How The Housing Crash Will Happen

What's up kids, it's Dad here! Okay, there we go, I said it. Anyway, I think it's time we address a topic that I'm sure a lot of people have considered recently, and that would be the next real estate crash. After all, I think it's no surprise that in the last 12 months a lot has happened.

Just recently, it was reported that real estate prices have hit another all-time record high across nearly the entire country. Housing inventory has hit an all-time record low, and buyers are left paying significantly over asking just for a chance to get the home they want. However, it's kind of strange because during the same time as all of that, 2.6 million homeowners are still in forbearance; up to 20 million tenants are still behind in the rent. The biggest wild card from all of this is that interest rates are now beginning to go up.

Now here's the thing: throughout history, there's always been a boom and bust cycle of the real estate market, and at some point in the future, there's going to be another real estate crash. Now, even though we don't know exactly when and what will cause it, there are some lessons that we could use from previous real estate downturns that anyone could apply today.

So let's talk about exactly what's going on right now, the chance of another crash happening sometime soon, how bad it would be if it were to happen, and then precisely what you could do about it to make sure you don't lose money, and instead, to make sure you make money. Because that's what this channel is all about!

As with getting your two free stocks down below in the description. But really quick, before we talk about that, I gotta share a quick message from my cat, Ramsay.

"Hey guys! I'll just make this super quick. I told Grammy needs to give me a treat if this video gets 69,000 likes, and I really want a treat. So make sure to crash that like button for the YouTube algorithm so I could stop trying to sneak into the treat bag late at night when everyone is sleeping. Thanks so much! And now let's get back to the video."

Alright, so in order to figure out how to best prepare for something like this, it's really important to understand the severity of the real estate crashes that have happened in the past. Because even though it's easy to think that you could lose everything if the market goes down and you're underwater on your loan, and then the bank forecloses on you, chances are most market crashes are not as catastrophic as you might think.

Like one of the first major real estate crashes happened in the year of, you guessed it, 1929. Just like the stock market peaked from record-high speculation and borrowed money, the real estate market fell alongside everything else. Real estate values plummeted by nearly 67%, and it took nearly three decades for real estate values to recover back to their pre-crash levels.

Then again, real estate encountered more difficulty in the 1990s. Until then, the real estate market was seeing a huge increase from new lending options, inflation, and a growing population. But the savings and loan crisis caused interest rates to go up, new constructions ended up going down, and prices remained fairly flat until about 1997.

And now, the most recent crash that almost all of us should remember is the housing collapse of 2008. This was caused by too many people speculating on the value of real estate fueled by easy access to money and adjustable-rate mortgages that allowed anyone to buy a home as long as they could just make the introductory payments.

However, a lot of those mortgages had a sudden balloon payment built in, which would cause the price of that mortgage to skyrocket after a few years. And as we all know, that turned out to be a disaster. But as more homeowners began defaulting on their payments when they weren't able to sell, that then fell back on the bank, who wasn't able to pay the investors who bought the loans to begin with, and that caused a near financial collapse.

Depending on the location, housing prices dropped anywhere from 30 to 62%. A new bailout was put in place, but now again in 2021, we are back at another record all-time high. However, the interesting part throughout all of this is that with the exception of 1929 and 2008, for the most part, the prices of housing have been fairly resilient.

Like during and after World War II in the 1940s, the price of real estate ended up booming from a surge in demand. Then during the 1970s stagflation era, where the stock market went down, real estate prices ended up going up because of inflation. After that, during the 1980s recession, real estate went up in price four and a half percent because inflation was still high.

The 1990s certainly saw some real estate markets going down in value, but for the most part, that was limited to no more than about 10%. The dot-com bubble also had very little effect on real estate values, as interest rates continued going down. In fact, in 2001, home prices climbed to, at the time, an all-time high.

But now we have some different challenges that will directly impact the real estate market. And when it comes to the issues that might happen today, we have three obstacles to overcome. The first is that right now, 2.6 million homeowners are in mortgage forbearance, meaning they've temporarily paused their mortgage payments until the illness subsides.

The concern right now is that if those 2.6 million homeowners are unable to make their mortgage payments once the forbearance period is up, they risk going into foreclosure. If that happens, there could be a wave of foreclosures all coming on the market at the exact same time. The other belief is that homeowners might postpone listing their homes in the market while they're not making their payments, thereby further restricting the available supply of housing on the market and driving up prices even further.

But the good news is that at least as of right now, the mortgage forbearance rate has been steadily decreasing month over month, which suggests that many homeowners just took mortgage forbearance out of an abundance of caution because why not? And now, as the economy is beginning to recover, they're starting to make their payments again. The new stimulus plan would also extend mortgage forbearance and foreclosures through June.

So even though it might be the equivalent of just kicking the can a little bit further down the road, it does give people more time to financially recover and get back on their feet. The second concern has to do with the 20 million tenants at risk of eviction. However, I just gotta call this one out for what it is, and that would be false.

I looked into this one further, and they got that data just from a survey that asked people how confident they were that they would be able to make the payment next month. In that survey, they estimated that 14.2 million households don't have 100% confidence that they could pay their rent next month, and that translates into over 20 million renters.

But even though that makes a great headline, that's not entirely factual. Just because you don't have 100% confidence you can make your rent payment doesn't mean you're not still gonna make your rent payment. In fact, if we go and use actual data from the National Multi-Family Housing Council (go and say that five times), we could see that over 93% of tenants are still paying their rent in full by the end of each month.

However, even though that might not be as bad as some of the articles make it out to be, the tenants who are behind on the rent are a legitimate concern. When it comes to that, the average delinquent renter is nearly four months behind on their payments; they owe $5,600, and in total, $57 billion of rent has gone unpaid.

Now that was partially addressed in the upcoming stimulus package, which gives $20 billion in rental assistance, although we'll see how that plays out and how effective that actually is in helping both tenants and landlords. Finally, the third concern: interest rates are beginning to go up. The higher the interest rates go, the more it costs to buy real estate, which means the more pressure there is for home prices to come down accordingly.

Now, the counterargument to this is that interest rates only go up when the economy is doing well, which could inadvertently also benefit real estate. But right now, it's still too early to see what type of effect this is going to have on housing values, if anything.

So given all the uncertainty out there and some of the variables that come with real estate values, here's how you could best prepare for another housing downturn. Because, like I said, at some point in the future, the housing market is going to be going down, and it's extremely important that you're prepared for this so that way you can do your best to make sure you don't lose any money.

Now the first thing that I would recommend that everybody do is get a 30-year mortgage. Now, I know what most people would think when they hear this, but "Ma'am, you pay more interest on a 30-year mortgage than a 15-year mortgage! Why would you cost us more money? Why would you mislead us like this, Grand? This is a sin!" And yeah, on the surface, it does look like you're going to be paying more interest on a 30-year mortgage, but in reality, that's actually going to help you save more money.

That is because the 30-year interest rates are at the lowest point they've ever been in history. When you consider that your investment returns are probably going to be way higher than what you pay in interest on a mortgage, it starts making a lot of sense not to pay off your mortgage early and instead invest the difference.

Not to mention, inflation makes your mortgage easier to pay off with future dollars, so actually, the longer you keep it, the cheaper and easier it becomes to pay off. But the 30-year mortgage also gives you a huge advantage over any other option out there, and that would be flexibility. Listen, there's nothing stopping you from paying off a 30-year mortgage in 15 years; just make a higher payment every month, and, uh, boom! It's the same thing!

But if something comes up and you need to pay less, a 30-year mortgage gives you more flexibility to make the minimum payment and then save the difference instead. That's why I always recommend locking yourself into a 30-year mortgage because during a downturn you have a choice to pay a lower amount than if you had locked yourself into a 15-year mortgage.

A second thing, speaking of all of that: always make sure you get a fixed interest rate. Right now, with interest rates so low, it makes sense to lock in a fixed payment so that way your payment stays exactly the same the entire time. By doing this, you're going to know with 100% certainty what your mortgage payment is going to be over the next 30 years, and by doing so, you could plan accordingly.

This prevents your payments from suddenly being increased five to seven years from now if interest rates are higher in the future, as they are today, which they probably will be. And if that were to happen at the same time the real estate market falls down, not only is that going to be costing you more money, but the market value of that home is going to be falling alongside with it. That's why you should just go ahead and lock in your interest rate, and then no matter what happens, your payment is going to be staying the exact same until it's entirely paid off.

The third, you could also refinance your home to save more money. Most likely, if you own a home already, you've either looked into this or you've done it, but if you haven't and you have the opportunity to refinance your home and save more money, then do it. Doing this allows you to get a brand new loan that replaces your current loan, and most likely, the new loan is going to be at a substantially lower interest rate than what you're currently paying, thereby saving you more money in the process.

Like for myself, in the last year, I've been able to refinance two of my mortgages, saving me about a thousand dollars a month for maybe about a day's worth of work. And also in doing so, I was able to lock in my interest rate for the next 30 years. Doing that makes your payments that much more affordable in the event the market goes down or you lose your job, or something else happens that would affect your ability to repay back that mortgage.

Now fourth, this is a really important one: avoid selling your house if you don't need to. The truth is, real estate values only matter if you intend on selling. So everything I've mentioned so far is really just designed to make your payments as low and predictable as possible so you won't need to sell. And ideally, by not selling, you'll have the time to ride out any short-term fluctuations in the price until eventually things recover.

The fifth is to always make sure to keep an emergency fund on the sidelines just in case you need it. The reality is, with real estate, anything could come up at any time that will end up costing you money. Like, for example, you might go an entire year without anything going wrong, and then one morning you'll wake up and it's $2,300 to fix an HVAC unit. That just happened to me in a rental unit.

The truth is, with real estate, you're still going to have a fixed cost every single month with owning a property, like property taxes and insurance, that needs to be paid. So my recommendation is to always keep a few months' worth of your property's expenses saved up in cash on the sidelines at all times. That way, should something come up, you're always going to have the money to pay for it.

And six, if you haven't done this already, it's incredibly important to get your two free stocks down below in the description because WeBull is going to be giving you two free stocks when you deposit a hundred dollars on the platform, and those stocks could be worth all the way up to $1,850, which is pretty much like free money if you haven't done that yet. So the link to that is down below in the description.

But anyway, for real, number six is to only buy a home that you know you could comfortably afford. Don't bite off more than you could chew. Don't overextend yourself because the house is awesome. Instead, get something that's not going to cost you more than what you could reasonably afford. Generally, I recommend your housing payment not exceed 25% of your income, and maybe on the high end, 33%. The lower your payment is in relation to how much money you make, the safer it's going to be in the event of a downturn and something happens to your income.

Real estate should ideally be something you only buy if you have the intention of holding on to it for at least eight to ten years and plan accordingly in terms of how much money you need to keep making those payments. But really, no matter what happens, I think we need to take a moment and appreciate the resiliency of the real estate market throughout history in terms of being a fairly stable store of value.

Now, that's not to say that prices will not go down, because certainly, there will be times where everything slows down and values drop. But instead, it's a lot more important to make sure that you buy a home that you can afford, that you lock in an interest rate for as long as you can, you ideally get that mortgage for 30 years, and then from there, you just hang on to it for as long as you can.

I highly doubt we would see a crash as severe as 1929 or 2008, which were both events that were highly concentrated and directly hit the real estate market. Really, instead, I wouldn't be surprised if we just saw a gradual slowdown in prices over time. Even though increasing home prices are beginning to worry people, as long as you buy a home that you could afford with the intention of holding it eight to ten years, you should be fine, and that should be long enough to ride through any short-term fluctuations in price.

And really, most importantly from all of this, the best thing that you could do is make sure to smash the like button for the YouTube algorithm. So with that said, you guys, thank you so much for watching. I really appreciate it! As always, make sure to destroy the like button, subscribe button, and notification bell.

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And lastly, if you guys want those two free stocks, use the link down below in the description, and WeBull is going to be giving you two free stocks when you deposit a hundred dollars on the platform, and those stocks could be worth all the way up to $1,850. So if you're interested in doing that, you may as well because it's basically just like getting free money. Let me know what three stocks you get! Thank you so much for watching, and until next time!