When The Housing Crash Will Happen

What's up you guys? It's Graham here, and if you thought the housing market was expensive, it got worse. Despite higher interest rates, record low affordability, and a 60% chance of recession, the housing market is now $2 trillion more expensive. That's right! Redin recently reported that the total value of US homes jumped 5%, the biggest gain in nearly a year, leading a lot of people to wonder how much higher could prices go. Which areas are seeing the biggest gains, and why did Warren Buffett just completely cash out of the housing market? Does he know something the rest of us don't?

So, with 2024 shaping up to be one of the most pivotal years for the housing market, let's break down exactly what's happening, what this means for you, the outlook for the rest of the year, and then finally what you could do about this—whether you're a buyer, a seller, or just sitting on the sidelines watching everybody lose their mind.

Although before we start, as usual, if you appreciate videos like this, all I ask for in return is that you hit the like button or subscribe if you haven't done that already. Doing that helps out the entire channel tremendously, and as a thank you for doing that, I'll do my best to respond to as many of your comments as possible, so thanks so much, and now let's begin.

All right, so before we talk about the potential pitfalls to watch out for in 2024, it's first important to understand the current state of the housing market, because this is going to lay the foundation for what we're about to see. And as of today, it's pretty shocking. That's because, like I mentioned earlier, over the last year, Redin found that the total value of the housing market increased by $2 trillion, and over the last two years, it increased by a whopping 13.3%.

So why is this happening, you might ask? Well, as they point out, we have three different aspects all forming together into the perfect storm. With the first being a shortage of homes for sale. As they explained, homeowners are reluctant to list their homes for sale because the vast majority of them have an ultra-low mortgage rate, and selling would mean giving that up.

Like just for some context, Goldman Sachs reported that 99% of homeowners have an interest rate below what's currently being offered on the market. 85% of those rates are well below 5%, and 63% are between 2.5% to 4%. In addition to that, Redin previously found that in areas like Chicago, Atlanta, Los Angeles, and Washington DC, homeowners with a mortgage rate below 3.5% were 7.6% less likely to put their homes up for sale than homeowners with their rate above 3.5%.

To put that into perspective, if a homeowner has an interest rate of 3%, prices would have to drop by 36% for that identical home to have the same monthly payment at today's interest rates of 7%. So, in many cases, it just doesn’t make financial sense to sell. In terms of what it'll take to change, research suggests that the 30-year mortgage rate falling to 5.5% is the magic mortgage rate that would be enough to push home buyers to purchase homes, but only time will tell if and when that eventually happens.

Second, home values hit a low about a year ago. As you can see, home prices almost slowed to a complete standstill at the end of 2022, over the fear of higher interest rates, which is also in part why we saw such a dramatic increase over the following year. Simply put, sellers were locked into their existing homes, the market stalled because so few people were listing their homes for sale, and as a result, the market had nowhere else to go but up.

Now, in terms of which areas saw the biggest price increases, suburbs made the biggest comeback while high-price cities fell out of favor due to a shift in remote work and the lack of affordability. Even today, this is still found to be the case, as work from home isn't going anywhere, according to company managers.

And finally, third, more homes are being built. After all, if you build it, they will buy. Okay, in all seriousness, with a rather drastic housing shortage, builders are now the ones filling the void. With new constructions making up one-third of the total market inventory compared to just 13.3% in the years from 2000 to 2019. In fact, this is giving the entire construction industry a reason to pick up the pace, with new buildings seeing a 21.7% increase from a year ago.

However, in terms of what's happening now, the future looks a bit more unclear. Because when it comes to the housing market, Warren Buffett looks to have just cashed out at the peak. So does he know something the rest of us don’t? Well, here's where things get really interesting. Back in August of 2023, Warren Buffett announced that he made a substantial investment in three major US home builders: DR Horton, Lenar, and NVR. All three specialize in building single-family homes throughout the United States, and together this amounts to nearly 170,000 new constructions a year.

Now, at the time, those shares were worth approximately $800 million, and prior to his acquisition, home building stocks had already done pretty well, outperforming the S&P 500 by a fairly wide margin, with DR Horton leading the list. But today, however, those numbers look very different—in a good way. Since Warren Buffett's purchase, DR Horton increased by 35%, Lenar is up by 30%, and NVR is up 20%, all in just 7 months. This means that Warren Buffett was able to cash out a $250 million profit from one stock alone in 7 months.

How well home builders have a very unique advantage that homeowners don't have, and that would be terms. Since mass builders usually have a fairly stable profit margin on every single sale, they're able to offer incentives to entice buyers to make a purchase. This includes buying down mortgage rates, money back, and closing additional upgrades for free, and price reductions if closed by a certain date.

For example, DR Horton said that their most successful initiative has been interest rate buy downs, where generally offering a point below market on 30-year fixed-rate mortgages for the life of the loan. Or in other words, if mortgage rates are at 6.2%, they could buy down your loan to 5.2%, saving you a pretty substantial amount. To make matters even better for construction companies during the housing shortage, many buyers had nowhere else to turn besides home builders, and that meant that there was a lot of demand to push up their profits, which in turn helped the stock price.

So that, of course, brings us to the question: why would Warren Buffett suddenly cash out of a stock that he usually holds for a very long time? With a lot of media outlets citing this phrase that if you aren't willing to hold on to a stock for 10 years, don't even think about owning it for 10 minutes. Well, the truth is, as of right now, we have absolutely no idea. Some people have made the argument that homebuilder stocks have rallied way faster than expected, so it makes sense that he cashed out and locked in his profits. But other people think that he's now changed his mind, that he is bearish on the housing market, and that's a red flag worth considering.

Now personally, I do think it's worth considering that according to Newsweek, he told investors that Berkshire Hathaway is no longer likely to achieve the skyrocketing performance it has been known for in the past. Anything beyond slightly better is wishful thinking. Now, even though this might not be a great thing for the future of the housing market and for home builders, it is worth noting that currently, Berkshire Hathaway is sitting on $168 billion worth of cash. So their entire homebuilding investment is worth at best 0.6% of that total amount. Just for context, that would be the equivalent of someone investing $700 who has $100,000 in savings. So I don't think that's enough to justify anything sinister going on—or is there?

Okay, so when it comes to this, a wealth of Common Sense blog posted a fantastic analysis on what he calls the bear case for housing prices, and for anyone who wants to follow along, I'll link to his blog down below in the description. I'd highly recommend checking it out for anyone who wants to learn more about the markets.

But in terms of what he found, you’re going to want to hear this. He starts off by reiterating that so far, nothing has negatively impacted housing to the downside: not rising interest rates, not rising prices, and not the economy. Instead, people are living in their homes for longer. 40% of Baby Boomers have lived in their homes for more than 20 years, and the vast majority of them plan to stay in their home well into old age.

There's also the concern that for people who have lived in their home for decades, capital gains could take up a significant portion of those proceeds, leaving them with a lot less than expected. So of course, they're choosing to stay. That's why all of this begs the question: what would it realistically take for the housing market to fall?

Well, as Ben Carlson points out, if there's a recession, people are unlikely to sell because they've already locked in a low mortgage rate. On top of that, 40% of homeowners don't even have a mortgage to begin with, so it's unlikely that there would be a whole bunch of panicked sellers trying to sell their homes at the exact same time. Of course, there could always be some random black swan event, but if that were the case, it would be impossible to predict.

To me, I think one of the best analyses was posted back in 2023 by Mark Woodworth, who noted that for housing prices to fall, there either must be a reduction in demand or a surplus of inventory. And in terms of how much it would take, demand would have to fall by 50% for housing to be in line with historic averages. Although, he says this is unlikely given how transaction volume hasn't fallen below 2 million since the early 1980s.

Alternatively, the housing supply could also double, which could theoretically happen at some point in the future, but it'll take time. For instance, in terms of how this could happen, Mark points out that a large portion of homes were bought by individual investors. And as the market price increases relative to what they're getting in rents, it could be a profitable time to sell.

This could also extend to those who bought Airbnbs, dumb money who purchased property because markets go up, or anyone else who hedged to speculate on real estate values. With more rental units being built and more people renting out their homes instead of selling, market returns might go down. But that's all speculation, and the market could very well just continue going higher, which is exactly what Morgan Stanley believes for their bull case.

According to them, their bull case is that housing prices rise another 5%, saying that with so many housing statistics at levels we have rarely seen over the past several decades, it isn't hard to envision housing activity and home prices evolving differently from what we've laid out above. Which for anybody wondering is that they expect the US economy to avoid a recession next year and the housing market to pick up as incomes rise and mortgage rates continue to fall slightly.

In addition to that, as rates eventually decrease, a consumer that has recently seen mortgage rates above 8% might jump at the chance to lock in 6.5% or 7% mortgages in far greater numbers than we're expecting. Of course, keep in mind that this is their best-case scenario, and in a more realistic outcome, they're a bit more pessimistic, believing that home prices will actually fall 3% by the end of 2024.

And then in the absolute worst-case scenario, they think that housing prices could fall by as much as 8% if absolutely everything goes wrong. For this to happen, mortgage rates would need to remain elevated, the economy slips into a recession, and demand for housing continues to soften. But even they admit that this would be extreme, and realistically, there's not much that would bring housing prices down a meaningful amount.

After all, a few days ago, the K Schiller index found that housing prices hit a brand new record high in December, and that's during a time when seasonally adjusted prices tend to be their lowest. What's even more remarkable is that all 20 major markets posted a year-over-year gain in 2023, with the lowest, Portland, coming in with a 0.3% increase. Because of that, they're forecasting a 5% increase in housing prices in 2024—far more optimistic than the 1.8% consensus—all thanks to sellers being locked in as mortgage rates move higher.

Even though this isn't necessarily good news for buyers, apparently, it's good news for the economy, at least according to the chief economist of Cerica, as he explains that house prices are the biggest component of household wealth for middle-income Americans. Their stabilization and then increase in 2023 helped Americans feel better about their household financial situation and boosted consumer confidence.

In terms of where they think the market's going to go, their expectation is that home prices will increase 2.3% in 2024, rising a bit slower than average hourly earnings as more newly built housing supply comes to market, and more homeowners who have been waiting to move or downsize start to take the plunge.

So what's going to happen then when rates eventually do drop? Well, in terms of when this is going to happen, as Realtor.com pointed out a week ago, we look for the average 30-year mortgage rate to fall to 6% by the end of 2024 and 5.75% by the end of 2025. This means that practically lower interest rates will allow buyers to qualify for a larger loan, and that in turn makes housing more affordable if values don't continue going higher.

For example, just consider that a buyer would be able to afford 17.7% more home if interest rates move from 7% to 5.5%. So that could put even more pressure on prices. Realtor.com even acknowledged this by saying that lower interest rates will fuel more competition among offers and will likely boost demand by pulling affordability-crunched buyers off the sidelines.

And if you want the scary statistics, it's even said that for every 1% drop in mortgage rates, there are 5 million more households that qualify for home ownership. This could lead to multiple offers, reduced inspection and appraisal contingencies, and a lot more patience required to eventually land a deal.

Or really, at the end of the day, you just need to pick your poison as a buyer. Would you rather have higher interest rates or higher competition in prices? Basically, the entire housing market is in a heads you win, tails you lose scenario for buyers. And that's why you need to be incredibly careful about what you purchase.

All of this means that the housing market still has a very long way to go to eventually return back to normal. According to Realtor.com, to close the existing 7.2 million home gap, the rate of single-family home construction would need to triple, and it would still take 4 to 5 years to meet demand. The way I see it, the only reasonable solution at this point is simple: multifamily housing like condos and apartments.

In fact, it was found that these properties accounted for 35% of housing starts in 2022 as climbing mortgage rates and prices dampened demand for single-family homes. In other words, single-family homes are costing too much to build and too much for buyers to afford, so multifamily homes could be a way to build at a cost and then pass those savings on to buyers.

Now personally, though, as far as what I think—someone who has worked full-time in real estate since 2008—I tend to agree that outside of a black swan event, there's probably not much out there that's going to force prices down to a meaningful amount. Sure, there's always the chance that interest rates decline, sellers choose to sell their homes because they want to finally move somewhere else, and interest rates don't hinder them from doing so, and then prices fall.

But the way things are looking right now, rates are unlikely to drop that fast. And even if they did, it's unclear how many sideline buyers out there are ready to make offers. That's why I think if you're looking to buy a home in the next few years, keep this in mind:

First, shop around your mortgage rate. Even though rates have gone up significantly, it doesn't mean you can't get a better deal with somebody else. So it doesn't hurt to ask. All you need to do is get a pre-approval letter, take that to another bank, and ask them to beat it. Then take that rate to another bank and ask them to beat that, and then repeat the process all over again with the first bank until eventually, you get the lowest price. If you don't believe me, it’s found that buyers who shop around their rate save an average of $84,000 over the lifetime of the loan. So there you go—it's like I just saved you $84,000. That's worth subscribing for and hitting the like button!

Second, don’t get attached to one property. Chances are eventually something else will come up if that's just as nice, so don't be afraid to negotiate and walk away if it doesn't make sense. Third, lock in a fixed-rate loan. I know there's a lot of excitement about being able to lock in a variable interest rate 5-year loan because rates are so much cheaper, and eventually interest rates are going to come back down, so you could refinance. But unless you're planning to flip the property, there is a lot less risk in locking in your rate long-term so that way, no matter what happens, your payment will stay the exact same. Plus, you could always refinance in the future if rates do come back down to a point that it makes sense.

And finally, fourth, only buy a home that you plan on living in for at least 7 to 10 years. This way, you'll be able to ride out any short-term fluctuations in the market until eventually, it hopefully recovers. Not to mention, with rents as inexpensive as they are right now when compared to buying, it'll take about 7 to 10 years to break even between the two.

So that's why you should make sure to hold as long as possible. And no matter what, get some free stocks down below in the description because I've got an affiliate link down there where you can get some free stocks—up to a few thousand. So I'll get a commission on that, but you also get some free stocks.

Thank you guys so much! Hope you enjoyed the video. Let me know what you think down below in the comments, and until next time!