Are Real Estate Prices about to Collapse?

What's up guys, it's Graham here. So for anyone who's seen my previous videos, you know there's very few things I love more than iced coffee, homemade avocado toast, and telling everyone to smash that like button if you haven't done that already for the YouTube algorithm. And that would be real estate.

I am absolutely obsessed over real estate. Like, I've worked as a real estate agent full-time since 2008 here in Los Angeles. I currently own six rental properties that I bought and then renovated to then rent out. Pretty much everything I make is reinvested into buying more properties, so you could say real estate has pretty much been my focus for over the last decade plus.

I remember just barely getting into the business in early 2008, as prices were just collapsing into the abyss and everyone thought that real estate was just a fool's investment. Until it started going up in price, and then going up a price even more, and then even more than that. And now apparently we're going to see prices collapse again.

So with that said, welcome to an article I just read by The Balance. In it, they say a survey found that 58% of people felt like there would be a housing correction by 2020. As a result, eighty-three percent feel like it would be a good time to sell. The article even goes further to explain that national median family home prices are 32 percent higher than inflation, similar to 2005 when they were 35 percent overvalued.

And yes, wait for it—there are even more spooky statistics: 52 percent of home loans are now originated by lenders who are not regulated as banks. Then combine all of that with the lack of affordable housing and some other eerie similarities between now and early 2008, and isn’t it looking like we're heading towards a real estate crash? Or is all of this just another false prediction, like they've been saying literally every single year since 2009?

Here's what I think. First of all, going over the article, they do highlight two key points which could have an impact on real estate prices. The first one being rising interest rates. It's no surprise that when interest rates slowly began rising last year, the markets were not too happy. By "not too happy," I just mean that the prices were going down.

This is because as interest rates go up, money costs more to borrow, which means people and companies have less profit left over. This means they need to raise prices to offset that cost, and then when consumers can't afford paying more, they don't spend. When they don't spend, the economy doesn't do as well.

Okay, maybe that's not the perfect example, but basically, higher interest rates mean less profit for businesses and people, which usually isn’t as good for the economy. Rising interest rates also mean that real estate costs more to own as well, which means that people won't be able to afford as much real estate as they could previously.

Like, we could just use this example here: if you take out a four hundred thousand dollar loan on a house at a three and a half percent interest rate, your payment would be just under eighteen hundred dollars a month for 30 years. But if interest rates go up just a little bit to four and a half percent, then that exact same property is now going to be costing you over two thousand dollars a month over the next thirty years.

That means you're going to be spending over two hundred dollars a month more for the exact same property with just a 1% difference in interest rate. So that means if interest rates start going up, real estate is going to cost more, which means that potentially prices might decline.

Secondly, the article also cited that the new tax reform is having a negative impact on real estate values. And I'm not gonna lie, there is some truth to this. This new tax reform just basically says that your state and local tax deductions are capped at $10,000 a year and you won't be able to write off anything beyond that.

Now, for the majority of people out there, this makes no difference to them whatsoever. But for people who live in high property tax states or high property value states, like here in California, it just means that you're not able to fully utilize as many of the tax write-offs as you were previously.

The same thing also applies to the mortgage interest deduction. Previously, you could write off the first million dollars of mortgage interest that you pay on a primary residence, and now that was lowered to seven hundred and fifty thousand dollars. Now again, this is something that is probably not going to impact the majority of people in the United States, but for people who live in expensive homes, this just means real estate gets marginally more expensive for those people.

However, despite this, after looking through their data, there should really be a few main takeaways in terms of how and when the real estate market might drop and then from that, how to protect yourself to make sure you come out ahead of it. Okay profitable! And of course, smash that like button if you haven't done that earlier.

First, when it comes to real estate, it's very important to understand what they say is very true. It sounds super cliché, but there's a reason that they say real estate is mostly location, location, location. It's impossible to say the entire real estate market is going to be going down in value. That's like saying all stocks are going to be going down in value without recognizing that some of those stocks might just end up doing incredibly well.

The same thing also applies to real estate. The thing is, real estate prices are heavily influenced by specific market demands, supply of inventory, and proximity to employment, and all of those will vary significantly from location to location. Case in point: in Boise, Idaho, prices went up on average of fifteen point seven percent in 2018. Meanwhile, all the way in Baton Rouge, Louisiana, prices only went up an average of one point seven percent during that exact same time.

Any time you're talking about real estate, it's so important to understand that this is such a localized market, and it's nearly impossible to make blanket statements across the entire country. Sure, maybe a massive recession or out-of-control unemployment or a steep increase in interest rates will impact real estate prices, but ultimately it depends on the specific region, and every market will react a little bit differently.

Now second, in terms of housing prices themselves, it's really important to distinguish that many markets still have not recovered from their previous all-time highs. When you account for inflation, prices just naturally rise over time, and as markets continue to develop, we're going to continually hit all-time highs. That doesn't necessarily mean it's overvalued.

A third major point this article missed is that for most people, the value of their home in the short term is not going to matter to them whatsoever. Here's the thing: if you're buying a property with the intention of flipping it within a few years for a profit, then timing the market accurately is very, very, very important. But for everyone else with the intention of buying a home and living in it for 10 years or more, then the price it's worth between then makes no difference whatsoever when you're not planning to sell.

I think that's the most difficult part for people to understand because everyone thinks to themselves, "I want to wait for the market to crash, and then I could buy in at a place." I'm just gonna wait for that. Here is the boring reality, though: it's more important to lock in a price you can afford on a fixed-rate low-interest rate loan than it is to speculate on the potential real estate values over the next few years.

No one can tell you with 100% confidence what the real estate market will be doing next year or the year after that or the year after that. No one! And while we could certainly try to predict very localized markets with somewhat reasonable accuracy, there's always a chance of being wrong, and that's just the truth.

But the good news here is that there are a few things that you could do to protect yourself, so that if the market does go down, you come out ahead, profitable, making money despite what the markets might do in the short term. And this is what those are.

First, any time you're buying real estate, the most important thing you should do is buy with the intention of holding it long term. The people who took the biggest loss when the markets crashed in 2008 were the people who sold. The best prevention for not losing money in real estate, as lame as it sounds, is simply not to sell. Most real estate markets just go through their natural cycles of going up and down, so the longer you plan to hold, the higher the chances are that you're gonna come out ahead and profitable.

Now secondly, and this one is super common sense, but you would be surprised how many people lack common sense: it’s just this: buy something that you can actually afford on a fixed-rate payment. Like, do not go and buy a home on an interest-only loan with a balloon payment due in three years. Like, you do that—that's stupid and you're gonna have a bad time.

Instead, always buy real estate on a fixed interest rate locked term so that way you know exactly what your payments will be. So even if the market does go down, it doesn't really make any difference as long as you can continue affording what the payment is every single month.

Third, and this one is so important—this will make you the most amount of money—is buy a property below what it's worth. This is the one reason why I absolutely love real estate: because the price is not fixed like it is with stocks. In real estate, you could literally negotiate the price of everything, and because of that you have a better chance at getting a deal below what it's actually worth.

The best real estate investors out there are the people who buy a property on like 70 to 80 cents on the dollar, and that way, even if the markets do go down 20%, their worst case scenario is usually just breaking even or making slightly less money. So basically, the better the deal you get, the more you can insulate yourself in the market going down and losing money. And if the markets just go up, then that means you make even more profit.

And fourth, any time you're buying a property for an investment, it's really important to understand that cash flow is king, not necessarily the value of the property in relation to what you paid for it. I know this sounds totally counterintuitive, but anytime you're buying rental property, the value of the property itself makes no difference. Instead, all you care about is how much rental income that property is bringing in every single month. That's it!

And the good news with all of this is that if the majority of people out there think the market is crashing and they want to sell, what are they gonna do instead? Well guess what? They're gonna rent! And that's very good news for all the real estate investors out there because now you have more tenants to choose from, which means usually you could charge a little bit more money.

And also, as a rental property, you could still deduct 100% of your mortgage and also 100% of your property taxes, unlike what you could do as a primary residence. So in terms of rental property and rental income, none of these market crash predictions make any difference whatsoever. You could still find great deals, you could still find very good cash flow, and with this, you could still make a lot of money.

When it comes to the entire article, here's what I think: I don't claim to always be right with this stuff. I don't have a crystal ball to predict the future. I just give my opinion based off my own experience and the information I have available to me at the time. And that's just this: I believe that if the majority of people out there believe there's going to be a real estate crash, then that makes it less likely to happen because it's already factored into the prices that we see today.

We usually see crashes when people do not expect a crash, and people are just irrationally bidding up prices beyond what was ever reasonable because they expect to be able to sell it short-term for a huge profit. And we're not really seeing that right now in this market. If anything, we're seeing more hesitation, we're seeing more inventory come on the market, we're seeing some sellers become more realistic with their selling prices, and at the same time, we're seeing record low interest rates.

Now, it doesn't mean that real estate prices might not drop further or that something can happen with the stock market or we see a huge recession. But in terms of the overall market, all I'm seeing is that it's slowly starting to become a little bit better for buyers, and that's really good news if you're looking to buy something right now and lock in a very, very low interest rate.

Like, I just recently refinanced two of my properties to a lower interest rate so I could save more money, which means that I get more money now in my pockets. So in a way, it's like I just need a little bit more money right now in this market. And as a potential buyer later on this year, I'm looking forward to a time where I can finally start negotiating prices again.

In the recent past, sellers have been the ones with all the leverage and all the power in negotiating the deal, and now, as a buyer, I am looking forward to scooping up some really good deals. Even if I buy something and the markets do end up going down, I only buy something that I know I can afford where the rental payments exceed all of my expenses on the property, and I intend to hold it long-term.

Honestly, that's really all we can ask for. Anything beyond that is just a guess. So really at that point, why plan your life and your investments around something that may or may not happen? All you need to do to make sure you don't lose any money in real estate is just this: buy a property when the right deal comes up and lock in a low interest rate loan long term.

Then, whether or not you're buying for personal or investment use, just make sure you hold the property for at least 10 years. And if you could do all of that, that will give you the best chance of making as much profit as possible when investing in real estate.

So, with that said, you guys, thank you so much for watching! I really appreciate it. If you guys enjoyed videos like this, make sure to subscribe if you haven't subscribed already. Make sure to smash that notification bell so YouTube notifies you any time I post new videos. It's three times a week.

Also, make sure 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. And thank you again for watching. Oh, and at my second channel, The Graham Stephan Show, I'm posting there every day I'm not posting here. So if you want to see me every single day on the YouTubes, make sure to add me there and subscribe.

So anyway, thank you for watching, and until next time!