In the last 2 years, it seemed like house prices will never fall.
They kept rising like there is no tomorrow.
It was one of the significant rises in house prices in the history of the market.
Imagine an asset that rises in value by 1 or 2 percent suddenly rose by over 20 percent.
Whoever got a mortgage in 2020, took one of the best decisions of his life.
Not only did the price of your house appreciate drastically but you also fixed your mortgage
rate at a historically low rate.
Buying a house through a low mortgage rate is probably one of the best ways to build
wealth.
You are going to pay for rent anyways, so why not pay for the mortgage and generate
wealth over time.
Even if you arent going to live there, if the mortgage rate is low enough, renting it
out will not only cover the mortgage payments but would also generate some income.
But that has changed in the last couple of months.
As the fed is tackling inflation, house prices are beginning to shake.
You no longer can get a 3 percent mortgage rate.
5 or 6 percent is the new normal.
When it comes to mortgage rates, a single percentage point already makes a huge difference,
leave alone 2 or 3 percent.
The average downpayment in the US is just 6 percent.
A half-million dollars house including taxes and fees at 3 percent would equal around $2,979.
If we take the exact same house but a 6 percent mortgage rate, the price would shoot to $3,824.
The difference is remarkable, especially if you are planning to rent it out and turn it
into it a source of income.
But that's just one part of the story because the other is - that house prices are declining.
Experts were warning all of us that this is not sustainable and house prices one way or
another should collapse.
It was turning into a bubble that would eventually burst.
It's both good news and bad news depending on whom you are asking.
If you are a homeowner, you want to keep watching how the price of your house keeps rising,
but if you are a homebuyer, finally you can consider buying a house since you don’t
have to bet and overpay for your house.
So let’s find out, will house prices keep declining?
will the market completely collapse by the end of the year?
Is it the right time to buy a house or not?
We will answer all of these questions and many more, but before we do that, give
this video a thumbs-up.
Let's look at what happened in short.
When the pandemic hit the world, the fed was so worried that the economy would collapse
that it instantly lowered the rates to literally 0 percent, especially after March’s stock
market crash.
Low-interest rates led to low mortgage rates which pushed demand to increase, at the same,
the pandemic slowed down supply chains which created a shortage of materials in the market
and decreased the supply of houses in the market.
On top of all of that, people were worried to sell their houses since the future seemed
unpredictable which further lowered the supply.
And what happens in a market where there is so much demand but so little supply?
Prices shoot through the roof.
It seemed like a bubble in the beginning, and it is to a certain extent but there is
always a ceiling to how high prices can rise.
Now, let's ask a different question.
What happens when mortgage rates rise?
Not only that will slow down the demand but also push banks to approve smaller mortgages.
Let's go back to the example we talked about in the beginning.
If the bank would approve you 3K dollar payment monthly payment on your income, at 3 percent
you could have got a half-million dollar house.
But now at 6 percent, you no longer can afford half a million dollars because at a 6 percent
mortgage rate, you have to make enough money to be able to make a $3,800 monthly payments,
which again lowers the demand and eventually leads to prices to decline.
But not everything is so crystally clear.
How would prices keep declining when there is worldwide inflation because of the reasons
we have already discussed in one of the previous video.
A general increase in prices will increase the price of materials to build new homes
which will overall increase house prices.
Inflation isn’t going to stop anytime soon.
It will take the fed at least a year to bring it down to 3 or 4 percent.
Regardless, if we look at the numbers, the median house price has already decreased and
this has a psychological effect.
When house prices are rising, people rush to buy homes afraid that if they don’t buy
now, they will have to overpay in the future.
But the absolutely opposite happens when prices are declining.
When people realize that prices are cooling down, they wait until they reach their bottom
line.
The only problem is that no one knows where is that bottom line.
That eventually leads to lower demand which pushes prices to decline further.
The fed is playing with fire here.
It’s trying to control inflation but at the same time not to cause a recession.
It’s a very dangerous game that can easily backfire.
The question is, how high the fed should raise the rates to tackle inflation?
According to experts, the fed should raise the rates to at least 2.5 percent to bring
inflation down to a meaningful rate.
Imagine if a 0.25 percent increase in march already caused such a huge spike in mortgage
rates, what kind of spike will an increase by another 2 percent will cause?
The last time mortgage rates rose so swiftly was in 1994.
In late 1993, rates were less than 7 percent.
By December 1994, they had surged to 9.11 percent, a jump of more than 2 full percentage
points in less than 12 months.
Maybe, the fed is trying to play out a similar scenario here.
Anyone who understands how the fed works, knows that it ain’t going to drastically
raise rates unless it’s a disaster like the 2008 crash where the fed had to raise
rates to cool everything down.
It was a mistake since that surge in interest rates created a catastrophe in the market.
If the fed was a bit more careful and slowly raised rates that would bring house prices
down over time, the crisis wouldn’t have been so bad.
So the fed would rather let inflation slightly get out of hand than slow down the economic
machine.
That’s why many investors believe that inflation will last for another 5 years.
Maybe not at 8 or 9 percent but something around 5 or 6 percent.
There are many reasons to back that claim and we didn’t include there, what would
happen if China suddenly would start a full invasion of Taiwan.
The shortages that war is going to create are beyond anyone's imagination.
Inflation is going to be so high that even if the fed raises rates to 10 percent, it
wouldn’t make any difference.
Lets hope that never happens.
The main question is, will the market crash by the end of the year?
The answer is - probably NO.
It’s true that the supply of homes is back to pre-pandemic levels and mortgage rates
are rising.
But that’s not enough.
There was already a shortage of homes in the market prior to the pandemic, so restoring
the supply to the previous level isn’t going to make a huge difference.
Will prices keep declining?
Probably yes!
In fact, it's already happening.
And might continue to happen until the end of the year.
But, didn’t a 20 percent increase in house prices created a bubble?
Well, 1 out of 5 dollars in the economy was printed during the pandemic, you can’t expect
to throw that much money into the economy and expect prices to remain the same.
It’s just one of the consequences of the printing press.
After each crisis, there is a gold rush where everything rises dramatically but then at
some point stabilizes.
We had our gold rush.
Whoever earned a fortune, good for them, whoever didn’t.
Well, maybe next time.
But until then, give this video a thumbs up and subscribe.
Thanks for watching and see you in the next one.