The Next Housing Market Crash (Worse Than 2008)

What's up, Graham? It's Guys here, and 2023 is already shaping up to be an absolute mess. Thieves have reportedly stolen 2 million dimes from the back of a van in Philadelphia. A teenager was banned for climbing into and getting stuck in a claw machine. Home prices just saw their largest annual drop in over a decade. Yep, you heard that correctly! The median sale price has absolutely plummeted in March. Market demand has abruptly fallen another 10 percent. All of this comes at a time when a new provision would tax home buyers with good credit to lower costs for those with bad credit.

So, with all of that going on, along with the fears of a looming debt crisis, it's important to understand exactly what's happening. Where are home prices falling the most? Why does JP Morgan warn that there's a risk of the United States defaulting on its debt for the first time ever in history? And what could you do about this to potentially make money?

On this episode of... If you want to donate to charity, it's probably not a good idea to throw cash from a moving vehicle. Although, before we go into that, as usual, if you appreciate all the research that goes into making a video like this, it helps out tremendously if you subscribe for the YouTube algorithm. Or if you want to be kept up to date on topics like this before I'm able to make a full video, feel free to check out my newsletter down below in the description. So thank you guys so much, and also a big thank you to public.com for sponsoring this video, but more on that later.

All right, now first of all, when it comes to housing prices, this year is likely to be challenging for four main reasons. Number one is going to be interest rates. As you can see, mortgage rates have risen at their fastest pace in history, and we're currently hovering around the same rates that we saw back in the early to mid-2000s. Except, unlike 20 years ago, home prices are no longer a hundred and eighty-seven thousand dollars; instead, they're four hundred thousand dollars. On top of that, 71% of homeowners and renters say that they will not accept a mortgage rate above five and a half percent, and as I'm sure you've seen, right now we're at 6.3 percent.

The second reason is that people have less money. A recent survey found that 61% of Americans will run out of emergency savings by the end of the year, and the majority have little to no retirement savings at all. In addition to that, almost 70% of those surveyed said that they're now saving less money because of inflation, which basically means less money to spend on a home.

Third, we have rising layoffs. Yes, things aren't bad enough. Layoffs have increased five-fold, with tech companies leading the way. On top of that, jobless claims are also rising, with fewer people employed.

Fourth, we have inventory. Surprisingly, housing inventory actually declined month over month, with buyers beginning to snatch up whatever's left on the market. Since 2007, active listings have been on a steady downtrend as people lock in rates and then refuse to sell, keeping prices from falling further. All of that combined is leading to a rather volatile market throughout the rest of the year.

In terms of what's happening now, you're going to want to hear this. In terms of how far home prices are falling, Redfin just reported that the median U.S. home sales price fell 3.3 percent in March to four hundred thousand dollars, which was the largest year-over-year decline since 2012. Now keep in mind, this is just the average throughout the entire country, which means that some areas are seeing substantial, actually worse, declines. For instance, Boise, Idaho has fallen 15.4 percent, Austin, Texas is down 13.7 percent, Sacramento is down 11.9 percent, and Oakland is down 9.7 percent. Pending home sales also happen to be down across the board throughout the entire country, meaning buyers are making fewer offers, which is resulting in sellers having to readjust their price if they're expected to make a sale.

In terms of what this means for you, practically speaking, 28% of U.S. homes sold for more than their final list price in March, which is down from 54% from a year ago. Although even with prices continuing to fall, the majority of sellers are still refusing to list their home because that would mean giving up their existing mortgage for an even higher one. In fact, it's reported that 99% of homeowners have a rate below six percent, and the bulk of those are locked in under four percent. This means prices would have to fall by 40% just for the monthly payments to equal the same cost as getting a higher mortgage should that person choose to move.

Basically, Redfin is suggesting that this is keeping the housing market from entering an utter free fall. If something is priced well, you could still expect a bidding war depending on the location. However, this is only the very beginning, because starting May 1st, things are about to get a lot more expensive if you have a good credit score. Let me explain.

A few days ago, a controversial rule was announced that would force home buyers with good credit scores to pay higher mortgage rates and fees to subsidize those with riskier credit ratings who are also buying houses. Now, if this sounds unbelievable, well, that's because it is, and I had a hard time wrapping my mind around where all of this originated since it seemed to have come out of nowhere.

So, in order to understand what's going on, you need to familiarize yourself with the term called loan level price adjustments. These were introduced 15 years ago after the mortgage crisis to compensate for the risks of lending money. Basically, this allowed lenders to charge fees based on the likelihood that someone was not going to pay back their loan. Generally, the lower the credit score, the higher the risk the borrower is, and the higher the score, the lower the risk. Seems common sense, right?

Well, in January of this year, new changes were put in place that would level the playing field between good credit and bad credit, and starting May 1st, the biggest benefits would go to those with bad credit. Of course, this inevitably winds up getting spun around as Biden redistributing high-risk loan costs to homeowners with good credit, which is kind of true, but it's not the entire picture.

Just to show you a before and after: if you have a 640 credit score and put 25% down, you'd previously have to pay a fee of 2.75 percent. Now that same borrower will only have to pay a one and a half percent fee. On the other hand, if you have a 750 credit score and put 25% down, you used to be charged a 0.25 fee, and now you're going to have to pay a 0.375 percent fee unless your credit score is above 780, in which case everything stays the same.

This heat map really shows who's paying the most. As you can see, borrowers in the middle wind up paying 0.75% more than before, while borrowers in the lowest credit tiers see a marginal savings. Now, don't get the wrong idea because people with bad credit still end up paying more in fees than people with good credit. But people with good credit now get less benefit than they did before, and people with bad credit end up seeing a slight savings. It's kind of like, in really simple terms, if the house is a hundred dollars, a person with good credit would pay a dollar instead of paying 25 cents, and a person with bad credit would pay 2.85 cents instead of paying three dollars and 25 cents.

If the Federal Housing Authority claims that this is to help maintain the financial health of Fannie and Freddie, a key element to their responsibility is conservative, but just like all things politics, they don't make a lot of sense. Like our next topic, because mark my words, this is going to be a huge issue over the next few months.

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And now, with that said, let's get back to the video. All right, now in terms of what's happening throughout the broader economy as a country, we are quickly running out of money. The current estimates indicate that that could happen as early as June, which, as you can see, is less than two months away.

All of this comes down to what's called the debt ceiling, which is the maximum amount of money that the United States is able to borrow to pay for all of its obligations, like Social Security and Medicare benefits, military salaries, interest on the national debt, and a multitude of other services that the country needs to continue running. However, once the debt limit is reached or we hit a ceiling, those items can no longer be funded to the point where they eventually have to begin cutting back and shutting down services to conserve their resources. It's really no different than someone running out of money in a bank account after maxing out all their credit cards and then scrambling to come up with whatever they can to stay afloat, except this time it's the entire country.

The go-to solution would be to simply raise the debt limit and borrow more money to pay for everything, but that requires that both sides agree to the terms of the new debt. If they don't, it becomes like a game of chicken to see which side flinches first, and you are the one that pays the price. In this case, House Republicans say that they'll support raising the debt ceiling if Democrats reduce their spending and eliminate student loan forgiveness, but Democrats say that they simply want to keep everything as is and raise the debt ceiling alongside with it.

In terms of what's probably going to happen, JP Morgan believes that the debt ceiling is going to become an issue as early as May and that the debate over both the ceiling and the federal funding bill would run dangerously close to final deadlines. As a result, treasury bills, which are essentially loans to the U.S. government, are surging, signaling a higher risk that there's a very, very small chance that they can't agree on time and miss one of their debt deadlines, which would be disastrous. As the New York Times pointed out, breaching the debt limit would lead to a first-ever default for the United States, creating financial chaos in the global economy.

Even though the United States has never defaulted on its debt, in 2011 they got so close that the S&P credit reporting agency downgraded them from Triple A to Double A Plus, and several other agencies issued a negative outlook as the debt crisis continued getting worse following that announcement. All three stock indexes fell between five and seven percent in a single day, and the president of the S&P resigned shortly after.

Now today, the market believes that there is a two percent chance of them not agreeing and defaulting on their debt, which, unfortunately, is the highest it's ever been. But all of this leads to what's being called the "X date," which is simply the day the United States runs out of money, and that is coming up way faster than any of us expected.

So in terms of what this means for you, there's really only three outcomes: number one, Democrats give in; number two, Republicans give in; or number three, which is most likely—both sides will have to come together, give concessions, and work it out. On top of that, it's also worth mentioning that reaching this debt ceiling limit is not anything new, and it's been happening on a regular basis for the last hundred years. In fact, the last time this occurred was back in late 2021 when the government hit their debt ceiling limit of 28.4 trillion dollars. After months of deliberations, halting reinvestments, and cutting spending, eventually they agreed on a new debt ceiling limit until that too ran out and they need to ask for more, which is where we are today.

Now, even though the most likely scenario is that both sides spend a few weeks or months negotiating to kick the can further down the road, in the unlikely event of a Black Swan case where they cannot agree on a budget and they end up missing a payment, the fallout from a lower credit rating would absolutely cause ripples throughout the entire market and would make it more expensive for the government to borrow money because all of a sudden they would no longer be risk-free.

Basically, the stock market really doesn't care until things get really bad. Although in terms of what I think about all of this, in terms of the debt ceiling, unfortunately, the entire situation has devolved into a political back and forth of various spending agendas. I have a feeling they're going to get as close as possible to actually defaulting without actually defaulting because that would be the equivalent of burning everything down for the sake of not letting the other person win.

But once they agree on a new debt ceiling, chances are they're going to keep pushing the can further and further down the road until eventually, it's another generation's problem, and we don't have to think about it. Now, in terms of the mortgage fee increases, though, that one I have no clue about. It really doesn't make a lot of sense to me to raise fees on those that are deemed less risky. But then again, nothing really makes sense anymore.

That's why it's probably best that you subscribe and hit the like button, so that way you could be kept up to date on topics just like this, and you don't miss out. So thank you so much for watching. As always, feel free to add me on Instagram, and as usual, don't forget that you could get a free stock worth all the way up to a thousand dollars with our sponsor public.com down below in the description when you make a deposit with the code GRAHAM. Enjoy! Thank you so much, and until next time.