Stopped Paying Mortgage | The 2020 Real Estate Collapse

What's up you guys? It's Graham here. So, I wanted to cover one of the most requested topics here in the channel over the last month. Besides the giant murder hornets coming to the United States. Really quick, have you seen these things? They're massive! If this gets much worse, toilet paper is not going to be the only thing flying off the shelves anymore; it's gonna be fly swatters.

Okay, but seriously, I've received the recurring comments that everyone has wanted me to address, and that would be: what is going to happen with the real estate market, and are our housing prices going to come crashing down? Like it’s a surprise to you, for the last ten years, housing prices have really done nothing other than go up and up and up. It's largely been a seller's market for years, and during that time, a lot of people have been waiting on the sidelines, just patiently expecting prices to come back down to a more affordable level.

So, is this that opportunity that we've all been waiting for? Especially when four million people have stopped making their mortgage payments? After all, the stock market recently saw a 34% correction from its peak. Over 30 million people are still on unemployment, and almost one out of every ten mortgages are in forbearance. So, this must have some serious implications for the real estate market, right?

Well, let's take a look at the data and the research, and then use that to determine how hard the real estate market might be hit over the next few months to two years. And if it does drop, then when is a good time to buy in?

And I say this as someone who pretty much built their entire career from real estates. I began working as a real estate agent in 2008, right as home values started going down. I then used all of that money to begin investing in real estate in 2011 and 2012. Even when I was making YouTube videos back in early 2017, the main focus and topic of the channel at the time was real estate.

So, let's get back to it and cover exactly that: what is going to happen with the housing market? What is going to happen with the nearly 10% of mortgages that are in forbearance? Well, will the real estate market come crashing down? And finally, will you smash the like button for the YouTube algorithm? Seriously, these types of data and research-driven videos take me significantly longer to research, plan out, film, and edit. So, if you guys enjoy them, make sure just to make the like button turn blue, which helps me out a lot.

And with that said, let's begin. Here, first it’s not surprising why so many people are wondering about the housing market. Because, unlike stocks, you can't just go online and check the day-to-day price fluctuations of housing values. It's not like you could check home values on Monday, and it’s $250,000, and then on Tuesday it went down to $247,000. But Wednesday we had a great day, and it went up to $255,000. It doesn't work like that.

Instead, the price of a home is largely determined by mortgage interest rates, the amount of demand for that specific home and area, how many other listings are on the market, and honestly, how well that home is marketed to the public. This is why home values become a very mysterious, unknown number that becomes very difficult to analyze in relation to our economy.

And because real estate is a lot more difficult to sell than, let’s say, your Carnival Cruise stock, we're not going to really know the full implications of this illness until after it's already happened. That's because, in order to determine where home values are going, there needs to be a trend of sales and data to analyze. It's going to tell us what's going on with the market, and that takes a lot of time. You can't just go and list a home and sell it in a matter of hours; you have to go and put it on the market, have virtual showings, maybe hold open houses, get a buyer, that buyer has to negotiate the deal, and then do inspections, and then get a loan.

The entire process from start to finish could take upwards of 60 days. So, what we see now in real estate is really just a reflection of what's happened two months ago, not what's going on today. But let's take a look at what's been happening and then try to use that data to figure out what might happen in the future.

So, given that, let's talk about a few of these looming real estate concerns. The first would be record high unemployment, where if those people are not making money, they're not making their mortgage payments. Like I mentioned earlier, 8.8% of mortgages are in forbearance, which means that lenders need to make payments to the investors on behalf of the homeowner. And even though the Federal Reserve agreed to buy these mortgage-backed securities from the banks, the worry is that at some point banks might begin restricting who they give a loan to, which means that fewer buyers might be able to qualify for a loan.

And when there are fewer buyers out there buying homes, that could cause prices to go down. Another concern is that when 35 million people are unemployed, many of them will be unable to pay their rent. This means that landlords might have to reduce the rent to help ease the burden on the tenant. And with lower rents, property values would fall in accordance to that.

The big fear, though, is that if people are not out there buying homes, then property values could fall from that. A portion of the homeowners could be underwater on their mortgage, which is where they owe more on the home than what the home is actually worth, and that could cause a wave of foreclosures across the United States.

But how close are we to seeing something cataclysmic? Well, we could begin by looking at Redfin, who is one of the leading real estate brokerages to go and analyze buying and selling data. Yes, you might be able to argue they're a little bit biased because their entire business model revolves around real estate. But the truth is their business model actually revolves around transaction volume. Meaning, Redfin doesn't care if values go up or go down; all they care about is that people are buying and selling, and if they do, Redfin makes money. Plus, they're able to gather a ton of data, so we could use that to our advantage to try to figure out what's going on with the broad market.

And the results were actually pretty surprising. First, they found that in April, we saw a 50% decline of inventory on the market compared to the previous year. Meaning that 50% of sellers are choosing to hold off from listing their home and not selling right now. This makes sense; there's a lot of uncertainty in the market right now, and with the illness going around, sellers don't want random people walking through their home. I totally understand that. Plus, in many cities, showings were actually banned in residential properties, so that forced people to sit on the sidelines.

However, now in May, they found an only 24% drop in listing as compared to the previous year. That indicates that sellers are slowly beginning to re-enter the market, although there's still far less inventory than usual. Next, as far as listing prices are concerned, meaning how much a seller asks for a property, Redfin found that listing prices are up 5.4% from the previous year, following a 1.7% drop in April that brought the average listing price down to $302,000.

But even more surprising is the recent surge in home buying demand, which just surpassed pre-crisis levels. Now for anyone not aware, Redfin classifies home buying demand as anyone who reaches out to tour a home, make an offer, or inquire about a property. And that shows there's a lot of people out there waiting to buy a home and waiting for the right opportunity.

In the search for home buying demand, they found that homes are selling at the exact same speed as they were back in 2019. Meaning as of May 8th, 45% of listings are under contract within two weeks, with mortgage applications up 11% from a week earlier. But with all of that, I'm sure what we really all want to know is, are prices going up or down? And data from the National Association of Realtors found that home prices actually increased in 96% of all metros during the first quarter.

Full disclosure here, but that is led by pre-crisis sales. But even in April, overall home prices remained relatively unchanged. The reason why is a simple case of supply and demand. In April and May, there was way more demand than there was supply, and that kept prices relatively unchanged. A lot of sellers who could afford to wait it out just decided not to list, and with fewer listings on the market, there's more competition between buyers to get whatever else is available.

Now, as far as where property values are going up the most, it was found that the largest metros with selling prices under the national average of $280,000 saw the biggest increase. Those areas included Detroit, Memphis, and Philadelphia. On the other hand, San Francisco is actually one of the few areas to see a price decline of 0.2%.

Although, let's be real, who cares about what just happened? Because all of that is in the past, and what really matters the most right now is what's gonna happen in the future. And for that, we should look at the price predictions from the experts. CoreLogic, who is one of the largest data analytics companies, found that even though prices have risen 4.5% year-over-year, they expect that over the next year we'll see an increase of only 0.5% from where we are now.

Which, when we account for inflation, works out to be a slight loss. Zillow also published their own predictions, which estimated that real estate values would drop 2.7% by October of this year. Although sometimes you can't just look at what a company is saying, but instead what they're actually doing. Companies like Redfin and Zillow have both resumed their home buying businesses, where they can make an instant offer to the seller and buy the home directly for a preset price in a matter of days.

To me, this just seems like an indication that both companies see tremendous value in giving sellers an easy out. If they want to sell their home but don't want to list it on the market, don't want buyers and sellers walking through their home, and they don't mind getting a lower price in exchange for an easy, seamless transaction.

However, in the past, these ventures were flops, and last year Zillow estimated that they lost almost $4,500 on each home they sold. But now maybe they see this as an indication that more deals are coming up, and they want to be there to take advantage of that. Perhaps they're going to be buying up all the Airbnbs that were used as vacation rentals. But who knows?

Although one aspect we do have to consider is unemployment. We can't ignore that with 15% of our workforce out of work, how many of those people are gonna have jobs to return to once all of this is over? And whether or not people are going to be returning to their normal spending. The city of Chicago estimated that 42% of jobs lost during the crisis are gonna be gone for good, and the only thing keeping a lot of people afloat right now is the increased unemployment benefit.

In a way, from my perspective, this just sets an unsustainable precedent. That yes, right now, money is coming in, but this is not sustainable without jobs to return back to or without an unemployment benefit that continues until things resume back to normal. Yes, I do have a feeling that unemployment benefits are going to be extended or some type of stimulus is going to be enacted to help bolster the economy. But if that doesn't happen, we could be in for quite the shock if people don't have jobs to return to and can't make their mortgage payments or can't pay the rents.

And that's something we've already begun seeing in more expensive markets. For example, New York saw a 4.3% decrease in rents over the last year, as landlords reduced their asking prices to get their units occupied. Rents in Los Angeles also decreased by two cents per square foot, which doesn't sound like a lot, because it's really not a lot, but it is significant because this marks the first decrease in rents in Los Angeles in over a decade.

This means that if rents go down, then typically property values go down alongside with it, especially on multifamily real estate. That's value depending on how much money it makes. This also does not include the mortgage forbearance rate of 8.8%. If those people can't make up the payments or add those missed payments to the end of the loan, they'll either be forced to sell or go through the foreclosure process with the bank.

So, as it stands right now, today, the average homeowner has about 60% of equity in the property, and about 40% of all properties are owned free and clear. That means we would be highly unlikely to see a large wave of foreclosures unless real estate values plummeted by like 30%. And that would end up leaving a portion of those homeowners underwater on their mortgage.

See, here's how that works: when homeowners are foreclosed, it just means they stopped making the payments to the bank, and the bank has to take back the ownership of the property to recoup their loan. But if you owe $100,000 on a home that's worth $150,000, then there's no way you're letting the bank take your property because it's worth more than what you owe on it. So instead, you would just sell the property, get some of your money back, and then pay off the loan with what's remaining.

However, if property values were to decline by 50%, where all of a sudden you owe $100,000 on a home that's only worth $90,000, then yeah, at that point, there's no incentive for you to continue paying off the loan. And you're more likely to let the bank foreclose you. Because even if you go and make those payments, you're still losing money.

So, in this case, even though there are mortgages in forbearance, it is highly unlikely that everyone is gonna stop paying their mortgage once the forbearance period is up. It's also highly unlikely that everyone is gonna want to sell at the same time. And it's highly unlikely all of that is gonna come crashing down on the market. Realistically, we are gonna have a portion of them defaulting on their loan and being underwater on their mortgage.

After all, as of last year, just under 10% of homeowners with a mortgage owed more on the home than what it was worth. Although a sizable portion of those people will still choose to make their payments or refinance their loan, or rent out the property to cover their costs, or basically resort to a foreclosure as an absolute worst-case scenario. That should overall hold prices relatively stable for the time being.

However, I also want to be a realist and just say this: the reason why home prices have yet to be affected is because real estate values typically lag behind everything else. Being able to sell a home takes time, and we're not going to be able to see the impact of that for at least another few months. It's not like the stock market, where you can just see the price of the stock going up and down by the minute.

In addition to that, interest rates are also incredibly low—so much so that if you can get a loan of under 3.5%, it's essentially the bank giving you free money. That's a huge incentive for people to go and take out a loan, buy a house, and lock in a long term interest rate at under 3.5%. And obviously, that's gonna drive way more demand for homes.

The other reality is that anyone who does not need to sell a home right now is not selling. That just means there's gonna be a lot less inventory on the market. And when you combine that with really low interest rates, it should keep real estate prices relatively stable.

Well, though, we have to acknowledge that what we're seeing right now is not normal, and once we begin to open back up the economy, we're gonna get a true sense of how many sellers want to get out of their property. We're also gonna be seeing how many buyers there are to pick up those properties the sellers want to sell. We're also gonna be seeing how many homeowners are able to restructure their loan to be able to keep the property.

So, even though as of right now property values are relatively unchanged, there's so many what-ifs that could impact the property values and cause us to keep stable or end up going down. And in terms of how values are gonna be impacted, I have a feeling it's gonna be very similar to the stock market, where some real estate markets are gonna end up doing really well and others not so much.

You don't really see much upside in real estate right now. You should not expect to buy a home for $500,000 today and then next year it’s magically worth $550,000. Unless, of course, you get a really good deal on it. But I do believe a few things.

First, this can be a good time to buy if you find a good deal and you can lock in a really low interest rate, with the intention of holding onto the property long term. The buy-and-hold approach right now is going to be ideal for this type of situation or really any investment right now, for that matter.

And second, it's very possible that real estate comes out of this relatively untouched, although it's really too early to tell, and a lot of it depends on whether or not unemployment benefits are extended, when our economy reopens, whether or not people resume their normal spending, if homeowners are able to restructure their loans, and whether or not you smash the like button for the YouTube algorithm.

So with that said, you guys, thank you so much for watching! I really appreciate it. As always, if you guys enjoy content like this, make sure to destroy the subscribe button and the notification bell so you get notified anytime I post a video. Also, feel free to add me on Instagram. I post here pretty much daily, so if you want to be a part of it, feel free to add me there, as on my second channel, The Graham Stefan Show. I post there every single day I'm not posting here. So, if you want to see a brand new video from me every single day, make sure to add yourself to that.

And lastly, if you guys want free stocks, use the link down below in the description, and Weeble is going to be giving you 2 free stocks when you deposit $100 on the platform, and one of those stocks could be valued up to $1,400. So if you want your chance to get two free stocks, use the link down below in the description. Let me know which two free stocks you get. Thank you so much for watching, and until next time!