"Do NOT Buy A House!" (Warren Buffett's Final Warning)

What's up you guys? It's Graeme here. So, Warren Buffett just issued a warning for the housing market and you're going to want to hear this.

See, back in 2012, after home prices collapsed, Warren Buffett famously said that he'd buy up a couple hundred,000 single family homes if it were practical to do so, and that if held for a long period of time and purchased at low rates, homes are even better than stocks. But now, in today's market, he's completely flipped. During his most recent shareholder meeting, Warren Buffett said that he no longer sees real estate as an attractive investment.

And when he really digs into it, what he says is pretty shocking. After all, he's outperformed nearly every investor in history. He's beaten the markets for decades in a row.

And when he issues a warning, it's vital to pay close attention because it might wind up making you or saving you a lot of money. Although, before we talk about the future of the housing market and what Warren Buffett just said, if you enjoy videos like this, it would mean the world to me if you hit the like button or subscribe if you haven't done that already. It seriously helps out the entire channel tremendously and is a thank you for doing that.

Here's a picture of a puppy. So, thanks so much and also big thank you to Incogn for sponsoring this video, but more on that later. All right, so in terms of what Warren Buffett just said about the housing market, I think you should hear it directly from him and then we'll break down each of his points.

Starting with this one. It's a lot easier to make money in the stock market than it is with real estate. Or as he says, it's so much harder than stocks in terms of negotiation of deals, time spent.

There's so much more opportunity in security market than in real estate. Now, in terms of whether or not this is true, let's start with median home prices, which over the last 100 years have increased an average of 4. 3% during a century where inflation averaged 3%.

This means that if you just bought a random house and did nothing but hold on to it, that house's value would increase just 1. 3% a year above inflation. However, even though that seems really bad, that's only a tiny amount compared to what you could be making with rental income.

Generally speaking, on average, a home typically receives about $3,000 a month for every $500,000 of value. And after expenses like property taxes, insurance, maintenance, repairs, and vacancy, you could very well be making an additional 2 to 6% every single year on your money. On top of that, you also have another very special aspect of real estate, and that would be leverage.

This means if you put $50,000 down on a $500,000 home, and now the home is worth $600,000, you didn't just make a 20% return, you made a 200% return on your initial $50,000. And that return is phenomenal. However, as Warren Buffett points out, this isn't as easy as just clicking a few buttons and being done in less than a minute.

Home ownership and investment takes a lot of time and effort, and it's ongoing. It never stops. Like most people, never take into account the time it takes to find and negotiate the right home, the cost of inspection and closing costs, the effort of ongoing repairs, the time of management.

It's exhausting. That's why I think for most people who are not full-time real estate investors, I hate to say it, they'll probably make nowhere near as much as they could have made investing in the stock market and will spend way more time trying to make these outsized returns. Like just consider that since 1928, the stock market has averaged a 9.

8% a year with dividends reinvested. This is without any work, no management, and no borrowing. Just buy a single fund, take a few seconds, don't pay our hands if the market falls, and do nothing.

This brings me to Warren Buffett's second point that stocks are easier. And when the real estate market is down, stocks are down even more. Like listen to what he has to say.

Large amounts of real estate have changed hands at bargain prices, but usually stocks were cheaper, but they were a lot easier to do. So there's so much more opportunity that presents itself in security market than in real estate. All right.

So, in order to understand what's happening, it's first important to see how housing did throughout previous downturns. Because surprisingly, over the last h 100red years, there have only ever been three housing crashes. With the first being in 1929, just as the stock market peaked from record high speculation of borrowed money, the real estate market dropped alongside with everything else in one of its worst crashes in history, falling 67% and taking almost three decades to return to its previous all-time high.

Then again, real estate encountered more difficulty throughout the 1990s. Up until that point, the housing market saw a huge increase thanks to a growing population, new lending options, and inflation. But the savings and loan crisis caused interest rates to rise, new home construction dropped, and housing prices remained flat, or even in some areas negative until 1997.

That brings us to the most recent housing crash, and that would be the great financial crisis of 2008. Depending on the location, home prices crashed anywhere from 30 to 80%. A bailout was put together and the housing market eventually recovered to where we are now at brand new all-time highs.

This means with the exception of two major real estate crashes in 1929 and 2008, housing prices have been fairly resilient with very few groundbreaking opportunities. Like during and after World War II in the 1940s, despite the stock market falling, housing prices and construction boomed from a surge of demand. During the 1970s stagflation era, real estate prices went higher thanks to inflation.

Again, during the 1980s recession, real estate saw a four and a half% increase as inflation stayed high. The 1990s saw some markets soften, but nothing dropped more than 10%. In fact, in 2001, home sales continued to climb to an all-time high despite the stock market falling as much as 80% depending on the index.

All of this suggests that yes, stocks have a lot more volatility. When the housing market falls, stocks tend to drop a lot further. And if you're looking for an incredible buy the dip opportunity, it's unlikely to happen in the housing market.

For instance, the last time Warren Buffett even considered buying real estate was back in 2012. And he said it himself. Part of the appeal was low interest rates fixed for 30 years.

Under certain conditions, borrowing at 3% from a bank makes a lot of sense. But today, that's no longer the case. So, what does Warren Buffett recommend instead?

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And now, let's get back to the video. All right. Now, in terms of Warren Buffett's thoughts on the housing market and why he stays away from real estate, he makes another really good point that most people don't consider, and it's this.

When you buy a property, it's usually from a single owner, and it's an enormous emotional decision to sell. and that takes a lot of time. Or here's what he had to say about it.

You're dealing with a single owner. To them, it's an enormous decision. When you walk down to the New York Stock Exchange, you can do billions of dollars worth of business, totally anonymous, and you can do it in 5 minutes.

And the trades are complete when they're complete. In real estate, when you make a deal, then people start negotiating more things and more things, and it's a whole different game. Look, from my perspective, as I alluded to earlier, he's not exactly wrong.

Real estate is not as liquid as stocks are. And anytime you want to buy or sell something, it takes a significant amount of time and effort. Not to mention, everything turns into a negotiation.

Like, when I make an offer, we usually go back and forth with the seller for a few days to a few weeks. Then, we do inspections. That turns into another negotiation for credits or repairs.

Then there's the negotiation with the escro company to lower some of their costs. a negotiation with the contractor on some of their repair estimates. It's a long drawn out process that's very difficult to scale unless you're dealing with a huge apartment building or a mass portfolio of homes.

On the other hand, if I want to buy or sell stocks, it takes just a few seconds anywhere in the world. I don't have to wait to try to find a buyer. I don't have to negotiate.

I don't have to wonder if the deal is not going to go through or if it is. It's just instantly finished. This is why Warren Buffett could get such outsized returns above and beyond anything else.

Well, let's take the example of buying the S&P 500 index. Instead of putting $50,000 down on a $250,000 home in 1995, an investment in the stock market would be worth over $94,000. Compare that to housing, which has appreciated 4.

3% and that would leave you with $844,000, not including the expense of maintenance, property taxes, insurance, and repairs. Of course, in fairness, that doesn't account for rental income. But still, when you look at the hour per hour value of your time, stocks are generally the clear winner.

So, when does it make sense to purchase real estate? Well, first of all, let's be real. You and I aren't Warren Buffett.

99. 99% of people are never going to see the returns that he does. And for everyday investors, it is possible to make a significant amount of money in real estate if you're buying as an investment and you're prepared to put in a lot of time and effort to run it successfully.

Yes, it is significantly more work than stocks, but the way I see it, it's not exactly a one-to-one comparison. For example, unless you're specifically buying an undervalued rental property that you could fix up at a favorable mortgage rate in a landlordfriendly city, most real estate is simply a long-term hedge against inflation and a way to put a roof over your head. That's it.

If you're looking for a place that you could move into yourself that you plan to keep for at least a decade, then yes, buying can make good financial sense. But at the short term, at today's mortgage rates and prices, investing in other assets seems to make more money on paper, even though it's more volatile. You also have to take into account the cost of property taxes, insurance, maintenance, and repairs that will eat into your profit.

And most people never take this into account to get a full understanding of how much their home is actually costing them, especially if they're not actively renting it out. Besides that though, on an emotional level, I will say that there is something to be said about owning your own house, having total control over what you do with it and deciding whether you want to move in or rent it out. It's up to you.

On top of that, it's hard to compare stocks to real estate because they both serve a completely different purpose. They're not one to one. Like, housing declines less and down markets.

It offers utilities and you could always live there. And you're able to borrow most of the money from the bank at a fixed interest rate. Not to mention, diversification is smart.

And just because something doesn't make as much money as possible doesn't mean it's worse. This is why as an investment, I haven't bought real estate since 2020. Since I already own real estate, I have that box checked off and I prefer a more hands-off approach.

Not to mention, from a return on capital standpoint, I'm only able to run a profitable rental business because these properties were purchased almost a decade ago, financed with really cheap debt. At today's levels, none of them would cash flow and I would be losing thousands of dollars a month. So, this was only sustainable when conditions were good, and now it's really difficult.

Yes, I'm sure deals still exist in certain markets, but they require a lot of time and effort to buy, find, manage, and renovate. And that's why I believe that dollar fordoll, index funds, for most people offer the best of both worlds. This is also why Warren Buffett would have bought real estate in 2012 after prices had already fallen 30 to 50% when interest rates were at their record lows.

But now there's not as much room for price discovery and on a large scale it just isn't feasible for him to move forward with it. But for the average person, it might on a small scale. Although I wouldn't expect you to get rich from it overnight.

Or I guess put another way, this is a long-winded way of saying that housing can be a good investment, but it's not automatically an investment by default unless you buy it specifically with the intention of making money from it. And even then, it's difficult to compare onetoone with the stock market because you need to live somewhere and housing is going to be a lot more stable even if the stock market declines. Personally, I believe that in real estate, you tend to make most of your money when you buy, not necessarily when you sell.

And it's difficult to compare values equally when there is an emotional aspect to owning a home. But it is worth reiterating that housing is not always the best investment. It's worth it to diversify your options instead of going all in on one thing.

Real estate can take you a lot of work and effort to manage effectively and no matter what. Most importantly, hit the like button and subscribe if you haven't done that already. And as always, feel free to leave a comment down below.

I will do my best to read and reply to as many of you as I can.