The Housing Market Is Going INSANE (40 Year Mortgages)

What's up guys, it's Graham here. So the banking industry is in deep trouble again, except this time it's the entire housing market at risk. In just the last few days, bank lending has fallen by the largest amount ever on record, and the situation is getting so bad the banks are now losing money on every mortgage they finance, which has never happened before in history. On top of that, this also comes at the same time as a looming commercial real estate crisis, the absolutely unheard of introduction of 40-year mortgages to encourage new buyers to enter the market, and another massive move towards money market funds, which Barron believes could be the next bubble. That's why we got to break down exactly what this means, what's actually starting to happen throughout the housing market, if 40-year mortgages are going to cost home prices to go back up, and what you could do about this to potentially save a lot of money.

On today's episode, make sure to hide your handicap registration if you plan to rob a bank, and yes, she actually got caught because she parked in the handicap spot with her placard on display. Although before we start, if you appreciate all the information and research that goes into making a video like this, it does help out tremendously if you subscribe for the YouTube algorithm. Or, if you want updates like this before I'm able to make a full video on them, check out my newsletter down below in the description. It'll be one of the first few links, so thank you guys so much! And also, a big thank you to public.com for sponsoring this video, but more on that later.

Alright, so in terms of where all of this starts, look no further than the banking industry because, for the most part, they've stopped lending money. See, all of this begins about a month ago at the collapse of three national banks: Silvergate, Signature, and the most prominent, Silicon Valley Bank. With the rapid rise of interest rates from the Federal Reserve, bank deposits have largely been under a lot of stress because they don't just take your money and then stuff it under a mattress; instead, they invest it. Essentially, this meant that Silicon Valley Bank, along with a lot of other major banks, had all of their customers' money, but it's illiquid in the event that everyone wants to cash out at the exact same time, which is exactly what ended up happening.

Despite the Federal Reserve's best attempts at calming the markets, regional bank stocks went into a free fall, and the international Credit Suisse began experiencing similar difficulties while customers withdrew billions of dollars, contributing to the bank's largest annual loss since the financial crisis in 2008. However, what people found the most remarkable was that Credit Suisse had just received a clean bill of health from regulators, and then it took them less than a week to completely collapse, leaving everybody to wonder who's next.

Well, in this case, it's not who, but what, and that what is lending. According to a recent report from Bloomberg, the last two weeks of March saw the largest contraction in lending on record, with almost 105 billion dollars erased from the market. In addition to that, it said that trillions of dollars are draining out of banks and into money market funds. That weakens the banks, not to mention fear that the banks are at risk is driving this trend and thus making the banks even weaker. The overall effect of this is that when faith in banks declines, so does lending, and the net result is a huge reduction in terms of what a bank is willing to give.

We're basically in, more simple terms, banks believe that the market is going down, their borrowers are going to be unlikely to pay them back, and that means they have to be very careful in terms of who they lend their money to, which means they have to tighten their checkbook. In fact, in the last week, the American Bankers Association index of credit conditions felt the lowest level since the onset of the pandemic, indicating bank economists see credit conditions weakening over the next six months. Although it doesn't stop there because in an effort to shore up additional demand, they're bringing something that I never thought we would see, and that would be the 40-year mortgage.

Right now, here's the scary truth: with interest rates rising, today's payments are 29% higher than a year ago, which was already 39% higher than the year prior. This means that the average homeowner is paying 50 to 65 percent more today than they could have paid two years ago just because interest rates are no longer under three percent. Obviously, this has severely impacted a person's ability to finance a home, and the end result is that mortgage demand has fallen to a 28-year low while everyone else is already locked in, refusing to sell. But there is a bit of a solution; on April 7th, the Federal Housing Administration announced that they would begin rolling out 40-year mortgages, except with a bit of a twist.

Although before we go into exactly what that is, here's a bit of a background on how it'll work. Anytime you get a mortgage, you'll generally have to choose between three different options. One would be a variable interest rate where you could lock in today for a temporary period, and then that way, it'll fluctuate until eventually you pay off your home. Two would be a 30-year term where you pay a slightly higher interest rate, but your monthly payment is lower because you could spread out your loan over three decades. And three would be a 15-year term where your payment's going to be about 30 percent higher, but your overall interest rate is lower, and you get to pay off your home in half the time.

But with prices having risen so unbelievably high, a 40-year mortgage would take the typical $350,000 home at a six and a half percent interest rate and lower that from $2,212 a month down to $2,049, essentially allowing you to purchase five percent more home or lower your monthly payment by $163 a month. This way, instead of paying $446,000 in total interest, you would have to pay $633,000, all for the low cost of saving $163 a month.

Okay, in all seriousness, I've seen a lot of posts like this, and they're not exactly wrong. A 40-year mortgage barely reduces the payments; it results in 10 more years of having a mortgage, and in my opinion, it's an absolutely ridiculous offer to even entertain. But don't you worry! Remember that twist I mentioned earlier? Well, as of now, the 40-year payment is only available to people who have fallen behind on their mortgage and need a way to save a little bit of extra money. In those cases, the FHA is allowed to take their loan and extend out the remaining term for another 40 years, essentially allowing them to lower their monthly payment and hopefully avoid foreclosure.

So basically, in order to qualify for this, you gotta be delinquent on your loan, approved for a loan modification, and be able to resume payments on a 40-year term. So it's not like you could just go to your bank and get this for a brand new purchase that you plan on making in the next few months. Pretty much the way I see it, this is a way for banks to avoid the costs and hassle of a foreclosure while being able to keep a property owner in their home for a slightly reduced cost. Although personally, I think it's only a matter of time until eventually it's an option that's available to everybody, including buyers who would be able to take out a loan that could very well outlive them, simply because home prices are getting out of control.

But you know what? I'll leave that to the politicians, especially when banks are losing money on every mortgage they issue. However, nothing beats California, who just took home ownership to the next level. Although before we go into that, as you probably noticed, interest rates have continued going higher, and even though that makes borrowing more expensive, there can be some benefits. For example, not only are major indexes less expensive today than they were a year ago, but treasury bills are also paying as high as 5 percent interest depending on the term. That means that now could be a great time to take advantage of the market, which our sponsor, public.com, wants to help with.

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So if you're interested, feel free to use the link down below in the description or visit public.com/gram to get started today. And now, with that said, let's get back to the video. Look, we all know that California is one of the most expensive real estate markets in the entire world. Like, how on Earth are people expected to come up with a 20% down payment when one in three residents pays more than half of their income in rent? Thankfully, there is, or I guess was, a solution for this called the California Dream For All Shared Appreciation Loan. I know, what a name, right?

Anyway, this new program would give first-time buyers a 20% down payment loan to go and purchase a property, and after you close, the new buyer would then pay back the loan and have to pay 20% of profits when they eventually sold. For example, if you buy a property for $500,000 while borrowing $100,000 in the program, if the home is one day sold for $640,000, you'd pay back the original loan in addition to 20% of the profits, leaving you with whatever's left over. Well, guess what? The program was so popular that the entire $300 million was gone in 11 days, and with 2,300 buyers recently approved, that's an average of $133,000 for each and every person at a time where real estate is the least affordable it's ever been.

Of course, the California Real Estate Association is urging for more funds to be added, but to me, I can't help but feel that this sets a very dangerous precedent. If home prices continue going higher, down payments will just continue to be subsidized by the state, even if that entitles them to 20% of profits. Or even worse, all of a sudden, it creates a financial incentive for the state to ensure that housing values don't go down, because otherwise their future appreciation is going to be at risk. The real winners that I see are existing homeowners because all of a sudden 2,300 more buyers have an excess of $130,000 more at their disposal. Basically, this just increases demand without increasing supply.

Not to mention, if the market continues going down, it could put buyers in a very precarious position, especially when they have little to none of their own money in the deal. One lender on Reddit even said that because I could structure this with 15% down and use the rest to cover closing costs, that means I could put people into homes with a life-saving thing of $1,000 or less if I choose to. Now, obviously, income requirements are a lot more strict, but if that person loses their job for an extended period of time, they're screwed. Personally, though, in terms of my own thoughts, as a real estate agent, real estate investor, and landlord, I think the 40-year mortgages are more like a Hail Mary to save the housing market from foreclosures than it is about saving homeowners on cost.

I tend to believe that the housing market is in a precarious spot, and if lenders could avoid defaults by extending out the term, then so be it. But let's not pretend that this is in the best interest of the homeowner. For them, I think it's a terrible choice to extend out your mortgage for 10 years just to save about five to seven percent in your payments. Financially, it just makes no sense unless you could recast your mortgage at an interest rate below four and a half percent, in which case I'm all for it. As far as everything else though, it's understandable that lending is drying up; businesses are not expanding like they used to, borrowing is extremely expensive, and people have to be very careful about what they commit themselves to.

I personally believe that now is a great time to reduce your overhead, pay down expensive debts, and keep cash on the sidelines in the event of an emergency. So overextending yourself right now is probably not a good idea considering the risk and cost. But the real impact that I see is probably going to be seen throughout the commercial real estate market, which is entirely dictated by the rate of return each property generates. That means if a building nets a hundred thousand dollars a year, investors were previously paying 2.2 million dollars because that worked out to be a four and a half percent return, which was insanely good when interest rates were low and every other asset was paying out one percent.

But now, when interest rates increased and treasuries are paying a guaranteed five percent, those very same commercial properties need to sell at an eight percent return to entice investors to buy them, which means that very same hundred thousand dollar building might be worth $1,250,000 in today's market. Now, obviously, this is a really simplified example, and you'd have to take into account 1031 exchanges and development costs that would keep prices slightly higher, but the math remains the same: values just have to drop to make financial sense, which is why it's said that a commercial real estate crisis could be looming.

That's why I believe it's best to stay educated on what's happening in the market, continue saving and investing as much as you can, and make sure that you have a steady income. Now, it's definitely not the time to begin scaling back, and as long as you carry forward, there could be some really good buying opportunities that come up soon in a market near you. 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 that free stock worth all the way up to a thousand dollars with our paid sponsor, public.com, down below in the description with the code Graham when you make a deposit. Enjoy! Thank you so much for watching, and until next time.