It Started: Housing Prices Are Collapsing

What's up guys? It's Graham here. So, we've got some bad news for the housing market, and unfortunately, it's expected to get a lot worse. That's because a new report just found that nearly 10 percent of homes purchased in the last nine months are now upside down on their loan. FHA borrowers have begun to fall behind on their payments, with delinquency rates increasing 150 above average, and as a result, sellers are pulling their homes off the market at a record pace.

This comes at the same time that mortgage demand continues to decline. Home prices, relative to income, are higher than they were back in 2008, and if this continues at the same trajectory, pretty soon we're going to be in a buyer's market. So let's talk about the latest data that was just released, which locations are most likely to be affected throughout the next year, why so many sellers are beginning to take their homes off the market, and then finally what you could do about all this to make money on this episode of "Millennials are now getting roasted because of their dated Instagram feeds." Yep, I am officially getting old.

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All right, now before we go into the specifics in terms of which markets are seeing the biggest declines, it's important to understand that housing prices are incredibly cyclical. And if you look closely, you're able to pinpoint the precise bottom of the market each and every year by looking at one thing: seasonality.

See, even though housing prices have generally trended upwards throughout the last several decades, once you zoom in, you're able to see that there is a consistent, predictable peak in value that goes up and down on a regular basis, like clockwork. And this is all because people are relatively predictable. Data from the last three decades has shown us that no matter what, two things always happen: people are more likely to buy a home and move through spring and summer, and sellers are most likely to take their home off the market in the winter.

For example, we could see that with the exception of the housing crash in 2009, more than 60 to 70 percent of the entire year's sales are transacted in the peak seasons. This means that all of our current data is looking that much worse when you combine off-season pricing with declining values and home sales. As far as when this begins to happen, pricing trends suggest that the most expensive months in the market occur in May, June, July, and August, and the slowest, least expensive months occur in November, December, January, and February.

The reason, you might ask— or I guess the reason I'm asking myself, to which I already know the answer, because I'm the one making the YouTube video— anyway, it should be no surprise that most families prefer to move after the school year and before summer finishes, and that happens through May and August. Not to mention, 73 percent of buyers said that a good school district was important in their home search, so it's reasonable to say that this would dictate the time of their move.

On top of that, flat out very few buyers want to move around the holiday season, which could also be impacted by less than ideal weather, so they choose to hold off until the spring. And that is why we have some really bad seasonal adjustment numbers that we're seeing today.

However, even though it might be easy to think, "Oh well, I'll just buy a home in the winter then, save five percent. Graham is a genius." Not so fast, because in terms of the latest data, you're going to want to hear this. First of all, it's probably no surprise that housing prices have declined. According to Black Knight research, National housing values have currently lost an average of 7.6 percent throughout Q3 of this year, which is the largest decline since 2009.

As a result, many recent home buyers are currently underwater on their mortgage, where they owe more on the home than what the home's worth. To make matters worse, even though this reflects eight percent of all mortgaged properties in 2022, other locations are seeing much worse numbers, some as high as 20 to 30 percent. And as home prices continue to decline, more and more borrowers are being left with almost nothing to fall back on.

For instance, 40 percent of homes bought this year have less than 10 percent equity left to tap. And as we enter some of the seasonally slowest months of the year, those most impacted and most likely to fault are those who put little to no money down. See, anytime you get a loan, you generally have two different options to pick from. One would be a conventional loan, which requires that you have a high credit score, more money down, and stronger income, or two, an FHA loan, which allows you to put as little as three and a half percent down without the stringent requirements of a perfect credit score.

Now, even though an FHA loan allows a lot of people the opportunity to become a homeowner at rates that are much more favorable than renting, the problem is that by putting almost no money down, any decline in home values is almost immediately going to put you upside down in your loan. So unless you have the money to pay that difference out of pocket, you're either stuck making those payments, unable to sell, or you fall behind, which is evidently what's beginning to happen.

As Black Knight points out, early payment defaults—which calculates the number of people who fall behind in their mortgage in the first six months—have risen to levels that we haven't seen since the great financial crisis of 2009. In fact, the situation is so severe that two-thirds of FHA borrowers have less than 10 percent equity left. So with housing affordability—or I guess I should say unaffordability—hitting levels that we hadn't seen since the 1980s, there is a lot more than meets the eye.

And the data doesn't stop there. That's because every month, Redfin compiles the information across tens of thousands of properties and then they neatly package it together so it could be picked apart on YouTube. This recent month was insane! Even though we've recently seen month-over-month declines across the majority of the market, this month was the first time that we've seen a year-over-year decline since 2019 in markets like Los Angeles and Austin, Texas.

On top of that, searches for homes for sale have declined 40 percent from a year earlier, signaling that we're seeing a substantial shift in buyer activity going into 2023. Now, median home prices across the U.S are still up 2.4 percent year over year, but that's rapidly slowing down, with asking prices having risen at the slowest pace since the beginning of the pandemic. In fact, it was reported that sellers are taking their homes off the market because they're often receiving no offers for the price they want to sell for, and sometimes no offers at all.

Not to mention, by the time that sellers realize their listing was priced too high, it had already been on the market for too long and is considered stale. Now, I will say as a former real estate agent, many clients will take their homes off the market before Thanksgiving with the intention of relisting again in the spring. After all, no one wants to have their home sitting on the market over the holidays, where every extra day just gives the buyer a little bit more negotiation room.

But in this case, it does appear like instead, many sellers are just choosing to wait for the entire market to recover, or if they're going to rent their home out until it does. Apartment List, for example, reported that national rents had fallen one percent in the month of November, which was the largest decline since they began tracking the index, and that was fueled mostly by excess inventory and weak consumer spending.

In addition to that, they also mentioned that vacancies are increasing because some Americans are moving back in with family or roommates or delaying striking out on their own, and that in turn is softening the rest of the market, with rents falling in 93 of the hundred largest cities. Now, keep in mind that this only accounts for new leases, so existing contracts are not going to be shown.

But in terms of which market saw the largest price cuts, wouldn't you know it? Here in Las Vegas, where I am, posted a three percent decline in the last six months, followed by Riverside, New Orleans, Sacramento, Phoenix, and Detroit. The strongest market still includes Cincinnati, St. Louis, Portland, and Charlotte.

Although as far as what we might expect throughout the next year, buckle up, because Redfin just announced their 12 predictions for 2023, and you're going to want to hear this out, because a few of them are rather surprising. As usual, I'll link to the full article down below in the description so that you could read along for yourself. But first, they believe that home sales will fall to their lowest level since 2011, with a slow recovery in the second half of the year.

This just means that when buyers don't want to buy, sellers don't want to sell unless they absolutely have to. On top of that, with interest rates having risen substantially from where they were a year ago, many sellers are locked in, and they don't want to replace their current mortgage with a new one at worse terms.

Two, mortgage rates will decline, ending the year below six percent. The thing is that many people fail to realize is that to a large degree, the mortgage industry is dictated by supply and demand, and when there's not a lot of demand, sometimes rates will be lowered to incentivize more people to get them. In addition to that, if inflation declines and the Federal Reserve lowers their interest rates as expected, that will also have a positive effect on mortgage rates.

Three, home prices will post the first year-over-year decline in a decade, but the U.S will avoid a wave of foreclosures. Redfin's most likely scenario is that home prices will drop five percent throughout the year or remain completely flat. They also believe that foreclosure activity will remain extremely low since a lot of those mortgages are locked in under three percent. So even if values do decline, as long as those people can afford to make the monthly payments, they'll be fine.

Fourth, Midwest and Northeast will hold up the best as the overall market cools. As Redfin explains, those areas tend to be the most stable than expensive coastal areas, and they didn't heat up as much during the pandemic home buying frenzy. Five, they believe that rents will fall, and many Gen Zers and young millennials will continue renting indefinitely. Sounds dramatic, but they believe that more supply, declining prices, and higher interest rates will convert fewer renters to buyers, and some of those people may choose to stay renters indefinitely while they pursue other projects.

Six, builders will focus on multi-family rentals. Listed developers will go where the money is, and if there's less interest in single-family homes, they will turn instead to multi-family, and that in turn will lead to lower rents as more supply hits the market. Seven, investor activity will bottom out in the spring, then rebound. As they explain, rate hikes and increased competition have forced a lot of investors to the sidelines, for better or worse, but they think those investors will begin to jump back in the market if the Fed eventually eases up on the rate hikes.

Now the other four predictions are mostly limited to migration trends, like Gen Z moving to more affordable locations and less restrictive zoning to help ease the housing shortage. But overall, it seems like their predictions for 2023 are rather mild, and if the worst we see is a five percent decline, for most people, they're probably not going to even notice.

As far as what the general public believes is going to happen, it really all depends on who you ask. Millennials, for instance, were the most vocal about their belief that the housing market was about to crash, while Gen X followed close behind, and Boomers just straight up admitted, "I don't know."

Now for those that did believe there was going to be a crash, 75 percent said that they thought it would be worse than 2008. So will it? Well, from all the data that I could gather, the answer is as of now probably not. In terms of foreclosures and underwater mortgages, even though a high portion of FHA loans originated in 2022 are technically negative equity, what the survey doesn't account for is the interest rates that were locked in.

And throughout the beginning of 2022, a lot of them were locked in below three and a half percent, which means negative equity really doesn't mean that much as long as they continue making the payments. Now the danger comes with the fact that if one of those borrowers loses their job and they can't afford to pay the mortgage anymore, then yes, they do risk falling into foreclosure, regardless of their interest rate.

But when you zoom out in the big picture, it's reported that fewer than one percent of homes mortgaged in 2021 are underwater, with only three percent having limited equity. That suggests that even if the market declines further, we're not going to enter a market where prices drop 35 percent across the board like we saw in 2008.

Now, personally, as someone who has worked full-time in the real estate market for now 14 years, I would not be surprised if home prices did end up dropping between five to ten percent. I wouldn't be surprised if highly euphoric markets saw a drop of 20 to 25 percent only because they've gone up so much, so quickly. But I don't think this points to a cataclysmic crash to any degree, and if anything happens, I think it's going to be a lot more mild.

The way I see it, I think this is going to lead to some pretty good buying opportunities throughout the next year, and I'm keeping some cash on the sidelines to buy a commercial office or warehouse space whenever a good deal comes up. If one comes up, I'm hoping I could find one, but we'll see.

For everyone else, though, if you're a buyer, just be patient and shop around your mortgage rate because the market is moving in your favor, and I would use that to your advantage. And for sellers, if you're serious about selling your home, you have to price it aggressively and realistically from day one; otherwise, you're probably just wasting your time.

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