It Started: The Housing Market Is Collapsing

Home prices are starting to fall. Buyers haven't been this pessimistic in a decade. The housing recession will probably end up being more severe.

What's up, Graham? It's Guys here. So as much as we joke about how Millennials are patiently waiting for the real estate market to collapse to be able to buy their first two-bedroom in Phoenix for $800,000, it finally happened. Housing prices have started to fall, with the latest data pointing to a housing recession as prices soften, demand slows down, and sales collapse at the fastest pace in almost two decades. Not to mention, Michael Bur just shared yet another cryptic warning on Twitter just moments before he sold his entire portfolio.

So let's explain objectively what's happening with the housing market, how much prices are declining, and whether or not you're living in one of the 123 markets that's expected to fall over the next year.

Although before we start, if you find this information helpful or even if you just came here for the memes, it would mean a lot to me if you hit the like button or subscribed if you haven't done that already. Doing that helps out the almighty YouTube algorithm tremendously, and is a thank you. Here's a story about how a seal broke into a house, traumatized a cat, and hung out on the couch.

All right, now in terms of the overall housing market, here's what you need to know. Because once you understand this, all the rest of it is going to make a lot of sense. When it comes to housing prices, almost everything is dictated by four main categories: supply, demand, interest rates, and the economy. The first two are fairly self-explanatory. If there's more demand than supply, then prices go up. If there's more supply than demand, then prices go down.

But to get a true indication of where the market is moving, you have to take into account the bigger picture. Because unlike the stock markets, home prices move a lot slower, and if you pay close attention, the data will tell you exactly what's beginning to happen. See, once a month, the National Association of Realtors publishes their data on the latest market updates, home pricing, and mortgage trends to give their insights as to the direction of our economy. This month confirmed what most people thought.

On the most basic level, we have the numbers that everyone is talking about: mortgage demand fell to a 22-year low as rates almost doubled from a year ago. Mortgage applications are 18% lower than the same week in 2021, and refinances saw an 83% drop year-over-year. But the one piece of data that matters the most is that for the first time since prior to the pandemic, home prices have declined month over month, with prices now $10,000 lower than they were just 30 days ago.

As they explain, the ongoing sales decline reflects the impact of higher mortgage rates, which peaked at 6% in early June, before now declining back to 5%. This increase severely impacted the number of buyers in the market, with total housing inventory having increased 4.8% for the month prior. Meaning, with fewer homes being sold, there's more available in the market for buyers to choose from.

However, even though they admit that we're witnessing a housing recession in terms of declining home sales and home building, nearly 40% of homes are still selling at full list price, and properties were staying on the market for a record low of just 14 days in July, suggesting that even though prices are beginning to fall, they're not dropping as fast as people would expect.

The reason, you might ask? Well, like I explained before in a previous video, there's a huge difference between what we call nominal housing prices and real housing prices. And if that sounds confusing, then you really need to understand exactly what this is because this is going to make a huge difference in terms of what we wind up seeing over these next few years.

And it all really boils down to this: on the surface, most people pay attention to nominal housing prices, which is simply how much does it cost today relative to how much it was in the past. It's how we track almost everything from stock prices, cryptocurrency, grocery items, used car prices, and even the McDonald's Big Mac.

But what everybody forgets is that if you want to get an accurate understanding about exactly how much something goes up in price, you also have to take into account inflation. By taking a home's price growth and then subtracting inflation, you're getting a much better understanding in terms of exactly how much your money is growing—or apparently not growing, depending on which way you look at it.

Even more confusing is that up until 1970, home prices were essentially flat and were only driven higher by the need for larger homes, loosened policy changes, lower interest rates, and the one you've all been waiting for: a lot of money printing. As you're about to see, in an effort to boost the economy after the 2008 Great Financial Crisis, the Federal Reserve began to buy and hold assets to keep interest rates low, thereby restoring confidence to the market.

But there was a problem. As soon as they began to reduce their balance sheet in 2018, stock prices dropped 20%, and home prices began to fall. Now, initially, the balance sheet reduction was likely meant to last through 2020, but then the pandemic hit, and a record amount of money was then reinjected back into the economy to keep it afloat. However, since April, they've been slowly selling off their holdings once again.

So what does this mean for the housing markets, and could another buying opportunity be coming soon to a market near you?

All right, now in terms of the future of housing prices, look no further than Zillow, who's identified 123 markets that they believe will see a decline throughout the next year. The largest drop so far was San Jose, which recently fell 42% month over month, along with Phoenix, Arizona, San Francisco, Austin, Texas, Sacramento, and San Diego, among others.

While areas like Miami, Richmond, and Memphis, Tennessee, actually saw a slight increase. However, even though this is good news for the stability of the housing market, with most areas expected to increase, the one issue that people need to be made aware of is inventory. As Zillow notes, cooling competition among buyers has resulted in homes spending more time on the market before selling. As a result, 18.6% of sellers reduced their list price in July, which was 7.5% higher than a year prior and more than double what we saw back in April.

On top of that, Zillow revised their forecast downwards to show home price growth at just 2.2% throughout the next 12 months, which, when adjusted for inflation, is probably going to mean that real price growth over the next year is going to be negative. And Zillow is not the only one who believes this either. Redin noted that sellers backed off, with many hesitant to sell for less than they would have gotten at the height of the pandemic.

Moody's Analytics also believes that a large portion of the market is going to see a decline over the next few years, with the most at-risk markets being the ones that saw the most appreciation since the start of the pandemic. They also estimate that national housing prices are overvalued by 24.7%, which means that US housing prices are the most detached that they've been from fundamentals since the housing bubble.

Although in terms of whether home prices are going to collapse, well, not exactly. According to the Bankrate Chief Economist, housing prices are likely going to cool down rather than crash because of five factors that are keeping prices relatively stable.

One, low inventory will likely continue, and even though more homes are coming on the market, it still dwarfs in comparison to what we saw prior to the pandemic.

Two, material costs have increased, and builders can't build enough to keep up with demand. Sure, he acknowledges that they're selling off existing inventory, but if the market falls, it might not make sense for them to build at the same capacity as they did before.

Three, demographics are beginning to change, with people valuing more space as they choose to work from home or relocate to other areas while they work remotely.

Four, lending standards are still strict, so there's very little concern that buyers won't be able to make their payments, at least for the next few years.

And finally, five, most homeowners have plenty of equity in their homes, so there's very little risk of them losing it to foreclosure, and they're very likely to stay where they are, especially if they've locked in a low interest rate.

CoreLogic also agrees with this, with the belief that home prices could still go up by another 42% year-over-year. However, I have to say the best analysis that I could find came from none other than Robert Schiller, who correctly predicted the 2011.com crash along with the 2008 Great Financial Crisis. Recently, he said that he believes the housing market is in trouble as he points out home prices haven't fallen since the 2007-2009 recession. Existing home sales are down, permits are down. It might not be catastrophic, but prices are expected to fall by something a little over 10% by 2024 or 2025. That's a good estimate.

Now from there, he follows up with three factors to keep an eye on. The first one is speculation. This is seen as investors and developers rushed to buy into property with the assumption that they'll be able to sell it for more in the future. As of now, we've seen a record number of investors enter the market with plenty of new homes under construction.

Next after that, we have second overvaluation. This is signaled by a price that exceeds what ordinary incomes could support. And we've hit that point, according to some of the largest data firms in the US.

And finally, third, we have the bursting of the bubble. Even though Robert Schiller believes that we could see a 10% drop throughout national home prices, most experts don't agree and instead they think we'll see more modest declines. To back this up, in 2007, mortgage debt service payments accounted for 7.2% of US disposable income. Now, it's just 3.8%, which leads people to believe that even though prices are high, it doesn't necessarily mean that they're going to crash.

On top of that, you also have investors like Michael Bur, who make the point that doomsday scenarios rarely ever happen because of debt, implying that the government has the ability to simply print their way out of any disaster, which causes things to last a lot longer than you would expect.

So in terms of my own thoughts, everything seems to be pointing in the direction that yes, the housing market is slowing down, prices are softening, and there's a lot less competition if you're a buyer. But to get a true indication of which direction the housing market is going, you have to take into account inflation. And again, that's what so many people forget.

For example, if Zillow predicts that housing prices will increase by 2.4% but inflation is 7%, that means that housing prices just fell by 4.6% even though they still end up costing more. This is exactly what happened throughout the 1970s when real prices fell by 11% over 3 years, and that needs to be considered. That's why I believe that unless you live in a highly speculative market, most likely, a price decline is going to be healthy, and it might be a good opportunity to negotiate a price in a property that's otherwise perfect.

Besides that, though, I probably wouldn't be worried about a catastrophic housing collapse. Although I would personally only recommend to buy a property that you intend on keeping for at least 7 to 10 years. That way, no matter what happens in the short term, you're going to be okay, and you're not going to be at the mercy of doom patrol.

So with that said, you guys, thank you so much for watching. As always, feel free to add me on Instagram or subscribe. And if you want even more information on the housing market, feel free to check out my newsletter down below in the description. It's totally free, it goes out twice a week—you may as well sign up for that too. Thank you so much for watching, and until next time.