Congress JUST Reset The Housing Market

What's up guys, it's Graham here. So, buying a home is about to get a lot easier because starting today, the federal government has agreed to back loans of more than a million dollars to help ease housing affordability. And that means you're one step closer to buying the 600 square foot bungalow in Venice Beach for 1.1 million dollars with only three percent down.

Okay, in all seriousness, despite some analysts calling for the biggest home price correction of the World War II era, these million dollar loans should, in theory, allow access to more affordable financing. But others argue that this is only going to make the housing crisis worse during a time where inventory is still near record lows. So, with all these new changes going into effect, it's important that we discuss exactly what's happening.

How this is realistically about to impact the housing market, whether or not your Venmo payments are about to trigger the IRS, and then most importantly, what you could do about this so that you're best prepared for whatever comes your way. Although before we start, since the government increased their loan limits, it would help out tremendously if you could increase the like button or subscribe by giving it a gentle tap if you haven't done that already.

Again, I realize it's annoying to ask, but it does make a tremendous difference. And as a thank you for doing that, here's a picture of handsome Patrick. So, thank you guys so much, and now let's begin.

Alright, so all of this starts with what's known as Fannie Mae and Freddie Mac. And even though they kind of sound like the rival duo who would take on the Island Boys, they're actually referred to as federally backed mortgage companies who buy and guarantee loans made by lenders and banks. See, anytime somebody wants to get a mortgage for a one-bedroom home in San Francisco for a million dollars, they go through a bank or a lender so that way they could borrow most of the money they would need to make the purchase.

However, what most people don't know is that when a bank gives you a mortgage, the bank's not the one who patiently holds on to that loan and waits for you to pay it off over 30 years. Oh no, instead, banks package all of their loans together into one giant basket, and then they sell that bundle off to investors as mortgage-backed securities while making a small profit in the process.

Now, in practice, if this sounds like easy money, the answer is yes, it kind of is. But banks can't just give a loan to anybody who asks for them because at the end of the day, banks are in the business of making sure those loans could be sold off to somebody else. Now, since these loans are financed by the government, there is a limit to how much money you could borrow, and that way they're not going to finance someone's fifth mansion in the Hamptons for 175 million dollars. Even though I'm not gonna lie, this house looks pretty insane. We got to get Ennis there.

Anyway, in most markets, this limit was set to 647 thousand dollars throughout most of 2022, but now that's officially changed. And beginning, well, immediately, borrowers are going to have a lot more money at their disposal. That's because, throughout the last year, both inflation and home prices have increased, and as a result, Fannie Mae and Freddie Mac's loan limits go up right alongside with it to the tune of 12 percent.

This equates to an extra 79 thousand dollars that buyers could borrow. As the Wall Street Journal says, the higher limits mean the borrowers could qualify for bigger loans without needing to take out jumbo mortgages, which aren't federally backed and have more stringent requirements for income, credit, and down payments. So, for thirty thousand dollars, you could be the proud new owner of a million dollar house minus income requirements and commissions and a credit score.

Now, before you go into a frenzy thinking, "But Graham, the government just wants to prop up the housing market before it crashes just like 2008," dislike unsub. The truth is, well, slightly less exciting. By law, Fannie Mae and Freddie Mac loan limits must be adjusted every single year in line with average price increases, and with housing still having gone up 11 year over year, buyers are able to qualify for more.

Even though in the short term, values have fallen, of course. I've said this before, but on the one hand, this gives buyers more room to purchase a home that they otherwise wouldn't have been able to afford. And given that prices have increased, this new limit would simply bump up to match what homes are currently selling for.

Not to mention, these higher loan limits would also not penalize buyers who happen to live in a high cost of living city where a starter home costs a million dollars because everybody from California had decided to move there. But others say that this questions the role of the government's involvement in the housing market and whether taxpayers should be backstopping home prices.

Basically, the argument is that by increasing loan limits past a million dollars, that might inadvertently cause more demand, causing prices to go even higher, causing the cycle to repeat itself. Or will it?

Well, it's important to reiterate that this is not the first time that Fannie Mae and Freddie Mac have been under a lot of scrutiny. That's because back in 2004, guidelines opened up that allowed these two agencies to begin issuing riskier subprime loans in order to meet affordable housing guidelines. Or basically, in other words, Housing and Urban Development wanted to improve the homeownership rate for those who are unable to afford a home, so they allowed for no money down, stated income, balloon payment financing so that anyone who wanted to buy a home could buy a home as long as they just signed on the dotted line.

And no surprise how that turned out, just ask Michael Burry. Now, at the time, the housing market crashed, Fannie Mae and Freddie Mac guaranteed about half of the outstanding mortgages, many of them underwater. And there was the risk that if those agencies went bankrupt, it would lead to a global catastrophe for everyone who invested in those funds.

Like, remember how I mentioned earlier how home loans are eventually bundled together and sold? Well, even though Fannie Mae and Freddie Mac guaranteed to buy those loans, there's nothing that says they can't sell them to someone else. You could even see on their website where they explained that they might hold them or they could package them into mortgage-backed securities.

So when those investments were no longer viable, the government was forced to step in. Now, as a condition of being bailed out in the mortgage industry, both Fannie Mae and Freddie Mac agreed to be placed under a conservatorship where all profits would go to the U.S. treasury for as long as, well, anyone's guess. But until then, the U.S. government oversees both entities and makes sure that they don't take on more than they could reasonably handle.

So is this something to worry about? On the most basic level, if you're concerned that this is turning into a repeat of 2008, the answer is no. In the mid-2000s, housing was fueled by rampant speculation, no money down, easy access to financing, and balloon payments that allowed anyone to buy a home. These were often referred to as ninja loans, which stood for no income, no job, no assets.

And as long as you said you're good, the bank basically turned a blind eye and said, "Here's the money." However, many of those loans had what's called an adjustable rate, which caused the price to dramatically increase over time. And that, of course, turned into a disaster. Once homeowners could no longer afford the monthly payment, they decided to sell, but when everyone decided to sell at the same time, that flooded the market with inventory.

Once that happened and no one was there to buy those houses, they eventually went into default, and that eventually fell back on the bank, which eventually fell back onto the investor. From there, we had an almost complete financial collapse until eventually, those banks were bailed out.

Now, even though, yes, we've seen a similar run-up in price throughout these last two years, a lot of that was caused by historically low mortgage rates, and buyers are still very much qualified in terms of what they're purchasing. That is a stark difference from the days of stated income, no money down financing. And sure, increasing loan limits could have some upward pressure on the housing market, but it's nowhere near what we saw back in 2008.

Now, as far as what I believe, someone who has worked full-time in real estate since 2008, I have to say even though, yes, this does allow people in high cost of living areas to theoretically get a one million dollar loan with three percent down, realistically, they still have to qualify for every other aspect of that loan. So if you weren't able to buy a million dollar house a week ago, chances are not much has changed.

Not to mention, outside of areas like California, Colorado, DC, New York, and a variety of other states, loan limits are based on the number of units you purchase. So a single-family qualifies for less than a duplex, which qualifies for less than a triplex, and so on. So if you really want to maximize how much money you could borrow, just go ahead and buy a fourplex in California.

Okay, but in all seriousness, a 12 percent increase across loan limits is not going to have a significant difference throughout the majority of the market. And the people who would most benefit from this would have already been on the line of what they could qualify for anyway. They've also agreed to lower the upfront mortgage fees for one in five buyers, and they should, at the end of the day, just get people a little bit more wiggle room when it comes to their finances.

Now, on the flip side, I do find it extremely interesting to point out that if values go down, these loan limits do not go down alongside with them. For example, as you can see throughout the 2008 great financial crisis, loan limits stayed the exact same despite housing values having plunged 30 percent. So if we see a drop in the near future, these limits are here to stay.

Separate from that, I also found it interesting that throughout the country, 41.6 percent of home purchase loans had interest rates below 3 percent. That means for homeowners who don't plan to do anything anytime soon, all of this white noise makes absolutely no difference. Nothing changes as long as you can make the monthly payment.

However, the same can't be said about investors who have their money with Blackstone. For those unaware, Blackstone operates a real estate investment trust where investors could pull their money together to buy a wide variety of assets, including residential housing, industrial office space, data centers, and hospitality. The benefit is that this fund could essentially operate like a REIT, except by limiting it to high net worth investors, they can operate without being publicly traded.

And up until recently, the fund has done exceptionally well. For instance, they have a 69 billion dollar value, 95 percent occupancy, only 46 percent leverage, with 87 percent fixed rate financing and a 15.5 percent annualized return over the last three years. But there is a problem. Since funds like this are primarily invested in highly liquid commercial real estate, investors have to be very patient if they want to get their money out.

After all, if your money is tied up in a large shopping center, you can't give investors their money back on a moment's notice without selling it. So, as a condition of using their service, Blackstone limits their investors to a certain percentage of the fund. And that's what's happening here. All of a sudden, too many investors wanted to get their money out all at the exact same time, and once that threshold is reached, they have the right to suspend further withdrawals to prevent a portfolio loss.

My guess on this is that most likely the investors in this fund simply believed it wasn't going to do as well in the future as it did in the past. Too many people wanted to move on to other opportunities, and the fund didn't have the cash on hand to pay them all out. This, unfortunately, is pretty much the risk with all things real estate. And frankly, you shouldn't be making an investment like this without expecting it to be at least a 10-year hold.

Like, even if you buy a property for yourself, selling it often entails weeks or even months of listing it on the market, negotiating with a buyer, and paying commissions. So that needs to be something that's considered before you even make that investment to begin with. Regardless of that, though, if Blackstone is facing these issues, it's probably a sign that investors believe that real estate will generate smaller returns than we've already seen. And that's something to consider.

But this, on its own, is probably not that big of a deal, especially when their withdrawal limits are only five percent every single quarter. That means they would need a full five years to cycle everybody out of the fund, assuming a hundred percent of the people want it out. And it's also in their terms of service, so this is what they signed up for.

Oh, and finally, I just want to say this: the IRS is now going to be tracking third party payments if you receive an excess of 600 through apps like Venmo and PayPal. See, prior to 2022, this only went into effect if you had more than 200 transactions valued at over twenty thousand dollars. So this is a huge change that most people should be made aware of.

That's because any time you make or receive a payment on Venmo or PayPal, there's a little toggle switch that says payments for goods and services. If that button is checked, your payment is processed as though you're selling a good or a service, and therefore that amount is redirected towards that 600 threshold. On the flip side, all transactions between friends will not be marked as goods and services and will not count. So you're not going to have to worry about your roommate reimbursing you for groceries and then being hit with a tax bill.

But you need to be made aware that all personal transactions should not be marked as goods and services. Otherwise, you're gonna get a knock on the door from the IRS. In addition to that, if you'd like more information just like this, before I'm able to make a full YouTube video on it, and in more detail than I can include here, I'll link to my newsletter down below in the description. It's totally free, and if you sign up, it gives me a good indication on which topics you want to see more of.

So thank you guys so much for watching. As always, feel free to add me on Instagram. And don't forget, our sponsor public.com has an offer for you down below in the description. It's a stock trading brokerage with a ton of valuable information. So if you want to be a part of it, again, the link is down below at the code Graham. Enjoy! Thank you so much for watching, and until next time.