The Housing Market Is ABOUT TO BOTTOM

What's up, Graham? It's guys here. So, to give you some context, just over a year ago, people were buying up as much toilet paper as they could, emptying it from shelves and causing the price to skyrocket as high as $100 a roll.

Well, as you would expect, that turned out to be a stinky investment. Since then, prices have flushed back down, and now toilet paper prices are being sold at a price that's well... relieving, pun intended. Although today, some say we're dealing with something kind of similar, except a lot more expensive in the housing market, where we may have officially reached the ridiculous stage.

Like the Wall Street Journal reports, the housing market is crazier than it's been since 2006. Another says the housing market is on fire, and the FED keeps adding gasoline. A third says that this is the craziest market in 30 years. However, that actually might soon start to change.

As CNBC reports, the epic housing shortage may finally be starting to lift, as a surprising number of new listings hit the market in June. Lumber has also started to come down significantly—down over 40% month over month. Today, pending home sales are surging higher, while economists now say that the housing market could soon hit bottom.

So, let's talk about what's going on in the craziest housing market that I have ever seen, whether or not it's a smart idea to wait it out, and if we've actually reached a peak before prices begin to bottom. That was another toilet paper pun! But before we go into that, it would help me out a ton if we got that like button to a peak by smashing it for the YouTube algorithm.

Or actually, how about this: if you hit the like button, I promise you I will not make any more bad toilet puns throughout the entire video. That's fair! So thank you guys so much, and with that said, let's begin.

Alright, as a super brief background, it's no surprise why the housing market rose in price so quickly to begin with. The first reason is low interest rates. This just means that the monthly cost of your mortgage goes down, while you're able to qualify for an even bigger loan, which coincidentally drives up the price of housing to the point where your payment stays pretty much the exact same.

For example, go and get a $300,000 mortgage at a 4% interest rate, and your payment is going to be $1,432 a month. But if interest rates then drop to 3%, then all that excess demand pushes the price of the home to $340,000. Well, congratulations! You just played yourself, because now with an even bigger mortgage, your payment is still the exact same thing.

So, even though you might think that low interest rates help, they do, but only if housing prices don't rise accordingly—which they have. The second reason is that you also have record low inventory. As the pandemic began to take shape last year, fewer properties were listed on the market for sale. Realtors had a difficult time showing homes, and sellers preferred to take their home off the market and stay put rather than risk putting their home at risk.

Combine that with record low interest rates and a flurry of buyers willing to pay whatever they can, no matter what the cost is, and that further perpetuates an even more limited supply that keeps pushing prices higher. Now, third, something new we have not mentioned is that you also have record low construction rates throughout the entire country.

Simply put, a lot of the builders were unsure of how the pandemic would unfold, and they temporarily put their projects on pause while they dealt with economic uncertainty and a shortage of labor. Obviously, construction is a career that can't be done remotely. When measures were put in place to prevent people from going into a job, that caused new construction to decline by 25%. Not to mention, those projects often take a year or more until completion, so we're facing a severe backlog of homes that have since been delayed.

Then fourth, we have the increased cost of building materials. In the last year, lumber prices have increased as much as 400%, adding on roughly $36,000 to the cost of buying a new home. The increased cost of materials does not apply to just wood; supply chain issues and limited capacity also raise the cost of installation, steel, plumbing fixtures, paint, stone, and everything else it takes to build a house.

So, what winds up happening is all that increased cost gets passed on to you as the customer. In fact, a study found that homes went up an average of 18% just from that alone. I say all of this because the reality is these conditions cannot last indefinitely. At some point, interest rates are likely to go back up; at some point, it's going to be a buyer's market again; at some point, building materials will come down in price.

And now, it's beginning to look like it's happening a bit sooner than we expected. Alright, so here's what's happening today. CNBC now reports that in June, new listings have increased 5.2% year-over-year and 10.9% month-over-month compared with May, which means there's now more inventory coming on the market for buyers to choose from. That's a relief for the entire housing market.

However, even though it is an improvement, housing prices are still up 12.7% nationally compared to a year ago. Inventory is also still down 43% since June of last year, and nationally, the typical home is only on the market for 37 days compared with 72 days during the same time in 2020.

Even though more inventory is coming into the market, listing prices are still going up, indicating that there's still no shortage of buyers out there willing to pay whatever they can just to get themselves a house. This is further amplified by CNN, who reports that the housing market is still on fire and the FED keeps adding gasoline.

That's because the Federal Reserve has continued to support record low interest rates, which drove the housing market way higher than it would be normally. In the process, first-time buyers are outpriced of the market, and that further worsens income inequality between those that could afford to buy a house and those that can't. That's led to record high housing prices that even the CEO of JP Morgan says is a little in a bubble.

But the situation is not as severe as in 2008 when there was a lot more leverage and poor underwriting standards. However, as we all know, these conditions just can't last forever. So how much longer do we have to wait until prices start coming back down?

Well, on a broad scale, in terms of the market going down in price, there's actually some good news if you're in the market to buy something. That's because first, pending home sales increased 8%, leading an economist to believe that maybe housing prices are going to start to come back down. The chief economist of the National Association of Realtors predicted that more homes will be listed in the latter half of the year, which would help slow the pace of home price growth.

Second, we also got to take a look at mortgage applications. Analysts say that in order to get a good idea of where home prices are going, you need to take a look at mortgage applications because future sales are a direct result of how many people are out there currently applying for a new loan. Just recently, mortgage applications have fallen to the lowest level in a year, indicating that first-time home buyers are getting squeezed out of the market due to a lack of entry-level homes for sale.

Now, before you go off on me because that doesn't sound exactly like a price drop, economists say that this could very well mean that prices are soon hitting a peak and that sales will soon hit bottom, given the flattening in mortgage demand over the past couple of months. Third, lumber prices did end up dropping 40% in June, which is the biggest monthly drop on record.

This, they say, was partially due to the reopening as Americans are going outside and taking vacations instead of completing home renovation projects and building. They also say that as supply chains begin working properly again, lumber prices should continue to fall, and all of those increased costs throughout the last year should begin to subside.

Then fourth, like I mentioned, more inventory on the market means more competition for sellers and more selection for buyers to choose from. This also solves a really unique problem because a lot of sellers refuse to list their homes on the market because they have nowhere to move to due to a lack of inventory on the market to begin with.

Although, as more people list their homes, that should encourage other people to list their homes, which might encourage other people to list their homes, and that will help the market. But even though housing materials are coming down, mortgage applications are slowing, and inventory is going up, does that actually mean we're going to see a drop in housing prices?

Well, not so fast. Even though things are starting to look better, that does not mean that housing won't remain somewhat expensive. For example, first, strict building code regulations mean that fewer homes are going to be built, leading to a housing shortage across the country and a constantly dwindling supply since 2006. That's something that's unlikely to change anytime soon, even if we do start seeing more inventory come on the market.

Now, second, interest rates are expected to stay low for another year or two. Just recently, the Federal Reserve noted that inflation came in a little bit higher than expected, and because of that, they're ready to increase interest rates sooner than they initially anticipated. They still maintain that the inflation we're seeing today is transitional; it's mainly due to a result of excess demand combined with supply chain issues, like our lumber example, and that they still plan to keep rates low, although we may see an uptick in 2023.

This means that real estate may continue to be very competitive throughout the next year or two, at least until interest rates start to have an impact on the market. The third aspect from all of this is that the mortgage giants Fanny Mae and Freddie Mac forecast that housing prices will rise 8% in 2021 before slowing down to 2.9% in 2022. Jillo is a little bit more ambitious when it comes to this, believing that housing prices could rise another 14.9% year-over-year.

Fourth, I never thought I would say something like this, but because materials are beginning to come down in price, builders are purposely slowing down their projects in order to wait for their materials to decline. Otherwise, they risk putting themselves in a position where they overpay the cost of materials. They extend themselves further than needed, and then by the time the home is actually ready for sale, those materials have gone down in price, and they need to make up the difference.

Builders are now starting to say that it's better to wait a year to buy until home prices begin to subside. And yeah, we've officially entered the Twilight Zone when builders are telling you not to buy what they have. They've also encountered issues keeping their homes on budget, noting that they can't price a home at a time of wildly fluctuating prices.

It's also said that at the current pace, the number of houses on the market nationwide won't reach normal levels for about 14 months, all things being equal. The most important metric we could start looking at today is inventory, which, as we could see, is starting to go back up.

So, I know all of this is confusing, and you just want to know: is the market going up or is the market going down? So here's my take on it, coming from the perspective of someone who's worked full-time in real estate since 2008 and is someone who owns eight properties across the West Coast.

Well, fundamentally, there's really nothing out there that screams that the market is going to come crashing down. So, for everyone who's waiting for a crash to happen, it would probably have to take a Black Swan event that no one could predict that would collapse housing values. Like back in 2008, the housing market was completely shattered by overleveraged borrowers who could not sustain their housing payments and were given more than they could handle by banks who wanted to package up all these loans and sell them to investors who are hungry for cash.

Today, though, buyers are extremely qualified; they're putting down a lot of money, they're locking in historically low interest rates, and most importantly, they can afford the monthly payment. That's going to prevent us from seeing a wave of foreclosures, like some of these articles say. However, there certainly is some concern about the end of mortgage forbearance potentially dropping tens of thousands of homes on the market all at the exact same time.

Here's the reality: the amount of homeowners currently in forbearance has been steadily declining month after month, suggesting that the majority of homeowners are beginning to resume their payments as normal. For any homeowners who cannot make their payment, most likely they would be able to list their homes on the market, sell it for profit, and then walk away with the excess cash.

In order for a home to really go into foreclosure, the buyer has to owe more money to the bank than what the home is actually worth. Only 2% of all mortgage properties fall in that category. That's it! So, the chances of all of them foreclosing all at the exact same time is pretty much not going to happen.

Instead, realistically, I think the biggest risk to housing prices is likely going to be rising interest rates, which is said to happen in about 24 months. In the interim, though, building materials have already started to come down in price. We're also starting to see increased inventory and also increased building, which is slowly going to soften the housing market.

Until then, we just got to keep an eye on inventory. The truth is housing prices could very well continue to rise if demand stays exactly the same. But artificial factors like high building materials will inevitably start to come down between now and the next 12 to 18 months. That means, as all of these analysts have predicted, the housing market could sustain an upward momentum, but it's likely to start slowing down as the co market comes to an end.

To me, I don't see anything pointing to a crash, but I do see a lot of things that I believe will start to normalize housing prices, and that I think is a good thing. Plus, if I were to guess, rental prices would probably be the next thing to start going up, since so many people are sitting on the sidelines just outpriced from the housing market.

Rental demand is probably going to continue going up, like rents have typically lagged sale prices throughout the entire pandemic. Now we're just starting to see a rental price uptick as people begin to return back to work. Just a heads up for anybody thinking of locking themselves into a lease, because as everything gets more expensive, unfortunately, your rent could be the next thing going up.

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; posts are pretty much daily. So if you want to be a part of it there, feel free to add me there as my second channel, the Graham Stephan Show. I post there every single day, don’t post here. Thank you so much for watching and until next time!