- In the past two years,
home prices have grown by double digits.
Meanwhile, inflation is eating away at savings.
Prices are rising.
Markets are shaky at best.
Oh, yeah, there's still a war going on.
My initial perspective is absolutely yes.
But I'm looking at at buying a new home and I
needed to really dig into the research just to be sure.
I need to know if this is the beginning of
another crisis or if it's just some kind of overreaction.
So I jumped in and I found this right away.
- If you're a home buyer, somebody or a young person looking
to buy a home, you need a bit of a reset.
We need to get back to a place
where supply and demand are back.
- Well, that doesn't make me feel any better.
Buying a home is one of the
most important investments you can make.
There's a real sense of satisfaction in owning
a piece of space, and yet it's becoming
harder and harder to actually do.
Not only that, housing bubbles have generated some
of the worst economic recessions in history.
It's no wonder that the Fed is worried.
Take 2008, after 9/11 and the explosion of the dot com bubble,
the US Economy needed a kind of boost.
So the Fed decided to lower interest rates.
This literally makes money cheaper to use and does
all sorts of things to stimulate the economy.
People shop more, companies expand because debt is
cheap and investors take on more risk.
Mortgages were easy to get.
Often these loans were of the no dock variety.
These were intended to help people in unusual
lines of work to help verify their income.
And the whole thing was good in theory.
Get working people homes.
That's a hallmark of being an American, being a human.
But it wasn't regulated very closely.
Borrowers began just handing out
mortgages like Halloween candy.
They were essentially Oprah.
You get a mortgage, you get a mortgage.
It didn't even matter if you had zero credit history.
People would buy dream homes
that they couldn't actually afford.
And all this easy credit wasn't actually that easy.
It was a ticking time bomb.
When it exploded, it blew a shock wave
through the financial markets, across the world.
Enter the subprime mortgage crisis.
$20 trillion in household wealth was wiped
out in a few short years.
8 million homes went into foreclosure.
To help cool down the economy,
interest rates were increased.
But this had a secondary effect.
Many people had arms.
Not like an actual arm.
Almost everyone has those.
I'm talking about adjustable rate mortgages.
People had super low rates at first, but as
interest rates rose, so did their mortgage payments.
All the while, home prices were actually decreasing.
It was a terrible place to be.
Now, of course, this problem is insanely
complex and there are a million factors.
But generally the 2008 issue was a
mix of high demand, low interest rates,
easy access to credit and inflated prices.
Bubble was created and you know how it played out.
But the interesting thing is
we've seen this all before.
Remember the Dutch tulip crisis?
Or the Mississippi bubble
back when it was still French?
Or the South Sea Bubble of 1720.
I mean, the Roman Empire even got rocked by its
own housing crisis way back in the year 33 AD.
So clearly this is an issue we've
seen before and we will see again.
Now, let's see how this market looks today.
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So the real estate market is built on
the assumption that house prices are always rising.
It's kind of a wholesome thought, and yes, it's true.
In the past two years, they grew by a lot.
In the richest countries, housing prices
grew by 13% in two years. And in the US,
they're going up by 20% a year according to the Fed.
That's the fastest growth in 35 years.
I personally purchased the house five
years ago when I was 21.
Now it's being appraised at more
than double what I paid. It's insane.
It wasn't even like an investment when I
initially purchased it, and now it's one of
the best investments I've ever made.
Understanding why this happened will help you determine
whether there's another bubble on the horizon.
Of course, we have the Pandemic.
It hit the economy so hard that in the first few
months, GDP fell at a similar rate to the Great Depression.
In response, central banks, in essence,
created a shield for the economy.
They cut interest rates to
provide easy money for everybody.
They gave large stimulus checks and
unemployment benefits to support households.
And all of this pumped a lot of
cash into the system, even when the stock market
was crashing and unemployment was spiking.
Meanwhile, there was a huge shift in the
way that people lived their daily lives.
Suddenly, the only way to work was remotely.
So people started spending more time at home.
A lot more time.
Homes became even more important.
Not just a place where you go to sleep or
have barbecues on Sundays, it was your office too.
With stimulus checks flowing and fewer ways to
go out and spend your money, people managed
to save a lot of extra cash.
And the surplus money went straight into the
safest investment of them all
- Long story short, we hear a story
too good to be true, it ain't.
- First of all, a decrease in house
prices isn't necessarily a good thing.
Sure, it makes homes more affordable, which is great
for those looking to buy their first homes.
But if prices go down too much or too
quickly, then people will struggle to pay their loans.
They end up paying for a mortgage
that's worth more than the house itself.
And if this happens to too many people,
then we have a systemic problem.
Just look at 2008.
So the question is not only whether prices
will go down or not, but also how
quickly and violently they go down.
At this very moment, the Fed is worried.
They're trying to cool the housing market down,
literally throwing buckets of water on.
factors high demand, low supply, and inflated prices.
And right now, we have them all.
People are working from home and want bigger spaces.
Our cities aren't building enough to keep up.
And yet that whole inflation thing kind of sucks.
Just think, the average sales price of a
US Home is $500,000.
That's absolutely insane and
unattainable for most people.
So things look more than just a little intimidating.
First,
This inflation is like a tsunami, and central banks
are increasing interest rates to help stabilize prices.
Basically, it makes mortgages more expensive.
And as a result, prices should drop.
For example, Freddie Mac's rates are
around 6%, which is very high.
Just a year earlier, they were about half of that.
Now, second reason - They don't just grant those
crazy loans anymore like they did in 2008.
If you bought a home in the last couple
of years, they asked for proof of income, ownership
history, a personal guarantee, a blood oath, and basically
require your toddler to sign as a co-debtor.
This means that the market is
less speculative than it's ever been.
And third, adjustable rate mortgages,
those arms from earlier.
They aren't used so much anymore.
Most countries prefer fixed rate mortgages.
They're just safer, and they have
a lower chance of default.
If you get a mortgage now and rates double
next year, you're just fine as a homeowner.
So for now, it seems like soaring home prices
should slow down without some kind of major crash.
And some even think it could decline.
According to Moody's, prices could drop by 5% to 10%.
And I mean, I guess we'll see.
But am I happy about this,
while searching for a new home here in Puerto Rico?
Not really.
Because there's another problem, especially for millennials
and Gen Z, first time home buyers
who might need to be patient.
Powell said that if you're a young person looking to
buy a home, you should wait for a reset.
And I mean, sure, but how long is that going to take?
The world population is always growing, and home
ownership is one of the most common ways
for families to start building and keeping wealth.
If you block this, you've got serious trouble.
You end up with millions of people that
live with their parents until they're 40.
Now, these high mortgage rates are making it
hard for new buyers to get a place.
It just isn't affordable anymore.
And it's a long commitment to
pay those insanely high interest rates.
And as a consequence, many builders
have just stopped developing new homes.
All the statistics on new home constructions are in a
free fall because why would they build new homes if
there's going to be no customers in the future?
This is a problem.
It reduces the need for construction jobs like
builders and carpenters, and it means fewer jobs
in real estate and mortgage departments.
That's why the S&P Homebuilders Index
has taken a sucker punch recently.
High prices, fewer homes, and fewer jobs to
create the new homes that we need.
It's a terrible combination.
That is, tens of millions of
people actively looking for homes.
However, while the population grows, there are
fewer and fewer homes in the US.
We are at a historical low.
Before 2008, things were peaches and cream, baby.
They were building literally nonstop.
Speculation was at its highest.
Investors were snapping up homes that they
never even planned to live in. And why not?
Real estate was essentially a sure bet
that's when the bomb exploded, the market
for housing construction was destroyed.
In the past decade, the number of new homes in the US
actually decreased.
And some argue that millennials are the least
financially fit generation to buy a house.
Less than Boomers.
Even less than Gen Z in a few years.
And there are a few reasons for it.
They say that it's because of the financial crisis,
student debt, and simply because many of
them move to expensive cities and decide it's
better to just keep renting.
And this may be true, but I think it's also a
change in perspective that's going on here precisely because
A lot of people simply don't see their first
or second house as their forever home, the place
of their dreams, where they're going to spend decades.
Many see this uncertain real estate market
as a potential way to create wealth,
one that's especially shaky right now.
So how am I going to navigate this market?
I am personally acknowledging the fact that
and that if I buy something now,
it could potentially be worth 10% less next year.
I don't see an outright crash coming.
at least not yet.
And even more importantly, I'm keeping in mind that it's
I'm going to use this time of
fear and try to snap something up.
Submitting an offer that makes
sense for the current economy.