In this interview, host Jason Hartman and guest Mark examine whether rising mortgage rates will trigger a crash in the U.S. real‑estate market. They begin by framing real estate as a credit‑based asset class, noting that when credit dries up the market can be affected, but recent rate hikes have paradoxically spurred buying due to FOMO (fear of missing out). They highlight that roughly 40 % of homes are owned free‑and‑clear and that about one‑third of transactions involve investors, many of whom are cash buyers, distinguishing this cycle from previous ones. The conversation then shifts to hedonic adjustments: buyers will accept smaller or lower‑quality homes as rates rise, illustrated by a $1 million home in Jacksonville versus a $1 million apartment in New York City, indicating a decline in standard of living rather than a price drop. Hartman explains a rule of thumb that a 1 % increase in mortgage rates translates to roughly a 10 % reduction in purchase price, but stresses that the real effect is on the size/quality of homes people can afford, not on overall price levels. They discuss financing dynamics—most purchases are still financed, but higher rates push more buyers toward cash or larger down payments, affecting equity and inventory. Historical context is provided by comparing today’s 3‑5 % rates to the 18 % rates of 1981 and the median trend since 2011. Finally, they touch on supply‑demand fundamentals, noting that limited inventory combined with FOMO can keep demand strong even as rates rise, suggesting that a crash is not inevitable but the market will adjust through smaller homes and reduced living standards.
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And now here's your host, Jason Hartman.
With the complete solution for real estate investors. What are the factors that keep the market going?
Very significant. Real estate, like many other things in our world, is a credit based asset class. And when credit dries up, you know, a lot of us, you and I were always looking at the money supply, right? But it's not just about the money supply, it's also about the credit supply, because credit is money, right? And so when credit dries up, it certainly can affect the real estate market, no question. And we've seen a pretty significant increase in mortgage rates just recently. Now that has really had the opposite effect of what many might think. It has not cooled the market, it's actually heated the market up to beyond its former red hot status because people have fomo, the fear of missing out. And they're just trying to buy any property they can right now because they think this may be the last of those low rates, maybe in their lifetime. And that's actually quite possible. But another thing that's interesting to note is that about 40% of all the homes in the country are free and clear. And many of the purchases are cash purchases. So to those purchases it's not a credit based asset. Now another metric that's interesting to look at is about 33% of the entire market, just real estate purchases, is investors. And many of those investors are cash buyers, like the institutional buyers. Now granted, they're also financed with debt, but it's a completely different concept of debt that's, you know, through the banking system, the investment banking system really, and through Wall Street. So these are all just factors that, you know, some of them didn't exist the last time around. I hate to say what is considered by many to be the famous last words of any investor. This time it's different, but it really is different. There are many, many differences.
That's why we say history doesn't repeat. But it rhymes, right? So it's a little bit different. So let's talk about the supply and demand metrics, because ultimately that's what we're always trying to figure out. Will the demand continue to stay strong and what's going to happen with the supply. Ultimately that's what's going to drive it. You talked about mortgage rates. So mortgage rates 1981 were over 18% and they've basically come down ever since. It's not in a straight line, but almost in a straight line. They appear to have bottomed just recently, just over the last year, in the mid twos. And now they've jumped as high as almost 5% in just the last two months. Now, if I look back at that, historically, we're kind of in this range that we've been in since about 2011. So really, like the last decade, it seems like now it's come up and down. But maybe if I were to look at some technical analysis, there's kind of a line there, like a median. Did you see that jump from, let's call it 3% to 5%, really having a massive impact?
Well, that is the trillion dollar question for sure. So many factors in answering that question. Number one factor that very few people really understand. I don't know, humans have a funny mentality about this. And I've really tried to teach around it on my podcast and on YouTube. And that is the idea that there is some, like, fixed idea of, you know, look, okay, you can say, well, if mortgage rates go up and that causes the payment to go up by X percentage, then people won't be able to afford a house. That's what you keep hearing, right? That's the kind of narrative you hear. But that's simply not true. And here's why it's not true.
Tell us why.
What gives is this? What gives is what people are going to get. They're still going to live somewhere, right? They're just going to have to accept less. And you teach your listeners, I know about hedonic adjustments, just as I do, and hedonic indexing, which is one of the ways they manipulate the consumer price index, the measure of inflation. And they say, well, hey, you know, this iPhone is twice as good as the phone I got 10 years ago, and this phone costs $1,500. But the consumer price index, by hedonic adjustment, since it's twice as good as the old one, considers that I only paid half as much for it. But that's not really true. I didn't really only pay half as much. So it's a hedonic adjustment. Yeah, it is. But we as people have hedonic adjustments. We have expectations. I give example of a $1 million home in Jacksonville, Florida. And then I give an example of a $1 million apartment in New York City.
Yeah.
And the home in Jacksonville is almost 5,000 square feet. It's on a big corner lot. It's got a beautiful yard. Gorgeous. It's just a gorgeous home. Big palatial master suite with a big master bath and, you know, everything you'd want in a great house. It's a little mini mansion, basically. Right. And then for the same amount of money in New York city. You get 653 square feet, Mark. And, you know, it's called a one bedroom, one bath, but it's not really even one bedroom. It's just. Yeah.
Jason, I live in Southern California on the beach, man. You don't gotta tell me.
You understand? Right?
You get a bungalow.
Exactly. But that's a hedonic adjustment.
Yeah.
Okay, people, what gives is the standard of living. People just get less. They'll just accept less. They have no other choice. Right. So they could have afforded a nicer, bigger, better house when prices were lower and interest rates were lower, but now they're gonna just take a smaller house in an inferior neighborhood. They're still gonna buy a house or they're still gonna rent a house. They're just gonna get less. The standard of living is declining. That's the reality.
Well, the last piece you just said there, they're still gonna buy or they're still gonna rent. So I wanna talk about that. But if I look at this, though, the. I believe the data, correct me if I'm wrong, But approximately like 96% of all homes purchased are financed. I don't know, maybe you said there's a lot of cash. Maybe that number has come down. I think I saw that number reported from the Realtor association about a year ago. But. But a good majority, almost. Almost all of the homes being purchased are being financed. And so people are buying the monthly payment. They're not buying the price of the home. So when people say homes are the most expensive they've ever been. Well, in purchase price, total dollar amount, purchase price, maybe that's the case, but payments, maybe that's not. And so I think the way the process works, I mean, obviously I bought over 100 homes is. And most of those were cash. But the way that most people would do it is I would go sit with a mortgage broker and they'd say, how much do you make? And I'd say, you know, whatever, 100 grand a year. And say, okay, based off loan guidelines, you can spend 40% of your income on your home. So that's 40,000 a year. Okay, 40,000 a year gets you this payment. And this payment can get you this much of a house, they kind of walk you into it that way. So if my income doesn't change, I'm still making 100,000, but interest rates went up, then I'm going to be able to buy less of a house. So then you would think that prices would have to come down, but I Guess what you're saying is that's not necessarily true because home prices don't necessarily have to come down. That person might just buy a cheaper house.
Yeah, a few things on that. Let's unpack it a bit. Yeah, so the first thing to know is that, like that stat you just mentioned about all the homes being financed, the cheaper the mortgages, the more people will use them, the more are financed. When the mortgages get more expensive, just like anything else, fewer people buy them. So more purchases will tend toward cash or larger down payments if people have the money. And there's certainly a lot of money in the system right now. Granted, it's fiat money.
We'll talk about that later.
But, yeah, that's a rabbit hole. We don't have time to go down. As the mortgages get more expensive, fewer people use mortgages. Right. So the actual equity, there's an incentive to increase your equity. Right. That's one thing. Another rule of thumb to remember is that 1% in mortgage rate is equivalent to about 10% in purchase price. Okay. So, you know, for the uninformed person who doesn't really understand the dynamics completely, they think, well, if mortgage rates go up, then all the prices are just going to drop 10%. No, that's not true. That's what happens to the standard of living. That's what drops.
So the price doesn't come down. They just buy 10% less home.
Exactly. Right. And so what. What happens is there are all of these other factors going on at the same time. So the first one is the FOMO factor that we discussed earlier. So when rates go up initially and there's that initial shock, everybody actually rushes into the market. You know, many think they rush out before it's gone. Yeah, yeah, get it before it's gone. You know, hey, we're raising the prices a little bit each day. So you're going to go out and shop. Right. Just like in the Weimar Republic, when you're. When your money's getting worth less and less, you spend it. Right. You don't save it because it's going to be devalued. You want to spend it. Right. That's the incentive. And so that all happens. But the other thing we got to just talk about is inventory. Okay. It would be completely remiss if we didn't discuss inventory.
