Stop Buying Homes | The Housing Crisis Just Got Worse

What's up, Grandma's guys? Here, so, uh, yep, it's official. The housing market bubble could burst this year, according to this guy!

Okay, no, but seriously, it's long overdue that we talk about what's going on. Because as both a real estate agent and real estate investor, it is shocking to see the current state of the market. Even though housing prices rarely ever see any abrupt movements, we are about to see some fundamental changes to home affordability, and that is worth breaking down.

For instance, mortgage rates just hit four percent for the first time since 2019. The national home lender Fannie Mae warns that the housing market is about to soon enter a new normal. And the most shocking from all of this is that I'm going to be putting my home on the market for sale! Yep, it's not click bait, but I'll explain it shortly because it's complicated.

Anyway, there's a lot that I'd like to get off my mind in terms of the real estate market. Because even though it's easy to get caught up in spooky headlines and market cycle charts just like this, it's important to look at the data, see what's happened in the past, and then come to a reasonable conclusion as to the outlook over these next 12 months. Oh wait, you just blinked!

Rents are now at 40%. But before we start, I know I joke all the time about asking you to smash the like button. But in all seriousness, the more likes a video gets, the more likely the YouTube algorithm is to recommend this video to a brand new audience. So if you want this video to randomly show up in someone else's homepage while they think to themselves, "Who is this guy, and why is he always sad in every single thumbnail?" just hit the like button!

As a thank you, here’s a picture of a cleaner shrimp. So thank you guys so much! You know, with that said, let's begin!

Alright, so for anyone who wants a quick 60-second explain like M5 version of what's going on in the simplest way possible, here’s what you need to know. Because this background is going to tie everything else together.

First, the March 2020 interest rate reduction allowed homeowners to lower their monthly payments while simultaneously having more purchasing power at the exact same time, thereby increasing prices. Second, the shutdown resulted in a record low number of homes on the market, and with a severely restricted supply, the leftover inventory was bid to even higher numbers. Third, supply chain bottlenecks meant that housing materials took longer to arrive, they cost more to buy, and that cost is passed on to the consumer. And fourth, labor shortages also fed into the overall cost of housing. With fewer people available to do the work, either they charged more, or fewer homes were built.

All of that happening at the exact same time has led to one of the hottest housing markets with some of the highest increases for both purchases and rentals. But that could all be soon coming to an end. Because there are some fundamental changes coming to these four items that could have an impact on pricing throughout 2022.

First, we got interest rates. It's no surprise that with inflation recently clocking in at seven and a half percent, interest rates are going to go up. With mortgage rates now rising to four percent, home affordability is directly affected. Just consider this: a year ago, if you got a five hundred thousand dollar mortgage at 2.8% interest rates, your payment was going to be two thousand fifty-four dollars a month.

But now, today, that exact same loan at a four percent interest rate is going to cost you twenty-three hundred and eighty-seven dollars a month, which is 16% more expensive! This kind of math also works in reverse. If you could afford a two thousand dollar a month payment, your loan is set to 487 thousand dollars at a 2.8% interest rate. But with rates at four percent, that two thousand dollar a month payment only gets you 419 thousand dollars, or almost sixty thousand dollars less home.

Now in terms of where we go from here, the Mortgage Bankers Association predicts that interest rates will continue to rise, ending the year at four point four percent. And as a result, they believe that home prices will decline by an average of two and a half percent. But is there actually any truth to that?

On the surface, it makes sense that the higher interest rates go, the less people can afford, and as a result, prices drop. But the more you look into it, the more you begin to realize that it's not exactly that simple. Robert Schiller himself, the king of the Schiller price index, was quoted as saying there's not a tight fit at all between the two. High mortgage rates do not translate automatically into low home prices. And then he backed it up with this chart right here. As you can see, even despite interest rates being increased and subsequently decreased, home prices continue to move higher—almost as though it ignored every piece of conventional advice that should have made a difference.

As for why this happens, it was explained that mortgage rates usually only increase during improving economic conditions or rising inflation. As a result, other factors in the economy that usually accompany a rate increase usually prevent prices from crashing to begin with. Another consideration that they mentioned is that mortgage rates tend to be pretty sticky in the sense that once a homeowner locks in a low interest rate fixed for 30 years, they're less likely to move. Because if they did, they would have to lock in a new higher interest rate, therefore costing them more money, meaning they're less likely to sell.

The same also applies to the purchase price. Even if they bought a home at the top of the market and then prices immediately declined by 15%, as long as those homeowners could afford the monthly payment, they're unlikely to sell because they couldn't afford to take the upfront loss. Causing, of course, again for prices to remain relatively stable. To quote them directly, "Rising interest rates create a domino effect. If you sell your home, then you must buy a new one at a higher interest rate than you were probably paying before."

Another study also supports this while confirming that it's hard to see any correlation for rising rates causing lower prices. However, it does appear that it is a factor for home affordability in addition to housing supply, the economy, lending guidelines, population changes, new construction, and home affordability. So in short, yes, rising interest rates do make a difference, but not enough on their own to cause prices to fall.

Second, we got new mortgage options. Beginning now in 2022, both Fannie Mae and Freddie Mac have increased their loan sizes by 18%, resulting in a maximum loan size of up to a million dollars throughout 100 high-cost of living cities. As you can see, this is the largest loan increase on record, and it was meant to reflect the lack of home affordability throughout some of the most expensive areas.

Or in other words, since real estate went up 10% to 35%, they've adjusted their loan limits accordingly, so they always lend in relation to the overall market. As the Wall Street Journal reports, the increase may make it easier and cheaper for some borrowers to buy a home, particularly in more expensive areas of the country. But the higher limits are also likely to elevate the debates on how big of a mortgage is too big to be backed by the government.

Now, it's important to mention that this is not the first time these limits have been increased. By law, every single year they have to be adjusted to reflect the current state of the market. Although it just so happened that this last year saw a huge price increase. So as a result, buyers are now able to borrow substantially more money.

On one hand, this gives buyers more room to purchase a home in these current conditions. Not to mention these higher limits would no longer punish buyers who happen to live in a high-cost-of-living area where a starter home is a million dollars. But on the other hand, some housing experts say that the expected jump in loan limits raises questions about the appropriate role of the government in housing and whether taxpayers should effectively backstop sky-high housing prices when Fannie and Freddie's market share is already rising. It's kind of like: prices rise because they raise loan limits because prices are rising. The whole thing is a mess.

Third, rising rents! It's no surprise that alongside rising housing prices, we're also seeing record high rent increases in equal proportions, sometimes as high as 40%. Which on the surface, I agree, it sounds absolutely absurd. In fact, some outlets say that rents are rising faster than property values, and they're right!

It's common that rental prices tend to lag housing values by sometimes as much as several years. Since when you sign a lease, you lock yourself into a scheduled price during which that rent stays exactly the same. However, one to two years later, when your lease is up, the landlord is free to raise your rent to a market rate, which is why you don't often see rent increases until much, much later. Or in this case, it's today!

As a landlord myself, I could personally attest that rising costs have impacted almost every single aspect of effective homeownership that need to be taken into consideration. For example, if I need to go and fix a broken sink, the faucet is now 20% more, and the plumber I have to pay to install it is now thirty percent more. Insurance costs are also going up because replacement values are increasing the premiums. At a certain point, those costs need to be factored into the cost of your overhead. Therefore, the minimum cost of rent.

Unfortunately for anyone renting, it doesn't look as though higher rents are going to subside anytime soon. From everything that I could find, there is nothing that suggests it's going to get any easier. However, in terms of rents rising as much as 40%, I do have to say that is somewhat false and it's entirely calculated by how Redfin defines a rent increase.

See, normal people hear 40% rent increase, and they imagine their rents going from 2,000 to 2,800 a month. But for this 40% number, the amount shown is the average rent—not the average of what all renters are paying, but the average cost of apartments that were available for new renters during the report month.

Or in other words, if you have a bunch of brand new construction luxury buildings available for rent and that rent is twice the cost of the older buildings, the higher prices averaged out, and therefore you see a 40% rent increase, even though the older buildings were never worth 40% more to begin with. So we could call that claim somewhat debunked. But there is truth that rents are increasing, but no, they're not rising as much as 40%.

And finally, fourth, in terms of the new normal, here's what this means for you in the overall housing market. The mortgage giants Fannie Mae and Freddie Mac warned that inflation will remain high and that home price growth will continue, adding that it's unclear what structural shifts in the economic and housing markets over the last two years will be permanent.

They also anticipate that home buyers could struggle with affordability challenges and predict home prices to jump another 7.6% this year. That just means that this year will be returning to a new normal. While supply chains are still continually strained, inventory continues to stay low, and demand continues to stay high.

But hey, you know what? At least on the bright side, they expect the recent rapid house price appreciation and rising mortgage rates will lead to growing affordability constraints, dragging on home sales but also likely limiting further price appreciation to a more sustainable pace. Or basically, they're just trying to say that prices are going so high that it's going to stop prices from rising much more.

In this case, their new normal is simply a lot of demand, low inventory, rising costs, and a lot more of the same throughout the rest of 2022.

Although finally, the words I never thought I would say: I'm going to be listing one of my rental properties on the market for sale, which would be the first time that I've ever listed anything that I have personally bought. See, when I first started selling real estate in 2008, I heard a recurring theme throughout some of my wealthiest clients. They almost all said they regretted selling their first few properties and would have been much better off had they just held. So that stuck with me.

From that point on, anytime I would go and buy a property, I went in with a mindset that I was going to be keeping it for the rest of my life. Just knowing that if I sell, I have to pay capital gains tax, I lose my cost basis, and I have to find a replacement. So I have largely resisted letting anything go—until now.

In my situation, this is a property that I purchased in 2011 for seventy-two thousand dollars in cash. Since then, I've had the same tenant paying the same rent for the last ten years. I honestly had no intention of ever selling it until recently when there was some unexpected water damage. The insurance company requires that it undergo about three months’ worth of renovations to bring it back to habitability.

This gave me the thought that since this area has gone up substantially in value, I now live out of state. I haven't been to the area in several years. I've depreciated the property as much as I can over that time frame. Now would be the opportune time to sell once the renovations are completed, and then I would be able to let go of a relatively turnkey brand new property in a state that has a relatively high tax.

In any other circumstance, I would choose just to continually rent it out. But with a fresh renovation on a vacant property, I believe that selling would be a reasonable move, and then I could move that money over to Las Vegas and maybe buy something locally.

Even though this is something I never anticipated doing, and I still plan to keep everything else, the more I think about selling this one, the more I think it makes sense in the long term.

But overall, it does appear as though the housing market is poised for more of the same in 2022. Although at the end of the day, no one has a crystal ball. Even though the pieces of historical data available to us, anything can happen, and it's up to us to make the most of it.

Because of that, if you're looking to buy a home, do your best to shop around, make yourself as strong of a buyer as possible, walk in a 30-year mortgage at the lowest rate you could find, and then just be patient. For renters, if you're worried about the price increasing, do your best to negotiate with the landlord and lock in as long of a term as you can, or consider seeing other options in the area to make sure you're getting a fair price.

Ultimately, the burden is going to fall on you to make sure you're not getting ripped off. So a little research here goes a long way! And finally, I’d like to turn this back on you. If you have any thoughts on the video, if you have any feedback, if you agree or you disagree, also make sure to hit the like button, subscribe button, add me on Instagram and on my second channel, The Graham Staffing 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. Thank you again so much for watching, and until next time!