So today we're going to talk about a 2023 correction, not necessarily
a crash, as indicated in my video last Friday.
For this video, I'm going to focus on supply and demand
because a lot of people are talking about real estate.
It's undersupplied, it's under supplied. It's under supplied.
And it is.
But I believe not a lot of people are focusing on the demand side,
and that actually is what's going to create this correction.
So when the Fed reduced their federal funds rate to almost zero in early 2020,
it created a rush of people buying homes, which created a supply issue.
It brought supply down and drove prices up.
This created an affordability issue for many Americans.
And now, of course, we're starting to see the Federal Reserve raise rates again,
which is creating an affordability problem even more.
We have high prices
and high interest rates, and it's driving most people back into rentals.
So when there's more homes on the market, prices go down.
When there's less homes on the market, prices go up.
And the mechanism that was used by the Federal Reserve was interest rates first.
They went down in 2000.
And now they're going back up,
which is creating some demand shifts and supply shifts in the market.
So here's a simplistic view of what's going on right now in 2021.
Demand was very high for housing, which created the prices to go up.
The supply is down and it is still down.
And we'll talk about that in a minute.
And interest rates were also down.
So this is what drove prices up in 2020,
2021 and in early 2022.
The big shift is interest rates have gone up significantly,
which has lowered the demand, which is now starting to increase the inventory
and starting to temper prices around the country in many, many markets.
It's interesting to note, and a lot of you are going to focus on supply,
that we are still very undersupplied and I agree with you.
However, we have an affordability issue and we have a significant
drop in the demand due to the price of money.
So while many of you are focusing on the supply side,
perhaps you should also focus on the demand side.
There are a number of factors that go into this.
Of course, there's population growth.
There's job growth, there's permits, there's existing housing shortages.
Those cost, the labor cost, the construction cost of land.
All of those things have to do with the individual real estate markets.
And your area is very unique to itself.
So the market conditions in Cleveland, Ohio, are going to be very different
than those in Phenix or those in Miami as an example.
So now let's take a look at the Saint Louis Fed's chart,
the monthly supply of new houses in the United States.
I think this is important.
It's not the total inventory, but it's a monthly supply of new houses.
Most notable is the in March of 2021,
when the Federal Reserve first raised rates.
You can see that the charts started to go up
from the very first federal funds increase by the Federal Reserve.
The chart is July of 2022.
This is after four rate increases.
As you can see from where we were to where we are.
This is a significant difference.
And the only thing that changed was that the Federal Reserve increased
their rates for times during this period of time and interest rates almost doubled.
Keep in mind, guys, this is supply, not necessarily monthly inventory,
but what I want you to see is the gap here.
This is one of the biggest increases since 2009.
It's significant and it needs to be watched.
Now, let's take a look at what's happened from these interest rate increases.
Mortgage demand has dropped to a 22 year low.
If that is it a red flag? It should be for you.
In addition to that, mortgage applications are down 23%.
And by the way, guys, that's a big number when you're talking about millions
and millions of people.
But what most notable is the bottom one, and this is really important.
Mortgage applications to refinance a home fell another 1%,
but were 83% lower than the same week one year ago.
So new homes are down 23% and cash out refinance are down 83%.
This is significant because this bottom one was the ATM
movement that everyone was using to fund the economy moving forward.
This is where they were getting all the cash.
And as you can see, that window is closing.
So what's happening here is people have a wealth trap in their own homes.
So they're going to watch the prices of their homes go down
and their wealth go down over time because they're not going to want
to refinance because prices for interest rates have doubled.
They're going to want to hold on to the old interest rates
because if they do a cash out refi, their mortgage payment
could significantly go up.
So now let's take a look at a couple charts.
And I think this one over here
by the National Association of Realtors is really important.
Brad is a high housing shortage and the blue is sufficient supply,
which means that there's not too much and not too little.
And then the great is no job creation.
This chart could be the precursor to where prices
are going to fall as a result of all this.
Because, again, going back to how we started with supply and demand,
if demand reduces, supply increases, prices will continue to go down.
But in markets where there's already a shortage of supply,
you will not see quite the price declines.
So let's take a look at this chart.
The Fannie Mae forecast themselves are showing
a signal, difficult reduction in home price growth.
Now, they're still actually showing home price growth
and I think that's because they have to.
But really, if you look at what I'm going to talk about next,
I think a lot of people are showing that we could potentially
get in to negative territory here.
So, again, are we in a correction or are we in a crash?
And the difference is 20% correction is under
20% and a crash is over 20%.
So the last crash we had was 27% where home
prices went down that much and that was considered a crash.
There's a couple of great articles that I would encourage you guys to look out.
This Ivy Zelman, who predicted the real estate crash in the mid 2000,
and she's basically saying that we are going to get into negative territory.
I think she said there's going to be a barrier between the eight and a 9% price
reduction in each of the next two years.
But guess what?
Abby Zelman is not the only one predicting these negative price reductions.
Many research firms, including John Burns,
Zonda Capital Economics, Pantheon, Fitch Ratings,
even Moody's, are saying that we're going to go into negative territory.
And here's the most alarming article
at Fortune that you need to look at is that Zandi believes
that we're going to have a 15 to 20% drop in the nation's
hundred and 87, significantly overvalued regional housing markets.
That's shocking.
Now it's possible that they're not wrong.
But if you take a look, going
back to the basics, we're at eight and a half percent inflation.
The Federal Reserve's got a 6% issue and the target, 2%.
And mortgage applications are at a 22 year low and we're 23% off the new ones,
83% off revise, which means a significant slowdown in real estate,
which means a significant price reduction and inventory will go up
and demand will go down and prices will also come down.