It’s Over: The Housing Bubble Just Popped

Hey guys! So really quick, I want to address a previous controversy. In a previous video, I tore up this hundred dollar bill to illustrate how the FED removes money from the economy. I understand that this was upsetting to some viewers, but rest assured no real money was harmed in the making of these videos. In fact, the only things harmed were these, uh, fake 100 dollar bills from Amazon that you could buy for pretty cheap.

So, uh, now that we've settled that, what's up Grandma? It's guys here, and well, they've done it! For the first time in a long time, housing prices are beginning to cool down with something we have not seen since 2008: a price drop. That's right! CNBC now reports that sellers are beginning to lower their asking prices as buyers are paying 38% more for their monthly mortgage payment than a year ago. Right as the Dallas Federal Reserve calls for a housing market bubble.

So, given how unaffordable the housing market has become—with record low inventory, buyers willing to pay a million dollars over asking, and others offering up the name of their first born child—let's discuss the new developments in the housing market, what experts predict is going to happen over the next one to three years, why housing prices are beginning to drop, and finally how Millennials have solved the retirement crisis. Because this is surprising even to me, and I thought I'd seen it all! Anyway, let's talk about all of that and more on today's episode of "Am I Wearing Pants?" to which the answer is I'm not going to tell you.

All right, so in terms of where all this craziness starts, here's what you need to know because these next 60 seconds should be able to summarize everything perfectly. First, the March 2020 interest rate reduction allowed homeowners to lower their monthly payments while simultaneously giving them more purchasing power at the exact same time, thereby causing prices to go up. Second, the shutdown resulted in a record low number of homes on the market and with a severely reduced supply, that leftover inventory was bid to an even higher amount.

Third, supply chain bottlenecks meant that housing materials took longer to arrive. They were more expensive, and consequently, that cost gets passed on to the consumer, which, you guessed it, causes even higher prices. Fourth, labor shortages also fed into the overall cost of housing because with fewer people available to do the work, they either charged more for their time or fewer homes were built, leading, of course, to less inventory.

All of that happening at the exact same time led to a very unique situation where housing prices rose to their fastest level—and well, pretty much ever. But that could soon be coming to an end because for the first time in a very long time, we're beginning to see a new shift in the market.

Here's what's being discussed: throughout the last few weeks, the Federal Reserve has been on a mission to raise interest rates and halt bond buying in an effort to combat high inflation. But the very obvious and very quick consequence of that is higher interest rates for everybody on everything. In fact, mortgage rates have risen at their fastest pace in 30 years, and the expectation is that they're about to go even higher, much, much higher.

Although the biggest impact in relation to this video is going to be home affordability. To break it down a little bit further, here's what I mean: if you're in the market for a home and you've been approved for a fifteen hundred dollar a month payment, you could afford a 350,000 dollar loan at a 3% interest rate. However, if rates increase to 5%, the maximum you could borrow is now 275,000 dollars, which means you'll either need a much bigger down payment or you're buying a less expensive home.

So, as you would expect, with interest rates beginning to increase, home values are beginning to take a hit. As a result, sellers are doing the unthinkable by lowering their prices. CNBC reports that the number of new listings last week jumped by 8% right as the average borrower is paying 38% more than they would for the same home a year ago. In response to that, 12% of homes had a price drop, which is 9% higher than a year ago.

With these kinds of drops occurring faster each month, Redfin went on record to say it goes to show that there's a limit to sellers’ power. There's still way more demand than supply, and buyers are still sweating, but sellers can no longer overprice their home and still expect buyers to clamor at their door.

However, we should just cut to the real juicy story here—with the warning from the Dallas Federal Reserve that we have entered a housing bubble. Now, first of all, it's important to recognize that just because something goes up in price doesn't automatically make it a bubble. After all, there is an element of supply and demand, increased cost in a local job market that could positively influence prices higher.

But in this case, the Dallas Federal Reserve has warned that the housing market has diverged from market fundamentals where there is widespread belief that today's robust price increases will continue. Or in other words, when a buyer purchases a home only because they believe that prices will go even higher, that is a sign of irrational exuberance. And that is the issue that we're seeing today in the market.

As they say, this can't continue—pushing prices beyond their fundamentals until investors become cautious, policymakers intervene, the flow of money into housing dries up, and a housing correction or even a bust occurs. So to look for a tipping point, they search for signs where housing prices have exceeded what economic fundamentals could justify. And what they found was quite surprising: they showed that from 1999 through 2008, the market experienced irrational exuberance just like it's showing now from 2020 until who knows how long.

Of course, this data means absolutely nothing without the analysis behind it. So to call it a bubble, they look for an imbalance between the rental to home ownership costs along with price to income to determine whether or not we're in this irrational exuberance phase. And the answer is yes…kind of.

Even though there's an imbalance between the price to rent ratio, price to income is higher than normal but still not irrationally exuberant. They explain that recent patterns may prove to be a less useful measure of home affordability because low interest rates and stimulus allowed more money to be spent. Although overall, they still did come on record to say that they do see abnormal housing behavior for the first time since the early 2000s simply because prices are increasingly out of step with fundamentals.

Now, on the bright side, they do admit that household balance sheets appear in better shape, and excessive borrowing doesn't appear to be fueling the housing market boom. So in terms of what the experts believe is going to happen in the housing market over the next few years and why Millennials have solved the retirement crisis with cryptocurrency, here's what you need to know.

All right, so now in terms of what the experts believe is going to happen within the housing market: First, they believe that Millennials and Gen Z are going to keep the market strong. They reported that most first-time home buyers are under the age of 40, which means the buyer pool is deep and demand will likely remain elevated—not to mention housing inventory has been on a steady decline since the early 1990s, so the chance of more homes getting built is probably not going to happen anytime soon.

Second, supply can't keep up with demand. They say that the supply-demand imbalance is the primary reason home prices have escalated so rapidly. After not building nearly enough homes for over a decade, it'll take home builders several more years at least to add more supply to the market.

Third, unlike 2008, buyers are a lot less likely to default on their mortgage today. It was found that more than 76% of mortgages go to buyers with a credit score exceeding 760. Lending standards have increased, and homeowner equity is at a record high. This means that the chance of a foreclosure or an underwater loan is relatively slim, and even if the market does decline, homeowners are not going to be forced to sell.

Fourth, a declining economy could affect the housing market. They mentioned that rising interest rates could put a damper on consumer spending, which increases the likelihood of a recession. Energy and commodity prices from the ongoing crisis with Russia-Ukraine could also have an impact, as consumer confidence drops to a 10-year low.

Fifth, most predictions indicate that housing prices will continue to rise but at a slower pace. For instance, the Mortgage Bankers Association predicts a 4.8% increase throughout 2022. Core Logic expects a 6% increase, and Realtor.com predicts a 2.9% increase. Now, granted, inflation could very well be higher than those numbers, so we might actually see a net decline. But regardless, these levels appear to stay even though interest rates are expected to continue going up.

That's why I believe the biggest deterrent for housing prices is simply going to be how quickly interests rates are going up, how much inventory is on the market, and how many other people want to buy the exact same home that I do. Obviously, this type of real estate market cannot keep going forever, but at least for the next few years, I could see housing prices remaining fairly robust as long as there's limited inventory on the market.

But just like Millennials are now the largest group of first-time home buyers, they're also taking a non-traditional approach to solving the retirement crisis with cryptocurrency. Yeah, no seriously! A survey from Investopedia found that more Millennials own cryptocurrency than stocks, and 28% say that they're planning to rely on their cryptocurrencies to support them in retirement. On top of that, Millennials also expect to retire three years sooner than Gen X and seven years sooner than Baby Boomers.

Not to mention, small side tangent here, but 45% of Gen Z and 40% of Millennials turn to YouTube for their financial education. How's it going, my fellow YouTube connoisseurs? Anyway, even though Americans feel fairly confident in their knowledge of investing, only 25% feel like they have a solid understanding of cryptocurrencies.

And when asked which asset they expect to yield the greatest returns over the next decade, all three generations said cryptocurrency, followed by stocks. It's also interesting that Gen Z mentioned that they felt the least educated when it came to taxes. 34% of them said that it was the most important financial skill they could learn today, which our sponsor Coin Tracker can help with down below in the description.

Anyway, when it comes to this, the younger generation said that they're depending on generating returns from cryptocurrency to build wealth and fund their retirement, which Investopedia mentioned was concerning given the lack of education around investing in crypto and the fact it's still not regulated by the industry.

But in terms of my own thoughts on this, it's really hard to argue with the data. Since the great financial crisis, Bitcoin and Ethereum have been the top returning assets of the decade. And even though some believe this to be a manic fad, as more and more countries, corporations, and hedge funds begin to use it, the price so far just keeps getting higher.

So, it's very apparent why people under the age of 40 see this as a huge opportunity and why they believe this to be a good source for retirement. Plus, studies show that you do not need a huge allocation to Bitcoin to see a positive impact in your portfolio. In fact, Fidelity found that just a 5% allocation to Bitcoin has boosted the cumulative return of a traditional portfolio by 65% since 2014.

Although in terms of my own thoughts on this, relying on cryptocurrency as a source of retirement is incredibly risky. As much as I'm a fan of Bitcoin and Ethereum, and as much as I see them as a part of a well-balanced portfolio, expecting them to continue increasing at the same capacity would be almost impossible. Even in the last eight years, seeing another 12,000 to 800% return would place Bitcoin at 5,376,000 dollars by 2030, which I don't want to say is impossible.

But listen, I'm not an expert on cryptocurrency by any means. But it would venture to say that the higher the price grows, the more stable and less volatile it'll become, and the slower it'll increase in price. As far as housing prices for sellers, higher interest rates will absolutely have an impact on your home's value.

There's only so high that prices could go until eventually you hit a wall. But for buyers, the bad news is that even though you might get a discount in the home's purchase price, your monthly payment could go up even more because of higher rates, and that needs to be considered.

Now, at the end of the day, as long as you don't intend to sell your house in the next seven to ten years, it's probably a good idea to stay patient, wait for the right house, and don't pay more than what your budget can support. Even for myself, I am actively looking to buy. Higher rates are causing sellers to re-evaluate their asking prices, but I know to take my time, wait for the right deal, and only purchase something once the seller subscribes. If they have not done that already, because it helps the channel tremendously.

So, with that said, you guys, thank you so much for watching! Also, make sure to add me on Instagram or on my second channel, The Graham Stephan Show. Thank you so much for watching, and until next time!