536: Should You Own a Home?

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 Here’s what’s strange and unique about real estate is that the supply is perfectly inelastic in the short run. So when everybody, when so many people start to move from California and parts of the West coast in into Utah, they can’t build ’em fast enough. So the demand overwhelms supply, and you get tremendous spikes in prices.

Welcome everybody. This is Buck Joffrey with the Wealth Formula Podcast coming to you from Montecito, California. Uh, before we begin today, a reminder, okay. There is a website called wealthformula.com and that’s where you should go if you want to be involved more in this ecosystem of wealth formula. Um, part of, uh, that website is a sign up to something called the Accredited Investor Club.

If you’re interested in seeing deal flow that is not available to the general public, uh, that relates to some of the concepts that we talk about on the show, like real estate and you know how to get involved when these cycles are down the way they are and all that kind of stuff, that’s where you want to be.

So go to wealthformula.com and sign up for, uh, investor Club. Uh, now, uh, speaking of, uh, real estate, you know, there is a different kind of, uh, real estate that we all. Whether or not we’re investors of real estate we’re familiar with, and that is home ownership. Home ownership. If you think about it, it’s really kind of baked in the American dream, right?

Everybody tells you that same thing, that you know, you, you wanna, so you start making some money, you gotta buy that house because it’s your biggest asset, right? But as a real estate guy. The guy who kind of focuses on the, um, you know, the structural ability of, uh, people to create wealth. I’m, I’m not actually convinced it makes sense for everyone, especially in your, um, early career.

Uh, and let me, let me kind of explain that. So say you start making some real money finally, you know, and for doctors that’s often, like when you’re outta residency for me was like. Gosh, not until I was 30. I don’t know. I was thinking I was like 33 years old maybe. I mean, that’s, that’s a long time to be, uh, broke for.

But yeah, I mean, I was, I did a long surgical residency and fellowship and all that kind of stuff, and that was the first time. Um, but you know, as soon as you start making that money, there’s just pressure. It’s a cultural thing, right. Buy a house and keep up with everybody, you know, build equity, feel responsible, you know, that kind of thing.

And then, um, and you kinda get wrapped up into that, right? And you, you wanna keep up with all those people that you fell behind from because you were in school for so long, or it been so, you know, you’re getting a late start on this whole adult, uh, upper middle class thing or whatever. But here’s the part that gets forgotten.

Is the reality is your primary home is not an asset. You know, Robert Kiyosaki talks about that all the time, and specifically he says that if something takes money out of your pocket, it’s not an asset, it’s a liability. Well, that describes homeownership for sure. Right? According to bank rate. And, uh, census Bureau, US homeowner, homeowners spend about $17,000 per year just to maintain and operate their homes.

And that’s before you make a single mortgage payment. Now, many of you are high paid professionals and you, you probably spent a lot more than that, that, you know, talk about property taxes, insurance, utilities, landscaping, repair bills, HOA fees, you know, so if your house is house is worth a $1.5 million and you know, like, I think that’s probably a lot of you.

Even the bare minimum 1% annual maintenance rule hits you with about $15,000 a year just to keep your place from deteriorating. And then you add insurance, taxes, utilities, everything else we talked about in here, looking, I don’t know, another 30, $40,000 per year and unavoidable, non-negotiable carrying costs.

And that still doesn’t cover the roof that fails. Suddenly, the appliances that die or the. Mother nature stuff. The reality is that none of this really feels like an asset to me. Now, to be fair though, home ownership is not really just what people think of as an investment usually. They usually buy them for stability of, you know, a place to raise kids, a sense of being settled.

It’s emotional, it’s psychological, and it’s all real. You know, it’s a quality of life thing. But if you’re young, and especially if you haven’t hit your first. First million or whatever it’s worth asking yourself a tough question. Is buying a home right now the best financial move? Or you know, is that just because it’s just the most familiar one?

It’s the one that everybody says you’re supposed to do. The facts are that, okay. US home price appreciated around 4.3% per year. You. Because listen, you’re, you’re not up, up levering these things and making money along the way. So that’s who you have to look at it. And meanwhile, if you look at the markets, you know, if you’re a stock market person, the SAP, they, you know, an average is 10% per year.

If you look at value add real estate, uh, you know, we typically target target 16 to 20%, uh, internal rate of return, uh, plus tax advantages. You’re not getting any of that if you just, uh, if you just have that equity in a house that’s trapped in there. Uh, so if you’re just getting started, you know, it might make sense to delay that home purchase, invest first.

Try to build some, you know, some income from your investments, some, you know, some additional wealth. And then let those assets. Um, you know, help sort of pay for that home or that lifestyle, right? And if you do that, you’ll be in, um, a, a position of strength rather than strain, because that’s a terrible feeling to be housed poor, you know?

And the irony is that waiting often gets you the dream home faster because your capital compounds instead of being trapped in drywall. And, and you know, it’s a better way to do things. It’s not being, um, it’s not being cheaper anywise or whatever. It, it’s just smart. It’s just math. Anyway, this week on Wealth Formula Podcast, we’re gonna break it down with an expert who digs into this very question and lays out why ownership might not be the golden ticket that people think it is, especially for high earners.

Uh, and we will have that. Interview right after these messages. Wealth formula banking is an ingenious concept powered by whole life insurance, but instead of acting just as a safety net, the strategy supercharges your investments. First, you create a personal financial reservoir that grows at a compounding interest rate much higher than any bank savings account.

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Welcome back to the show, everyone. Today, my guest on Wealth for Meal podcast. It’s Dr. Ken Johnson, the Christie Kirkland Walker, chair of Real Estate and professor of Finance at the University of Mississippi. Welcome, Dr. Johnson. How are you? I’m doing great. And you, I’m doing well. Um, you have a very interesting, uh, focus of attention, which, um, I’d love to start talking about right now and well, let me ask you this question first.

You know, most Americans still see buying a home as the foundation of wealth. Is that, uh, is that a false idea? Um, and I guess the other question is, well, why did we get that notion in the first place?

Sure. So two short questions there, and they’re really pretty easy to answer. Yes. Home ownership is a vehicle for creating wealth.

It’s perhaps though not the best overall vehicle for creating wealth. Uh, historically though, most individuals in the US didn’t have access to the capital markets, so that’s becoming less and less so today. So you could think of it like this. A matter of fact, myself and an uh, professor named Dr. Ellie Bra, we did a study about 12, 13 years ago.

We looked at home ownership and creation of wealth and renting and reinvesting those monies that you would’ve put into home ownership and which way would’ve ended up creating more wealth. In other words, I rent and reinvest, or I own and I build equity. And on average, renting and reinvesting wins, but not buy that much.

So home ownership is a great wealth creation vehicle, and if you don’t have access to capital markets, if you have access to capital markets, renting and reinvesting might be a little better. Whatever you do, don’t do the third option of renting and spending that difference on beer and cookies.

Yeah, yeah, sure.

Um, well you, you know, so you decided to test, uh, you know, that belief in the first place with data, and that led to the question of whether home ownership always makes people richer. You talk about that data that you analyzed.

Sure. So we look at. A data stream of housing values. Originally we used all Case Siller numbers when we were going back, but in the recent years, we started to use the third party platforms, Zillow, redfin.com, realtor.com, all produced a sec.

Uh, segments of data that are essentially repeat sales indices for almost 400 metropolitan areas around the country. And from there we can predict. Given past housing prices, were average past average housing prices where we can predict where current housing prices should be, and then we compare those differences.

We do that for buy versus rent. In terms of a price to rent ratio, we do it in strictly in terms of price, and then myself and two other professors, Dr. Biddy Waller and Shelton Leaks. We actually look at rents, where we look, where should rents be and compare to where they are. So we run really four indices on any given month.

And, and right now it depends on where you are. The buyer or WR signals are a little different in different areas around the country. It’s not one clear picture.

Yeah, I, I was gonna say, I, I would imagine if you looked at that data, for example, in, you know, over the last couple of decades, uh, in somebody in, you know, Southern California or you know, somewhere where the prices have gone absolutely mad that those people would’ve gotten.

Um, you know, those guys probably really outperformed any kind of market. Um, can you, can you talk a little bit about the demographic differences?

Sure. So as a general rule where you see the, the demographics moving to, you also see the capital moving to, so there’s been significant movement of, of people and capital from the west coast, from the Midwest and northeast, and there’s almost a U shape, if you will, that runs through.

Utah, Colorado, Wyoming, down into Texas, Arizona going back east and then back up the East Coast to just pretty much into Virginia, Northeast, Midwest, west Coast have been demographically seeing people move away, uh, in terms of the number of people that are, that are changing their locations and the wealth is following them.

So you see home prices kind of follow that, not. Without, there are exceptions of course, and depends on where you are, but the demographics, demographics solve all real estate problems. If you’re having a rapid increase in population, your home prices are gonna bounce back, that’s for sure.

Right. Does this data, I mean, I’m thinking about, um, you know, there’s certainly, when we talk about housing, people buying houses, there’s, there’s a difference between, you know, the, the lower ends, the middle end, and the higher ends of housing.

Uh, uh, how does that all break down?

So we look at trends, but that’s absolute, what you say is absolutely true. But we wanna look at a trend. So we trim the data in every market so we can see the general trend. We can’t drill down past the metro level as defined by the Office of Management and budget. So when I talk to you about Los Angeles, I know a lot about Los Angeles as a whole.

Not as a smaller, smaller segments and not across price segments either, but there’s definitely different price performances. Um, higher end homes tend to suffer less, uh, and these downturns, so them, while all markets say if you’re going down, they, they might be going down, but not as much in the higher end.

And that’s because of higher wealth. Individuals can, on average withstand a downturn, whereas. If you’re in the lower end of the income spectrum, you’re gonna have to sell the house or move on or change for whatever reason. The situation is, is dependent on the economics as well. So if, for example, uh, you’re having a downturn in, I don’t know, Texas, like you’ve seen in Austin, you’ve seen the downturn in.

In Austin? Well, the higher wealth individuals can withstand this. The lower income strata are gonna have to deal with this by moving, uh, perhaps, but it’s not always the same per market. And a lot has to do with the delta between what an individual’s worth, say total wealth minus their total debt. So that delta, if that’s highly leveraged and the delta’s small, then you’re gonna see real estate prices respond much quicker in that market.

When you see a larger delta on average, you’re gonna see less responsiveness and the higher wealth individuals will be able to write out the bad times, and coincidentally, take advantage of the the good times, um, better than all else, being equal,

better than others. And on the individual basis, Dr. Johnson?

I, well, first of all, I, I’m looking at this, you know, this rent versus by question that affects people on an individual basis. And I, I think it’s, um, interesting to point out that I, I think that, and, and correct me if I’m wrong, but this is applicable across home prices, right? I mean, we’re, we’re not talking ab I mean, typically we’re thinking about, well, gosh, if somebody’s.

Gonna live in an apartment building versus, you know, if they’re gonna try to buy a small home. But we’re, we’re talking about the comparison, relative comparisons, even in the super, you know, the higher affluent areas. Right. Is isn’t that fair? I think that’s a fair statement, yes. Yeah. And so as a, as a follow up to that, when somebody is thinking about, say there is somebody who’s fairly affluent.

What do they do? I mean, at an individual basis, what can somebody do to, you know, look, uh, at, at whether it makes more sense for them individually to buy or to rent.

Sure, sure. So that brings up a really interesting question. So when we invest in the stock market or buy bonds. We’re looking at a, at a return.

It’s a, it’s an investment. Good investment, good. Only housing is both an investment good and a consumption good. That’s what makes it very difficult to price. Additionally it, it’s a necessary good. Even com complicates it even more, but that’s at the lower end. So we’re interested in home ownership from a perspective of both consumption and investment.

I think when you look at this from the higher end net worth individuals, you’ll be seeing these folks that are a little bit more interested in consumption, perhaps relatively speaking to those in middle income America. In middle America. It’s just going to happen that way. They have a bigger delta between total wealth and total debt.

With that, they’re going to be more interested in the consumption and consumption. The consumption component of a home is much more difficult to price. You will see, and it’s not my work, but if you look across the research, you’ll see that higher end home owners have larger net worth. In other words, they have a bigger delta between that total wealth and total debt, and they are buying more for the the consumption end of the component than just a strict.

I need some form of an investment where I’m getting a return.

Right. And, and, and there’s also the other confounding factor I would imagine, and I maybe this rolls into your, uh, issue of consumption, is that there are often a lot of sort of hidden costs associated with buying versus renting. Can you talk about trying to weed through some of that?

Sure some of the highest costs that we don’t think about when we own, although we do take cut down on risk. And also I think that’s come back to consumption. I, I is the fact that there’s the opportunity cost. So think about having 50%, a hundred percent of your home paid for. This, it’s the opportunity cost.

You’ve actually taken capital out of play at higher returns to put it into something that perhaps, yes, you see it as a form of an investment, but it’s also partly consumption. And I think that’s why many people end up paying for their homes when they can, because there’s an old saying, and that is, you can’t go broke if you don’t owe money on it.

Right? So if you, it’s hard for the lender to come get your home and you don’t really care, right? You wanna be able to. Have no debt on your home. It doesn’t make the typical financial sense if we argue at it from leverage and returns and maximization of returns. I think most people this high end level are looking at, you know, I, I, I, I have high net worth.

I’m looking at both consumption and the investment side of the component. But very often the consumption wins and the investment is I can be safe and I can own this house. Outright in many states too, your homeowner, the home that you live in, you are actually, if you’ve homesteaded the home, you’re actually protected against lawsuits and other things that are out there.

Divorce cases will protect your position in, in terms of a homestead. So you can protect a significant portion of wealth by having a paid for home. Um, does it strictly still make it a good financial decision? But this form of insurance. So you’re gonna see as you move higher and higher and higher in price, no matter where you are in the country, you’re gonna see a greater and greater percentage of those homes that actually have been paid off or have minimal, uh, loan balances.

So you’ve, uh, you know, you’ve been studying decades of housing data, and I guess one of the questions, if you go back into history, um, you know, we, we hear in the news right now about home affordability is such a major issue. What were some of the major turning points, um, in American history and that have shaped basically, you know, these returns and, and perhaps, uh, shaped our.

Entire perspective of home ownership in the first place. I mean, maybe they’re not the same assumptions to use anymore.

Sure. Well, I think if you go back, the first major critical change that that happened probably in our parents’ lives, or at least when they were young children. Was there was a saying they don’t build ’em like they used to.

Yeah. ’cause they all used to fall down. Uh, but when Fannie and Freddy and FHA and Va, the, the, when these loans first started coming out, we had government backing o of the lending process. And the lending process became a little bit more standardized. Not that the government was making the loans, they just stood.

To form a help form a secondary market. The lenders then also required better quality of building. So this all happened right after world, right before and right after World War ii. That’s a critical moment in time, and that’s from that point where we started to see home prices pretty much only appreciate.

Um, the next thing is we’ve seen significant growth in our population in the US across that span of time. And so as our population grows, as we form households. It’s a scarce good. We’re just on historically haven’t been building fast enough to keep up with the population. So as we build population grows, we occupy the homes.

There’s high demand for the homes, there’s high demand. There’s also a trade off between roofs to live under and rent and roofs to live under and own. But no matter what, we have a growing population. So now come forward to where circa of six, seven, depending on where you were in the country. We have this crash in housing driven mostly by, well, we loaned pretty much everybody too much money or too friendly of terms builders.

We had a belief that builders went out and satisfied that you, you know, home prices only grow to the sky. The builders couldn’t, we could never have too many homes when in fact we ended up with a way, a significant oversupply of housing by oh 6, 0 7 when. That market turned down. There was this oversupply, so then we’re starting to get to hit from a foreclosure crisis, a downturn in the economy coming in around seven and eight, depending on where you were again in the country.

Home prices started down and there was nothing to catch them. Oversupply. Bad economy. Nobody wanted to buy depending on where you were in the country. These, all these markets all bottomed out. We follow the top 100 markets by population. Nothing magical about that, just by population. And so what, when we look at these markets, the bottom always appears around 11, 12 ish.

Alright? So. What happened during that time was we lost so many of the small builders in the country. We lost tens of thousands of small builders, and they’ve just not come back. So we’re dealing with that problem still today where we have a chronic shortage of brews to live under. Although we seem to be making a comeback here, especially in the multifamily housing, is helping provide roof, excuse me, roofs to live under, doors to live behind.

So here we are today and many people we we’re experiencing overpricing in many parts of the country, and many people are expecting a crash because that’s what it did last time. Housing does follow a cycle, but the last cycle was the tsunami. Typically, those, that’s very atypical. This time around, we’ve already seen the, the crest, the peaks of the market were far less depending all around the country.

Nobody got as overpriced as they were. 15, 16, 17 years ago, the downturn has been far less. Um, generally speaking, because we’re short of housing now, what we’ve seen buck is that that prices have kind of gone flat, if you will, lateral rather than increasing or decreasing, they’ve gone kind of lateral to the timeline.

Therefore, the trend in prices is catching up to actual home prices. We’ll get back on that long-term pricing trend. So we’re not gonna, the likelihood of a crash is near zero. This time around, but what we’re gonna face instead of a crash will be affordability issues. Both rents and home prices oscillate around a trend, and so they’re mean reverting.

It’s what makes it so easy to, to statistically model them. But it’s hard to explain. People see this trend, but those are kind of the the path. That’s the path of how we got here over the last a hundred years. I think our greatest threat to home prices will occur after you and I have left this planet.

But sometimes in the foreseeable future, if our population begins to shrink, just like many other parts of the world, Italy is a prime example. We will stop having that engine that makes home values grow. And if we have a decreasing population, we’re gonna need to worry about home prices.

The affordability issue itself, doesn’t that create, um, sort of a, a downward pressure on price?

I mean, I think, I think what you’re saying is yes, it does, but not enough to create some kind of crash. Is that that right?

That’s correct. That’s correct. And, and so we’ve all got backgrounds in finance or training and finance, and we’re watching investments and we expect our homes, or we expect real estate to perform very much like stocks.

Uh. Higher rates, lower prices, lower rates, higher prices, and it just doesn’t work that way as quickly. Real estate is a financial asset, just like a stock, but it trades in slow motion. And because of that and human emotion around that consumption, investment, human of, uh, emotion or aversion, excuse me, aversion to risk, we get slightly different.

We see home prices become sticky downwards. Not that they can’t go down, but they don’t respond as fast as we think they will to higher and higher rates. When rates go down, there’s nothing to stop them from being sticky upwards. So we tend to see lower rates, boost prices, so we tend to be a little hot, if you will.

So our, our, our peaks are a little bit more than our troughs. If you look back through time.

Um, I’m curious just in, in terms of historically you’ve made this comparison, um, uh, today’s Florida to California in the fifties. Can you talk about that?

There was significant growth in California after World War ii.

There always had been, but it, it exploded exponentially after World War ii for many reasons. From weather to. To, to economy, to everything. People. Were going to the West Coast. Now I said, I said this about Florida. I also have said this about Texas. In recent years, you’ve seen this huge surge and we’ll deal with Florida.

So you’ve seen this huge surge into Florida Now. I lived in Florida until a year ago, and it was not uncommon. In the last few years to see new tags that were from all over the country. Predominantly though from the Northeast and Midwest, and so you have this significant, huge influx of population. It’s changing the entire economy of Florida.

Florida was historically for tourism and retirement. It’s really hard. To, to to retire anywhere. Orlando South, at this point in time, California saw the same thing by the way people were gonna go to California and live the good life forever. Well, a lot of people wanted to go to California and so we just we’re seeing history repeat itself.

Florida is slowly pricing itself out of the the retirement market. The tourism market will become harder and harder to maintain in the southern part of the state as time passes. Yes, people are gonna want to go to Miami Beach, but they can’t afford the hotel rooms per night or the Airbnbs. And so the pattern of California, I think we’re gonna see for Florida, especially because of the retirement and tourism side, I don’t necessarily see the same pattern for Texas, but I do think there’s gonna come a time where you’ll see the retirement market move, if not out of Florida, at least up into the Northwestern Panhandle.

Of Florida, and you’ll see retirement communities developing along the Georgia, South Carolina, um, Alabama and Mississippi Coast, uh, Baldwin County, Alabama. A few people know about it, but they will soon. It’s a great place to retire. The beaches look like sugar and the cost of living is very, very low.

Yeah.

So those areas in Florida then, do they become, um, you know, do they, do they start significantly pricing people out? Just the way it happened in California at that point?

You’re going to see some of that. So we’re gonna have affordability issues in, especially in South Florida, like we had in many parts of California.

So you’re going to see this happen and evolve through time. But one of the things that’s also going on in Florida, it’s just not, it’s who’s moving to Florida. So there, there’s an old website that’s gone, and I wish it was still there. It was called How Money Walks. It’s disappeared, but they, they measured.

The, the changes in adjusted growth income by county, which counties were growing the fastest in the country or shrinking the fastest in adjusted gross income. And Palm Beach County was leading that. It was number three overall in the country. So there’s a lot of capital coming in and, and Palm Beach County, you hear a lot about Wall Street South that’s developing a lot of the financial industries moving into Palm Beach County and other parts of southeast Florida.

You have healthcare. Uh, in, in Broward County, that’s the next county down. Miami-Dade is the big new crypto capital of the world. Tampa. Orlando, still a lot of tourism in Orlando, but you’re seeing healthcare markets develop there, um, technology in in Tampa as well. So you’re seeing an economic shift in change in central to South Florida that’s not happening as much in the northern part of the state.

A lot of that’s going on in Texas as well. You’re seeing a recovery right now in the Northeast. So we measure the most overpriced cities in the country in terms of we can predict where prices should be, and we look at their actual prices. And seven of the 10 most overpriced cities in the US are actually in the Northeast and in the Midwest.

So there’s been a resurgence in people wanting to move back, and we’ve already seen that, but I don’t think people are gonna play ping pong back and forth between Florida and, and, and these corridor of the country. But you’re actually seeing and now a resurgence in the demand. And prices are really good in places like Philly, Detroit, even though they’re very high in Detroit relative to where they should be.

Prices are really good. Same thing for Cleveland. Um, so you’re seeing parts of the country that people are not only moving back to, but perhaps like we saw for generations, many people that lived in rural areas are not making their first move to Florida. Now they’re making their first move to Philadelphia,

for example.

What are some of those markets that are really overpriced versus, I guess, underpriced right now?

So when we look at the top 10 most overpriced markets in America right now, we look at their prices, where they are and compare them to where they should be statistically modeling them. We’re seeing the most overpriced markets are Detroit at 33.5%, and then following, falling in descending order of Cleveland, Ohio.

New Haven, Connecticut, Akron, Ohio, Worcester, Massachusetts, Las Vegas, Nevada, Hartford, Connecticut. Rochester, New York, Knoxville, Tennessee, Toledo, Ohio. You’ll notice. And these are overpriced. These are overpriced. These, the overpriced mark.

That’s so, that’s sort of counterintuitive, isn’t it? Ab absolutely.

But yes. Wow. Okay. And then h how about the, uh, underpriced markets? I’m curious

on that too. Sure. So when we then go to the opposite end of the spectrum, and usually now with underpriced comes risk and there’s risk in both of these markets, what you wanna do, both overpriced and underpriced, what you wanna be long term in a housing market.

Uh, ’cause you want to be really close to that trend and not have these dramatic swings. It’s just like stock price. We don’t like volatility. Housing, it’s, it’s dangerous for performance. The most underpriced markets. We only have four markets in America right now that are trading at a discount relative to their long-term pricing trend.

In other words, statistically, where they historically prices say prices should be today only four cities are underperforming. That that’s Austin, Texas at 3.1% below where they should be, or a discount of 3.1%. San Francisco at a discount of 6.5%. Wow. New Orleans, Louisiana at a discount of 8.7 and Honolulu, Hawaii at a discount of 10.3.

Notice I’m not saying these markets are inexpensive. They’re just below where they’ve historically been. These are the best buys right now because they’re below their long-term.

Again, extremely counterintuitive when you bring in some, you know, a place like San Francisco, which is extremely expensive, but, but you’re Yeah.

Very, very counterintuitive. It, it’s, it’s, it’s fascinating. So it seems like the more secondary, tertiary markets are actually the ones that are overpriced, which is. Uh, what is there general reason for that?

Well, I, I can give you a very general reason. The, the demand is outstripping the supply, but that’s, but now what’s behind that part gets really difficult.

Uh, a number of us are talking about this, so there’s no real data is anecdotal. Uh, we think that a lot of resurgence in places like Toledo, uh, in Cleveland and Detroit. Yes. Some few people are moving back from, say where they’ve migrated into Texas or the no, no income tax states, Tennessee, Texas, Florida.

Some few of those are going back. You’re still seeing people leaving rural areas and moving into cities, and so if I am in middle America and I’m looking to not be. In a small hometown any longer, and I’m looking for financial opportunity. Perhaps I make my first jump to Detroit as opposed to moving to Miami, Florida.

Right. And, and so we don’t know that though. We, the demographic data comes out so slowly, but yes, we’ve been very surprised because this overpricing is developed in, in, mostly in the Northeast and the Midwest in the last six months. When you look at our data month to month, you don’t see significant price changes or, or, or ranking changes.

But if you look at it every three, six. Nine months. It’s, wow, the world looks a lot different than it did six months ago. Um, two and a half years ago, the most overpriced city in America was Boise. Uh, I became the most hated man in Boise, Idaho, there for a while, but now it’s the 83rd most overpriced. So just in two years that market changed pretty significantly.

People are still moving in. The marginal change though here, here’s what’s weird about strange and unique, let’s not call it weird, strange, and unique about real estate, is that the supply is perfectly inelastic in the short run. So when everybody, when so many people start to move from California and parts of the West coast in into Utah, they can’t build ’em fast enough.

Or into Idaho, Utah, that, that northwest part of the country, when people move there, you can’t build them fast enough. So the demand overwhelms supply and you get tremendous spikes in prices.

When I think about it, it actually does kind of make sense because what you’re looking at is you’ve got these markets that may be inexpensive, but that’s the reason there’s more demand there.

Right. And, and, and that’s, that’s why relatively speaking, they are. Over. I mean, they’re, they’re, they’re more expensive for what you would expect in that area, whereas, well, it’s to

where they should be, but not more expensive in absolute terms. Right. I think you’re right. Other parts of the country that would surprise you?

We, I, myself and a couple other guys decided to follow the, the housing markets and in the SEC schools. And, and I’m sure if we expanded beyond that to the A CC Big 10, if you looked at university towns, we look at the SEC, we’re in the SEC and you’re seeing significant growth in all of these markets. And you notice Knoxville was in the top 10 most overpriced cities.

So you’re seeing significant movement in this world where. Not all, but many can now begin to work from home and actually have significant incomes. They’re deciding to go do that at their alma mater or a nice university town. So it’s a different way of life and I think that’s gonna continue. Uh, so, and so, I don’t know where this ends up, but if I was a smaller.

If I was a smaller town in America, I would be looking to increase my infrastructure in terms of, of internet availability. You know, how much the bandwidth, I need a big bandwidth for my hometown so we can grow and attract people in and, and I think you’re gonna see more of that, but still the cities are gonna grow.

I think you’re gonna see. People 20 years from now, we’ll still be talking about how many people are leaving rural America and moving into metropolitan areas ’cause they’re following the potential for economic growth.

When you look at, uh, all the data that we’ve been talking about, obviously this relates to a person who is living in you, a home that they purchased or renting a place that, uh, you know they’re gonna live in.

How, how does this data translate to investors in, in real estate?

Sure. So, uh, one of our other indices, we call it our price to rent ratio. It’s really a PE ratio for rents versus home ownership. Uh, and then so we can look at that. So if you’re in our a hundred markets, we know the average price, right? So it’s gonna be priced, divided by the annual average rents.

So it’s gonna be how many dollars in price do you pay for every $1 an annual rent? And that gives us the relative. Difference between owning and renting. The higher that ratio, the L, the more you should on in general, be leaning towards renting. The lower that ratio, the more you should be leaning towards owning.

And we used to do an old buy versus rent index for 23 cities. We now do it for 100 cities, and this price to ratio produces almost the same exact answer. So when we look at the average price to rent ratio in an area and we just compare, are they above or currently, are you above the price to rent ratio, uh, for Los Angeles, California, or are you below it?

If you’re above that average for say, the last 10 years, you’re gonna be rent friendly. If you’re below it, you’re gonna be bio friendly. I can do this very quickly. If you want, I can pick a, pick a, um, pick a California market you’d like to know about, but a city, um, yeah. Yeah, well, why don’t we use mine?

Santa Barbara, California, Santa Barbara. Let’s see if we got you. If it’s, is it in the, uh, largest 100 metros and population?

Probably, probably not. Okay. Yeah, I don’t see it. I don’t, okay. Well, let, let’s, let’s try, um, why don’t we try Dallas, Texas. Okay.

Dallas, Texas. That one’s in the top 100 in terms of population, so Dallas, Texas right now.

Uh, their price to rent ratio is at about a, just below a 6% premium. In other words, that trade off between renting and owning is about 6% above where it should be, so it slightly favors renting. I’ll jump to the next index. If we look at actual prices in Dallas, a slight premium. So it’s, it’s, it’s telling me, Hey, that my price to rent ratio’s high, slightly favoring ownership, but it’s probably because prices are a little high and they might change.

Uh, Dallas is at a bit of a premium right now, and I’ll bet you without, well, I, so I will now go look at Dallas rents. My gut feeling is they’re gonna be below average. They are, they’re at about a four and a half percent discount. So that’s just market dynamics in motion right there. We can do that for a hundred cities pretty quickly.

Mm-hmm. So Dallas prices, that price to rent ratio, it slightly favors renting as opposed to owning. If I could mention one city really quickly, that is just it. It jumps off the page every time we do this New Orleans, Louisiana right now. They’re at a price to rent ratio of 15% below where they should be, but they’re also at a deep discount.

So something really strange is going on in New Orleans right now.

15%

discount to

what? Sorry, can you

explain that one again? Their, their price to rent, their price to rent ratio is 15% below where it historically has been. So the, the average price to rent ratio in New Orleans, uh, has been 15.3. To now it’s at 13 or 15% below where we should be.

New Orleans is just screaming for home ownership, but home prices right now in New Orleans, they’re significantly below as well. I could look that up very quickly. New Orleans. New Orleans currently is at about a 8.79% discount, so prices are down and they’re, but they’re moderating and they’re probably gonna move back towards that trend.

New Orleans is a risky market, but you don’t see markets fall 15% below their price to rent ratio. Imagine a PE that was 15% below where it shouldn’t be that that’s a stock high. So it’s risky though, that’s, that stopped that you would wanna buy it probably comes with a lot of risk, but New Orleans presents some pretty unique investment opportunities at this point in

time.

Yeah. So for, for an investor at looking for, you know. The ability to raise rents. How would you use that exactly?

So if I’m looking at an ability to raise rents, I’m probably not looking at a, at at, at a metro that has a price rent ratio at a discount that’s below where it should be, because boy, it’s just screaming by you’re, you’re kind of spitting into the wind at that point in time.

So you wanna look for markets that have an upward trend or stable. At least a flat trend in home prices and, and rental prices. And you wanna look at one that has a premium in the price to rent ratio. Uh, I’m trying to think of a, yeah, what would

be a good, uh, what would be a good example? Maybe somewhere in the Southeast Carolina?

Probably.

So let’s, let’s look at, uh, just outta curiosity, let’s let, that’s a unique question. So let me look at Knoxville. I’m thinking Knoxville or Charlotte are probably gonna fit that Bill. Charlotte probably is. Yeah. Let’s look at Charlotte. Let’s look at Charlotte. I’m closer there. Charlotte, North Carolina.

The price to rent ratio is at a 10 plus cent per percent premium. When I look at home prices in Charlotte, you want home. Home prices are gonna be propped up by rents, by the way, so higher rents usually lead to higher home prices as you are. Alternative option to own as to, as opposed to renting. Uh, but we’re gonna look at Charlotte.

Charlotte, North Carolina. Home prices are currently at a premium of 21% and have held pretty steadily even through this downturn. If I go back three years, they were at 27%. So they haven’t come down that much. If I look at rents in Charlotte North, oh, they’re a little bit of a discount.

Mm-hmm.

So, but I think that chance to rise.

Yeah, that’s,

I guess that’s, as an investor we do, you would look at that and say, well, with the ownership premium there, there’s a upside on the rent.

Uh, yeah, absolutely. Absolutely. So what, what I, what I would tell you, so our goal when we set out to do this Buck every kind, is just to help people make more informed solutions.

So we wanna have a, we wanna provide for them a lot of data to look at as an open source. So we, we actually work with four different. Indices right now. We do prices, we do rents. We do the price for rent ratio, which is the buy versus rent trade off. We also do an inflation adjusted. Now as a, an academic, those are wildly interesting to me.

I don’t think it’s as appealing to the consumer though. But, uh, there are 10 cities right now. By the way, new Orleans was perhaps the worst, but there are 10 cities in the US since 2025. After you adjust for inflation, they have lost value on average, so they weren’t wealth creating at all. Yeah.

Interesting.

Um, this is all really fascinating stuff. Is this stuff available for anybody to take a look at and, and play with on their own?

Uh, absolutely. So the American Real Estate Society, a RES, houses two of our indices. So it houses the, the Waller, W-A-L-L-E-R, weeks, W-E-E-K-S and Johnson, J-O-H-N-S-O-N, rental index.

If you just Google American Real Estate Society, Waller Weeks and Johnson, it’s gonna pop to the top of your search. Um, also at the American Real Estate Society is the bja, which is hard to pronounce and even harder to spell, but it’s B-E-R-A-C-H, Abraha and Johnson Housing Ranking Index, B-E-R-A-C-H-A Johnson.

Housing Price Index Aries, they’re gonna find that. I’ll send you the links if Yeah. If that helps. Yeah. We’ll put ’em in the show notes. Sure. And, and then probably the next one, the price to rent really helps you on that buy versus rent decision. That’s me and Ellie Bra. And we do that rental price to rent ratio, which is really buy versus rent.

Uh, I’ll send you all the links.

Yeah.

Uh, people always trip up on Ellie’s Mae. They wanna call him Barcha, but it’s bra.

Dr. Johnson, thank you so much for being on, uh, wealth Formula Podcast. This has been a fascinating interview, buck. I’ve enjoyed it, and I’ll send you the information. You make a lot of money but are still worried about retirement.

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