So today we're going to talk about how the Fed might crash the real estate
market.
They've got two options and both are poison.
So the Fed has a choice of two poisons, either
combat inflation or create a recession.
This video is going to talk to you about which one I think is going to happen.
So let's first talk about inflation.
So the fork in the road,
if it moves towards inflation, it seems to be the most probable.
And here's why.
As you can see, it wasn't that long ago in 2020 that the economy
was right around a 2% inflation, which is the Federal Reserve's target.
Since that time, over the about 18 months, we've seen inflation rise.
And here's a breakdown of all the different components
that make up inflation.
Now, the Federal Reserve chairman, Jerome Powell, is
definitely in the hot seat right now as he stares down the economy.
And he's trying to figure out, do I combat inflation?
Because I should remember, makes 100% of the people poorer.
It erodes people's incomes and their savings account.
Inflation impacts everyone.
Where a recession is more of a lag, but inflation left untethered
is going to continue to erode people's incomes
and their ability to live and could potentially force
things like more homelessness and not be able to pay for their rent.
Now, what's most important for you to look at here is that it's taken
almost two years for inflation to rise.
We can see that it takes a while for inflation to creep up
and it's going to take a while for inflation to creep back down.
Some people think it could take a year to two years to get inflation
down to the 2% target rate.
Hopefully, you attention
to these Federal Reserve meetings because at every single meeting this year
they've raised the federal funds rate and they have three more to go.
So the Federal Reserve has to pick their poison.
Do they increase interest rates and combat
inflation to help 100% of the people,
or do they push the economy into recession?
I think they're going to do the latter.
So now let's talk about a recession and what that means to you.
So what is a recession?
A recession is a significant decline
in economic activity that lasts for months or even years.
Experts declare a recession when a nation's economy experiences
negative gross domestic product or GDP, rising levels of unemployment.
We're going to talk about that in a minute.
Falling retail sales, sales and contracting
measures of income and manufactured for an extended period of time.
Recessions are considered an unavoidable part of the business cycle
or a regular cadence
of expansion and contraction that occurs in a nation's economy.
So the one thing that the media is focused on right now
about levels of unemployment, which is currently at 3.6%,
which is very good and healthy.
However, the economy has for sure slowed down
as the cost of borrowing has gone up.
As I'm going to show you here in a minute.
So experts are debating on whether or not there is a recession or is it?
And I just don't even think it matters.
I believe that the Fed is going to continue to raise rates
and drive levels of unemployment up
as a result of trying to curb inflation.
So what does that mean for the real estate market?
So I think the real estate market has peaked largely, certainly
in single family homes, which I'm going to show you in a minute.
And on the commercial side, which I'm very active in,
we're probably somewhere right about here.
We've peaked and we're on our way down.
So call it in the first few innings, a typical recession
could last anywhere from 6 to 12 months generally.
So that means that we might have a 6 to 12 month fall in housing prices
as the interest rates continue to go up and we combat inflation.
Forever.
One obviously in real estate, you want to be buying right in here.
So don't be confused by the media saying we have low unemployment
because what's happening is the cost of borrowing is going up
and so real estate sales are going down, credit card rates are going up.
So the economy is slowing down, which is exactly what we need to do
to combat inflation.
Now, there are several kinds of recessions.
There's a V, a U, a W and an L.
And there's all kinds of experts trying to predict
what kind of recession this is going to be.
Obviously, we hope that it bounces back quickly and is a V recession.
You should be prepared for a long recession or more of an L recession.
There are a lot of factors that are going to determine this in the future,
but it's important that you watch what they are.
I believe we are in a recession and we are heading into a deeper recession
as they continue to drive unemployment up, as they combat inflation.
So now let's take a look at it as it compares to housing.
So on the left hand side, you see the US interest rates.
On the right hand side you see the new home sales.
And of course, we now have had another quarter of dropped sales.
Hopefully you can see the correlation, the January 2020
right here when they drop the interest rates almost to zero.
And of course, at the same time, we saw a spike in sales.
So the only thing that's happening is now
the rates are going up and we're seeing a drop in sales.
So this is very easily explained when rates are low, sales are high,
borrowing costs are better and consumption is higher.
When rates go up, people pull back.
And that's what's happening right now.
The first thing that will happen is that the market will go back into equilibrium,
which of course is traditionally 4 to 6 months of MLS listings.
That's very typical.
It has not been that way for a while as a result of these low interest rates.
So all that's happening is these interest rates are going up
and it's starting to normalize the housing market.
The next thing that's going to happen here is that prices will continue to drop.
We're already seeing price cuts in many markets as I speak.
More supply, more inventory, less buyers, lower prices.
That is basic supply and demand.
So how the Federal Reserve might crash the real estate market
by continuing to rise its interest rates and continuing
to see lower home sales to save the economy from a high inflation.
I believe that the Federal Reserve is trying to take care of inflation,
which impacts everyone and is waiting to deal with the recession later.
And as you can see from the historical effective
federal funds rate, we've been significantly higher.
And if you take a look at this chart right here, here's where we are right here.
You can see it's hardly anything on this chart.
They have a lot of tools in their toolbox to try to mitigate
these inflationary times that we're all experiencing.
And we might be going into a recession, too.
But they're going to deal with that later.
The solution for you is to pay attention to the next three Federal Reserve meetings
this year, as you could start to see them increase in the federal funds rate
and to see exactly what's going to happen to new home sales and to inventory.
You should be making sure that you have plenty of cash reserve
and that you're fixing your interest rates today so that you understand
and know what your cash flow is, because you can make sure
that it's the same next year and the year after because rates are increasing.
For those of you who are afraid of a recession, we're going to talk about
that more in my recession protection strategy video that I'm doing next
and exactly some of the techniques that the rich do
to protect themselves during an economy that's going to into a downturn.