In 2019, the idea of buying a house seemed dumb because the world was going global, home
prices were barely moving, and the stock market was holding strong. Buying a house wasn't
really as attractive as other investments, but 2020 changed everything. The fed made
buying a house one of the best investments you can ever make. Prices literally rose by
over 20 percent. The stock market definitely rose much higher, but it crashed. At the time
of this script, the sp500 is up by around 12 percent since its pre-pandemic level, while
house prices are up by around 20 percent since the beginning of the pandemic.
However, that's slowly changing. We have talked already that this is not sustainable because,
unlike the stock market, where everyone with a few dollars in their pocket can buy stocks,
the housing market is different. A house is usually the biggest purchase in most people's
lives, so the market barely moves by 1 or 2 percent a year. That's why some economists
warned us about another housing crash since the last time house prices rose so much created
the biggest financial crisis in the last few decades. So since we are seeing more and more
such headlines ( shorturl.at/foFQ2 ), are house prices finally declining? Did the housing
crash just begin? Will the current housing crash will be as bad as the crash of 2008?
We will answer all of these questions and many more, but before we do that, give this
video a thumbs up and let's get started.
On the 15th of June, the federal reserve threw an atomic bomb and surprised everyone with
a 0.75 percent increase in rates. This is the biggest increase since 1994. That's going
to have a devastating impact on the housing market since the last interest rate hike by
the fed already caused serious damage to the housing market.
It might be difficult to expect something to fall when it's rising so fast, but let's
look at what's happening on the ground. According to experts at realtor.com, more
and more home sellers are slashing their prices in certain areas. This is actually serious
since just over 6 or 8 months ago, we had cases such as this where buyers are ready
to overpay for a house just to be the one who is going to buy that home.
Seems like the days when buyers wou ld bid for a house are over. We are entering a new
period where sellers might have to enter into a price-slashing war to attract buyers. At
the end of May, Redfin reported that nearly one in five buyers were lowering their prices,
something not seen since October 2019. There is a simple explanation behind that. The vast
majority of houses in the U.S. are purchased through mortgages. To be more precise, over
60 percent of homes are financed. When the fed raises rates, the cost of borrowing capital
rises, lowering the number of debt borrowers can take with their current income. A smaller
mortgage limits their options, resulting in a lower demand, pushing sellers to slash prices
to sell, and so forth. Moody's, the credit rating agency, gave Fortune exclusive access
to its updated proprietary analysis of U.S. housing markets. They tried to find out whether
people with local incomes could support local homes. Through the first quarter of 2022,
national house prices are "overvalued" by 24.7%. That's up from the fourth quarter of
last year when Moody's Analytics determined national house prices were "overvalued" by
20.9%. When the gap is too wide between house prices
and what people can afford, it's a matter of time before demand significantly drops.
That's when you know that the market is overvalued. That's why experts at Atlas Research found
out that More than 25% of homes on the market right now have cut their prices. Zillow found
a similar trend in its data. 6.44% of home listings on Zillow saw a price cut—the
highest weekly share of price cuts in more than five years.
At the end of the day, the laws of economics determine the market's direction. In January
of this year, the supply of homes finally returned to its pre-pandemic level. However,
mortgages were still attractive to drive buyers. However, fast forward to today, and the market
has changed drastically. The supply of homes in the market hasn't just risen slightly but
is at its highest level in the last 12 years. Last time the supply of homes was at this
rate back right after the 2008 crash in May 2010.
There are many reasons behind that, of course, but one of them is definitely the fact that
sellers have realized that prices aren't going to keep rising if they keep holding on to
their assets. They have reached their peak, and the downfall has already begun. If you
don't sell now, tomorrow might be too late. The urge to sell before mortgages become too
expensive is driving the supply of homes to the roof. That's actually a really dangerous
sign of where the market is because it illustrates that the shortage of homes in the market wasn't
because we couldn't build more homes but rather because buyers were not willing to sell, waiting
for a better opportunity. The question is, what percentage of the houses in the market
were purposefully held by the sellers. If that number is too high, we might find ourselves
in a market filled with homes but very little demand which easily can lead to a catastrophe
that we have witnned in 2008. The consequences of 2008 lasted over a decade.
The problem is that the U.S. economy is not in a position to witness another such crisis.
The challenges that the country has been facing for the last 2 years are already shaking the
economy. Mortgage rates have already hit 6.3 percent, and the real cost to buy a house
has officially spiked over 50% in just 6 months. That marks the highest mortgage rate since
2008. The 3.2 percentage point jump in mortgage rates over the past year also marks the biggest
upward swing since 1981. Soaring mortgage rates mean many would-be
borrowers, who must meet banks' required debt-to-income ratios, have lost their mortgage eligibility.
While buyers who are undeterred will simply have to pay more—a lot more.
It will take us another few months to realize how much the demand is going to fall over
the next few months. And if the fed hikes the rates again to over
2 percent as some experts expect, things might get really ugly by the beginning of 2023.
Of course, there are experts who are calming us down that a crash isn't gonna happen, and
I really hope that's true. But experts also predicted that the average 30-year fixed mortgage
rate would climb from 3.1% to 3.3% by the end of 2022. We can't say for sure what to
expect in the next 12 months since they are so many factors are influencing the fed's
policy. The United States is trying to balance between managing its internal affairs at home
and standing up to Russia's invasion of Ukraine that's causing worldwide inflation. Rising
rates alone aren't going to change everything. If inflation keeps rising, home prices are
unlikely to fall since inflation will simply make the cost of building new houses more
expensive, which will at least keep prices where they are. The Biden administration already
announced that the president will visit Saudi Arabia to convince the crown prince to increase
the supply of oil to fill the gap and finally bring prices down. Will he succeed? I don't
think so, since oil-producing countries are making more money than ever. But how negations
are going to continue will remain to be seen. So the direction the housing is going to be
headed isn't just based on the fed's policy but is also greatly affected by external factors.
Thanks for watching and I will see you in the next one.