The Worst Housing Crash Just Started

What's up guys? It's Graham here. So, the housing market has taken a rather unexpected turn in just the last few weeks. New reports are beginning to show some major cracks throughout some of the largest cities in America, with empty San Francisco office buildings expected to sell for up to an 80 percent loss. In addition to that, Blackstone is once again limiting withdrawals from their real estate fund. This is a large portion of their investors attempted to cash out at the exact same time.

Realtor.com released their latest findings for the residential housing market, and this man was arrested with the fake Boris Johnson driver's license that expires in the year 3000. So, with all of that going on, we should really discuss what this means for the future of the housing market, why some experts are calling for carnage in commercial real estate, and how you could use this as an opportunity to make money. As soon as you subscribe, or if you'd like to read about these topics in sometimes more detail than I'm able to include on a YouTube video, feel free to follow my newsletter. It'll be in the pinned comment and it's totally free. So, thank you guys so much, and now with that said, let's begin.

Alright, so to start, before we dive into the latest details of the residential housing market and which areas are seeing the biggest declines, we should first discuss what many experts are calling to be the next market disaster, and that would be commercial real estate. This is a term that encompasses every piece of property that's used for business, like office space, warehouses, retail shopping centers, restaurants, or basically any building that's not a home or an apartment.

Now, generally, in most cases, these types of buildings are rarely ever owned by the end user themselves. Like most stores you see don't actually own the real estate they operate from, and instead, they prefer to rent. This means that there's a massive 20 trillion dollar market of hedge funds, investors, and real estate investment trusts whose sole purpose is to go out there and find undervalued commercial real estate, turn it around, and secure a tenant that could bring in more customers to the area, thereby increasing its value to make a profit.

However, since these deals could cost tens or sometimes hundreds of millions of dollars, groups of investors often pull their money together to make the purchase, and everyday investors like you and I could buy into those funds through publicly traded companies like Simon Property Group, Realty Income Corp, or a variety of other options out there to get some of that sweet, sweet passive income, or so we thought.

See, unlike residential real estate where you have the luxury of getting a 30-year mortgage at a fixed interest rate, commercial real estate is, well, different. Well, I guess for one, most commercial real estate loans only have a fixed term for three to seven years, after which point it readjusts to whatever the current interest rate is. Second, these loans have an amortization schedule that's typically longer than the original term. For example, if you were to go and buy a normal house, after the 15 to 30 years is up, you usually own the home outright. But that's not the case with commercial real estate. Instead, you'll usually have a 20 to 25 year amortization schedule where a portion of your monthly payment goes towards the loan, but there might be a balloon payment due at year seven, which means if values decline, you might owe more on the building than what the building is actually worth.

And third, as you've probably noticed, interest rates have gone up substantially in the last year, which means there is a mountain of real estate that's about to be reset at current interest rates, and that, in turn, could lead to an outright property disaster. For example, CPC reports that 25 percent of all office building loans are coming due in the next year, and with rates now five times higher than they were a year ago, ownership costs are going to be going up substantially.

And if you thought that was the end of it, it's really just the very beginning. Now, I understand that this might be a little bit too detailed, but stick with me because you're about to learn a lot. If you're not already familiar with how this works, commercial real estate is valued on three main factors. One is the land and future development potential of a project. Two is the price per square foot that it would cost to recreate the exact same building today. And three, which is the most important, is how much money that building is able to make.

For instance, if you pay a million dollars for a building that makes a hundred thousand dollars a year, that's a ten percent return. If it makes fifty thousand dollars a year, that's a five percent return and so on. Because of that, when it comes to these types of investments, property owners will always try to maximize the rent because its value is almost entirely dictated by item three—the yield. And the more money a property makes, the more it's worth.

But today, those properties are declining from a lack of rent and they're facing some stiff competition in the form of treasuries. See, at the core, investors are all about the numbers. They just think to themselves, how could I make the most amount of money for the least amount of risk and work? Well, when interest rates were at record lows and property was earning four and a half percent, real estate was looking pretty good because it was actually paying something that was better than nothing. But now treasuries are paying about five percent; even the most basic of savings accounts are paying four and a half percent. Most mortgages are above seven percent, and that's making real estate look a lot less appealing because why would you buy a negative cash flowing property at five percent when you could get that risk-free, guaranteed with a treasury with no work whatsoever?

This suggests that in order for real estate to remain competitive, it has to offer a return that's higher than that that you could already get risk-free, which is a really fancy way of saying that real estate returns have to go up. Combine that with the fact that some buildings are now seeing a lower rent at the same time that interest rates are about to be reset higher while office space sees an 18.2 percent vacancy rate, and you've got the perfect storm for a commercial real estate crisis.

So, is this something to worry about? Well, let's start with Wall Street because according to Fortune, they're running away from the housing market, and a prime example would be Blackstone. They operate a real estate investment trust where investors could pull their money together to buy a wide variety of assets from residential housing to industrial office space to data centers to hospitality. The benefit is that this fund could operate somewhat like a REIT, except by limiting their exposure to high net worth individuals, they don't have to be publicly traded. And up until recently, this fund did exceptionally well.

But like I was alluding to earlier, there's a bit of a problem. Since funds like these are primarily invested in highly liquid real estate, investors are somewhat limited if they want to get their money back. After all, if your money is all tied up in real estate, you can't just snap your fingers and give it back to investors when they want it. So, as a condition to the service, they limit investor withdrawals if too many people want to get their money out at the same time.

And wouldn't you know it, Blackstone has limited investor withdrawals for the sixth straight month in a row. Why, you might ask? Well, imagine it kind of like you bought a million dollar house with a thousand other people. If five of those people want their money back, that's not a problem because you probably have that sitting in reserves. But if 400 people all want their money back at the same time, you can't do it without selling the house. So either place a restriction on who could take their money out or you have to wait until the house is eventually sold.

In this case though, Barron's reported that investors requested four and a half billion dollars from the fund at the exact same time. This is also shared by Wall Street sentiment towards housing as well. For instance, Invitation Homes, which is the largest owner of single-family renters, has scaled back their purchasing because they believe that no longer makes financial sense, especially when they expect the market to continue falling, like office space in San Francisco which could see an 80 percent crash.

Although before we go into the consequences for everyday investors, we should first cover Realtor.com's latest housing report because there is a lot of new information here that will have a direct impact on you and your wallet in terms of what's happening today. They found that there are 48 percent more active listings available on the market than there were a year ago, and even though that sounds like a lot, it's still just a fraction of what was available prior to the pandemic.

On top of that, they also found that no region saw an improvement in sellers listing homes for sale in April, which means across the entire country, there's less interest in people listing their home for sale—probably because they don't want to give up their existing mortgage rate. It's also quite interesting that the typical home spent 49 days on the market this April, which is 17 days longer than the same time last year. However, homes still spent 12 fewer days on the market this April than they did in the average April from 2017 to 2019, and this is precisely why the housing market is not seeing a huge crash like so many people predicted.

Now, in terms of which location saw the biggest price increases and drops, research from Black Knight found that Columbus, Ohio, Hartford, Connecticut, and Worcester, Massachusetts saw the largest increases. Well, the sharpest one-month declines could be found in markets like Austin, Texas, and Provo, Utah. Beyond that though, if we look at this from the peak, the largest price declines so far have included areas like Austin, San Jose, San Francisco, Seattle, Phoenix, Las Vegas, Boise, Stockton, Sacramento, and Salt Lake City.

So, in terms of what this means for you and what you could potentially do about this to make money, here are my thoughts. First of all, when it comes to funds like Blackstone, unfortunately, this is just the risk when it comes to all things real estate. Frankly, if you want to buy property, it should almost always be viewed as a 5 to 10 year hold at the very least because selling could often take a lot of time, and profit is not guaranteed depending on the timing of the market. Even if you buy a property yourself, selling a property often entails weeks to months of listing, waiting for a buyer, and paying a commission at closing, and that's something that has to be considered before you actually go and make the purchase.

Separate from that, I also think that if Blackstone is facing these issues, it's probably a sign that wealthier people expect real estate to either deliver subpar returns or prices will begin to come back down, and that's probably why they want to take their money out and be able to redeploy it elsewhere where maybe there's more potential.

The good news is that not all real estate's at risk and there are quite a few types of buildings that are actually doing quite well. Like Bloomberg reported that vacancy rates for warehouse and industrial spaces are low; retail vacancy is only 5.7 percent; and hotels are garnering record revenue. In addition to that, about three-fourths of commercial real estate debt generates enough income to pass banks' research or financing standards without any major changes, and delinquency rates are still below what they were prior to the pandemic.

No office space though, on the other hand, could be the exception because JP Morgan warns that 21 percent of office loans are destined to go bad, with lenders losing an average of 41 percent of the loan principle on the failures. Because of that, banks are expected to scale back on their lending, be way more cautious about who they extend money to, and that's likely going to affect you or anyone else who wants to borrow some of the bank's money.

That's why I think if you're looking to invest in real estate right now, take your time, be aggressive with offers, and think long term about whether or not a property really makes sense to buy. Now, I personally believe that long-term real estate still can be a great opportunity, but short term, banks will make it a lot more difficult to get a loan, and that's something worth considering—unless, of course, you have a low credit score. Just kidding.

So with that said, you guys, thank you so much for watching. As always, feel free to add me on Instagram, and don't forget that you can get a free stock worth all the way up to a thousand dollars with our paid sponsor public.com down below in the description when you make a deposit with a good gram. Enjoy, thank you so much, and until next time.