. And for most people, when we’re talking about building a foundation for financial security, yes, the home equity is great, but we’re gonna need to live somewhere until the day we leave this earth.

So it’s not going to be converted into money for you as long as you, you still need shelter. 

[00:06:44] Jeb Smith, Huntington Beach Realtor: Yeah. And we can talk about the idea. ’cause Josh, that’s not entirely true. It can be converted. Using cash out refinances, home equity. 

[00:06:52] Josh Lewis, Certified Mortgage Consultant: No, that, that’s what I said Jeb. You are going to increase the liability.

So Yeah. When people are saying, Hey, it’s a liability, you put 5% down, you have a 95% liability. Let’s say 20 years down the line, you’ve got that down to 30%, you can get it but you’re going to get it by increasing the payment and decreasing the amount of equity you have.

[00:07:09] Jeb Smith, Huntington Beach Realtor: Agreed, but at the same time, you could use that money to buy other quote unquote assets that could create cashflow that may in and of itself pay for by having a renter in there, paying down the mortgage.

Where yes, you’ve created quote unquote another liability, but it’s being paid for by the renter, by someone else paying that mortgage. And you are gaining the home equity, the appreciation, the idea of again, having another fixed asset in a time where rents are going to increase.

And we can talk about that more here as we talk about the idea of it being a liability and not an asset, but just understand, all of these things are true in some way, right? So you have to understand, when you read a definition of something like a house being a liability, not an asset, yeah, there’s truth to that.

But at the same time it can also be an asset. It’s just how you look at it, how you want to use that piece of property and really what your goals are at the end of the day. And here at The Educated Home Buyer, it’s really about us delivering the information to you so that you can make the best decisions for yourself.

Josh and I aren’t here saying that all of you need to go out and buy a house because this is what it’s going to do. We’re saying, Hey, these are the things that it can do for you and we’re fortunate enough to both own real estate and reaping the rewards of it, and I think we all wanna see people in a position like ourselves.

Josh if there’s a really good example I can give, and I’ve used this example before. Before we dive into the next thing is I bought my house back in 2012. At the time, I don’t remember what the rate was. You might know you did the loan. 

But I was able to refinance that mortgage during the pandemic and take it down to a 2.99% 30 year fixed, actually keep my loan term the same. So I didn’t go back to a 30 year fixed [00:09:00] mortgage, kept my loan term the same. And my mortgage payment not only went down but it’s half of what I could rent my house for today, 10 years later.

So that is how much of a benefit I’ve gained by becoming a homeowner and fixing my housing cost. And I think Josh, that’s really, I. What we’re striving for here is the idea of fixing a cost in an inflationary environment over time, 

[00:09:27] Josh Lewis, Certified Mortgage Consultant: And I want to add some context to that. You got in at the absolute perfect time. Near low’s we’d started seeing the market upturn, but we were near cycle lows, which were inflation adjusted, the lowest home prices we’ve seen in a long time. 

We also had a steady decline in interest rates, so you’ve got it at the low price, you were able to refinance at the lowest rates on record, and rents have gone up.

So I wouldn’t expect someone buying today to be in the same position, but what I will tell people, We used the example a couple of weeks ago. I have some folks here in Redondo Beach. They said, this is nuts. For us to get anything decent. Rent is $5,000 to get something nice. It’s $6,000. We went through it, their mortgage payment would be $6,800.

And they were like, oh my God, that is terrible. So that’s not even the greatest example. ’cause that’s not a huge spread. $1,800 or a little less, about 25, 30% spread between those two. But if we look at 3% increases in rents over the next 10 years, it will cost them more to rent than to own. 

And during that same time, they would have been reducing the principal with forced monthly principal payments, and most likely they’re going to get an opportunity to shave $800 to $1,500 off of that payment with a refinance. And that’s a refinance into the five, five and a half percent range. Not saying we ever get back to a four or three and a half, 3%. 

So even today, it is very easy for someone to say, Nope, home ownership is a liability. I’m gonna rent, keep my freedom. I’m gonna save money every month. They are not actually going to be saving money because everyone understands in investing, the most important thing is time to allow compounding to occur. 

The compounding is working against you in housing, when you delay. You’re not getting the benefit of that leveraged appreciation. You’re not getting the benefit of the principal reduction, and at the same time, rents are going up.

So again, that is not to say that everyone should buy a house and buy a house today. I am on record that everyone should buy a house, but at the right time in their life. So there is a clock ticking that you should do it sooner rather than later. That doesn’t outweigh every other calculation that you’re doing.

It is something important to consider that in a short period of time, even now, we’re the opposite of when Jeb got into the market in terms of higher prices and higher interest rates. Rents are not going to be improving in desirable areas. They’re going to continue to go up at a higher rate than the rate of inflation.

And with that, the fact that there is no 30 year fixed rent means in 10 years, that discount that you’re getting to the market right now of renting versus owning will [00:12:00] flip on its head. 

[00:12:01] Jeb Smith, Huntington Beach Realtor: No. And with that let’s talk about, the idea of it being a liability, right?

We’ve mentioned that a couple of different times. One reason a lot of people out there use it, the terminology, a liability when they’re talking about a home came from Rich Dad, Poor Dad. Robert Kiyosaki, right? One of the books, I think a lot of people out there have read. 

Really good book on real estate investing. Has a lot of great principles in it. It’s probably a little outdated at the moment just because of all that’s changed. 

[00:12:25] Josh Lewis, Certified Mortgage Consultant: He wrote it before he went crazy. Jeb, he wrote it before he lost his mind. 

[00:12:28] Jeb Smith, Huntington Beach Realtor: He’s definitely lost his mind at this point, but he’s become a billionaire or pretty close to it by owning a ton of real estate. So the man knows real estate.

And with that said, he has the idea that a house is a liability, and that’s because it’s leveraged essentially with a mortgage. So Josh, let’s talk about the idea of it being a liability, why people believe that and then we’ve already touched on it a little bit, but we can talk about it being an asset as well.

[00:12:53] Josh Lewis, Certified Mortgage Consultant: We can compare it to any number of things. So if we wanna talk about an asset, a pure investment that is just an asset, let’s look at something that is used as a hedge against inflation. Gold bars. I’m watching Who Is Erin Carter on Netflix? It’s not the greatest, but it’s pretty good. I do recommend it if you need something to watch Jeb or any of you listening at home.

But they rob a Brinks truck and it’s got a bunch of gold bars and looking at it kinda makes you think of that. So think in terms of a gold bar. It’s worth whatever the price of gold is today. But that’s a pure asset. The price can go up, the price can go down, but it’s an asset. You can convert it for money.

Your house, you can convert it for money, but generally you’re going to finance it. If you’re listening to this show, unlikely that you are the buyer that is gonna go and pay cash for the home. So whether you’re buying a $300,000 home or a $3 million home, there is some liability attached to that. You need to make that payment every month.

You need to pay your property taxes, you need to pay your homeowner’s insurance, and you need to pay the maintenance and upkeep on the home. So those things are all liabilities. But that doesn’t mean that the home is not an asset. In an example, someone buys a $500,000 house with an FHA loan today, they have a very little bit of equity in there, about three and a half percent.

In five years, they’re gonna have, depending on what happens with the market, 10 to 20% equity. In 10 years, 30 to 40% equity in that property, assuming they don’t sell it, take cash out. So it grows over time. 

So in the early going there is absolutely more of a component of a liability to it compared to other assets. And in terms of you taking that asset, that wealth and converting it, ringing the cash register so you can do something with it. It takes time. 

You gotta hire someone like Jeb. You gotta pay someone like Jeb. You gotta market it. You gotta go through the process, pay closing costs.

Or if you just want to refinance, you have to qualify according to the guidelines available at that time. Pay someone like me to do that. So it is very different.

Whereas that gold bar, you can walk down to the gold and silver shop, sell it tomorrow. If you have a bond, you have a stock, it’s even easier. You go online, push a [00:15:00] button, you sell it, and the money comes into your account. 

So truly it is very different than other assets and other forms of storing wealth, but your net equity is going to grow over time and it is always going to be wealth. 

[00:15:15] Jeb Smith, Huntington Beach Realtor: You mentioned something there that you didn’t really touch on. We’ve touched on it in other episodes, but the idea of housing having additional maintenance, things that you have to take care of. Whereas a renter, it’s all taken care of for you therefore, that’s a better deal. 

Let’s use an example, own my home since 2012. It’s more than doubled in value during that period of time. Again, a lot of things, like Josh said were luck. Timing, just things happened in the market that I couldn’t control, that I benefited from. Nevertheless, if I weren’t a homeowner, I wouldn’t have taken advantage of that. And here we are. 

Last night, I find out that our freezer’s not working on the refrigerator. It’s about 10 years old. It’s that time to replace the refrigerator. Now, in some cases, you’re a renter. You have to bring your own refrigerator in. But let’s just say that you’re in a rental right now that has a nice new refrigerator.

Well, Jeb has to go out and buy a refrigerator. Because there’s a Labor Day sale, it’s gonna cost me about 3,500 bucks. Otherwise, it’d be close to five grand for the refrigerator that we’re looking at. $3,500. 

Am I happy that I have to pay $3,500 for a refrigerator? Absolutely not. It’s like going to the dentist. It’s money. That’s great. You get this nice new thing in the house that’s gonna be cool for about 10 minutes and then that newness wears off. But here’s the deal. I could still be in a position where I’m a renter and I have to buy a new refrigerator.

Maybe not the same cost, whatever. Or it’s a cost that you incur. For me, Josh, it’s like mortgage insurance. It’s the cost of doing business. It’s things that just happen that you have to take care of in one way or another. And I could sit there and look at that and go, “This sucks. I’m a homeowner that’s doubled my equity in this period of time. And God…”

Or I could say, “you know what? It’s just, this is what it is. I’ve decided to become a homeowner. These are costs that I’ve incurred, and now here we are.” And so it’s the latter, even though I’m not happy about it. It’s the latter. 

[00:17:05] Josh Lewis, Certified Mortgage Consultant: Jeb, I have the perfect comparison for this. Home maintenance is true. It is a fact. There are costs.

But again, let’s go back to the experiment that’s been performed over the last 50, 60, 70 years in America. People who own homes have 40 times greater net worth. 50% of that is in home equity and they have paid for all of the maintenance in their home during that time. 

Think of it in terms of having a child. I think I saw the number, Jeb. Is the number from zero to 18 the average American will pay $300,000 to raise a child. Is that the correct number? I. Or is it even worse than that? 

[00:17:36] Jeb Smith, Huntington Beach Realtor: Honestly, I don’t even want to know, quite frankly, Josh. I just see the debits continually go out for different things.

[00:17:42] Josh Lewis, Certified Mortgage Consultant: You, you’ve got three, so if I haven’t, if my number is correct, you’ve signed on for about a million dollars. So let’s look at it this way. Most people don’t have a million dollars or $300,000 in their 401k, in their bank account and most won’t in 18 years. But those that have a kid, [00:18:00] will get that kid to the finish line.

They will feed them, they will get them into soccer. They will pay for their school trips, school uniforms, anything that comes up along the way. And it’s far more expensive than home maintenance. So what happens with your home? It’s just like Jeb, was he happy to pay for a fridge? Is he happy to pay $700 for travel club soccer?

No, but it’s required.

[00:18:23] Jeb Smith, Huntington Beach Realtor: How much?

[00:18:23] Josh Lewis, Certified Mortgage Consultant: And what you need to do. Was I low, was it like $1,200 for club soccer? 

[00:18:27] Jeb Smith, Huntington Beach Realtor: It’s three grand, bro. 

[00:18:29] Josh Lewis, Certified Mortgage Consultant: Okay, so see, you can tell I have a four-legged child and I could talk to you a lot about vet bills, but I cannot talk to you about child costs, but they’re very similar.

It’s something that if I told you, Hey, you’re gonna have this, and you would go, I’m a renter, I don’t have that. That sucks. But if I told you, if you cover that cost for the next 20 to 30 years, you’re going to have 40 times greater net worth. You don’t notice it. You don’t feel it as you’re going. 

You are going to be writing checks and let’s be realistic. There are some people, I look around my neighborhood. My neighborhood is pretty nice, Jeb. Your neighborhood is pretty nice. You know the people who are serious about their home maintenance and have kept it up and it’s in style, up to date, clean, perfect, nice stuff. And the person that’s been there for 35 years and has done the minimal maintenance.

So there’s a range of what you can and need to do within there, determined by what your expectations are for the type and style of home that you have. And that just continues to lead me back to, there is no right answer. Josh can’t tell you the right answer. Jeb can’t tell you the right answer. 

What I can tell you is over time, the thing that leads to better financial outcomes is finding a way to make this work. So we show up here every week, talk through this, so hopefully you, your significant other, your family can talk through it and make the best decisions for you to decide when and how to enter the housing market if it’s appropriate for you. 

[00:19:47] Jeb Smith, Huntington Beach Realtor: And we’re gonna talk about the idea of buying a rental property and just renting here in a minute ’cause that’s another thing that has come up in conversation that, you know it’s better to go that route. Before we do that though, Josh, another thing came to mind when we were talking about the idea of maintenance costs. 

I think of it like health insurance. I hate paying health insurance. I rarely go to the doctor with health insurance. But when I’m sick and I have to go in for surgery or do whatever, I’m really glad I have health insurance. And so it’s like that is it. Like, yeah, it’s a cost that nobody wants to incur, but it’s really nice when you have it at the end of the day. 

And I think of it like, Hey, yeah, you’re paying a little bit more for a mortgage maybe than you are renting in some cases. And at the end of the day, it’s gonna be worth it. So that said, Josh, there’s this idea out there that it’s better to potentially buy a rental property because of housing affordability, because of where interest rates are and housing costs and how it’s unattainable for many out there to maybe buy a rental property in an area and continue renting.

Thoughts on that? 

[00:20:50] Josh Lewis, Certified Mortgage Consultant: We’ve talked about it here on the show. Not a terrible idea. Probably the best example had a listener to the show reach out about six months ago. He said, Hey, I’ve been in my place for seven [00:21:00] years. The rent was low when I got in here and the guy likes me and he has never raised the rent.

I pay about $2,200 a month for a 3000 square foot condo that to buy something similar, my payment would be $5,000 a month. So with this, I’m able to save all of that extra money. Like I made good money. So he says I can afford $5,000, but as it is, I’m putting three grand a month either into my 401k or additionally into my savings, and he has a chunk of money.

So we looked at that and said, you probably should consider buying in another market. So if you are someone here in Orange County where Jeb and I are, like your minimum that you’re looking at for a rental, if you’re looking at two bedrooms, is about $2700-2800 a month. That can easily go up to $4,000.

Now if you buy that same property, you’re way over $4,000. So I get it. If someone looks at this and goes, “Hey, this is not possible.”

So what is the alternative? We’ve talked about other markets where rents are much higher relative to home prices. The rents are not higher, they’re cheaper. But they’re much higher relative to the home price.

An example, we love to use, Middle of America, good, solid market. Omaha, you can buy homes for $200k, $220k, $225k and they’ll get you $1200 to $1,500 a month in rent. So it can make sense to become a homeowner, to acquire an asset that will do many of the things that we talked about in terms of owning your own home.

And there’s just some complications there. The easiest one, I’m a mortgage guy, so the piece that I think in terms of you have to have a 20% down payment. So even though we’re talking $200,000, we need $40 to $50,000, whereas buying a $600,000 to $700,000 condo here in Orange County, you can do it with 3%. So literally half the amount of money.

So we have to cover that hurdle. You still have to qualify. So can it be a good option? In the right situation, it can be a good option. We have another listener to the show, did a refinance for early last year and the purpose was to take cash out to buy another rental property.

And it was right when rates started going up. She wanted to buy in Southern California. Doesn’t make sense. Anything that she would buy with the amount of money she has available would be a negative each month with current interest rates and prices. And so we started talking about other states.

And we go every piece of it, she’s like, I’m not comfortable with that. I like being where I can drive, where I can manage, where I can keep an eye on everything. So I’m not poo-pooing the idea in any way, shape, or form. As a matter of fact, Jeb, you and I have talked about together or separately buying outta state. 

I have parts of the country I am comfortable with, where I have family members, where I can travel to, that I would be open to doing it. So owning rental property is a great idea. It is different than owning your residence. 

‘Cause we get into that concept again that I wrote about in my newsletter last week of self-liquidating debt. Meaning that I have to pay to put a roof over my head. 99% of people don’t have someone giving them a free place to live. So you’re going to have a shelter cost. I [00:24:00] should allocate some of that to a mortgage to pay it off over time and to fix it over the next 30 years. 

So you do not have that with a rental property. I don’t think this is a bad idea at all. But the video said, Hey, you should be looking to buy rental properties because that is an asset. That builds wealth ’cause it’s bringing you in rent. It ignores the fact that again, you’re gonna get an 80% mortgage to buy it. So it has a liability attached to it. It’s going to have maintenance. The tenant isn’t gonna go, Hey, I’m gonna write a triple net lease like a commercial tenant. They’re gonna say, you’re gonna pay the taxes, you’re gonna pay the insurance. You’re gonna pay when Jeb’s fridge goes out. 

So all of those things still apply. You get some of the benefits of ownership. You get all of the downsides of ownership and you get a unique benefit that you wouldn’t otherwise have in terms of rent. Of someone bringing in money that again can liquidate that debt in that someone else is paying it.

You’re buying an asset that generates a rent yield that pays the financing. So it’s a great idea. It’s not the right idea for everyone, and I don’t think it’s a replacement for home ownership. They’re two very different things. 

[00:25:08] Jeb Smith, Huntington Beach Realtor: And we’ve talked about it in other episodes too, Josh, about, you know how the prime buying age for most people is 33 years old, right?

That’s what it’s been proven over time. 33. It’s that time in their life. They’re starting families, getting married, having kids, all of those different things, right? So 33 seems to be that number. That’s when you really start to earn. Probably getting towards a good part in your career where you’re gonna start going up the ladder, so to speak. 

Maybe not the corporate ladder. Maybe you’re self-employed and your business is taking off or whatever, but it’s at a point in your life where income should continue to go up from that period of time, right?

The earlier you can fix your housing costs, the less of your overall budget it’s going to be at the end of the day. By doing it earlier in your life if you have that benefit, as your wages increase, as things change, hopefully rates go down, you’re able to refinance and even lower that cost at some point, which has been historically the case over the last 40 years. It’s less and less of a quote unquote liability in your overall financial picture.

So something to keep in mind there. And Josh, you and I were talking prior to the show about, a client of mine. You actually did the loan for him. But he bought a condo, a one bedroom condo probably about three years ago. 2019, I believe was the year. 

In a 55 and older community here in Huntington Beach and I think he paid about $350k for it. I don’t remember the number exactly. But somewhere in that ballpark. He was a veteran. He was able to refinance that condo with a 2% interest rate. Two, two and a half. You would know better.

[00:26:40] Josh Lewis, Certified Mortgage Consultant: It’s close to two. It’s either 2.00% or 2.125%. 

[00:26:43] Jeb Smith, Huntington Beach Realtor: So low 2%. He called me about two months ago and with the idea of wanting to sell the property. I go over to his house, we’re having conversations asking him why he’s selling it, what are you trying to do here? Trying to get the big picture so that I can help him. 

And his idea is that he’s trying to lower his housing [00:27:00] costs. He’s a little bit older now. Got a wife. Gonna spend some time in Mexico. She’s got a property there. He is gonna spend some time here. Just better his financial picture, so to speak.

And so I asked him, have you gone out and looked at rents? He’s looking to stay locally here to Orange County, but maybe go a little bit further inland. He’s by the beach now. And I said, have you looked at rents? And he said, no, but I’m pretty sure, with what we’re looking for, we could definitely find it.

We’re looking to go to more affordable areas, Anaheim and some of the other areas. And I was like, okay, sure. You sound like you have an idea. Calls me back probably about two, three weeks later and says, Jeb I’ve changed my mind on trying to sell my property. I’m like, oh, what happened?

We went and looked at what rents were relative to basically my mortgage payment and I’m not saving any money. And I’m like, that’s essentially the conversation we had. And fortunately he found out now versus putting his home on the market, getting a buyer under contract and not being in a position to back out of the property.

It was part of my job to have these conversations and fortunately for him, we had the conversation. He took it to heart and actually did some of the homework and went out and looked and realized that by him fixing his housing costs just a couple of years ago, that he’s in a much better financial position by keeping his home.

Not only has it gained over a hundred thousand dollars in equity since he bought it, he has a lower monthly mortgage payment than he would renting. And that was only in a three year period of time. And I realized a lot’s changed in that three year period of time that may or may not happen again in the future, but it did happen and that’s where he is. And if he hadn’t done that, he would be in a different position today. 

[00:28:38] Josh Lewis, Certified Mortgage Consultant: You mentioned an important point that is a good way to close the loop. When I bought my home, we’ve talked about this in the show, in 2000, we paid $580k for it, and at that time my aunt told me I was insane paying $580k. Because she bought a very similar house in 1974 for, I believe it was like $42,000. So you look at that and you go, you’re paying 12 times, 15 times as much for a very similar property. You are insane. 

That property has increased 300% since I bought it. Very close to 300%. In the same time we had I think a five and a half percent interest rate when I bought the property. We have a 2.75% interest rate. 

[00:29:19] Jeb Smith, Huntington Beach Realtor: You got yourself a better rate than you got me? 

[00:29:21] Josh Lewis, Certified Mortgage Consultant: I did. I did. 

[00:29:23] Jeb Smith, Huntington Beach Realtor: Wow.

[00:29:24] Josh Lewis, Certified Mortgage Consultant: I didn’t take cash out. 

[00:29:25] Jeb Smith, Huntington Beach Realtor: Unbelievable. There you go. 

[00:29:26] Josh Lewis, Certified Mortgage Consultant: So when we look at it what does that tell us?

Does it guarantee that goes forward? From 74 to 2000 when we bought, 25 years, her home had gone up literally like 12 to 15 times. Mine’s gone up three x. So if we flash forward 15, 20 years at a high level of appreciation right now, maybe they only double in the next 20 to 30 years.

But when you look at that, doubling it. When you look at rents continually trending up over time, even buying today at what most people will look at and say, just like my aunt did, that’s a crazy number. [00:30:00] You’re fixing the cost. You are putting a portion of that to forced savings in reducing the monthly principal on your mortgage.

At current prices in lots of parts of the country, you are still getting a tax benefit. You’re getting leveraged appreciation over time. We don’t know what’s gonna happen over the next 1, 2, 3 years. I can tell you in the next 20 years, homes are gonna be more expensive than they are today. We showed a chart on the live show last week. People say affordability’s crazy. Home prices have to crash.

Home prices don’t have to crash ’cause we’ve reached a new level of low affordability. Relative to nearly every major country in the world, we still have much more affordable homes. So they can get more unaffordable. We can still have appreciation. And we did last week’s episode of the show, are interest rate’s going to 8%.

And what we’ve seen so far this week is they’ve retreated, and that is our belief that inflation is under control. We will see interest rates moderate. Time will tell if that 40 year downtrend goes back in place and someday we’re doing loans again under 3%, but they are going to be significantly lower than they are today.

That will be supportive of higher home prices and helpful to anyone who is able to bridge that gap and step in right now. The most important thing Jeb, for us to say is this is not to say that it’s easy or that everyone can do it. You may run the numbers, you may talk to a mortgage guy, you may talk to a realtor. Mortgage girl. Don’t wanna be sexist here. 

You may talk to someone and they run through the numbers and it’s not a reality for you right now. It may not be possible. It may be possible, you may decide it’s not the right point in your life. We’ve talked about all the things you need to consider. So this is in no way saying you have to do it today.

We are saying this is why it’s worked out for everyone over the last 75 years, and we’ll work out for those going forward who are able to do it and decide to do it. So don’t let a lot of the misinformation out there tell you things that should not be impacting the decision.

Focus on are you at a stable point? Does home ownership make sense for you? Do you have a long-term time horizon? Can you qualify for a home that you would be happy with? Those are the things that you need to be determining. 

[00:31:59] Jeb Smith, Huntington Beach Realtor: And I honestly think that’s the best way to end the show right there with what you said.

So buy when it’s the right time in your life. The slogan of the show, Buy Right, Borrow Smart, Build Wealth, right? So buy when it’s the right time in your life. Borrow smart to make sure you have your finances in order. Make sure if you have a budget. You know you can afford the payment.

And then the last part takes care of itself. Build wealth. Time. Make sure you have time on your side. The compounding of appreciation over time is what creates that wealth that we talked about. So hopefully you guys found some value in that. Until next time, adios 

[00:32:34] Josh Lewis, Certified Mortgage Consultant: Amigos!


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