The Housing Bubble Burst Has Started.

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before the price goes up i hate to say

it but the real estate bubble that the

federal reserve warned about right here

folks

is beginning to burst take a look at

this report from the end of march from

the federal reserve the dallas federal

reserve research division

quote

we argue that the underlying causes of

the run-up differ from those of the last

housing boom which preceded the

2007-2009 global financial crisis

however there is growing concern that

u.s house prices are again becoming

unhinged for fundamentals this

under the title real-time market moving

monitoring find signs of brewing housing

bubble and it's no surprise that when

mortgage rates skyrocket three to four

percent and buyer purchasing power

plummets to the tune of 30 to 40 percent

that we might begin to see some signs of

the bubble popping or at least air

getting left out let's talk about those

signs

in this video

first we need to understand some

fundamentals and that is that real

housing prices

are now above

the upper bound 95

level which is just a fancy line that

the federal reserve draws that shows

when are housing prices deemed exuberant

or too hot the last time we crossed over

this line

was right here in a period of time that

actually lasted quite a bit from about

the beginning of 2000 to the 2008 market

crash

being above that line though is a

dangerous sign of a potential housing

market bubble and folks look at where we

sit

right here

and this chart

only goes through the end of 2021

and home prices have only accelerated in

the first three months of the year

that's because those closing on homes in

the first three months of the year we're

still able to lock in substantially

lower rates than buyers today

if we hop on over to view the price to

rent ratio we also see a substantial

decoupling of prices

to rents and so what we have is anytime

the

right here this blue line and the green

line again go above this fancy red

dotted line that the fed has drawn we

get exuberance again based on how far

prices have disconnected from rents you

can understand that clearly via the

lines on the bottom and you could see

that here as they show you how rents are

moving versus how home prices are moving

okay so

bottom just says if we're above the red

bad here you go we are above the red

and you can see the difference here

between rents and home prices blue being

home prices that deviation right and the

same thing we're seeing at housing

prices to incomes

but not quite over that red line yet but

that might be because this is based on

incomes that have been inflated

by stimulus

so where does that leave us now well

folks and now it leaves us with housing

inventory

that is the percent change of housing

inventory

finally skyrocketing the annual change

of active listings is finally blowing up

and people say oh well home prices can't

go down because there's no inventory

well folks look at this chart the only

time you've actually seen since 2016

inventory levels move uh even in the

positive direction compared to the prior

year was briefly here in 2019

now we're seeing a positive move in

available properties on the market this

jump in inventory is unsurprisingly

leading to a substantial amount of price

reductions in areas throughout the

country whether it's austin texas price

drops in all metro areas whether it's

price drops in seattle washington or los

angeles the black line representing an

increase in the amount of active

listings with price drops and we're

seeing this explode everywhere

especially in markets like boise where

we're starting to see 10 to 20 percent

of homes with active price reductions so

folks who say oh there's a shortage of

homes just wait the more we see price

reductions the more houses can

potentially hopefully sell but can

potentially also

stagnate on the market at the same time

as we're seeing active listings

increase

now the stock market sees the writing on

the wall this is the msci world real

estate index and you can see it's not

yet fallen below its 10-year average but

we've come down a substantial amount

about 30 percent on real estate stocks

because that's the belief of the stock

market that real estate is going to

suffer impairments evaluations which

would lower the balance sheet at real

estate companies like reits basically

price gonna go down of houses so we may

as well pre-price the stock lower that's

the thesis and again it makes sense

when

you see interest rates skyrocket the way

they have now fortunately and this is

good news for the housing market here

briefly recently is we've seen the

10-year treasury yield come down off of

its highs of about three and a half

percent to about three percent this

helps

keep housing interest rates for

mortgages somewhere around five and a

half percent when we get to that three

and a half percent ten year we start

seeing rates closer to six and a quarter

to six and a half percent and that's

substantially more painful another 10 to

20 percent of purchasing power for

buyers evaporating at this higher rate

and so it's no surprise that when we

look at a home builder report the second

largest home builder in the country

lennar we see that orders and traffic

sales incentives and cancellations have

all worsened in the month of june with

lennar again the nation's second largest

home builder they have three categories

of markets experiencing suffering

category one markets on screen here have

found purchasing power flattening in the

pace of sales flattening areas like san

diego orange county phoenix san antonio

houston florida category two markets are

seeing more aggressive price reductions

like salt lake and reno in the bay area

and category three markets are seeing a

more significant market softening and

correction and folks we have seen this

deterioration get worse just since the

beginning of

june but folks are we actually starting

to see home prices start declining

well that's what we're going to talk

about right after i mention this message

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algorithm so what makes us think that

the housing bubble has actually started

to burst well take a look at this

this

is a report that indicates the average

momentum of home price appreciation has

not just flattened

it's actually the red line it has

started to

decline

this is starting to show

that in markets throughout the united

states and 37 of markets in the united

states we're actually starting to see

home price

decreases and this is a leading

indicator in fact and this particular

data from

housingalerts.com which is a blog who

collects this quarter over quarter data

to try to give us some leading

indicators which are so hard it's so

hard to get leading data for real estate

they list the following

counties and cities as showing declines

you can see the declines on the right

there and you can pause the video at any

point here but we can start seeing

quarter over quarter declines of two

tenths of a percent of a percent three

tenths of a percent and if you go

through this list you can see it

continue point six percent point seven

percent point eight percent one percent

one point four percent going up to two

percent three percent declines in

charleston west virginia and uh you've

gone iowa city here 3.1 percent declines

and these are in quarters

if you multiply the quarter

by four to annualize these declines if

this pace of decline continues a decline

of 3.1 percent and a quarter could

represent a decline of 12.4 percent in

iowa city just as an example and this

assumes that we're not going to see an

acceleration of price declines so we're

already starting to see quarter over

quarter price declines and this makes

sense because we saw housing inventory

go up we saw the price drops

on active listings

we have more listings stagnating and

fewer pending sales and what comes after

that price drops now let's go away from

a blog's leading indicators and look at

what morgan stanley and barclays tell us

or credit suisse affordability fallen

and this dampens housing starts you can

see housing affordability plummeting and

the start of an inflection point in

housing starts right over here

take a look at the next one we have

new and pending home sales both have

substantially slowed gray or pending

home sales and the black line are new

home sales both of these can be useful

as leading indicators as it takes us

until closing to know the price of these

but we know that the volume of them is

starting to decline and so that's why we

have to really pay attention to when

these houses actually start closing what

kind of declines are we going to see and

then of course this is a another chart

from morgan stanley on existing homes

available for sale in gray and new homes

available for sale in black and you see

an inflection point up that's a little

more still traditional on existing but a

substantial explosion in new homes for

sale and it'll just be a matter of time

until we see that same movement on

existing home sales as price drops and a

lack of sales lead to stagnating

inventory and more people listing homes

for sale

now there's also the risk that

institutional buyers potentially slow

their purchasing of properties taking

less inventory off of the market this so

far has been corporate buyers as a

percentage of the purchasing market

somewhere around two to two and a half

percent for either institutional or eye

buyers and if this flattens or inflicts

to the downside we'll have less

institutional investors what about

non-corporate buyers well the individual

investor is still buying but what

happens when this inflects down and we

start getting new data from individual

investors no longer buying because

they're waiting for potentially better

rates after all jerome powell told us if

you're a home buyer right now it might

make sense to wait for a reset when

rates come back down and things become

more affordable

folks the data is speaking volumes the

real estate market is slowing down and

it's time to get ready to be a buyer

increase your income increase your side

hustles increase your savings and reduce

your spending get your debt to income

down if you have debt and start talking

to a lender today about what you could

do to make sure you can qualify for a

rental property by the end of the year

or a home for you to move into maybe

it's a duplex maybe you want a house

hack it and if you're unfamiliar with

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much and good luck