[MUSIC PLAYING] It's always fun to watch economists go back
and forth about inflation and deflation, but since the recession in 2008, we've been in
this kind of financial twilight zone.
Everybody keeps talking about doom, gloom, and deflation, but the S&P just keeps rising.
My question is, why is my rent so damn high?
I bet a lot of you are watching this right now crying in your New York City shoebox with
your AirPods on so you don't wake up your roommates in your $5,000-a-month studio.
I mean, seriously, how great of an investment must real estate be?
Well, make yourselves at home, because today we're going to talk about residential real
estate.
And it's all going down on Real Vision's The One Thing.
[MUSIC PLAYING] What's going on, investors?
AK here.
On this episode, we're going to try to answer three questions.
One, why are rents so high?
Two, is it worth to buy a house right now?
And three, is housing the next big shoe to drop?
And could it drive the economy off a cliff again?
Keith [INAUDIBLE] thinks we're standing on thin ice when it comes to the housing market.
[INAUDIBLE]: There are very dangerous circumstances today that you have to think about in terms
of making decisions concerning houses.
The first is that there are still millions of these redefaulting modified mortgages that
are growing, that are still a problem, and like I said, there's really no solution to
that.
If you add to that the fact that you have millions of homeowners defaulting or in long-term
delinquencies who have no intention of repaying the mortgage, that's what you have to understand.
If you haven't paid a nickel over the last five years, you have no intention of repaying
it, and you think that you can stay as long as you can.
And isn't that just great for them?
The only ones who lose are the lenders, which we don't spend very much time talking about.
We also have what I mentioned before, home sales which are declining.
That's always a danger sign.
And the last thing, as I said, is the number of properties on the market actively listed
is growing and shows no sign of turning around.
If that continues, that's really big.
So what does that mean for you?
What would I do?
There is no way I would consider buying a house, either to live in or as an investment,
with all of these circumstances and risks that I've been talking about.
And the second thing is, if I were a seller, if I were a homeowner, I would seriously consider
selling before things get much worse.
And that begs the question, how the heck did we even get into this mess?
Keith had this to say.
[INAUDIBLE]: If you think about it, it was like money falling from the sky.
And in California, nothing was crazier than there.
You could pull out $100,000 $200,000, $300,000 in cash because of the growing value of your
property.
The lenders were more than willing to shovel it out because they thought the prices would
go to the sky.
And oop, what happened when home prices leveled off?
Millions of these homeowners, especially in California and some of the larger metros--
New York City, and Chicago, around the coast, but it was nationwide-- they found themselves
with a much larger mortgage.
And when prices began to turn down, very quickly the property was underwater.
They were underwater and they started defaulting in droves.
And that was one of the main reasons why the mortgage servicers decided, we have to modify
these millions of mortgages.
Otherwise, this price collapse will just continue.
That's a pretty bleak outlook.
And in Game of Thrones style, if you think this has a happy ending, you haven't been
paying attention.
[INAUDIBLE] adds-- [INAUDIBLE]: You would think that with all
of these solutions, that that would solve the problem, but it didn't because almost
from the beginning, millions of these modified mortgages started redefaulting.
The homeowners for some reason, whatever-- they decided that my house is underwater and
I can't really afford the mortgage, or I have no intention of repaying.
And so they started redefaulting.
Some of them have redefaulted two or three times.
If you take a look at this next graphic, this is from Fannie Mae.
You can see that the number of redefaults as quickly as a year after the modification
is increasing between 2012 and 2016.
So the situation with the redefaults is getting worse.
A second redefault-- the chances of redefaulting a second modification is greater.
So this problem, you have to understand, is getting worse as we move forward.
My view is that there really is no solution to this massive problem of redefaulting modified
mortgages.
We're talking about millions of them.
If that's the case, then at some point, many, if not most, of these modified mortgages that
are redefaulting will eventually have to be foreclosed and liquidated.
And when that happens, then it will really hit some of the major metros hard, and prices
could actually begin to decline-- I hate to use the word, but-- again.
And look.
The bottom is probably not going to fall out tomorrow, but maybe we're seeing this scenario
rear its ugly head somewhere else.
Gerard Minack came on Real Vision to give an update about Australia.
Listen to him describe how housing weakness is infecting the entire economy.
What's happened over the last quarter or two is we're seeing signs that the downdraft in
housing, borrowing, and wealth effects are starting to build steam.
And that's making it increasingly likely there will be a recession.
Now, I'm not making recession my investment base case yet.
But if we were to get another two or three months of data like the sort we've had over
the last two or three months, then I think investors should make recession their investment
base case in Australia.
And if we were to see a recession, trust me, it would be world's best practice.
This would be a disaster, given how indebted we are, how expensive your asset prices are,
and the inability of policymakers to respond.
Sound familiar?
Yeah.
It sounds just like the situation in the US.
So listen, whether [INAUDIBLE] is right or not, it still looks like the other shoe is
poised to drop.
We all need to pay attention to this shifting narrative and decide when's a good time to
get in, and when to get out.
And I know I haven't answered the question yet about why the rent is so high.
Well, it's high because real estate, like every other asset nowadays, has been financialized.
That means the main purpose of your house is not to live in anymore.
No.
Now, it's just a financial asset that's used for speculation.
And if you want to stay up-to-date on this housing situation to make sure you don't get
screwed, again, well then make sure you subscribe to Real Vision.
I'll talk to you next week.
[MUSIC PLAYING]