Just a little over a year ago, people would laugh at you for saying that home prices are
going to collapse. Zero rates kept mortgage rates so affordable that it didn't matter
how high were the home prices. It made sense since the mortgage was split between 30 years,
which would reduce your monthly payments to just a few thousand dollars. But the post covid boom
is now over. Interest rates are at over 4 percent, and mortgage rates have risen to over 7 percent.
Now buying a house seems less attractive than it was when rates were around at 3 to 4 percent.
a single percentage does play an important role. It could make a difference of a hundred,
if not a few hundred thousand dollars over the course of the mortgage. And now imagine how much
of a difference a few percentage points make! At the beginning of the year, the Fed was
convinced that if it is going to raise the rates, it was definitely going to stop inflation. That
seemed convincing because that's how it works. When inflation is rising too fast, you raise the
rates, but as we are seeing that even though the rates are at over 4%, inflation is still there!
Yeah, it has declined a little bit, but it's still pretty much there!
So the question is, why is inflation not decreasing
even though the Fed has raised the rates? Here is what raising rates are going to do!
It's going to crash the demand, and let me tell you this, crashing the demand doesn't necessarily
fix the problem. Crashing the demand means making people poorer so they won't be able to afford what
they could afford so because people are now poorer, companies have to decrease prices to
be able to sell their products and services. But prices don't always rise because there
is too much demand. There are other factors that influence the price, such as the cost of
producing the product or the shipping cost. Definitely, zero rates did play the biggest
role in creating this inflation in the first place, but you have to consider the fact that,
During the Covid era, we also had people unemployed and sitting at their homes
with very little savings to survive. The covid era had the biggest impact
on the housing market. Prices rose faster than they had risen prior to the last housing crash
that devastated the entire economy. There was an almost 38 percent increase in just 2 years,
and now it seems like the pyramid is about to collapse. Home prices across the country
are falling down. In San Jose, prices are down 9.4%, Seattle 8.2, and Oakland 7.6.
The question is, are we about to witness another housing crash? Will the next housing crash be as
disastrous as the 2008 crash? And how can you prepare yourself not only to protect
yourself but take advantage of this crisis? We will answer all of these questions and
many more, but before we do that, give this video a thumbs up and let's dive in.
If a year ago, most people still expected home prices to keep rising, the situation is much
different now. Morgan STANLEY expects home prices to finish this year with 4 percent. That might
seem still optimistic, but given the fact that they have been growing by over 20 percent over
the last few years, that's scary! Home prices are still rising in some places like New York
or California, in places where your average folk wont be able to afford a house, But overall they
are failing in many other places. House prices are already stratospherically high that only the
top 1 percent can afford them! And it still makes sense to buy them since people are willing to pay
fortunes just to rent a room in New York City. But there is always a ceiling. Doesn't matter
how great life is in New York, if home prices decline enough across the country, that will
drag down the rest of the market, including big cities such as New York or Los Angeles.
Some expect prices to fall by 4 percent, others by over 10 percent. But in order for it to match the
2008 crash, then prices have to decline by over 27 percent. The 27 percent decline wasn't over just
over the course of a year but rather 4 years. If we assume that home prices will lose as much
value as they have gained over the covid era, then that's a possibility. And let me remind you that
prices since march 2020 are up by 38 percent. If they just decline by half of that over the
course of the next 12 months for unknown reasons, like people no longer taking
mortgages because they are simply too expensive. A half-million-dollar house at a 3 percent mortgage
rate equals around 2K dollars monthly payment, while at 7 percent means a 3K dollar payment. An
extra thousand dollars is a huge difference in a country where over 60 percent of people can't
even pull out a thousand-dollar emergency. Think about it this way, let's say there
are 10 chocolate bars in the entire economy and 10 dollars. That's it,
that's your entire economy. In this hypothetical example, 1 chocolate bar equals one dollar.
That's what it means that prices are set by supply and demand, the essence of capitalism.
Let's say now that we have doubled the number of dollars in this economy now, instead of 10
dollars, we have 20 dollars, but the number of chocolate bars is still the same, which is 10.
In this scenario, one chocolate bar would equal 2 dollars since supply and demand determine prices.
Now replace chocolate bars with houses, and you understand what's has been happening the last
2 years. More money that has been thrown out of nowhere was the primary reason that caused
the price hikes, now the fed has been trying to do the absolute opposite since February,
taking that money out of the economy which is why prices have been falling but it seems like
not everything is going according to the plan. But do you realize what it means for home prices?
Exactly! Going back to the pre covid period. Of course, they will not go back as much
as they were before, but even a 20 percent decrease would be disastrous.
The fed knows that, and they have a strategy. They don't really care if prices decrease by
20 percent or 40 percent. People won't panic and will gradually adapt to the
new reality as long as it happens smoothly and gradually. So the crisis wouldn't be
as bad as it might be if prices fell by 20 percent in a matter of a few months.
After successfully crashing the entire stock market, sending crypto to the absolute bottom,
and crashing home prices in many cities across the country, inflation for October has been 7.7
percent. Honesty, I don't know what's the peak of hiking the rates, I would love to know that,
but let's just hope it ain't going to continue because the consequences seem very terrifying.
Here is what I think would be the right thing to do. By the way, this is not financial advice. If
you have been holding stocks, then everything has fallen to rock bottom. Asset prices, like stocks
and house prices, will most likely further decline over the course of the next 6 months until we know
for sure how high the fed is willing to raise the rates. Around mid-December, the fed is going to
announce how much more it will raise the rates. If the rate hike would be by more than 50 basis
points, then it seems like the fed is seriously willing to collapse everything just to bring
inflation down, but I guess it wanted to send a message over the course of this year
that if the fed is saying it will raise the rates, it will ! and will crash the market!
No one should think that he is above the fed because prior to 2022,
no one took the fed seriously when it kept saying that it might raise the rates.
So, we might not have reached the bottom yet. Even if we have reached it, the fed won't bring
down the rates overnight. It will gradually bring them down unless the fed decides to
hike the rates to 20 percent, as did in the 1980s. But I don't think that's happening.
It won't make sense to take a mortgage within the next 24 months since rates
aren't coming down most likely so those who hold cash will rip off the market.
That's it for today, thanks for watching, and see you in the next one.