It’s Over: Why The Housing Market Is Screwed

What’s up, Grandma’s guys here! So, every now and then I see something that makes me lose absolutely all of my faith in my fellow millennial generation, because a new study just found that Millennials are more likely to water their house plants than think about their finances. Yeah, let that sink in for a second.

It's not getting any better either, with the fear of debt holding many of them back from buying a house, with 61 percent of Runners unable to afford to buy a home in their city. But that could soon change. Even though the housing market is seemingly unstoppable, having increased another 17 percent throughout the last year, Housing Wire now calls the real estate market savagely unhealthy. Zillow predicts that the wildest home price swing still awaits. On top of that, now that the Federal Reserve has committed to their plan to aggressively raise interest rates, one analyst warns that the housing market is in the early stages of a substantial downshift while more investors are dumping stocks for cash and potentially bracing for recession concerns.

So let's talk about the five latest real estate predictions from analysts and experts, why home sales are expected to drop by 25 percent, and then finally why Millennials are so bad with money. But first, before we go into that, YouTube just released an update where if you hit the like button, there's some really cool confetti that appears! If you don't believe me, just give it a quick tap to find out for yourself. See? Isn't that awesome?

So, thank you guys so much for doing that and subscribing. And with that said, let's begin.

Alright, so for anyone who wants a really simple, super quick 60-second recap on what's going on with the housing market, here's what you need to know.

First, the March 2020 interest rate reduction allowed homeowners to lower their monthly payments while simultaneously having more purchasing power at the exact same time, thereby driving up prices. Second, the shutdown resulted in a record low number of homes on the market, and with a severely reduced supply, the leftover inventory was bid to even higher amounts.

Third, supply chain bottlenecks meant that housing supplies took longer to arrive, they were more expensive, and that cost gets passed on to the consumer. Fourth, labor shortage also fed into the overall cost of housing, and with fewer people available to work, they either charged more or fewer homes were built. All of that happening at the exact same time has led to one of the hottest housing markets of all time, with the highest price increases on record for both purchases and rentals.

But that could soon be a thing of the past because now the Federal Reserve has started raising interest rates for the first time since 2018. And if you're curious what happened back then, the housing market dropped. See, after the 2008 Great Financial Crisis, the Federal Reserve did something very similar to what we're seeing today; they lowered interest rates and purchased mortgage-backed securities as a way to stimulate lending and get the housing market back on its feet.

But that couldn't last indefinitely. In 2015, the Federal Reserve began raising interest rates for the first time in seven years, and by 2018, they'd increased to the highest level in a decade. Although when they signaled for even more rate hikes in 2019, the market went into a full-scale panic. By May of 2019, it was said that the Federal Reserve had ruined the stock market rally, with the S&P 500 having dropped 20 percent from September through December in 2018.

Although one of the less talked about aspects of this free fall was the impact on the real estate market. Within six months of the stock market decline, home sales began to drop, prices started to fall, and growth almost completely stalled. Will the federal funds rate approach two and a half percent?

However, here's where things took a very interesting turn. In mid-2019, the Federal Reserve decided to lower interest rates again because, as they say, there's really no reason why the expansion can't keep going. Inflation is not troublingly high—if you look at the U.S. economy right now, there's no sector that's booming and therefore might bust. In other words, they lowered interest rates to boost and maintain growth, which they were not seeing in a rising interest rate environment.

And as you would expect, not even six months later, median home prices hit another record high while housing inventory hit a record low. But now that we're seeing something similar with the Federal Reserve raising interest rates back to where we saw in 2018, could that lead to another housing market slowdown with prices expected to fall?

Well, the chief economist and founder of Pantheon Macroeconomics projects that existing home sales will drop roughly 25 percent from the annual pace of 6 billion set in February to four and a half billion by the end of summer. On top of that, he says that the housing market is in the early stages of a substantial downshift in activity, which will trigger a steep decline in the rate of increase of home prices—starting perhaps as soon as the spring.

Part of this is backed by the recent drop in mortgage demand, which slowed to its lowest point since 2019, with demand for refinancing having dropped nearly 50 percent from a year ago, signaling that higher interest rates are putting more pressure on buyers. As a result, they have less interest in purchasing—pun intended.

Rising rates also have a direct correlation with home affordability, with a median cost of monthly mortgage payments having increased by more than $400, or 27 percent over the last seven months.

Although as far as what the experts believe we might see over the next year, here are the five predictions that I think are worth discussing.

First, mortgage rates will rise. As of today, mortgage rates have increased from 3.2 to 4.4 percent, which is now the same level that we saw back in 2019. It's no surprise that rates will probably go a lot higher as the Federal Reserve continually raises rates for the foreseeable future. This means either demand will begin to subside or buyers will rush to lock in a low rate while they still can.

Second, expect less competition. According to the National Association of Realtors, they explained that the combination of rising interest rates and rising house prices will push some would-be home buyers out of the market, which may result in reduced competition after the summer buying season is over.

That's at the same time as third, home price appreciation will slow. Now, on the surface, estimates for the 2022 housing market are well guesses at best. For example, CoreLogic expects housing prices to see a six percent increase throughout the next 12 months. Realtor.com predicts another 2.9 percent rise, and Zillow says that supply chain bottlenecks and years of underbuilding will keep inventory relatively low for the foreseeable future, with prices of course peaking at 21.6 percent in May before slowing back down.

The fourth expensive homes will become more affordable, but cheaper homes will become more competitive. MarketWatch quoted that there are more listings in the upper-end homes priced about $500,000 compared to a year ago, which should lead to less hurried decisions by some buyers. It's also expected that as mortgage rates rise, some buyers will be forced to shop in a lower price point, driving up the competition in less expensive neighborhoods.

Finally, fifth, they say that foreclosures will rise. With the end of mortgage forbearance, it was assumed that homeowners who were unable to make their payments will eventually default and then let the property go back to the bank. However, as a real estate professional myself, I have to say I completely disagree. Even though the foreclosure rates have been increasing, data from RealtyTrac found that most of the activity is primarily on vacant and abandoned properties, or loans that were in foreclosure prior to the pandemic. Across the U.S., only one in six thousand, six hundred and seventy-five homes falls into this category. And if we look back historically, we could see that we're still well below average, meaning fewer people are underwater on their homes, fewer people are going into foreclosure, and more people than ever have equity from which they could cash in on.

But even with all of that out of the way, that still leads to the question, why does Zillow believe that the wildest home price swing still awaits, and what prompted me to suddenly get brand new insurance policies on every single property that I own? Well, a few days ago Zillow released their updated forecast on the market, and in these current conditions, even with the Federal Reserve raising rates, they believe that housing prices will increase 17.8 percent through February of 2023.

However, as far as my own thoughts as a full-time real estate professional since 2008, these predictions, I think, are just predictions. For instance, back in May of 2020, CoreLogic, who is one of the largest data analytics companies, found that even though prices had risen four and a half percent, they thought that throughout 2021, we would see an increase of only half a percent, while Zillow also published their own predictions which estimated that real estate values would drop 2.7 percent by October of 2021.

So, you could see just how wrong that was. I mentioned this before, but in the big picture, even though higher interest rates do impact home affordability, other factors like local market conditions, supply, new construction, inflation, unemployment, and the overall health of the economy play just as big of a factor.

The issue that we have today isn't so much one of speculation—no money down and free loans to anyone who wants to get one—but instead, a shortage of inventory combined with strong demand that's pushing prices even higher.

Although speaking of property values, this is the reason why I took out some rather large insurance policies against my homes, and I have a feeling most people don't even know that they should be doing this. So listen closely: when you buy a home, if you have a mortgage, it's required that you have an insurance policy in the event of a fire, flood, damage, destruction—the list goes on.

Under those conditions, the insurance company gives you a repair maximum in terms of how much you could spend and how much they value the property. But those insurance estimates are often based on values from years ago and not necessarily what it's going to cost today, and that means a lot of homeowners are severely underinsured and would be absolutely wrecked in the event something were to happen.

Just consider this: property values have doubled in price since the Great Recession; construction costs increased 23 percent since 2020 and hit a 50-year high. And chances are, if you want to repair your home based on an insurance quote from more than a year ago—how do I say this? You're going to be screwed.

Right now, experts are warning homeowners to check their insurance policies, noting that two-thirds of homes in the U.S. are now underinsured in the event of damage, and on average, they're underinsured by 22 percent. That just means instead of getting three hundred thousand dollars to repair your house, now you're only getting two hundred and thirty-four thousand dollars, and the rest is up to you.

You're on your own! That's why I highly recommend any homeowner call their insurance carrier and make sure they have the proper coverage for today's prices and not based on years ago. You could even take this a step further and get what's called extended dwelling coverage, so that if there is an overage, you would be taken care of.

For myself, I changed all eight insurance policies to reflect a much higher value, including, by the way, both my Tesla and the Ford GT, which would have been impossible to place at the stated value that they were a year ago.

And I know this is a boring topic and it only applies to a small subset of my viewers, but seriously, if you own a property, go and do this! Or if you have a parent or a friend who owns a property, just tell them about this and do their own research, because if anything were to happen, they will thank you.

Although, to end things off, as far as the near-term outlook on the stock market, apparently investors are more concerned about global growth than any other time since the great financial crisis of 2008, and have ramped up their cash holdings to a two-year high. Of course, that also coincides with worries about the inverted yield curve, with one analyst saying the market perhaps is assuming that they can't thread that needle. It's going to be tough not to drive us into recession.

Jerome Powell, on the other hand, said that they're keeping a close eye on the first 18 months of Treasury rates to see a sign of a recession, of which they don't see a concern quite yet. Although even if we did see an inverted yield curve, Bank of America explains that it's not the standalone indicator of recessions as it once was, with the market continually moving higher in the long run.

So, in terms of what you could do about all of this, basically just don’t be a millennial—according to a new survey that found that managing money ranks dead last on Millennials' priority list of certain activities, which includes playing with pets, caring for houseplants, surfing the internet, and thinking about dinner.

In fact, 45 percent of Millennials said that they don't even know how much money they have in their accounts, and four in five respondents said that they're more likely to make impulsive purchases because they trust autopay to keep track of their bills.

That's why throughout all of this, it is so important to keep a budget, track your expenses, cut back as needed, invest consistently regardless of what happens, and otherwise just do the exact opposite of what a lot of people are doing. Although you should always subscribe because hopefully, the more information you know, the more money you will wind up making.

So, with that said, you guys, thank you so much for watching! Also, make sure to add me on Instagram or on my second channel, The Graham Stephan Show. So, thank you guys again, and until next time!