How The Housing Crash Will Happen

What's up, you guys? It's Grahe here. So, I think it's about time that we address something that probably a lot of you have recently considered, and that would be when is the next housing market crash actually going to happen? After all, home prices have just recently hit yet another all-time high in November after rising for 10 straight months. More and more Americans are beginning to rush back into the housing market with record down payments.

And the most surprising from all of this is that, according to my Twitter poll, nearly half of those surveyed said that they were likely to buy a house in the next 2 years. However, it's also important to be aware that throughout history there has always been a boom and bust cycle throughout the real estate market, and at some point in the future, there's going to be another crash. So, with that said, let's discuss exactly what's happening in the markets, the chance of a real estate crash happening sometime soon, how bad a crash could be if it were to happen, and then finally what you could do about it today to put yourself in the best position possible to come out ahead.

Although, really quick, before we start, if you enjoy these videos and you find them helpful, all I ask for in return is that you gently destroy the like button for the YouTube algorithm by making it turn blue or subscribe if you haven't done that already. It helps out the entire channel tremendously, and as a thank you for doing that, I will do my best to respond to as many of your comments as possible and wish you a happy holidays. So thank you guys so much, and also a big thank you to Hero Bread for sponsoring today's video, but more on that later.

All right, so before we talk about the potential pitfalls to watch out for in 2024, we first have to talk about the current status of the housing market because this is going to lay the foundation for what we're about to see. And as of today, it's pretty shocking. According to Realtor.com year-end review, the entire housing market was perfectly summed up in one word: Frozen. Not the Disney movie, with the entire belief that 2023 will go down in history as one in which the housing market came to a complete standstill. Why? Well, as it turned out, the higher interest rates went, the less affordable it was for buyers to obtain a mortgage, and the less likely sellers were to sell.

In fact, as they point out, this year is on track to have the fewest existing home sales since 1995, and pending home sales are also at their lowest level ever in history since they began recording the data in 2001. This is even more alarming when you consider that the US population has also grown 18% during that same time frame. Now, even though you might expect home prices to fall as a result of this, they didn't. Instead, the median price increased 2.1% year-over-year to $428,000, which is a new record.

To make matters worse, home builders are not able to keep up with excess demand since higher financing costs are eating into their bottom line. So, this has led to a 3.2 million unit deficit throughout the United States, with the end results still being higher prices, more expensive units, and a lot for me to talk about here on YouTube.

Although, in terms of what you could expect in the next year, and whether or not prices might go down, here are the pros and cons to watch out for because once you understand this, everything is going to make a lot of sense. To start, let's talk about why some analysts believe that the housing market could decline in 2024, with the first being affordability, or I guess the lack thereof. See, a basic way to measure the housing market is to take the area's average sales price of monthly payment, divide that by the area's average income, and voilà! You've got a formula to determine how many buyers would be able to qualify.

On a really simple level, this gives you a pretty decent indication of whether or not the housing market is over or undervalued. In terms of what's happening today, nationwide we have the worst affordability since 1984. CNN reported that currently, 38.6% of the median household income is required to make the monthly payment on the average home purchase, and typically a home is considered affordable if that amount is below 30%. This, unfortunately, has resulted in 99% of the United States being unaffordable for the average American making $71,000 a year. Realtor.com also found that throughout the United States it takes an income of nearly $110,000 to qualify for the average home at today's prices with 20% down. And if you want to buy a home on the West Coast, it takes an income of $161,000.

Second, we have higher unemployment. Now, before people start commenting, "But Graham, unemployment is at one of the lowest levels ever in history at 3.7%!" What are you talking about? Don't worry, I'm playing devil's advocate here because the findings are actually pretty surprising. Besides the 1950s after World War II, the unemployment rate has never been able to sustain below 3.5% for more than a year. If you don't believe me, look at the data in 1953. High inflation caused a recession that more than doubled the unemployment rate; the same occurred in 1958 and in 1969 when interest rates were increased. The 1970s and 80s recessions were also caused by an era of high inflation, high unemployment, and rising rates.

While the 1990s saw a time of restrictive Fed policies, 2000 saw the burst of the dot-com bubble, 2008 sent us into the Great Financial Crisis, and now here we are again with similar patterns to the ones before us. It's also quite interesting that as inflation slows down, unemployment typically goes back up, as shown throughout every year since 1949. To make matters worse, the average worker saw a 6 to 7% income loss for each 1 percentage point increase in the unemployment rates. So, if this happens, home affordability could go even worse.

Third, we have the chance of a recession. According to the chief economist at Realtor.com, a recession in 2024 would likely weaken housing demand beyond its current low level, and if it were significant enough, it could stress existing homeowner finances enough to prompt some to sell, reversing the supply-demand balance that we've seen in the last few years. To dive a bit deeper on that, Fannie Mae also issued a warning that personal consumption remains to what we believe to be an unsustainable level relative to incomes, and the full effects of monetary policy tightening are still working through the economy.

Finally, in a more official survey than my Twitter poll, almost everybody believes that now is a bad time to buy a house. In this case, only 16% of people believe that now is a good time to buy a house, which, as you would guess, is at an all-time low—not the band. Anyway, what's the most surprising about this is that high mortgage rates surpassed high home prices as the top reason why consumers think it's a bad time to buy a home, and this is what's leading to the lowest consumer confidence ever reported. All of this sets the stage that there are some factors outside of our control that could negatively impact the real estate market in 2024.

Although this is really only the tip of the iceberg because in terms of why housing prices could actually begin to go back up and what you could do about it, here is exactly what you need to know. Although before we go into that, I know we usually talk about getting the bread here on the channel, but today I also mean that quite literally. For the last few months, I've been taking my health a lot more seriously. Like, I've been eating better, I've been going to the gym 5 to 6 days a week, and I've been optimizing every aspect of my life, of which our sponsor, Hero Bread, is there to help.

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And now with that said, let's get back to the video. All right, so in terms of why the housing market might continue going even higher and what you could do to best protect yourself, let's start with the most basic, and that would be falling interest rates. As of the other week, Jerome Powell indicated that we're likely to see three rate cuts throughout 2023 of 25 basis points each, which would take us to a federal funds rate to 4.5% and eventual mortgage rates between 5.5% to 6.5%. This suggests that with affordability improving, more buyers could be pushed into the housing market and cause prices to go up even further.

In fact, Wells Fargo went on record to say that home prices will continue to appreciate, rising 2.5% in 2024 and 4.4% in 2025. Zillow also thinks that home prices will increase by 6.5% by July of 2024, and Goldman Sachs agrees, predicting that home prices won't decline from here on out. Second, more sellers in 2024. Look, the fact is, 60% of homeowners have a rate locked in below 4%, and that means they're not moving unless interest rates come down to a point where there's not a huge disparity between what they're currently paying and what they would be paying.

After all, why give up a 3% mortgage at $2,000 a month when the same mortgage would cost $3,300 at today's 7%? However, with the belief that interest rates are coming down, research shows that the 30-year fixed-rate mortgage falling to 5.5% is the magic mortgage rate that would be enough to push more home buyers to purchase homes. On top of that, homeowners who are also potential home buyers may see a drop in rates as an opportunity to sell and move fast before competition heats up, leading to a sudden influx of inventory that could begin as soon as next year.

Third, from all metrics so far, there's no indication of a recession. According to Jerome Powell, the economy is gearing up for a soft landing in 2024 because inflation is largely under control, GDP is strong, and consumer spending is robust. It's also worth considering that there's currently $6 trillion worth of cash sitting on the sidelines, so if anything were to break, there's a lot of cash getting ready to push us forward.

And fourth, any drop we do see could likely be due to seasonality. See, even though housing prices generally trend higher in the long run, once you begin looking closer, you'll begin to realize that there are very consistent, predictable price swings that happen on a regular basis, like clockwork. And right now, as you're about to see, we're about to enter a time where the market slows down. Now, even though most seasonal pricing tends to have a variance between 8 to 12% off the sales price, some locations like the Northeast and Great Lakes could see a difference of all the way up to 22% between summer and winter prices, which means now could be a good time to negotiate if you could find the right deal.

And finally, five, long-term housing has always gone higher. Like, just consider that when you adjust for inflation, housing values have only seen one decline in the last 50 years with that being in 2010. Even over the last 100 years, housing prices have steadily increased as new construction constantly lags the growing population, so it could be inferred that this might continue to be the case for another 50 years.

Although, just in case it doesn't, as a former real estate agent and real estate investor since 2008, here's my advice on precisely what to do to make sure you come out ahead no matter what happens. The first thing that I'd recommend everybody do is get a 30-year mortgage. Now, I know what most people think when they hear this, but Graham, you pay so much more interest on 30 years than you do in 15, or you just get an adjustable-rate mortgage since interest rates are coming down. But long-term, it could also be a lot safer. That's because the 30-year mortgage gives you a major advantage over pretty much every other option, and that would be flexibility.

Like, there's nothing stopping you from paying off a 30-year mortgage in 15 years if you just want to double up the payments. Easy! But if something comes up and you need to cut back or spend a little less money, the 30-year mortgage gives you the flexibility to make the minimum payments if you absolutely need to, and I think that's invaluable. Second, always get a fixed interest rate. Look, the entire economy is uncertain. You could have never predicted we would be here today 5 years ago. That's why it makes sense to lock in a fixed payment every single month until your loan is paid off, just for the peace of mind. Plus, if rates wind up declining like everybody expects, then you could move on to third: refinance.

If you ever have an opportunity to refinance your home to save some money, do it! This allows you to get a brand new loan that replaces your existing loan, and when interest rates are lower in the future than they are today, that new interest rate replaces your current one, and you save some money. Fourth, avoid selling your home unless you absolutely have to. The truth is, real estate values really only matter if you intend on selling. So, everything I've mentioned so far is really about bringing your monthly payments down as low as possible so that if you don't have to sell, you don't need to.

On top of that, by not selling, you'd also be able to ride out any short-term fluctuations in price until eventually, the market recovers. Fifth, always make sure you keep an emergency fund on the sidelines for when something comes up. The reality is, with real estate, something is going to break at any point when you least expect it, and it's going to cost you a lot of money. For example, I went 2 years without anything going wrong, and then a $2,500 heating bill.

The other reality is that throughout your term of ownership, you're going to have recurring costs that you just can't avoid, like property taxes, insurance, and normal repairs that you need to budget for. That's why my recommendation is to always keep a few months of property expenses on the side in cash for when you'll eventually need it. And lastly, my sixth best piece of advice is to only buy a property that you could comfortably afford. Don't bite off more than you could chew. Don't overextend yourself because the home is cool. Just buy something that you could reasonably pay for in a worst-case scenario. Generally, I recommend that your housing payment shouldn't exceed 25% of your income and maybe 30% on the top end. If you could keep it below that, you'd be okay.

But overall, no matter what happens, I think we need to take a moment and appreciate the resiliency of the real estate market throughout history. It's a fairly stable store of value. Like, besides the exception of 1929 and the 2008 real estate crash, overall, the trend has been consistently upwards. Now, that's not to say that prices will never fall because certainly, there are going to be times where the market slows down and prices drop—especially since the real estate market is highly localized.

But overall, it is important to instead buy a house that you could afford with a fixed-rate term, preferably for 30 years, to lock yourself in and then hold on to it for as long as possible. Now, I highly doubt that we would see a crash like 2009 or 2008 since those were highly concentrated in the real estate markets, but I also wouldn't be surprised if we just see a slowdown in growth over these next 10 years. Even though increasing home prices are certainly worrying people, as long as you buy something that you could afford with the intention of holding on to it for at least 8 to 10 years, any short-term fluctuation in price shouldn't make much of a difference.

But you know what would make a difference? If you hit the like button and subscribed if you haven't done that already. So, with that said, you guys, thank you so much for watching. I really appreciate it. And don't forget that you could also get two free stocks down below in the description when you make a deposit using a paid affiliate link. Those stocks could be worth all the way up to a few thousand, so if you're interested, the link is down below. Enjoy! Thank you so much, and until next time.