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Published On: July 2nd, 2021

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Is Real Estate a Good Investment?

Pundits have recently been slapping the “bubble” label on the real estate market. Should you be worried? Creative Planning’s Peter Mallouk and Jonathan Clements discuss how real estate is part consumption and part investment, and the roles it can play within your overall financial picture. Also, Peter describes the motivation behind Creative Planning’s new financial education center, Pathway Financial Education.

Hosted by Creative Planning Director of Financial Education, Jonathan Clements, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!

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Jonathan Clements: Hi, this is Jonathan Clements, Director of Financial Education for Creative Planning in Overland Park, Kansas. With me is Peter Mallouk, President of the firm, and we are Down the Middle. Today’s topic: real estate. The word “bubble,” which pundits seem to apply to pretty much everything these days; it’s now getting slapped on the real estate market. But should we be worried? According to the National Association of Realtors, the median sale price of an existing single-family home climbed almost 24% over the 12 months through May to a record high of $350,000. Affordability, which takes into account things like the typical home price, typical family income, and average 30-year mortgage rate has deteriorated sharply this year. On the other hand, affordability is still substantially better than it was in the early 1990s or at the peak of the 2006 housing bubble, thanks in large part to today’s low, low mortgage rates.

Moreover, according to S&P data, while home prices are up 86% since the market bottomed in 2012, that is the housing market, prices are up just 35% since the 2006 housing market peak. That 35% is a tiny gain for a 15-year period. So, what’s your take, Peter? Are we in a bubble?

Peter Mallouk: So, I don’t think it’s a bubble. I think the reality is that every time we get a new generation since the Baby Boomers, we get this narrative that this new generation isn’t going to live in houses and they’re just going to live in the cities and they’re not going to have families and all this stuff, and it’s just always wrong, always wrong. And I don’t know how this narrative gets going and gained steam and the media feeds it. And it is true that young people have kids later now. And I do believe that 30 is the new 21 in many different ways, but the reality is people eventually want a little bit of space and a lot of people get married and have kids and want to move out of the city. And so, we had this very big pent-up demand for millennials and soon Generation X of needing housing.

And there were a lot of people in real estate that saw that disconnect. I have a few clients that are developers that said, “Hey, look, there’s not enough houses for these people whenever they come around.” So I think we have had a little bit of that. Second, ‘08 or ‘09 might seem very distant to some people, but it was not that long ago to people that were in the real estate market. This aggressive building kind of really came to a dead halt. I mean, it took a long time for construction to come back after ‘08, ‘09, for lenders to come back after ‘08, ‘09. And you started to see steady build-outs, but you did not see a lot of supply. So, there wasn’t really room for a sudden shock.

And you layer on top of that what happened during the pandemic where people suddenly all of a sudden wanted to look at water or some people wanted to be in a gated community, or some people just wanted to be in a house that had more than one room, and didn’t want to be trapped in a small space, and wanted a yard and saw that they could live there, and this ability to work remotely and not have to be one building away from your office in downtown San Francisco, all of that stuff also encouraged people, drove demand in the housing market. So, you have pieces of this that are shocks to the system that will be absorbed and part of it’s generational.

Jonathan: But in the end here, we don’t buy the national housing market. We buy one home. If a couple came to you today, Peter, and said, “Should I be buying a home today?” What would you say? What would you ask them? What are the criteria they should be considering?

Peter: The first thing I talk to people about is you should have a home if you want a home, right? A home, people say it’s a good investment, or it’s not a good investment. It’s not a good investment. So, if you’re building your net worth statement, you have to look at your net worth statement. All assets are not created equal. So, there are assets that bring money to you. Those are great assets from an investment standpoint and from a building wealth standpoint. There are assets that take money away from you. Or, if we’re lucky, we may break even. In the former, you would have real estate like a rental home. You buy a home, you rent it to other people. That’s an asset that brings money to you, or you rent a duplex or an apartment complex or an office building. If you buy a house, the house takes money away from you.

I have a house. I love my house. I don’t buy it because I think it’s a great investment. Now, when I bought my house, is it worth more today? I’ll use an example. I have a small condo that I bought for 200 and something thousand dollars in the ‘08, ‘09 crisis. Today, maybe it’s worth $400,000. Somebody might say, “Well, Peter, that works great. You made money.” Well, it went up about a hund