Dave Ramsey is wrong about housing

Dave Ramsey is wrong about housing

The financial coach Dave Ramsey has helped numerous individuals improve their finances and get out of debt. However, in a recent rant, Dave Ramsey said that housing is not going to go down because of “supply and demand”, showing that even individuals well versed in finance can miss the macroeconomic environment and say things that may ultimately hurt those that follow them.

There are several arguments that show that this view is most likely incorrect:

1) House prices are the opposite of interest rates

Banks create credit out of nothing, so the amount the incremental homebuyer can pay for a house is determined by how much they are able to borrow. The lower the interest the more they can borrow, and therefore the more they can pay for the house. This is one of the reasons that Prof. Richard Werner who coined the term “QE”, says that we should not allow bank credit creation for fixed asset purchases, as it creates asset bubbles and financial instability. The COVID stimulus-induced inflation has caused a historic increase in interest rates, which should lead to a lowering of housing prices.

2) Housing supply is at its highest since 2008

3) High mortgage rates reduce demand

Along with mortgage rates determining the maximum amount someone can borrow, it also changes the number of people that can borrow. As mortgage rates increase, fewer people actually qualify for a mortgage as well as existing home owners choose to stay in their existing homes, as they would not be able to afford as big a home if they sold their current house and had to refinance at higher rate.

30Y Fixed Rate Mortgage vis CNBC

4) We may be at the end of the debt super cycle

Since the late 1970s, we have been in a disinflationary environment leading to ever-increasing amounts of debt and asset prices. This may be finally coming to an end and leading to either a stagflationary environment in which debt and therefore asset prices are deleveraged over an extended period of time.

Now there is the chance that inflation or a monetary reset wipes out debts, but in some previous examples such as Weimar Germany, when the currency was reissued, mortgages were revalued in the new currency, not wiped out by the previous currencies devaluation.