It Started: Home Prices Are Falling 50%

What's up guys, it's Graham here, and it's official: after a decade of unstoppable growth, the housing market is beginning to fall. A new report from Redfin just found that home buyers are now backing out of deals at the fastest pace since the start of the pandemic. Prices are decelerating at the quickest pace in history, and several markets have already fallen nearly 50 percent from their peak. This comes at the same time that mortgage rates are beginning to approach seven percent. Home prices, relative to income, are now at a higher level than the 2008 housing bubble, and nearly 80 percent of the United States is about to be affected.

So, let's talk about exactly what's happening, the latest data that was just released, which markets are most likely to be affected, and then finally, what you could do about this information to make you money. On this episode of Millennials, might soon be able to afford a home. Although before we start, even if you're not able to afford a home right now, I guarantee that you can afford to subscribe if you haven't done that already; because 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 baby gecko. So thank you guys so much! Also, a big thank you to Hippo for sponsoring this video, but more on that later.

Alright, now all of this begins with the monthly housing report for the National Association of Realtors, who publishes their data on the latest market updates, home pricing, and mortgage trends to give their insight into the future of our economy. Their latest report was the first time in 10 years that home prices have started to fall. First, we need to talk about home sales. This is a metric that indicates how many homes are actively being sold on the market in a given month, and generally, this gives us a better indication of market inventory, demand, and a buyer's willingness to close on a home.

Now, throughout the pandemic, home sales hit an all-time record low simply because there weren't enough homes on the market to be sold. But now, home sales are declining for another reason, and that would be home affordability—or more accurately put, the lack thereof. Year over year, home sales are down nearly 20 percent, marking the seventh straight month of a decline. In terms of why, their Chief Economist noted that the softness in home sales reflects this year's escalating mortgage rates, which, as of a few days ago, began to approach seven percent.

The second metric we're talking about is called the month supply of inventory. This refers to the number of months it would take for current inventory on the market to sell. For example, if there are a thousand homes on the market and 200 homes are being sold every single month, that equates to a five-month supply. In terms of where we are today, you might want to sit down if you're in the market for a brand new construction; supply has ballooned from three and a half months of supply at the beginning of the pandemic to now 8.1 months of supply, suggesting that if you're a buyer, you're going to have a lot more leverage today than you did in the past.

For all the other sales, however, month supply has increased from 2.6 to 3.2 in August of 2022, meaning more homes are being listed, but it's not yet at the point where buyers would begin to have the upper hand. The reason, you might ask? Well, interestingly enough, they point out that some homeowners are unwilling to trade up or trade down after locking in historically low mortgage rates. So, homeowners who are not able to afford current prices at current rates would rather just stay put.

However, that brings us to third, home prices. Even though homes are more expensive today than they were a year ago, most of that growth was attained in the first few months of 2022. In the last 90 days, home prices have been falling nationwide. Median prices are currently sitting at $389 thousand, down from the peak of $413 thousand that was recorded back in June. On top of that, despite 81 percent of homes sold in August being on the market for less than a month, prices have dropped 0.44 in the last 30 days, with larger cities like San Francisco, Seattle, and San Diego down two to three and a half percent, implying that if this trend continues, we're on the track for a national housing correction.

Now, yes, it is true that home sales are seasonal, and even in a normal market, home prices soften from the end of summer through the start of January. But some locations are experiencing a rather substantial price drop, and the worry is that this will continue throughout the entire U.S. See, one of the biggest issues is that unlike the stock market, which is reflected in real time, housing data is reflected 30 to 60 days after the information was compiled. So what we're seeing today is really a snapshot of what happened about two months ago. And because of that, current market conditions could actually be quite worse.

Even the Chief Economist for Realtor.com said that for homeowners planning to list, today's market is significantly different than the one from even three weeks ago, meaning we're not really going to know the true effects of today until November. On top of that, just consider that according to Freddie Mac, a 30-year conventional fixed-rate mortgage was 5.22 in August, and now the average is 6.86 percent, with rates as of a few days ago even hitting seven percent. That means that housing affordability is currently at its lowest level in 37 years, requiring 35 percent of the median household income to make principal and interest payments on the median home with 20 down.

Now, even though this affects the entire United States, one location that stands out in particular is California because their affordability was recently found to be one of the worst in the country. Research from Richard Haynes found that in Q2 of this year, only 16 percent of California's population could afford the median-priced home, meaning it takes a minimum income of $199,200 to qualify versus $150,000 last year. He goes on to say that prior home corrections have taken place when home affordability drops below 20, suggesting that something has to give—either prices drop or interest rates fall.

Here's the deal: when it comes to home prices and the amount that you pay every single month, just because prices go down doesn't necessarily mean your monthly payment's going to be any more affordable. Just consider this: if home prices are $400,000 and you can get a three percent interest rate loan for the entire amount, your monthly payment is going to be just over $2,100 a month. However, if mortgage rates increase to six and a half percent and that exact same home falls to $320,000, as you can see, your monthly payment is still going to be $2,100 a month, and the only thing that changes is your purchase price.

Now, of course, the good news is that it doesn't seem like home prices are going any higher at the same time that interest rates are going higher, but it does paint the picture that home affordability takes into account a lot of moving parts. One of those is the reason why buyers are beginning to back out of deals at a record pace.

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Alright, now in terms of where buyers are backing out and which locations are seeing the largest price drops, almost all of them are centered around the areas which saw the highest demand throughout 2021. The top spots are Jacksonville, Las Vegas, Atlanta, Orlando, Phoenix, and Tampa, with more than one in five buyers choosing to back out and cancel the deal. And the reason is pretty simple: to start, buyers no longer need to waive inspection and appraisal contingencies to get their offer accepted, allowing them to back out if they find an issue with the house or have trouble getting a loan.

On top of that, it might be advantageous to back out if they believe home prices are about to fall even further or if they find another home that suits their needs even better. In addition to that, another consideration is known as the Home Purchase Sentiment Index. This is a survey that analyzes consumer sentiment towards owning and renting a home, the current state of household finances, and overall confidence in the economy. In August of 2022, it was fairly telling in terms of which direction they believe the economy was heading in.

The most recent report showed that only 22 percent of homeowners believe that now is a good time to buy, 59 believe it's a good time to sell, and over the next 12 months, they expect home prices to remain completely flat, with rental rates declining by 5.7 percent. On top of that, it's also worth noting that if respondents were to move, 32 percent would consider renting, which is the highest amount surveyed since prior to the pandemic. All in all, this signals that consumers are the most pessimistic they've been about the housing market in a decade, which of course is reflected in the first month-over-month decrease in price since 2012.

Although when it comes to declining home prices, no one is more qualified to talk about the future of the market than the ultimate housing analyst himself, Robert Schiller, the creator of the Schiller price index. On September 28th, Robert Schiller published his latest findings in the New York Times, where he explains that from December 2019 to June 2022, U.S. home prices increased by 45 percent, which has never happened in such a short amount of time in history since the index was created.

Now, it is true that remote work caused a mass relocation to more rural areas, driving an estimated 60 percent of the home price surge. But as he explains, that's not the entire picture because office spaces are continuing to do just as well. So that leaves one explanation: he theorizes that since anxiety and depression rates more than quadrupled during the pandemic, as a way to cope, many Americans purchased a home to add more structure to their lives during a time where they felt the psychological pressure to lock in record low rates with a 30-year mortgage.

In terms of where the future lies, he thinks that inflation-adjusted home prices will likely be a lot lower in a few years, but that's not certain, of course. From my own experience when it comes to mortgages, I absolutely agree. Throughout the pandemic, I saw some of my smartest and wealthiest clients taking on as many loans as they could because the rates were too low to pass up. Even for myself, I was able to refinance two and a half million dollars with mortgages at 2.875 fixed for 30 years, which essentially means that I'm getting paid to borrow money.

But now, that's not so much the case. Overall though, it's difficult to determine exactly what's going to happen. One side argues that there's an element of home price growth that's driven by remote work since this caused an increase in demand, while another side says that home prices might drop but they won't crash, with the truth probably lying somewhere in the middle. In terms of what I'm seeing, there are a lot of people who locked in low interest rate mortgages over the last two years who refuse to move because they don't want to give up such a low rate. After all, it makes no sense to move from a three percent mortgage to a seven percent mortgage and double your payment unless home prices declined by 40 percent, and realistically, that's not going to happen.

In fact, it was found that 92 percent of homeowners with mortgages have rates below five percent, and half have rates below three and a half percent. So a significant amount of the market is not going to be affected whatsoever by higher interest rates. That means that for the foreseeable future, we could continue to see relatively low inventory, and that could prevent prices from falling too far. Some forecasters believe that this could be a 10 percent correction in prices while buyers wait on the sidelines, while others believe that housing prices might return to where they were back in 2021.

But some markets could be hit worse than others, with some that saw the biggest pandemic increase going down in price, along with the high-end luxury market which has already fallen five percent in the last three months. But other markets could continue to increase in price, so we'll very much have to take a wait-and-see approach. That's why I believe that if you're happy with your home and can afford it, you're better off just staying. If you're a buyer, be patient, shop around, know your mortgage rates, be aggressive with offers, and don't be afraid to walk away.

I personally would not be flipping homes in this market; I wouldn't be making any short-term bets. But long-term housing still has its purpose, so time is on your side, and only purchase a home that you intend on keeping for at least seven to ten years. So with that said, you guys, thank you so much for watching. As always, feel free to add me on Instagram. Thank you so much for watching, and until next time!