The Upcoming 2021 Real Estate Collapse Explained

What's up you guys, it's Graham here. So today we're literally going to be talking about my favorite topic in the entire world. And I know you think this might be a setup for me to say, "And that topic is asking you to smash that like button for the YouTube algorithm." But no, I'm being serious. We're going to be talking about what's going on with the real estate market in 2021, whether or not it's poised for a collapse, and what you could do in light of this information.

After all, this isn't exactly an easy topic for anybody to answer because on the one hand, inventory is at its all-time record low, mortgage rates have hit their record low more than 13 times this year, and analysts at the National Association of Realtors are predicting that these conditions will cause the housing market to go up another eight percent next year. However, on the other hand, mortgage forbearances are ticking upwards, more tenants have fallen behind on their payments, and some economists are predicting a wave of foreclosures that will crash down in 2021. So which one is right?

Today, we'll be sifting through every single well-formed piece of data and research that I could find, highlighting the struggles and issues that real estate is likely to face in 2021. Then, we'll cover exactly what you could do about it based on actual studies, analysis, and statistics from as far back as I could find. But then, of course, I will give you my own anecdotal opinion at the end because this is my video and I could do whatever I want in here. I guess I never thought about that—I can't do anything. Hmm, if I were to do anything, what would I do? Well, I would most likely offer you four free stocks when you deposit $100 on Weeble using the link down below in the description because those stocks could potentially be worth up to $1,600. And at that rate, it's pretty much free money.

But seriously, that offer aside, here's everything you need to know about the 2021 housing market and whether or not it's a good time to buy during all of these crazy times. So thank you so much for watching, and as usual, here's a crazy cool transition.

All right, so let's begin with the good news first, and then we'll talk about the bad news because who doesn't like hearing the good news first, right? It makes us all nice and happy before being slammed into the ground by the bad news. By the way, I can't tell if my choice in shirt just makes it look like I'm a floating head here. If that's the case, I'll wear a white shirt next time.

Anyway, we'll first begin with this article from the National Association of Realtors, who launched a survey among 20 top U.S. economic and housing experts who predicted that housing prices would see an increase of 8% in 2021. Well, I guess this is not exactly good news if you're a buyer, but if you're a seller or you're an owner of real estate, then you're probably pretty happy to hear this. Now, I'm sure by now you're probably wondering, how can real estate prices continue to go up even higher? This is getting absurd.

Admittedly, there are a few factors that are helping push up prices even further. The most noticeable one, if you've spent a few minutes browsing homes online, is the lack of inventory. It's recently recorded that the number of homes currently listed for sale on the market is at its all-time lowest level ever recorded, going back nearly 40 years. Now, something like this is typically calculated by what's called the month's supply of inventory. This looks at the sales volume, the number of homes currently on the market, and how long it would take for all of those homes to be bought up.

The result is then how many months of supply is on the market. For example, we could see that throughout the 1990s, there was between 6 and 10 months' worth of inventory on the market, meaning that if all homes suddenly stopped being listed, it would take between 6 and 10 months for all of the buyers out there to buy up all of the homes until there's nothing left.

Then in the 2000s, that number steadily dropped to five months' worth of supply as more and more people bought up homes. And then, of course, when the housing market collapsed and foreclosures were everywhere, inventory increased to an almighty 10 months' worth of supply. And now, in 2020, we're sitting at the record low of just 2.4 months' worth of supply—the lowest level in, well, ever.

Now, obviously, a big reason for the lack of homes being listed is that homeowners might be under pressure just to stay where they are and have chosen to delay listing their home until things calm down, or they just don't want to take the risk with strangers walking through their homes at a time where the illness is a big concern. But besides that, we also have some other factors that greatly contribute to the lack of inventory, and the biggest one being record low interest rates, driven, of course, by the Feds reducing their federal funds rates all the way down to zero percent.

Like, over this last year, it seems like literally every other week, it's a brand new record interest rate low, and that's because it definitely has. Rates have now dropped below 2.7% on a standard 30-year fixed-rate mortgage. Just for reference, last year interest rates were around 3.7%, which means they were about 40% higher than we're seeing today.

Now, if you want me to put that into numbers for you, because a change like that is kind of hard to put into perspective: a $300,000 mortgage at 3.7% interest would cost you $1,381 a month, with $920 per month going to interest. But at 2.75% interest, that exact same loan is now only going to cost you $1,216 a month, with only $675 a month going towards interest. That means the difference between 2.7% and 3.7% on a $300,000 mortgage means you get to keep an extra $250 a month every single month over 30 years.

That also means, because of that, home buying demand has increased and increased and increased to a brand new record high. A survey found that more than half of all buyers felt like it was a good time to buy because of insanely low mortgage interest rates. So it's no surprise that's driving a large portion of people to buy a home and lock in those interest rates while they still can.

So between low interest rates, low inventory, and high demand, it's become a bit like the perfect storm for real estate prices to rise abnormally faster than usual. But I'm sure you might also be wondering, why don't they just go and build more homes to satisfy all this demand? Well, that would absolutely help, but there are a few roadblocks to that.

One, strict building codes make it nearly impossible to create affordable housing. And two, the cost of building materials has increased significantly this year, and that's added on to the final price that you pay for your finished product. That leads many economists to believe that next year is going to be more of the same, with real estate prices continuing to increase.

The Federal Reserve has said it themselves that they plan to leave interest rates unchanged, inventory is still at its record low, and unless a big portion of the market decides to list their home all at the exact same time, we're unlikely to see much of a change anytime soon. However, not everyone is so optimistic. And to counter all the talk about the housing market going up, I think it's only fair that we talk about the reasons the housing market could—wait for it—go down.

We'll start off with this economist, Michael Strain, talking about the foreclosure wave that will crash down in 2021. Now, he starts by talking about what we've already covered: interest rates and inventory are at an all-time record low, demand is sky high, and that's driving up the price of housing. But where he differs is in what's called the K-shaped recovery.

See, in the beginning of the year, we had all of these letters to signal what type of recovery we would have in the market. The most common was the V-shaped recovery, which meant that we would drop down and then shoot right back up. But there were also talks about a J-shaped recovery, an L-shaped recovery, and a W-shaped recovery. What's kind of taking shape now is what's called a K-shaped recovery.

This signals that some sectors and people see their wealth and income skyrocket, like that upper line of the K, while the others on the bottom line of the K see their incomes dry up and businesses shut down. Now, this is evident a lot in the stock market as well. Tech companies like Amazon and Shopify have been booming, but oil companies in retail are still down from where they were.

Now, this economist says that the K-shaped recovery is going to hit low-income homeowners the hardest, which is where we're going to see a wave of foreclosures. He also goes on to say that as of recently, 10% of the 8 million single-family mortgages backed by the FHA were delinquent by more than three months. He then says that this is cause for concern because the only reason we're not seeing a wave of foreclosures right now is because of a provision in the CARES Act that temporarily freezes foreclosures until 2021, which as we could tell is coming up pretty soon.

Now, when I heard this, I wanted to get the full picture behind it because when you hear that 10% of all FHA-backed mortgages are in default, that is 800,000 homes in potential foreclosure. So in order to get some reference as to how bad that is, we need to have some context as to what it normally is. Well, through September of 2018, the rate of seriously delinquent loans was about 3.7%. And at any given point in time, historically, eight to nine percent of FHA loans are behind on their payments by 30 days or more.

So yes, FHA loans more than 90 days late are more than double what they were just two years ago. But given that most of the time almost four percent of all FHA loans are more than 90 days behind in their payments, and the prominence of how easy it is to apply for mortgage-related forbearance, it's really not as bad as one might expect it to be.

Now, besides that, we also have some very interesting news from the National Multi-Family Housing Council—try saying that five times! Anyway, they track how many tenants pay their rent and at which point of the month. Now, this is another metric that's very important for us to look at because this gives us context as to what many landlords might be experiencing, and when their tenants are not paying rent, that could spell disaster for future evictions.

Well, they found as of November 93.6% of tenants all paid their rent in full for the month. However, that was a decline from 95.2% in the year prior. Again, all things considered, it's not that bad. Of course, people will inevitably say, "But Graham, they said that only 75.4% of tenants paid their rent in December." That means that 25% of tenants are going to get evicted, and to that I say, no, it does not work like that.

This only counts full payments that have been processed by the sixth of the month. Now, as we could see historically, only about 20% of tenants have consistently paid the rent after the sixth of the month, and payments are always lower when the cutoff ends in a weekend and the payments can't be processed. So I guarantee by the end of December, this number is going to be significantly higher and more in line with statistical trends.

Or in other words, it's not going to be as bad as if you just looked at this and nothing else. And finally, let's talk about foreclosures. The data company Black Knight found that 2.75 million mortgages, or 5.2% of all residential properties with a mortgage, were in active forbearance as of December 8th. And yeah, if 2.75 million mortgages all went into foreclosure at the exact same time, that would be a recipe for disaster.

But thankfully, there is a much more broad perspective when it comes to this. So here's what you need to know: there's estimated to be 138 million total housing units in the U.S. That includes single-family, multi-family, condos, and apartment buildings. And of all of those buildings, 40% of them are completely owned outright with no mortgage. Then, of those properties with a mortgage, which is estimated to be about 50 million properties, the Mortgage Bankers Association found that 5.83% are in a mortgage forbearance plan, which they say impacts 2.9 million households.

But let's keep going even further down this rabbit hole. In order for a home to be foreclosed on, it needs to be taken over by the bank, and the seller must generally owe more on the home than what it's worth. Otherwise, the seller would just list the home on the market and sell it, and then walk away without a foreclosure. Well, in terms of how many people out there owe more on the home than what the home is worth, the data company CoreLogic found that only 3% of all mortgaged properties are underwater, which is at an all-time low.

That means that homeowners, on average, have more equity and worth in their home than any other point in history. So now, we're going to be doing some really exciting math. If we assume that all 3% of those underwater homes go into foreclosure from those 5.83% of mortgages that are currently in forbearance, that means that only 0.1749% of all mortgaged properties would go into foreclosure. And that equates to 96,000 homes out of 138 million total housing units.

Now, in other cases where the homeowner is unable to make the payment, they would most likely list their home on the market for sale. They would sell it, they would get back some of the money that they have in the property, and then they would move to a less expensive area, or they would use whatever they have left over to rent until they could get back on their feet.

So overall, given the numbers and the evidence presented to us, no, a wave of foreclosures is highly unlikely if happening in 2021 that would just crash the real estate market. So where does this now leave us? Well, the Redfin CEO says that this crazy home buying demand is likely to continue into 2021. This is going to be driven by people who tried to buy this year but weren't able to, so they're going to be looking again next year.

He also even admits that this type of price increase is absolutely unsustainable and will eventually come to an end. Right now, a lot of the home buying demand is driven by people who have the finances to take advantage of cheap money. The data company CoreLogic also expects real estate prices to continue to increase as well, although they see home prices only going up 1.9% year-over-year.

Although they don't necessarily have the best track record with estimating some of these predictions, as we could see from this old report earlier in the year, and yeah, they were pretty off. So all in all, it looks as though, barring any sort of unexpected events that none of us could predict is gonna happen—which I hope I didn't just jinx it there—most likely we're going to be in for more of the same in 2021.

Although, most likely we're going to start to see more inventory coming on the market, and maybe prices won't go up as much as they were this year. This situation is much different than what we saw in 2008, which was driven by unsustainable adjustable-rate mortgages that anyone could get into who didn't have the finances to buy a home with no money down.

Today, home equity is at an all-time high, people are very qualified to purchase the homes that they're buying, and interest rates are locked in at their lowest levels ever in history. This is likely going to continue until we either get higher interest rates, the cost of materials goes down to build a home, zoning restrictions ease up to create more affordable housing, or you win the lottery and can buy whatever you want without looking at the price.

But most importantly, I don't expect there to be this mass wave of foreclosures. I don't expect there to be this cataclysmic event that causes the real estate market to collapse. And if everything stays the same as it is right now, it's probably going to be another wild year for real estate in 2021.

So with that said, you guys, thank you so much for watching. I really appreciate it. As always, make sure to destroy the like button, subscribe button, and notification bell. Also, feel free to add me on Instagram; I post pretty much daily. So if you want to be a part of it there, feel free to add me there.

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So if you want those stocks, pretty much free money at that point, let me know which stocks you get. Thank you so much for watching, and until next time.