It Started: The Worst Housing Crash In 40 Years

What's up, Graham? It's guys here, and it finally happened! U.S. housing prices just saw the largest single-month acceleration in 40 years, leading analysts to believe that housing prices have officially hit a tipping point. Month over month, national home prices have declined 0.77%. Even though that doesn't sound like a lot, it's begun to create a substantial shift within the entire housing market, with Goldman Sachs believing that more price drops are likely to come soon to a market near you.

So let's discuss exactly what's happening: the brand new housing data that was just released, which markets are most likely to be impacted, and then finally how you could use this information to make you money, or I guess not lose money, depending on which way you look at it. Although before we start, as usual, if you enjoy videos like this where I talk about the unbiased facts, studies, and data, it would mean a lot to me if you hit the like button and subscribe for the YouTube algorithm. It's totally free; it takes you just a split second. And as a thank you for doing that, here's a picture of a manta shrimp.

All right, so all of this begins with a report from Black Knight Research, who monitors the market on a regular basis to determine housing demand, delinquency rates, prices, affordability, and a variety of other metrics that basically tell us if housing prices are going up or down. This last month was quite telling in terms of which direction we're headed. First, let's talk about mortgage refinances. This is when a homeowner takes out a new loan to replace the old one, usually with the intention of being able to restructure their payments, extend their loan term, cash out profits, lower their interest rate, or otherwise be able to keep the property for longer.

In July, every single aspect of refinances dropped to its lowest level ever reported in history. The second that then leads us to home prices, as they report the housing market has officially shifted from slowing down to a decline in July, with median prices falling for the first time in 32 months. Of course, there is the narrative that, "But Graham, housing prices are still 14 and a half percent higher than they were a year ago." And yes, that is true, but as they point out, most of that growth occurred in the beginning of 2022 when interest rates were still at historic lows.

But now, with interest rates continuing to increase to their highest level since 2008, prices are beginning to turn around. That means that annual price growth in July was the fastest single-month deceleration in more than 40 years, falling during a summer month that usually increases. They noted that some markets are being hit worse than others. The largest decline so far is awarded to San Jose, California, with a 10% drop in just the last three months, along with San Diego, Los Angeles, Riverside, Portland, Las Vegas, and finishing off with Richmond, Virginia, with a decline of 1.1 percent.

All in all, more than 85 percent of major markets have seen a decline from their peak, with more than a third seeing a decline of at least one percent. But in terms of what this means for you and what their data says is most likely going to happen, here's what you need to know. On the surface, the biggest issue is no surprise: home affordability. Black Knight mentions that with prices beginning to decline, this last July was one of the 10 least affordable months in the last three decades, with almost 33 percent of the median household income needed to purchase the average home.

Because of that, they mentioned that it would require some combination of a 30% rise in incomes, a two percentage point decline in 30-year rates, or an additional 20% pullback in home prices to bring home affordability back in line with long-run averages. Even more surprising is that the monthly payments needed to purchase the average home are still 41% higher from the start of the year and 75% higher since the start of the pandemic. As a result, fewer buyers are able to afford the typical home on the market, leading to more inventory beginning to build up, which, let's be real, is desperately needed.

Now, don't get the wrong idea because inventory is still well below the historic average, but should these conditions persist, they estimate that we would cross the six-month inventory threshold by December, tipping the market in favor of buyers for the first time in recent years.

Now, even though this sounds alarming—and it is—as of now, the vast majority of homeowners still have positive equity in their homes, meaning they owe less on the home than what it's worth. Even if prices declined by five percent nationally, less than one percent of those homes would be underwater, which is an amount that's still well below historic averages. Even with a 15% decline in price, fewer homes would be underwater than we saw back in 2016.

But keep in mind this is just one data set from one company, and others like Goldman Sachs have a slightly bleaker outlook in terms of the future of housing. All right, now in terms of the future of housing prices, even though Black Knight reports on past data, others like Goldman Sachs use that data to then predict what they think will happen in the future. According to them, they believe that nearly 40 percent of markets will see a decline throughout 2023. Why, you might ask? Well, they noted that one in five sellers have already begun to drop their asking prices, with the median price declining from $449,000 at the peak to now just $435,000.

In addition to that, the average home now sold for less than the list price for the first time in more than 17 months during the four-week period in August. Now, in terms of which locations had the largest price drops, areas of Boise, Idaho, Denver, Colorado, and Salt Lake City, Utah took the lead, with more than 50 percent of sellers having dropped their price in order to get the home sold. This also continues throughout many of the largest regions, with more and more sellers beginning to compete against each other for a smaller pool of buyers because interest rates have increased.

As a result, Goldman Sachs came on record to say that we expect home price growth to stall completely, averaging zero percent in 2023, while outright declines in national home prices are possible and appear quite likely for some regions. Large declines seem unlikely; however, there is one curveball to all of this that we all need to be made aware of, and that would be the upcoming Federal Reserve rate hike.

See, mortgage rates are indirectly influenced by what's called the federal funds rate. This is the interest rate set by the Federal Reserve that determines how much banks charge other banks anytime they borrow money. When that interest rate increases, other interest-bearing products go up as well. All of a sudden, things like savings accounts, bonds, CDs, and treasuries offer a higher return, and as a result, mortgages have to charge more to remain competitive. After all, why would you pay three percent to buy someone's 30-year fixed-rate mortgage when you could get three and a half percent risk-free for buying a U.S. treasury?

That's why, over the last few months, we've seen mortgage interest rates skyrocket to a 14-year high, as both investors and banks expect interest rates to go up even further. So what you pay is a combination of supply, demand, and higher interest rates that get passed back on to the customer. Now, even though some of these rate hikes have already been priced in, the Federal Reserve recently came on record to say that while higher interest rates lower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.

These are the unfortunate costs of reducing inflation, which basically means interest rates are going higher, and there's nothing you could do about it. As of the time I'm making this video, the market currently believes that the Federal Reserve is 82% likely to implement another 75 basis point rate hike on September 21st, meaning we could soon see the highest interest rates since 2007. This comes as they continue to battle inflation that's substantially above their two percent target. Growth has not slowed down, and demand is still there. Even though this is a lagging indicator, the Federal Reserve does have to get ahead of these price increases, and that will absolutely have an effect on what happens to the housing market.

So, in terms of what this means for you in the market, here's what you need to be made aware of. One, when sellers can't get the price that they want, they're instead choosing to rent. This is good news. Throughout the last few years, rental prices have skyrocketed from increased demand and higher inflation, with median rents crossing $2,000 a month for the first time in history. But now, with more homes being offered for lease, this should help ease up some inventory and help bring down prices right alongside with it.

Now, anecdotally, this is also what I experienced throughout the 2008 housing crisis. Almost every homeowner who couldn't sell became a landlord, and everyone who couldn't buy became a tenant. This allowed homeowners the option to eventually wait for prices to recover, and I can absolutely see the same thing beginning to happen today. The second, as we approach the end of summer, housing demand typically declines, and that could be pronounced throughout the rest of 2022. A Redfin Chief Economist even went so far to explain that, thanks largely to mortgage rates near or even above six percent, potential home buyers and sellers are focusing on the back-to-school season and enjoying the last days of summer rather than getting into an uncertain market.

Now three, even though that sounds severe, it's probably not going to lead to an all-out crash. For example, Moody's Analytics believes that most likely, housing prices will shift anywhere between zero and negative five percent year over year, to as much as negative 10 if we enter a severe recession. This worst-case scenario still pales in comparison to the 2008 Great Financial Crisis, where housing prices fell 33 percent from the peak over a period of three and a half years. Because of that, there are some steps that you could take to get ahead if you're in the market to buy a home.

One, shop around your mortgage rate. Even though rates have gone up significantly, it doesn't mean that you can't get a better deal, so it does not hurt to ask. Two, don't get attached to any one property; chances are eventually something else will come up that's just as nice. So do your best to negotiate, and don't be afraid to walk away if you have to. Three, lock in a fixed-rate loan. I know there's a lot of excitement about being able to lock in a variable interest rate loan because it's cheap, but unless you're planning to flip the property in the short term, it's a lot less risk to lock in the longest term you can upfront. That way, no matter what happens, your payment stays exactly the same.

And four, only buy a home that you plan to keep for at least seven to ten years. That way, you'll be able to ride out any fluctuations in price until eventually, they recover back to brand new all-time highs. So with that said, you guys, thank you so much for watching. Also, feel free to add me on Instagram. Thank you so much for watching, and until next time!