The Housing Market Bubble Just Popped

What's up you guys, it's Graham here! So we have to talk about what's going on with the housing market because it was just found out that prices are continuing to go higher.

Wait, what? Yep, you heard that correctly! Even though housing starts have dropped to their lowest level since the start of the pandemic, mortgage demand plunged to a 22-year low, and sales have fallen 3.4% in May, the housing market still managed to increase in price. This leads to the number one question that I get here on the channel: when is it going to be a good time to buy, and when is the housing market finally going to collapse?

So today, let's talk about the current state of the housing industry, how much prices could possibly fall, and if the market could begin to head in the same direction as stocks. Based on data and science, all of that to end more on today's episode of "patiently waiting for the market to collapse so that Millennials could finally afford a home." Brought to you by our lovely sponsor, Black Rock! Just kidding.

But if you appreciate the humor and all the work and research that goes into making a video like this, it would mean a lot to me if you either hit the like button or subscribed if you haven't done that already. Plus, as a thank you for doing that, here's a picture of a baby pigeon. So thank you guys so much, and now with that said, let's begin!

All right, so in order to understand what's going on with the housing markets, you first have to understand how it works. One of the first things to look at is what's called housing starts. On the most basic level, this is the number of homes that have started construction and broke ground as of a certain date.

This encompasses the building of single-family homes, condos, and apartments, where each individual unit counts as one housing start. In this case, housing starts are beginning to decline. Even though we've seen a rather substantial uptrend throughout these last 10 years, many new constructions came in 14% below their estimate, with fewer units being built for the first time since the pandemic.

When it comes to this, the Chief Economist at First American said that builders are responding to the decline in affordability and cooling demand by building less. But a slowdown in construction is concerning because the US continues to face a housing shortage; we need more homes, not less.

When it comes to building more homes, though, you also have to look at another metric: building permits. See, even though housing starts count the day construction begins, building permits take it a step further and count the number of projects in the pipeline, acting almost like a leading indicator in terms of the overall housing market.

And now, building permits are down 7%. In places like Dallas, it was said that a combination of supply chain challenges for builders, higher mortgage rates, inflation, higher building material costs, and labor shortages, along with general economic uncertainty, are some of the reasons being cited for a slowdown in construction.

In many cases, the fact is material prices are changing so rapidly that builders are less likely to undertake a project, knowing that it's probably not going to come in within budget. Not to mention, determining a completion date is anyone's guess while materials are backlog. Because of that, fewer projects are entering the construction phase than before, and that has the potential to limit the supply of new homes in the market.

Speaking of additional homes, though, we have to talk about new listings, which counts every single time you see a new home come up on the market. Realtor.com just reported that the supply of homes for sale dropped 9% last week compared with the same week a year ago. Redfin also found that new listings rose twice as fast as they did from a year ago.

In places like Austin, active listings are already up by 146%, and the general consensus seems to be that if you're determined to sell your home, it's probably better to do it now than wait and potentially miss the boat while prices are at record highs.

Now, even though this might sound like great news, the reality is inventory is still extremely low when compared to historical standards. However, it is said that one of the key factors fueling this inventory comeback are new sellers who are listing homes at a rate not seen since 2019, as well as moderating demand and with pending listings declining year-over-year in May.

So let's talk about that last point: home affordability. This refers to a buyer's ability to reasonably pay for the costs associated with buying and owning a home relative to their income. And well, housing affordability is the worst it's been since almost ever.

A report from Black Knight research found that the monthly principal and interest payment on an average price home by a buyer who puts 20% down has gone up by roughly $600 or 44% since the start of the year, and that has been a major deter for more people entering the housing market.

Just consider this: if you're in the market for a home and you're approved for a $1,500 a month payment, you could afford a $350,000 loan at a 3% interest rate. However, if rates increased to 6.5%, the maximum you could afford to borrow now is $240,000, which means you either need a bigger down payment or you have to buy something in a lower price point.

Now, another way to think about it is this: when rates rise from 3% to 6%, a $350,000 home is going to cost you $622 per month extra for 30 years just because of the rate change.

Okay, in all fairness, it's not just that. The National Association of Realtors also mentioned that higher spending on other consumer items means that the consumer will have less income to spend on a mortgage payment and will be looking for a home that is about $440,000 cheaper, leading, of course, to less activity overall.

And then we have something that everyone gets confused with: home sales. I mean, that’s to be kind of expected, by the way news outlets phrase their headlines: "Sales of existing homes fell in May," and "More declines are expected! Home sales in Las Vegas slide again as mortgage rates climb."

And by the sounds of it, you would think that home prices are falling right alongside with them, but uh, nope! When it comes to this, home sales only refer to the number of homes successfully being closed, not the price they actually end up selling for, and that is a huge difference.

In fact, a small number of home sales could actually be the reason why home prices are going up because, with less inventory on the market combined with fewer homes being built, you're naturally going to have declining sales with prices that have nowhere else to go but up.

For instance, when you look at the population-adjusted new single-family home sales, you'll notice that since 2008, the entire industry has been building less than before, leading to fewer home sales in general. As a result, as of just the other day, the median price to buy a home just broke $400,000 for the first time ever in history, representing a 14% increase from a year prior.

Even then, 88% of homes sold in May were on the market for less than a month. But I get it! With all of the real estate jargon out of the way, people only care about one thing. So before we talk about it, I recommend you sit down.

In the big picture, though, prices are still rising for one simple reason: there's just not enough supply. The fact is, we are still well under historical averages of what would be considered a healthy market, and when builders are scaling back due to their own rising costs, that means less future supply that will hit the market at a later date.

Because of that, BNY May predicts that prices will move up in 2022 by 10.8%, but they also forecast a significant cooldown in 2023, with prices climbing just 3.2%. Now, it is true that more than 25% of homes on the market right now have cut their prices, but that seems to be more of a symptom of overly ambitious sellers thinking they could ask exorbitant prices than it is about seeing net values actually decline.

When it comes to this, Redfin went on record to say that it goes to show that there's a limit to sellers' powers. 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.

Although overall, the general consensus throughout more than a dozen analysts seems to be that housing is probably not going to see a decline throughout the next 2 years, even despite more homes coming on the market at the same time as higher interest rates, which sounds completely counterintuitive, but historically low inventory continues to be the main focus, and that in turn is keeping housing prices from falling too much.

The current housing market also makes it extremely unlikely that we're going to see foreclosures hitting the market, with Black Knight having reported that the national delinquency rate fell to 2.8% in April, hitting a new record low for the second consecutive month, and overall delinquencies are down near 40% year-over-year.

The reality is, higher prices give homeowners the ability to cash out for a profit if they're unable to make or afford their payments, especially when only 2% of mortgaged properties are underwater. That in turn gives a very unusual side effect to the housing market that most people don't even consider, and that would be rental prices.

Well, more and more people hold off from buying a home, they're turning to renting, which in turn causes rental prices to also go up. It was shown that new rents on single-family homes were up 14% in May from last year, and in Miami, that number was 41%. Median rents are also up 26% from before the pandemic, and the more expensive homeownership gets, the more renting looks like the better option, driving up the price.

In fact, in New York, there is an hour-long line to see a 370 square foot, third-floor walk-up apartment listed for $2,337. Now, the one thing that I found the most interesting is that in times like this, rents actually tend to remain fairly stable regardless of how the housing market performs. That's because for the most part, rents lag home prices as tenants lock in 1- to 3-year-long leases, allowing their monthly payment to stay the exact same throughout the entire term.

That balances out any short-term movements in housing prices and allows the landlord to reset to market rents once the tenant moves out. Rents also tend to move upwards as overhead increases. So when you have higher property taxes, higher insurance, higher maintenance, and higher labor costs, that eventually has to make its way to the bottom line of what a landlord has to charge just to break even, and that is partially why rents have increased past $2,000 for the first time ever in history.

So in terms of my own thoughts, as someone who's been full-time in the real estate industry for over 14 years, I have a lot to say. In terms of the for-sale housing prices, it seems that all the experts believe that prices will remain high, and I somewhat agree.

The issue is that even though we do have more inventory coming on the market, it pales in comparison to the amount of homes available in a normal market. So it'd be kind of like throwing a bucket of water on a house that's already engulfed in flames. I mean, it helps, but it doesn't make much of a difference.

In order for the housing market to see a substantial decline nationwide, we would need to see a lot more inventory from sellers who are forced to sell in a market where the majority of buyers are sitting on the sidelines because of excessive economic uncertainty. But holding us back is still a shortage of inventory.

And when builders are cutting back due to their own rising costs, that is a sign that in the future we’ll have even fewer homes to pick from that would have otherwise been completed. You also have the issue that homeowners have locked into historically low mortgage rates, and when you have a 30-year fixed-rate loan at 3%, it doesn't make sense to get rid of that mortgage only to buy a new home at a much higher price at a 6% interest rate.

In my opinion, that's either going to prompt people to stay in their homes for longer, remodel what they have, or list it for rent if they can't get the price that they want. Like, I remember back in 2008 when I first started selling real estate, the homeowners who were underwater on their purchase simply rented it out as a way to break even on their payments, and long term that worked out in their favor and turned out to be very profitable.

That's why if you're investing in a market like this, it's extremely important to focus on rental cash flow throughout these next few years while more people choose to rent than buy. And if you're interested in partnering with me on potential opportunities, I'll link to more information down below in the description.

Of course, sure, I am seeing some areas experience a decline in rental rates while people move out of state or migrate to different areas, but overall, rents are probably going to remain the same, if not see an increase right alongside with the average pace of inflation.

In terms of housing prices, though, just like with rents, I am sure there are going to be parts of the country that see a slight decline as people move around different areas. But I honestly don't see anything that would point to a massive housing collapse.

The market is still relatively strong, unemployment is low, fixed-rate mortgages ensure that anyone who's already bought a home is not going to have their price increase out of nowhere, and there isn't much happening right now that would force a sale below market rates.

Today, we could probably see some softening with a few areas declining 5% to 15%. But since real estate is highly location-dependent, we could also see other areas continuing to go up in price. So it's hard to say. I know that's not the best news, but from my own perspective, now could be a great time to negotiate an offer.

And if you're looking for a home that you could keep for at least 7 to 10 years, now could be a great opportunity to still buy something if something comes along that you can reasonably afford. So, keep an eye on prices, do your best to shop around, and no matter what, subscribe for more updates if you haven't done that already.

Thank you so much for watching, and until next time!