The Coming Real Estate & Housing Crisis.

hey everyone kevin here in this video

we're going to talk about what the

federal reserve says is the biggest risk

to the housing market and what could

potentially create a housing market

crash we're also going to break down

what is not presently a risk for the

real estate market so that way we can

get the perspective of the federal

reserve and see what they think the

biggest risk to the housing market is

and that way we can project when that

risk might become most evident folks

let's get right into this video right

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you so much and let's get into the

content so

we're going to go to the federal

reserve's a financial stability report

and we're going to break down the real

estate sections in this video i've

broken down the stock market sections in

the other video the first video that i

did in this sort of financial stability

report series and i'll link that in the

description down below so if you want to

see that portion you can see that there

this is going to essentially be part two

where we talk about real estate and in

part three we'll talk about stable coins

so let's talk about this most asset

classes here have obviously seen

valuations substantially higher than uh

you know current like historical

valuations we're seeing this prices of

everything go up but don't worry they

say no inflation right now we'll put

that aside let's focus on the actual

facts here supported by low mortgage

rates and strong demand housing prices

continue to rise at a rapid clip

outstripping increases in rent now this

is actually really important to know

because it really sets the stage for the

potential for rents to go up even more

and even though there doesn't the

federal reserve doesn't believe that

there's a lot of speculation happening

in real estate i do believe that

investors are expecting to be able to

raise rents as tenants move or

so that way they can essentially raise

rents to market levels as opposed to

having people in locked contracts now or

if they buy product projects people i

believe are projecting higher rent

increases in time so people are kind of

starting to build in higher rents and

their valuations we're starting to see

this come from sellers as well

reiterating higher asking prices which

something pretty wild that just happened

in in real estate data as well i always

recommend and refer people to the redfin

data center to keep track of what real

estate prices are doing sort of on the

day-to-day and there was a little

interesting inflection point that i saw

if you jump on over the data center and

you go to median sales price take a look

at this usually towards the end of the

year like 2020 2019 well 2020 was a

little bit of an exception so i'm just

going to remove 2020 so we're going to

exclude 2020 here just look at the the

blue and the gray here this is 2019 and

2018. you always tend to see when school

starts and you get into the fall season

this reduction in pricing and you

generally don't see an increase in

pricing until february and march and in

2020 i'm sorry in 2019 you did see a

tiny little bit of push in the uh the

second to last week of december but

beyond that we don't really often see

prices going up at the end of the year

but take a look at 2021 folks this is

weird we followed almost the exact

inflection point to the dot in timing

with prices starting to soften a little

bit and now they've actually u-turned

back up it's pretty incredible and this

the sustainability of this is obviously

in question but these are some

worthwhile things to pay attention to

now the federal reserve goes on to see

here however with valuations at high

levels housing prices could be

particularly sensitive to shocks and

this is especially true if housing

prices keep going up so this is a risk

factor that we're going to want to pay

attention to in real estate and they're

going to give us a specific catalyst in

a moment as well they do mention here

that aggregate commercial real estate

prices have continued to go up since may

that was the last time they did a

financial stability report however

prices for retail hotel and office

sectors have remained roughly flat amid

limited transaction volume since the on

onset of the pandemic they also do

mention that farmland prices continue to

be l

sorry elevated relative to rents and

incomes against sellers almost

projecting hey you should be able to get

more rent in the future from this

now let's uh let's keep going here to

some of the core updates that they have

on real estate here they mention housing

prices continue to increase and

valuations are high relative to history

but take a look at this price to rent

ratios have been rising across

geographically dispersed housing markets

and so really what they're saying is

everywhere across the united states this

isn't just isolated to certain areas we

are seeing rents not catching up with

home valuations that home valuations are

rapidly escaping rent levels and that's

what you see here if you're at a level

of 100 right here that would mean that

home prices are essentially par with

rent prices but now you're getting this

insanity where

housing prices are essentially growing

exponentially and rent prices are are

barely growing if anything they're

growing more linearly probably somewhere

around five to eight percent whereas

housing prices have gone up 20 to 25 a

percent in many cases so really the

expectation here is that rent prices

could continue to go up for the time

being at a slower pace but longer than

housing prices go up so we could

actually see housing prices moderate at

some point in the future but rents

continue to push up

because of this sort of delay in how

long it takes to actually get rents up

pretty incredible and it really reflects

a lot of the inflation that we've seen

in the markets it just takes longer to

be realized in real estate and it could

be a catalyst for keeping cpi data

higher for longer which is not good

because if cpi data is higher for longer

since owner's equivalent rents and

housing make up about a third of the

weight for cpi and cpi is one of the

tools along with the pce that the

federal reserve uses to project when

they'll raise interest rates we can

actually see these lagging rents end up

pushing inflation up more for longer

leading interest rates to go up more

rapidly and sooner being bad for real

estate pricing but we'll talk more about

what'll be bad for real estate pricing

in a moment it's worth noting first

though that even amid such rapid and

widespread price growth the price the

fed here says there is currently little

indication of highly leveraged real

estate investment activity or a

deterioration in underwriting standards

now both of these are extremely

important back in 2006 and seven the

federal reserve was keen to a

deterioration of underwriting standards

and so were fannie and freddie mac uh

fannie mae and freddie mac but the

problem was

with uh with these companies is the

private market just said look if you

folks aren't going to compete these

government sponsors or sponsored

entities aren't going to compete we'll

just give people subprime loans in the

private market we don't need fannie and

freddie so fannie and freddie really got

squeezed out even though they realized

the loan quality that was happening in

the market started rapidly deteriorating

i mean dead people were getting loans

people were getting loans with stated

income it was a complete disaster and

that's one of the reasons we saw this

massive real estate bubble in 2008

and this destruction of housing wealth

and there are a lot of people really

comparing now to then but i don't think

they're realizing that the average

credit score of somebody getting a

mortgage these days is well over 750

they have very high uh

incomes compared to their monthly

payments they are

have the ability to repay those

particular words their ability to repay

are very important because lenders have

to prove that or be held

liable for giving a loan to somebody who

doesn't potentially have the ability to

repay a 30-year loan over the lifetime

of that loan that was totally the

opposite in 2006-7 6-7 it was like

i don't really care if you have the

ability to repay i just want to make the

loan and you could just refinance in a

few months that doesn't fly anymore

today the negam and all that old stuff

that doesn't fly anymore today so this

is actually very very important for the

long run health of the housing market to

see uh it or and to keep an eye on and

that's deterioration of underwriting

standards and speculation and so far at

least the fed says they're not seeing

that yet now they're not necessarily uh

the only experts in the real estate

market but i'm also not seeing that on

my on the local level and i would talk

to other real estate agents and lenders

that you know in your area and get a

feel from them what do they think

now uh let's see what else we have so

then we go on over to

uh over here default risk so low

interest rates continue to mitigate

investor concerns about default risk

arising from higher leverage

and where we do see some leverage going

up and then probably the highest area of

leverage or debt risk right now is in

leveraged loans not particularly in

housing loans like mortgages leveraged

loans are basically subprime loans to

businesses and those are no bueno we

don't really want those

so uh then we have default rates on

leverage loans has actually fallen

though worth mentioning that and the

financial position of many households

has continued to improve since the

previous financial stability report

which again was done in may 2021 and it

supported that's back when when people

were supported by pandemic stimulus a

recovering economy and rising housing

prices still however some households

remain financially strained and more

vulnerable to future shocks these

vulnerabilities may be increased by the

expansion or sorry the expiration of

expanded unemployment programs

forbearance and eviction moratoria as

well as potentially covet coming back so

there are households that do have risk

levels and those are specifically the

households that are relying on mortgage

forbearance although i personally

believe there are a lot of people using

mortgage forbearance that don't actually

need it it's kind of just like a free

stimulus program and that's not

necessarily a bad thing i mean it's it's

there this is what we talked about when

these programs were created we covered

these forbearance programs very very

in-depth uh now there are actually

opportunities for folks in mortgage

forbearance to request a 40-year

mortgage i might make a separate video

on that let me know in the comments if

you want that

but i actually think that's a phenomenal

idea for people to be able to lower

their housing payment and catch up over

the long term on their uh their owed

money that their or owed payments that

they didn't make during the 2020 to 2021

uh payment cycle but anyway continuing

on here household debt growth it did

pick up in the second quarter of this

year that's april may june debt owed by

roughly one half of households with

prime credit score continue to account

for all of the growth driven by

increases in mortgages credit cards and

automobile debt so this is very very

important right this is basically saying

the debt growth we're seeing at homes

and households is is really driven by

folks with prime credit scores and this

makes sense why we are seeing this large

uptake in the average credit score

because it's the people with money and

with wealth and with good credit scores

that are actually out there making more

money i think this is why people like to

say it takes money to make money right

so the increase in mortgage and

automobile debt reflects a surge in

demand for housing and autos as well as

substantial price growth in these

categories mortgage debt accounts for

roughly two-thirds of household debt

with mortgage extension skewed towards

prime borrowers mortgage forbearance

programs have helped reduce the effect

of the pandemic on mortgage

delinquencies the share of mortgages

that are either delinquent or in loss

mitigation programs including four bands

was slightly above four percent in

august of 2021 down from its peak at 8.9

percent in may 2020. so that's really

good mortgage loss and mitigation uh

delinquencies right here this is kind of

where you're seeing delinquencies and

being right above four percent right

here in the delinquent or in loss

mitigation uh well the top one here is

lost mitigation the bottom one is uh

and delinquent and the bottom one is

just delinquent so delinquent means like

you just stop paying for example loss

mitigation means you stop paying but

you're working with the bank okay so

you're gonna have more people in the top

line less people in the bottom one who

just aren't responding but take a look

at this if you compare back to

2019 at which 2019 that would be 20 this

would be 19. 2019 would be right here

you look at 2019 and we're actually

either at or lower in loss or

delinquency status in the amount of

people in these programs or having these

issues than where we were in 2019 that's

actually a really good thing also

borrowers who receive forbearance are

definitely more likely to have been

delinquent before the pandemic before

have lower incomes and have subprime

credit scores so this is where the

federal reserve is really going to talk

about the risk factors with the mortgage

forbearance program that's what we're

going to talk about here is a potential

risk factor for the housing market now

and we'll talk about another big risk

factor for the housing market as well i

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into real estate the proper way now

getting back to forbearance here take a

look at this the fed believes that

borrowers exiting forbearance are

expected to resume making their payments

and servicers are expected to be able to

work with them to modify their mortgages

to be

attainable or payable especially if it's

uh resorting to like a 40-year mortgage

or if they needed to sell the cool thing

is

prices have gone up right so these

borrowers should be in a higher equity

position it's not like they've been able

to add on debt because if you're in

mortgage forbearance you can't add on

debt so the cool thing is if somebody's

a mortgage forbearance they're not

adding on debt to their house well maybe

through credit credit cards and other

things but they're not able to add

household or like housing debt mortgage

debt right or a credit line or whatever

they can't add that and home values have

gone up so they actually have that net

worth in between there that should make

them leave them insulated but the

question is what if what if everybody

sells that's in forbearance right could

that crash the market well the fed

believes that as of september 21st there

were about one and a half million

properties in foreclosure and the fed

believes that should all of these

properties be put on the market

simultaneously an unlikely event they

say obviously it's very unlikely that

they would all come in the market at the

same time but even if they did the fed

believes that would only add about two

to three months of housing supply and

not really dent the housing market uh

substantially enough to cause a drop in

overall home prices

i did think that was very interesting uh

one and a half million properties though

does represent let's see one and a half

divided by seven that we're expecting uh

that would be an additional one and a

half million property sales because we

usually sell about seven but that could

also offset some others so let's say

it's 1.5 million sales out of 8 million

if that were to happen right in a year's

time frame that would be about 19 of

additional supply and i would expect

that additional supply would be sort of

spread out

and if if anything if if one and a half

million new households just decided to

sell i would expect more that this would

just soften the rate of real estate

appreciation

and i don't i actually agree with the

fed that i don't think that the

forbearance is expiring and then people

potentially selling which i also don't

think most of them will but even if all

of them decided to sell i think it would

happen in a spread out way over the over

a year and an 18 increase in supply

could potentially be matched with an 18

decline in prices in theory right but

there is so much demand that i would

expect if anything it would probably

just stop home price appreciation and

maybe maybe potentially prices could

fall somewhere on five percent or so

solely out of forbearances i don't

believe that this is going to be the a

big catalyst that is going to lead the

market to sort of crash but we can keep

an eye on these forbearance folks so

that's one of the nice things about

watching data so we can keep an eye on

those that that is not as big of a

catalyst that we want to pay attention

to

instead though we do have some risks

here take a look at this this is the

real risk for the housing market a steep

rise in interest rates could lead to a

large correction in prices of risky

assets valuations of many assets have

benefited from low interest rates and

therefore may be susceptible to a spike

in yields especially if unaccompanied by

an improvement in economic output a

range of financial intermediaries hold

long-duration assets like long bonds and

they could suffer mark-to-market losses

when interest rates go up so when

there's an adjustment in the liquidity

of companies because interest rates are

going up we can also see an adjustment

in household liquidity because

households net worth is going to decline

at the same time as housing demand

subsides so now you have less housing

demand less household liquidity because

people's net worth is potentially

declining as interest rates go up and

the federal reserve believes that it's

actually interest rates going up not

mortgage forbearances that are going to

be the biggest potential catalyst for

housing market crash the resulting

stresses may be especially pronounced

for homeowners currently in mortgage

forbearance or in the subprime and near

prime risk categories this would be for

individuals who have not yet made or

committed to let's say a 40-year

mortgage that people in forbearance who

don't get their act together before

interest rates go up have a real risk of

potentially having a default risk unless

they've tied in some sort of fixed rate

loan so if you're a forbearance get in a

fixed rate loan as soon as possible but

more important additionally here the

effect of a rise in interest rates on

borrowing business borrowing costs would

likely be amplified so if all of a

sudden you have stretched real estate

valuations companies losing liquidity

because interest rates are going up and

their sort of uh cash equivalents are

losing value treasury bonds and excuse

me and business borrowing costs are

going up now you could be in a situation

and then of course you have chinese real

estate that also has stretched

valuations you could be in a situation

where uh oh interest rates going up

that's going to be the real potential

market crash catalyst and we we know how

much interest rates are going up we've

already been talking about this we

expect this is the current expectation

that in the first half of 2022 we're

probably going to stay at zero

in the second half of 2022 we'll

probably go to 0.25 to 0.5 so a bump of

about a quarter because we're at 0 to

0.25 right now

oops let's go ahead and mark that to

0.25

in the first half

and second half so i'm just going to put

20 23 in 2023 we do expect two rate

increases so that could bring us up to

0.5 to 0.75.75 to 1. so we'll put 0.75

to 1. and 2024 we might actually see

three increases where we could get from

one to one and a quarter a quarter to

five a five to point seven five so that

would look like 1.5 to 1.75 by 2024 this

increase could lead mortgage rates to

increase by about one and a half percent

a one and a half percent increase in

mortgage rates is generally associated

with about a 15

decline in real estate prices and so

this is where if you do have mortgage

forbearance folks selling and let's say

you get this max potential 18

uh

increase in supply which is going to

slow home price appreciation

at the same time as rates go up now you

have a problem now individually i don't

think mortgage forbearance is going to

be more of a problem than just slowing

real estate price appreciation and

growth bringing us to zero but if on top

of that rates go up

now we can see the catalyst for home

prices declining and personally i don't

recommend waiting for this to happen to

buy because well then rates will be

higher and i think if you could find a

really good deal in real estate you

should get it but i do think that the

fed's right here and i know that does

you know saying the words the fed is

right i get it but i do think they're

right it's not just forbearances it's

gonna be interest rates that's the

bigger issue uh and this gives you some

insights into what the fed believes uh

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and building your wealth with real

estate thanks so much for watching this

update i'm gonna go look at a

fixer-upper tomorrow

thanks so much for watching and we'll

see you next time

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