For over 2 years, we have been wondering when will everything crash? Well, the last 6 months
proved that has started. Raising rates by 1 or 2 percent is m ore than enough to crash
the booming stock market. Many companies that doubled their stock prices throughout the
pandemic lost all of their gains and are back to the pre covid era. Whoever sold before
the crash must have profited enormously. But a stock market crash is not a big deal since
most of the stocks are owned by the top 10 percent of Americans. However, when real estate
prices crash, everyone suffers since everyone has a roof over their heads. House prices
increased by over 10% in 2020 and almost 20 percent in 2021. We hadn’t seen such price
hikes since 2005 or 2006, when the housing market was heading into a crisis that would
take down with it the entire economy. And since the fed is raising the rates, house
prices are crippling. So, the question that many have been asking is - will the 2008 housing
crisis repeat itself? Are we headed into a similar crisis? and how bad will the crash
be?
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. The current crisis is unlike the 2008 housing
bubble. The 2008 housing bubble was driven by different factors. Loose banking regulations
led to overrated mortgage-backed securities that were issued by rating companies. Junk
loans, or the loans that had the highest chances of defaulting, were mixed with good loans
and were given AAA ratings. Investors traded these securities based on the narrative that
these are stable, great loans that are inured by giant financial institutions such as AIG.
But the moment some of these loans began to crack, it was like the domino effect that
led to the crash of the market and bankrupted giants like Lehman Brothers or AIG.
But the current housing bubble isn’t driven by junk loans or fake triple-A ratings, which
is leading many to believe that the housing market is fine. However, what we also have
to take into account is that there are no 2 identical crises. Each bubble or each crisis
is different. Once there is a crisis, and we take measures to fix it, we learn the lessons
and try our best not to repeat it, at least in the foreseeable future, that’s why ever
since the 2008 housing crisis, taking a mortgage has never been as easy as it was before the
2008 crisis. So it will be unwise to imagine that the current crisis will follow the exact
steps of the previous crisis. What we have to take a look at is why house
prices rose much and what are the chances that they could collapse. If there are such
indicators, then a crisis is an option. After the 2008 crash, many home builders went
bankrupt since house prices collapsed, and building homes was no longer a profitable
business. Only the most stable companies survived the crisis. Since the government tightened
banking regulations, the demand for houses dropped significantly, which made it even
more difficult to sell homes. However, a lot has changed since then. Banks are of course,
still regulated but getting a mortgage isn't as difficult as it was right after the crash.
The housing market began to grow at an average rate of 1 to 3 percent at best since the Supply
of New Houses in the United States was at a stable rate. But if you look at the date,
more and more developers jumped into the game when they saw that mortgage rates were at
a historical low and the demand for houses is at all times high. Even though the pandemic
created such a huge shortage of real estate, starting from 2021, the supply of new homes
began to rise to the point where its almost double the pre-pandemic level.
They have begun slashing prices to be able to sell now since the fed is literally raising
rates at every opportunity. Higher interest rates mean higher mortgage rates which mean
lower demand. Lower demand means - it’s difficult to sell your house. So it’s better
to cut prices and sell now before the fed hikes rates further and makes it even more
difficult to sell. Builders are slashing home prices and slowing
construction as buyers pull back, survey shows Boons for Buyers: Here Are the 10 Cities Where
Sellers Are Slashing Home Prices the Most Why Real Estate Is To Blame for America’s
Spiking Inflation Up until February or March, we had the absolute
opposite happening, where buyers would start a bidding war just to be the one who is going
to purchase this or that property. We have seen headlines multiple times where people
are overpaying 20, 30, or even 50 percent just to buy a certain property. We were also
in this uncertain period where we thought that the world might end. The media was shouting
all over the place that we had no idea how long it would take for us to get back to work.
People got scared. They were not ready to sell their homes, fearing they would be left
out. But today, fast forward to 2022, when we are facing challenges such as a real conflict
in the middle of Europe that's endangering the current world order, the media is no longer
focused on covid cases, and people are getting back to their pre-covid lifestyles and are
back to selling their homes. Some people waited 2 years just to sell their homes. Why sell
now when tomorrow prices would rise? The last time we had a similar crisis was
in the late 1970s after the Iranian revolution, when oil cuts sent shock waves across the
globe, raising oil prices. By 1979, inflation reached a startling 11.3%, and in 1980, it
soared to 13.5%, and then the economy fell into a recession. To be honest, if we look
at the date, things are much worse than they have been back then for multiple reasons.
First of all, Russia is not Iran. Russia is much bigger and deeply integrated into the
world economy. It doesn’t just export a lot of oil. It's the largest gas supplier
and the largest wheat exporter, and its invading a country thats also one of the largest wheat
exporters in the world. And we didn’t have a global pandemic where we printed trillions
of dollars to make sure everyone stayed at home.
The fed raised the rates first to around 10 percent, then to 19 percent by January 1981.
Think for a moment how high mortgage rates would be if interest rates were 19 percent.
I think mortgage applications would drop so much that home builders will start going bankrupt
again as they did in 2008 and 2009. People will start slashing prices more just to be
able to sell since the demand will simply vanish. Only those with cash will be able
to buy. By the way, Only a third of home buyers pay full cash, and more than 65 percent of
home buyers finance their homes with a mortgage. Another reason why the housing market crashed
back in 2008 is because when people with bad credit history defaulted on their mortgages,
prices began to decline by 10, 20 percent. When people who actually could afford their
mortgages realized their 500K mortgage was now worth only 400K, they also defaulted on
their mortgages since it didn't make sense to keep paying a mortgage thats much more
expensive than the actual prices of the house. That drives house prices further down. We
are seeing the exact same trend now. House prices rose by almost 20 percent last year
alone, and this year, builders are slashing their prices. The number of active listings
are going up, and Mortgage applications are going down because mortgage rates are rising.
And if inflation is not going to come down, the fed will keep raising the rates to crash
the demand. On top of that, we will most likely face a recession, as we have discussed in
the previous video since the world is on the brink of energy and food catastrophe, which
will further lower the demand which will bring prices down.
If real estate prices decline by 10 or 15 percent, what will homeowners who took mortgages
in 2021 will do. Will they keep paying their overpriced montages?
Maybe yes, maybe no. If the answer is no.
Can the fed afford to slash interest rates again?
It can’t even bring down inflation after multiple rate hikes. I don’t think they
will risk lowering rates in the coming future. It’s a recession that we will have to swallow.
I know that the fed keeps saying that they are not seeing any signs of recession, but
the fed is very carefree with its words. What the fed says matters the most. Remember, back
in 2021, we already had the data that inflation was getting out of hand, but the fed calmed
us down by saying that they are no signs of inflation. But when it happened, the fed didn't
instantly raise the rates but warned the market. The market didn’t listen. So, it warned
it again, it didn't listen, then only it acted and hiked the rates.
Then they said that the US is not in a recession, and now J Powell says that a recession is
a possiblity. So I wouldn't really trust the fed since the job of the fed is to calm down
investors and make sure that recession is not as painful as it could be.
It’s really difficult to say for sure what's going to happen. But looking at all these
data now, a housing crash that’s in some ways similar to the 2008 crisis is a real
possibility if things continue the way they are now. But only time will show what's going
to happen. Thanks for watching and see you in the next
one.