Should you invest in real estate now?!
If you turn on the news, besides the pandemic, everyone is talking about the housing bubble.
Experts are warning that the housing market will crash in 2021.
And as a piece of evidence they bring the example of the 2008 crash that 2020 is following
the exact same patterns so the housing market should crash again next year.
And this is pretty interesting because if we are in a bubble that will burst next year,
it will present a golden opportunity for a lot of people to jump in and make a fortune
because a housing bubble means that houses will be sold at a fraction of their real price
once the bubble burst.
Imagine at $200,000 home that you wanted to buy is suddenly on sale for 70 or $80,000
and interest rates are so low that you can get it immediately if you can make the downpayment.
Doesn't that sounds like a golden opportunity?
Everyone likes investing in real state because for some weird reason we believe that real
estate prices will always rise however we have seen countless times that's not the case
and house prices can actually drop.
To figure out if investing in a real state now is a good idea or not we have to understand
a few things.
Do home prices always rise?
How housing bubbles area created?
And finally when exactly the market will crash?
Before we move on.
I want to take a moment and thank our sponsors - Skillshare.
If you want to learn how to analyze companies like professional investors and find out if
a certain company is a good investment or not.
You have to take this course by Skillshare because it will teach everything a professional
investor uses to value a company.
And it is taught by Business Casual ( the YouTube channel you probably know).
I have taken the course!
Its short, animated, and worth your time.
Skillshare is an online learning community for creatives, where millions come together
to take the next step in their creative journey.
Skillshare offers thousands of inspiring classes for creative and curious people, on topics
including illustration, design, photography, video, freelancing, and more.
And all that is for less than dollars a month with an annual subscription.
But because you guys are the best audience in the entire youtube,
The first 1000 people who click the link in my description, will get a free trial of Skillshare
premium.
By the way, you will be supporting the channel by signing out to Skillshare.
And now lets get back to the video.
The 2008 Crash - The mother of Housing Bubbles
One of the tools the fed has at its disposal to control the economy is the interest rate.
When the economy is rising too fast, the government intervenes and raises interest rates to stop
the flow of capital into the market so that the economy doesn’t turns into a bubble,
because high interest rates means borrowing money becomes expensive which means less people
would borrow money which will result in less spending.
And vice versa.
Thats known as Monetary policy.
So back in 2000s, when the dot com bubble burst, the stock market lost almost 5 trillion
dollars of market cap, the economy was in a recession, so the fed lowered interest rates,
From around 3 percent to 2.5 then to 2 percent all the way down to a little over 1 percent
to encourage everyone to borrow money and spend in order to get back the economy on
its knees.
And it worked, by 2003 the economy began recovering, by 2006, the stock market reached its pre
dot com crash level.
But low interest rates means low rate of return on government bond and interest on fixed despots.
It no longer made sense for investors to buy government bonds or keep their pile of cash
in the banks since inflation would slowly eat it away especially when a few years ago,
they made unbeliever returns during the dot com bubble, the s&p500 rose by over 400 percent
from 1995 to 2000.
So investors were looking for a new opportunity, a safe and rising investment to throw their
money at and real estate seemed like a great idea, but investor don’t have the time to
deal with individual buyers so financial institutions came with a brilliant idea.
Since interest rates were so low, everyone was buying a house, so financial institutions
would take these mortgages, bundle them together and sell them to investors in forms of shares.
These investments [proved to be really great, but banks run out of financially responsible
people to loan mortgages but investors still wanted to buy these investments.
So banks started giving subprime mortgages or mortgages to people with really low credit
scores, people didn’t necessarily have enough income to keep making the mortgage payments.
Why?
Because they would take these mortgages, bundle them together and sell them to investors.
Low interest rates and rising home prices kept attracting more and more investors.
The reason why these investments appeared so seductive is because the investors argued
that, even if they would default on their loan, its not a big deal, the bank can get
back the house and sell it and since home prices were rising, they would still make
a profit, it seemed like the perfect investment.
So the banks gave mortgages to everyone, that inflated home prices to unbelievable heights,
but at some point one of the borrowers defaulted.
So his home was put on sale, then the second one, then the third.
Soon, there were so many homes on sale but not enough buyers, and home prices began to
fall.
When people saw that their 500K dollars mortgage house is suddenly worth only 250K, it stopped
making sense for them to keep making mortgage payments so they walked away from them.
Now there were even more houses on sale, driving home prices even lower.
So the banks were left with a lot of worthless mortgages that no one wanted to buy so they
went bankrupt one after another.
but how is this all related to the 2021 crash?
Well, the government intervened and saved the big banks in return that they would tighten
their regulations and won’t randomly give mortgage unless they have high enough credit
score and are able to make the monthly payments.
For sometime, they did, if in 2010, you would try to get a mortgage, the banks would require
you endless number of documents to prove you are financially responsible and you have a
stable job that will allow you to make mortgage payments on time.
So, Home price returned back to their pre crises level by 2012.
The only reason, the market would crash again is if house prices will start rising dramatically
again and there won’t be a demand to meet it.
In the last 8 years, home prices did actually rise but mortgages were no longer given to
irresponsible borrowers.
In fact, In 2016, the FED stepped in and raised interest rates from 0.25 to 0.5 so that it
wont turn into a bubble.
By 2019, interest rates were at 2.5 percent.
Borrowing money became expensive, although the number of mortgages dropped to a certain
extend, but the demand was still there so prices kept rising.
- Covid-19: The crises that suppose to crash the housing market
When the pandemic stopped the economy, it was clear that the housing market is going
to crash, because overnight millions of people lost their jobs which means, they won’t
be able to continue making their mortgage payments and default on their mortgage which
means, suddenly there are going to be too many houses in the market as it was back in
2008 so home prices will start falling which means the housing market will crash.
But what we didn’t take into account is that, the Fed just recently went through a
housing crash so it knew how to stop it.
First of all the government distributed stimulus checks to help everyone to pay the bills.
The government granted financial aid to businesses who retained their employees so most people
could keep paying the bills, including their mortgage.
And to seal the case, the government intruduced a forbearance plan which basically means,
you can put your mortgage payments on hold until 2021.
And that means that non one is going to default on their loan this year, and by the next year,
a vaccine is hopefully will be available and everyone will get back to work and keep making
their monthly mortgage payments.
but why in the middle of a pandemic, home prices are still rising?
Remember, in the beginning of the video we talked about How the fed lowers interest rates
during recessions to help stimulate growth.
Well, that’s exactly what they did.
The fed lowered rates to 0.25 percent which made borrowing money more affordable so the
demand for homes rose while the supply didn’t.
Is the market overvalued?
Probably!
But its definitely not a bubble.
Once the 2020 rollercoaster will end and life will get back to normal, home prices may depreciate
to what they really worth, but that might not happen next year.
Of course if you take individual cities like San Franciso, New York City, or LA, home prices
might be slightly more overvalued.
But that’s pretty much about.
it.
So, is it a good idea to invest in real estate now?
Probably no since the market is slightly overvalued and a correction might happen next year, on
the other hand, timing the market isn’t a great idea either, especially the housing
market since house prices don’t jump up and down like stocks so you might end up waiting
a few more years.
And now its your turn, do you think we are in a bubble?
Will home prices crash next year?
Let me know in the comments below.
And that’s it for today.
Make sure to give this video a thumbs if you have enjoyed it.
And if you are new around here, smash that subscribe button and the bell besides it,
thanks for watching and until next time.