It Started: The Upcoming Housing Collapse - Round 2

What's up, Graham? It's guys here. So, we got to talk about the housing market because after two years of non-stop bidding wars, price increases, and low inventory, believe it or not, asking prices have begun to fall. Except for Betty White's house, which sold for two million dollars over list, but we'll save that for another time.

Anyway, with the 30-year mortgage now beginning to exceed five percent, application demand is dropping. Lenders are beginning to trim their workforce, and some even think that rates could hit as high as eight percent in 2025, leading, of course, to the assumption that the housing market has peaked. On top of that, it's also reported that a property tax reckoning is coming as property values skyrocket throughout the country, leading to the concern that affordability might continue declining, even if you're not in the market to move anytime soon.

So, we should talk about why and where property values are beginning to fall, how much sellers are reducing their asking prices, where mortgage rates are likely to increase throughout the rest of the year, and then the topic I'm finally talking about: I'm buying another property right now! But you didn't see that one coming.

Although before we start a brand new article, just confirm, affirm, that the eighth wonder of the world is smashing the like button for the YouTube algorithm. So if you want to experience the wonders of virtual confetti, just give it a quick tap because it helps me out tremendously. Now, with that said, let's begin.

Alright, so in terms of where to start, these last few months have been quite the change throughout the entire housing market. We've gone from the lowest mortgage rates in history to the highest in the decade within just two months. In that same time frame, housing price growth also began to slow down, with falling mortgage demand, higher rates, and increasing unaffordability. Is that even a word? On affordability, if not, it should be.

Anyway, up until now, the spark of home price growth was driven by four main categories. First, record low interest rates gave home buyers more purchasing power to purchase an even more expensive home for a lower monthly payment, thereby pushing up prices. Second, the shutdown resulted in a record low number of homes on the market, and with reduced inventory, whatever was left over was bid up to an even higher amount. Third, supply chain bottlenecks and shipping constraints meant that housing materials took longer to arrive, were more expensive, and that additional cost gets passed on to the consumer. Fourth, labor shortages also fed into the overall cost of housing, and with fewer people available to do the work, fewer homes were built, and that led to less inventory, which led to higher prices during a time of high demand.

Although objectively, these conditions can't last forever, and eventually, the pendulum has to swing back in the other direction, kind of like what we're seeing now. First, rising interest rates in an effort to bring down the highest inflation that we've seen in 40 years. The Federal Reserve outlined a series of rate hikes planned throughout 2022, and that means mortgage rates are going higher. Now, even though the Fed has been very clear about their intentions well in advance, on March 16th, they approved their first rate hike of 25 basis points, which immediately resulted in a five percent mortgage.

In addition to that, there's also the expectation that rates are about to rise even further, with the Fed scheduled to meet six more times throughout 2022. No matter what happens, the CME gives an 87 percent probability that the Fed will increase key interest rates to 2 to 2.25 percent by the end of the year, which is eight times higher than where we currently stand today. That would lead to the sharpest pace of Fed tightening since 1994.

In terms of housing, though, the name of the game is simply affordability. Take this as an example: if you could afford a thousand dollars a month at a three percent interest rate, that gives you a two hundred and forty thousand dollar loan to spend on whatever home you want. But if rates increase to six and a half percent, that very same one thousand dollars a month only gets you a one hundred and sixty thousand dollar loan.

So, how do you bridge that gap? Well, either you'll have to come up with an extra eighty thousand dollars out of pocket, you'll be forced to look in a less expensive area, or housing prices would begin to fall. In terms of the actual numbers, though, it was reported that the monthly mortgage payment for a median-priced home is now five hundred and thirty dollars more than a year ago, adding more than six thousand three hundred dollars to a homeowner's annual budget.

Long term, however, a survey from the New York Federal Reserve found that most households expect that interest rates on a 30-year fixed-rate loan to increase to 6.7 percent next year and reach 8.2 percent by 2025. Although the National Association of Realtors believes that the market is already priced in all the possible rate hikes and therefore we should expect to see a five and a half percent mortgage throughout 2023.

Of course, whether or not this actually happens is yet to be seen, but in terms of the more immediate impacts of rising rates, we should look no further than rising inventory. On the surface, it's no surprise that the number of homes on the market is incredibly low compared to historical averages. See, housing is typically measured in what's called month supply of inventory. This refers to the number of months it would take for the current inventory on the market to sell. So, for example, if there are a thousand homes on the market with two hundred homes being sold on a monthly basis, you have a five-month supply.

When it comes to real estate, there is a defined equilibrium that everyone should be made aware of. When there's six months or more of inventory on the market, it's referred to as a buyer's market, whereas if there's less than six months, it's a seller's market. And in terms of where we stand today, actually, we shouldn't stand; I recommend you sit down for this one.

That's because in January, it was reported that there was only 1.6 months' worth of inventory on the market. That was it! Now today, it's shown that there's only two months' worth of inventory on the market, so it increased but not by much. Now, it is worth noting that typically there is a seasonality when it comes to the real estate market, where fewer homes are listed throughout the winter and more homes are listed throughout the spring and summer. So, we could very well be headed in a direction where we see peak inventory over the next few months.

Now, obviously, this is not a normal market, but the experts do predict a few changes to happen throughout the rest of the year. One, the chief economist at Realtor.com says that we might see a slower pace of sales in the fall because rising mortgage rates are pushing up housing costs. Two, Zillow believes that the stock of existing homes on the market is finally starting to refill, as our March data shows total inventory now rising strongly. Three, Redfin believes that it might be a net neutral because higher interest rates will lead to a lock-in effect for homeowners, so they may not list. And four, 74 percent of industry experts believe the market will get back to those pre-pandemic inventory levels by 2024.

Although really, at the core of all of this, it’s simply just underbuilding—basically, there’s not enough homes being built to satisfy all the people who want to buy them. Like Phoenix, for example, is 15,000 apartments short of housing to accommodate current residents and anticipated growth this year, and California is estimated to be 2 million units short of reaching where they should be. All of that is to suggest that even though inventory and construction is increasing, it could take time to build up enough to satisfy demand, and that could keep prices relatively high.

But what about the sales numbers? Because someone has to be buying the homes in today's market, right? Since we need an intro for this segment, I'll just say it: third, home sales throughout February dropped by 2.7 percent, and in March, they dropped another 4.1 percent, meaning fewer buyers are purchasing properties now that rates have increased. I also found it interesting that 28 percent of home sales were made up of all-cash transactions, the highest since July of 2014.

Don't think those are just investors either because they only make up 18 percent of all home sales, while owner-users make up the rest. Although I digress; besides that, MarketWatch pointed out that pending home sales have continued to decline as buyers hit a ceiling on what they can afford. One analyst explains that the number of homes being sold could drop by as much as 25 percent, meaning with fewer buyers, inventory could build up and potentially prices could fall, which is actually beginning to happen.

Even though demand is still incredibly high, sellers are beginning to lower their asking prices or even selling them with a stranger living in their basement. But in terms of where prices are falling, Realtor.com cited the 10 areas seeing the largest price cuts, and the first on the list is Toledo, Ohio, down 18.7 percent. Rochester and Detroit are not too far behind, down 15 to 17 percent, and Los Angeles, where I used to live, is down five percent.

Now, unfortunately, unlike the stock markets, it's nearly impossible to analyze real-time housing data to determine and extrapolate just how big of an impact rate hikes have on prices. That's because buyers typically take 30 to 60 days to close on their home, and most of today's sales are a result of buyers locking in an interest rate from 60 days ago, which is probably significantly lower than they would get today.

Now, even though, yes, some say that lower sales could be the result of lower inventory, I do want to comment about an issue that's beginning to create a lot of buzz online, and that would have to do with skyrocketing property tax values. Because just wait, this is about to become a very controversial topic. So, here's how this works: when you buy a property, your property tax rate is calculated based on the purchase price, and from there, it's allowed to fluctuate within a certain range each and every year depending on the values in your area.

However, with prices going up so quickly, property tax increases are becoming a lot more common, and in states like Texas, appraised values can increase by as much as 10 percent annually. Meaning it's about to become a lot more expensive to own a home depending on where you live. For example, let's just say you bought a Texas home for three hundred thousand dollars in 2014 at a two percent property tax rate. You would be paying six thousand dollars a year.

But if appraised values increase by 10 percent every single year by 2022, your same home could have an appraised value of six hundred and forty-three thousand dollars, and property taxes would then be twelve thousand eight hundred dollars a year, which is more than double! Some states, like California, limit the property tax increases, so that people are grandfathered in based on the original purchase price of the home. But others, like our Texas example, are facing severe problems as homeowners pay the consequence of higher values, with 97 percent of properties seeing a 10 percent increase in their tax bill.

Of course, some argue that since Texas has no state income taxes, their benefits are balanced out. But no matter what you believe, this will place a higher burden on middle-class and retired homeowners who may not be able to afford the price increases just because everything else is going up. Personally, I say track property taxes with the rate of inflation. That way, you're effectively always going to pay the exact same amount.

Now in terms of my own thoughts on this: since I have been full-time in the real estate industry since 2008, I could absolutely see rising mortgage rates having an impact on housing values in the near future. But long term, a lack of inventory combined with decades of underbuilding is likely going to keep housing prices high for quite some time.

It's also no surprise that before I went crazy making YouTube videos, real estate was my main focus. I worked as a real estate agent from the age of 18 years old, and then after years of saving, I started buying properties on the side. Although throughout the last two years, besides buying this place in Vegas, I've largely taken a step back from real estate because it's become so time-consuming, competitive, and difficult to find a deal.

The issue is that I was in this weird price point because I didn't want to compete with home buyers who were looking to buy a house for themselves to move into, but I didn't have the finances to compete with institutional investors who could plunk down 20 million dollars in cash to buy a commercial building. So instead, I wound up taking a completely different approach by partnering with investors like Ryan Pineda and using a power in numbers to collectively buy a lot more than I would be able to afford on my own.

One of them is in St. Louis; it's a mix between commercial and residential lofts, and the other is a project in Phoenix, Arizona, where, like I mentioned earlier, they're in desperate need of more housing. So if you're an accredited investor and you want to partner with us on this deal or a deal in the future, I'll link to all the information down below in the description.

But overall, from my experience, what's helped me the most is both as a homeowner and an investor is to always practice patience. Always buy and live below your means, plan to hold every single purchase for at least seven to ten years, and if possible, lock in a low-interest fixed-rate mortgage so that way your payment always stays the exact same. Even though we're likely to see some areas decline in price, other areas could very well wind up increasing.

So, understand that real estate is a very localized market; just like some stocks could be down the same day another stock is up. Long term, I believe we're eventually going to return back to a normal. 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.