The Housing Market Is Sinking

What's up you guys? It's Graham here. So let's talk about something that I'm sure most of us have considered in some way or another, and that would be the next housing crash. After all, in the last month, housing prices have continued to hit record high after record high. Inventory is at its lowest level in history, and across all metrics, a recent survey found that the overwhelming majority of Americans now feel like it's a good time to sell a home but a bad time to buy one. With even the search term "housing crash" having just increased 100% to the highest level it's ever been, that's not exactly surprising either, considering that interest rates are said to increase faster than we initially expected. The eviction ban was just postponed another 60 days, and now with foreclosures being allowed to move forward, there's certainly the concern that a wave of homes is going to hit the market as Congress keeps kicking the can further and further down the road until eventually it's too late.

But thankfully, there are some things that you can do now ahead of time to make sure you're in the best position possible to come out ahead—profitable. So that way, no matter what happens, you're totally prepared to print tendies. But really quick, before we dive into the current state of the real estate market, I want to say a huge thank you to the sponsor of today's video—the like button. Unfortunately, 90% of viewers leave that like button unsmashed, and that is unacceptable! For the low cost of just absolutely nothing, you could give the like button the click it deserves. And as a thank you for doing that and helping out the almighty YouTube algorithm, I will do my best to respond to as many of your comments as I possibly can. So thank you guys so much! And now with that said, let's begin.

All right, so first, in order to figure out how to best prepare for something like this, we should cover the severity of the real estate crashes that have happened in the past. Because even though it's easy to think that the market is going to crash and I'm never going to be able to financially recover from this, the truth is with some preparation ahead of time, losing money in the long term is actually fairly rare. And yes, I did just use an old meme; I hope you enjoy it. Anyway, the first major real estate crash we got to talk about is the Great Depression of 1929.

Now here's the thing: most people know this as the infamous stock market collapse where prices dropped 83% over 2.8 years. But because of the mechanics behind the crash, real estate was also significantly impacted as well. That's because prior to 1929, the economy was booming. Money was pouring out of every crevice. Banks lent money to anybody you asked, and people, for a lack of a better word, just speculated on everything because values kept going up. However, once the market showed even the slightest glimpse of a peak, people began selling out of everything and withdrawing their money from the banks for fear that the banks would be going out of business. But banks didn't have enough money on hand to give back to their customers all at the same time, so they began shutting down. That meant that afterwards, the banks left standing didn't have extra money to lend out. Assets were seen as too risky, and because of that, real estate suffered and saw a 67% decline in price for nearly two decades.

But thankfully though, afterwards, real estate didn't see a big decline until much later in the 1990s. Now prior to then, the real estate market saw a huge increase due to new lending options, growing population, low interest rates, and easing regulation. But the Savings and Loan crisis caused interest rates to suddenly go up, home construction dropped, and housing prices remained fairly flat until 1997, which then leads us to the next real estate crash in 2009.

This was caused by too many people speculating on the value of real estate, fueled by short-term cheap temporary adjustable-rate mortgages that allowed anyone to buy a home as long as they were able to make the introductory rate payments. However, a lot of those loans had what's called the balloon payment, which caused the price to go up substantially after a few years, and that was a disaster. People began defaulting on their loans, inventory flooded the market, banks went out of business, and the housing market fell 33% throughout the US, with some harder-hit markets declining more than 70%.

However, the interesting part with all of this is that throughout the last 100 years, with the exception of both 1929 and 2009, for the most part, housing prices have been fairly resilient decade over decade. Like after World War II in the 1940s, housing prices and construction boomed due to a surge of demand. Then during the 1970s stagflation era, real estate kept going up from an increase of inflation. Then during the 1980s recession, real estate went up another 42% as inflation stayed high. The 1990s saw some markets drop, but the hardest-hit areas didn't even decline 10%. The dot-com bubble had very little impact on real estate prices as interest rates went down.

But now, with housing prices at the highest level they've ever been, with most Americans thinking it's a bad time to buy a house, we have some different challenges today that will directly impact the real estate market.

When it comes to some of these issues that might happen, there are five points to consider. The first: rising interest rates. It's no surprise this is one of the main reasons why real estate saw such a huge price increase to begin with. When the Federal Reserve lowered their benchmark interest rates all the way down to 0% in March of 2020, would-be homeowners took that as an opportunity to lock in a really cheap loan that would allow them to purchase even more house and therefore drive up the price. That's because home prices and interest rates are directly correlated. And since the 1970s, the lower interest rates go, the faster home values increase, leaving us in a unique position where eventually, interest rates might have to go back up.

Now, originally, this was planned to happen in late 2023, but now that inflation is rising faster than expected, some anticipate that a rate increase could happen as soon as 2022, meaning the cost of a mortgage could get more expensive, and that would put downward pressure on housing prices. The second: more inventory for sale. Now here's the thing: as the pandemic began to take shape in March of last year, fewer properties were listed on the market for sale. Realtors had a difficult time showing properties, and sellers preferred to take their home off the market and stay put rather than sell their home and put themselves at risk. But when you combine that with low interest rates and eager buyers willing to scoop up anything they can just to lock in a loan, that limited inventory pushed prices way higher than expected.

On top of that, construction was also delayed due to a shortage of building materials, supply chain issues, and a scarcity of labor, which meant that even if builders wanted to construct more homes, they couldn't. This then led to prices moving even higher, but now that might soon start to change with inventory increasing for the first time in a year. As the economy slowly begins to open back up, more and more sellers might feel comfortable finally cashing out of their homes and adding more inventory on the market for buyers to choose from.

The third: buyer optimism is also declining. This was discovered by a survey conducted by Fannie Mae, which found that overall, 70% of Americans felt like it was a good time to sell, and 64% said that it was a bad time to buy. That said, this indicates that buyers are reaching a tipping point regarding what they're willing to pay, and homes could only get so expensive before eventually people are outpriced and are forced to wait on the sidelines for things to come back down.

The fourth: building materials are also coming down in price as well. Now this has been a really hot topic lately because in the last year, lumber prices have increased up to 400%, adding on roughly $36,000 to the cost of buying a new home. On top of that, supply chain issues and limited capacity also raised the cost of home insulation, plumbing fixtures, paint, stone, and everything else it takes to build a house. So what winds up happening is that increased cost gets passed on to you as the customer, while home construction costs went up 18% just from that alone.

But the good news is that lumber prices are finally falling, down about 68% since the peak, and housing materials are also falling in price alongside with it, as Americans are spending more time outside and finally going on vacations instead of taking up home renovation projects. All of this is to say that the cost of building a home might soon start to come back down.

And finally, the fifth: we have the eventual end of both the eviction and foreclosure moratorium. These were the protections put in place during the beginning of the pandemic to prevent both tenants and homeowners from being displaced from their homes. For tenants, this included a ban on evictions that was just recently extended through October, and for homeowners, they had the option to claim mortgage forbearance and temporarily pause their payments for up to a year.

But now, as both of those protections are beginning to come to an end, the concern has now shifted to what happens when they expire. Is that going to lead to more inventory on the market from homeowners who need to sell? Well, that's not exactly clear because even though we have a list of reasons why real estate could go down, we have just as many reasons it could go back up.

For example, first: interest rates are still at historic lows, and they could stay there for quite some time. Even though some expect rates to rise as soon as 2022, Jerome Powell still maintains that rates will stay near 0% through 2023, meaning we could continue to see more demand for mortgages, further boosting up prices more than they are now.

Second: even though more homes are coming on the market, there's still a dramatic shortage of inventory in the US. In the big picture, inventory is down 43% since June of last year, and nationally, the typical home is only on the market for 37 days compared with 72 days during the same time in 2020. And even though more inventory is coming into the market, listing prices are still rising, which indicates there's still no shortage of buyers out there willing to pay whatever it takes to get a house.

The third: even though building materials are also coming down in price, they still have a long way to go. That's because supply chain shortages still have an impact on how much material can be produced, and because of that, economists say that demand for lumber is expected to hold up well for quite some time. Although supply should rebound, and the price of lumber should sharply decline by the end of 2022 as lumber imports increase.

Fourth: we could continue to see more home buying demand from both Millennials and Gen Z over the coming years, further boosting up prices. Like it was reported that this year, Millennials have dominated the home buying market, but soon approaching is Gen Z, and with 72% of them saying that they eventually want to buy a home, that could mean eventually even more buyers lining up to place offers.

And fifth: the risks of a new shutdown could potentially hold the recovery and limit the amount of new inventory coming on the market. That's because the longer our economy is restricted, the lower interest rates will stay, the less material can be produced, the less people want to move, and the higher prices will generally be, as we've seen throughout the last year.

All of this, of course, is just speculation, but the reality is we have no idea what's going to happen. And that means accurately predicting what's going to happen with the real estate market is next to impossible. But at least the good news is, regardless of what happens—whether the market goes up or it goes down—there are some things that you could do immediately to make sure you come out ahead—profitable.

This is what you need to know:

The first thing that I would recommend everybody do is get a 30-year mortgage. That's because the 30-year interest rates are still the lowest they've ever been in history. And when you consider that your long-term investment returns are going to be way higher than your mortgage interest rate, it starts making a lot of sense not to pay off your mortgage early and invest the difference instead. Not to mention, inflation makes your mortgage easier to pay off with future dollars, so the longer you keep it and the higher inflation is, the cheaper that loan becomes.

A 30-year mortgage also gives you the major advantage of flexibility. Like there's nothing stopping you from paying off a 30-year mortgage in 15 years if that's your priority; just double up your payments and voila, it's the same thing. But if something comes up, you lose your job, or you need to pay a little bit less, a 30-year mortgage gives you the flexibility to make the minimum payment and save the difference instead of locking yourself into a higher payment up front like with a 15-year mortgage.

Second, always get a fixed interest rate. Right now, with rates so low, it makes sense to get a fixed payment every single month until your loan is paid off. By locking in your rate, you'll know exactly what it's going to cost you every single month for the next 30 years, and from that, you could plan accordingly. That also prevents your payments from suddenly being increased 5 to 7 years from now. If payments are higher in the future than they are today, and if that were to happen while the real estate market is down, not only is that going to cost you more money, but the market is falling alongside with it. So go ahead and lock in your interest rate, and then no matter what happens, your payment is guaranteed to stay the same.

The third: while we're on the topic of loans, you should refinance your mortgage to save more money. Now, most likely if you own a home already, you've probably either done this or at least considered it. But if you have the opportunity to refinance your house and save a little bit of money, I would go for it. This allows you to get a brand-new loan that replaces your existing loan, and in many situations, the new loan is going to be at a lower interest rate than what you're currently paying, thereby saving you more money every single month.

And fourth, one of the best ways to make it through a real estate crash is to only buy a home that you plan on keeping for at least 7 to 10 years. The truth is real estate values only matter in the short term if you intend on selling. So everything I've mentioned so far is designed to keep your payments as low and predictable as possible, to prevent you from needing to sell. Then ideally, by not selling, you'll have the time to ride through any fluctuations in price until eventually, you're back to profitability.

Then fifth, if you're buying a property as an investment, you should focus on cash flow first, value second. I know it sounds kind of counterintuitive, but when you invest in real estate, the value of the house doesn't make much of a difference. You just care instead about how much that property is making you every month.

And the good news for something like this is that usually if real estate values are falling and fewer people are buying, they're renting instead, which means you have more options for tenants. Not to mention rental prices tend to be completely immune and stable from any real estate price drops. So even if real estate values go down, the rental prices should stay the same or even increase.

And six, the best piece of advice for anyone watching is to only buy a home that you could comfortably afford. Never max out the loan that you're able to qualify for. Never extend yourself too far because the house is awesome. Never spend more than 35% of your income on housing payments. Instead, get something that is not going to cost you more than what you could reasonably pay if your income goes down or you lose your job.

The reality is the lower your payment is in relation to how much money you make, the safer you're going to be to be able to keep it through a downturn without running out of money or having a difficult time staying afloat. Real estate should ideally only be something you buy if you plan on keeping it at least 7 to 10 years, with a fixed interest rate locked in for 30 years on a payment that you could reasonably afford. And that way, even if the entire market goes to poop, you'll be able to get through it just fine without any change to your day-to-day lifestyle.

And lastly, let me just say this: there's no shortage of people out there wondering if it's a good time to buy a house or if they should wait for prices to come down. And my philosophy is, who knows? There's really just as many reasonable arguments why the market should go down as there are that the market should get even more expensive.

So as long as you could stick with those few points I just mentioned, take your time, buy a house that you could afford, and plan to hold on to it at least 7 to 10 years, the chance of you losing money long-term is fairly slim. And the difference between you buying now and later is going to be fairly nominal.

I think it's way more important than instead to focus on what you can control, like maintaining your own finances, buying less than what you can afford, keeping a budget, saving money, and keeping an emergency fund. I'm a firm believer that those habits will take you way further than perfectly trying to time the real estate market, along with, of course, smashing 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 subscribe button and the notification bell. Also, feel free to add me on Instagram; my posts are pretty much daily. So if you want to be a part of it there, feel free to add me there, as my second channel, The Graham Stephan Show, I'm posting there every single day. I'm not posting here, so if you want to see a brand new video from me every single day, make sure to add yourself to that. Thank you so much for watching, and until next time!