The Biggest Housing Crash Of Our Generation Is Coming

What's up guys, it's Graham here. So, I normally don't post back-to-back real estate videos, but when I saw this headline, I had a feeling that quite a few people are going to be asking for my thoughts. If you don't know what I'm talking about, it's this: mortgage demand drops to a 22-year low as higher interest rates and inflation crush home buyers. To make matters worse, some articles are even saying that foreclosures have increased at a rate of 700 percent, while the Federal Reserve is days away from another rate hike of an additional 75 to 100 basis points. This gives us the clear signal that mortgages could soon get a lot more expensive.

So, let's talk about the new housing data that was just released, what the signals are in terms of the future of the housing market, if there will be an opportunity for Millennials to finally afford a home, and then the question I’m sure you all want answered: how did this man push a peanut up a mountain using his nose? Yeah, seriously, that was a real news article as of a few days ago. But don't you worry, I got you covered on that and more on today's episode of Everything is Fine.

Although before we start, since mortgage rates have increased, it would mean a lot to me if you increased that like button and subscribed if you haven't done that already for the YouTube algorithm. Doing that costs you nothing, it's totally free, it takes you just a split second, and just thank you for doing that. Here's a picture of a baby dolphin! So thank you so much, and now with that said, let's begin.

Alright, so to start, once a month, the National Association of Realtors publishes their data on the latest market updates, home pricing, and mortgage trends to give their insight as to the direction of our economy. This last month was, uh, well, surprising. Now, on the most basic level, we have the stats that everyone is talking about: mortgage demand plummets 22 percent. New applications for a mortgage fell 19 percent, lower than the same week in 2021, and refinances are down 80 percent year over year.

But the most mind-boggling part from all of this is that home prices still went up and are now 13.4 percent higher than they were a year ago. So how is that even possible? Well, as they explained, part of this price increase has to do with time on the market, which references how long a home is listed for before it sells. In June, homes stayed on the market for an average of 14 days, which is two days less than they were back in May and three days less than we saw a year ago in 2021.

This means that despite all the anecdotal stories, sellers are actually getting faster offers at higher prices. But, uh, there is a bit of a catch. Even though more inventory is being listed, the record low pace of time on the market implies that homes priced right are selling quickly, and homes priced too high are simply turning buyers from even making an offer. This partially explains why we're seeing so many price cuts despite the average selling price continuing to go higher.

And here's a simple way to visualize it: here's a very silly looking cartoon. When sellers expect their home to continue appreciating at 30 percent every single year, it's easy to get ahead of themselves and ask a price that's unrealistic in a market that's beginning to soften. On the other hand, sellers who price in line with current values get their asking prices and earn more today than they would have a year ago.

Now, in terms of who's buying these homes, it's mostly BlackRock, if they could rent them back to you for an even higher price. Just kidding! First-time buyers actually made up the largest share of purchases, with 30 percent of the overall sales volume, while investors and second home buyers came in at 16 percent.

But in terms of where future values might be headed, there's one other report to look at and that would be a report from home builders. Now, just like the National Association of Realtors pulls data and then extrapolates what we've already seen, homebuilder information gives us an in-depth look into the future. Evidently, based on the data, the housing market is in a meltdown. According to the most recent report, builder confidence for new single-family homes posted its seventh straight monthly decline in July, which is one of the biggest single month drops in its 35-year history.

As they explain, production bottlenecks, rising home building costs, and high inflation are causing many builders to halt construction because the cost of the land, construction, and financing exceeds the market value of the home. While 13 builders reported reducing home prices in the last month to bolster sales and/or limit cancellations, however, that's just for single-family homes. Once you look at multi-family construction, that number changes substantially, with construction for five units or more rising by 15 percent.

As they say, rising rents are creating an incentive to build more rental units, even in the face of rising finance costs. So, in a way, it's kind of like a double-edged sword. Because if builders scale back during a time when inventory is already extremely low, we'll be faced with an even worse housing shortage, keeping prices high.

So, in terms of what we could wind up seeing throughout these next few years, I wanted to share a really interesting breakdown from the newsletter Calculated Risk, which I'll link to down below in the description because this gets good. As Bill McBride points out, most people are making the mistake of comparing our current housing market with that of 2008. But lending requirements are vastly different today than they were in the past. To get a true reflection of what's actually going on, look no further than 1978.

That was a time when the U.S. experienced runaway inflation, interest rates spiked as high as 20 percent, gas and energy prices soared, and home prices were caught in the crossfire. Both in 1978 and today, we've seen a similar uptick in year-over-year mortgage increases, with rates rising by more than 50 percent. Even the mortgage rates are lower today than they were in the past; there are a lot of similarities.

So what happened? Well, to get into that, it's really important that you understand the difference between nominal and real returns. In really simple terms, a nominal return would be your hundred dollars today growing to a hundred and twenty dollars a year from now. That would represent a 20 percent profit, and on the surface, that looks pretty good. But real returns factor in the boogeyman of inflation, where even if you make a 20 percent return, if inflation is 21 percent, you've officially lost money in terms of your net purchasing power despite your account growing in value by 20 percent.

Now, if that part doesn't make sense to you, just rewind by about 20 seconds and watch it over again, because once you understand that, all of this is going to start to make a lot of sense. As Bill points out, from 1978 through 1982, nominal home prices continued going higher, but real returns, when accounting for inflation, fell by 11 percent over three years, meaning home prices went up in terms of dollars, but because of inflation, their net value declined.

Even though people's net worths were going up on paper, does that make sense? The thing is, since homeowners were able to lock in low-interest fixed-rate mortgages, home values tend to remain sticky in the sense that those who aren't forced to sell won't sell. That's why we could very well see home prices continue to go up even though real values might decline.

It's also important to mention that this isn't just a matter of increased home prices but also rents, because this has a huge impact throughout the entire housing market, and almost no one is talking about it. As Reuters pointed out, multi-family construction gained ground as rising rents burnished the appeal of apartment projects.

This is an extremely important sentence that should not be missed. See, in most cases, investment properties sell for a multiple of what they make relative to other investment properties that are listed for sale. So, in really simple terms, if there's a building that makes a hundred thousand dollars a year in rent, there's most likely going to be a buyer out there willing to pay a million dollars and get a 10 percent return.

But if rents rise, and now all of a sudden that building makes a hundred and twenty thousand dollars a year, does it still sell for the same million dollars? Well, the answer is probably not. Even though some of that rent increase would be used to offset the cost of higher interest rates, most likely, you would be able to find a buyer willing to pay 1.1 million dollars just because your building makes an extra twenty thousand dollars a year in rent.

This is something that a lot of people forget. Large construction projects and apartment buildings are valued based on their gross rents and net operating income. So when rents are going up, long-term investors see this as an incentive to hold even more multi-family real estate, and therefore prices remain high.

In addition to that, rents don't always rise because of greedy, soul-sucking landlords who try to extract as much value from society as possible, but instead because overhead costs increase. There needs to be an equilibrium between what a tenant pays and what a property needs to make to simply break even. What many people fail to realize is that for a landlord, there is going to be ongoing maintenance, property taxes, insurance, repairs, vacancies, and a multitude of other factors that need to be accounted for that go into the bottom line of what needs to be charged in rent. Anything below that threshold would result in a loss to the point that it makes more sense to take the property off of the market.

Okay, but in all seriousness, inflation is increasing the bottom line for rents, which, in turn, is boosting up property values. But what about the foreclosures, Graham? And that's actually a really good point, because as I was planning this out, Patchback David posted a video explaining how foreclosures are up by 700 percent. So that's got to be bad news, right? We have 700 percent more foreclosures this year, same time, than we did last year: twenty-three thousand two hundred and four foreclosures, according to the database management company Attom.

Well, I found the exact source that he referenced, and I couldn't find a single mention of the 700 foreclosure increase anywhere. In fact, they say that foreclosures are up by 188 percent from a year ago. But I don't give up easily, so I did some more digging, and the only mention that I could find of a 700 percent increase in foreclosures came from a self-published article on Full.com in March of 2022, which references their source as Black Knight without providing a link. Then everyone else picked it up as a fact.

So then, of course, I went back to Black Knight, and even when you look at their own article from the exact same month, there is no mention anywhere of a 700 percent increase in foreclosure rates. If anything, they say that the number of active foreclosures edged slightly higher in March, making it the first year-over-year increase in almost 10 years. That hardly sounds like a 700 percent increase.

So, if there's any credible source out there that says this, I would love to hear it because I couldn't find it anywhere. But anyway, I digress. Foreclosures are up 188 percent, but that only sounds bad until you realize just how few foreclosures there were to begin with. It's kind of like saying foreclosure activity went up by 300 percent because they went from one to three. In this case, it's kind of similar; for the last 13 years, foreclosures have been trending downwards, with even pre-COVID markets stabilizing with just under a hundred thousand foreclosures a year. Today, we're at 33,000 foreclosures, or one-third of already extremely low levels.

If you're thinking about patiently waiting for one of those foreclosures to come on the market that could scoop it up, all I gotta say is good luck, and you'll have to be extremely patient because it'll take an average of 917 days to make its way through the legal system. The truth is, as it stands today, homeowners have on average 185 thousand dollars worth of equity in their homes, meaning on an average selling price of five hundred and seven thousand dollars, home prices would have to decline by 36 percent across the board just for those homeowners to break even.

That means the chance of this happening, even on a large scale, will homeowners stop making their payments while you then wait another three years to make its way through the system, is rather unlikely in a way that would make any meaningful difference on the market. Not to mention, less than half a percent of homeowners with a mortgage are more than 90 days late in their payments compared to almost five percent at the peak of the housing bubble.

So from everything that I could see, there is no risk of foreclosures flooding the market, and I cannot find a single piece of data that credibly says that foreclosures are up by seven hundred percent. So overall, in my own opinion, I would not be surprised if nominal values continued going even higher, while real values stayed flat or even saw a bit of a decline. For real estate investors, that could actually make a pretty good opportunity for rising rents. But for everybody else, my advice is pretty simple: just buy what you're comfortably able to afford when you're ready, on a home that you plan to keep for at least seven to ten years.

But from all the data that we're beginning to see, I would not be surprised if some markets begin to soften and the rate of returns begins to return back to somewhat of a new normal. It's nothing to me that spells out a disaster, and depending on the deal you get, hey, you can actually make some money. But you know what? What do I know? I'm just a talking head here on YouTube.

So with that said, you guys, thank you so much for watching! Also, feel free to add me on Instagram. Thank you so much, and until next time.