How Much Housing Prices will Fall | The Coming Crash.

hey everyone kevin here in this video

we're going to talk about exactly how

much real estate prices are going to

fall in the future now you might think

it's crazy wait how can we determine how

much home prices are going to fall well

i'm going to show you with a rule of

thumb in this video and some new insight

that we just got yesterday and this is

very important but first we've got to

look at something that is becoming an

inflection point in real estate right

now and it has to do with slowing down

home sales and slowing down price

appreciation now this is not necessarily

a bad thing

this is something that you would hope

and is actually something that is

natural around this time of year in fact

let's start there let's start at the

redfin data center it's very normal that

after the summer we get a slowdown in

the amount of new listings especially as

children go back to school the red line

here is 2020 which i think is a little

bit of a a weird year we should say but

otherwise you see here in 2019 and 18

a consistent downtrend right around the

time that school starts in terms of new

listings

but what we also want to keep an eye on

are median sale prices and here what

you'll notice is around this time of

year you usually have a moderation in

prices or a decline in prices

and that's exactly what we're seeing

here ever so slightly the median home

price sort of peaked around 361 thousand

dollars and we're down just about one

ish percent to about 358 thousand

dollars at the same so so in other words

good to sort of take a little checkpoint

there and mention we got less properties

being listed and the properties that are

selling are starting to sell for a

little bit less even though less are

coming on the market

which oftentimes has been associated

with well if less listings are coming up

in the market that means more of a

supply crunch right but if we've got

less listings coming on the market and

we're seeing a little bit of a slowdown

in pricing then that's generally a

consistent sign that prices are

softening a bit we do the see the same

thing here in pending sales would make

sense that pending sales would rotate

down around this time of year so this is

pretty natural most important one to pay

attention to here is the slight

inflection point in this moderating of

prices we're not consistently going to

the moon anymore like we were really

since uh i mean january of this year and

much of the end of last year we saw a

good bump as well with the exception of

really november december when real

estate does often also slow down

okay so what does this have to do with

the future well in addition to seeing

this sort of moderating in prices here

on the redfin data center or in articles

such as this one from reuters which

mentions that this is as of september

22nd so this is a yesterday article

don't worry this information you're

going to get in this video is still

going to be timely even if you watch

this in the future but it does say here

existing home sales fell two percent in

august housing inventories declined at

13.4 from a year ago and median home

prices increased they're still up 14.9

from a year ago but we're starting to

see that inflection point right see the

report from the national association of

realtors wednesday showed the smallest

share of first-time homebuyers in more

than two and a half years and

we are seeing a moderation in existing

home sales reflecting some easing of the

buyer frenzy okay this makes sense so

what does this have to do

with prices in the future and how do we

calculate how much real estate prices

could potentially fall in the future all

right let's answer both of those

questions so the first one that i'm

going to tackle is i'm going to give you

information that's going to help you

recognize ah okay so this is where we're

potentially going to get some softness

in the real estate market it has to do

with interest rates and bonds so

mortgage rates in real estate are at

record lows right now but when the

10-year treasury bond rotates to the

upside

mortgage rates tend to go to the upside

and we had a little bit of what we're

calling a delayed taper tantrum the

federal reserve said on wednesday that

they do not expect to start tapering or

reducing support for the economy until

november but then at the end of next

year they're going to increase interest

rates and even though we're not going to

see that interest rate increase until

the end of next year we're starting to

see that movement in the treasury market

already this is the 10-year treasury

market right here this is what it looks

like and you can see on this one-month

chart here that we're peaking at the

highest level here in the last one month

chart i'll remove myself for a moment

here at about 1.43

now we've been much higher as inflation

fears were higher in earlier parts of

the year and so you can see we're really

just starting to finally trend back up

but watching this is going to be a big

indicator because mortgage rates will

rise and as mortgage rates rise home

affordability goes

down

now that is a very very important piece

of the puzzle right here and that helps

us understand how much real estate

prices could come down

so what else do we know as in terms of

why we're starting to see the spike here

in the 10-year treasury market why are

we seeing this again and why did real

estate prices not collapse earlier in

the year when the 10-year treasury yield

was higher

well very good questions that i kind of

just asked myself

this particular rise here in 10-year

treasury yields is worth noting was a

very temporary cause this was based on

fears of inflation not longer term fears

of rates going up and so this was mostly

a movement that impacted the stock

market specifically tech related stocks

or kathy wood style stocks

this over here is in my opinion less

concerning right now the stock market

and more concerning to the real estate

market and the reason it is is because

of this year from the federal reserve

now this is a little bit messy so i'm

going to erase this a little bit and

we're going to clean this up together

right here

the federal reserve is projecting that

interest rates will have their first

increase of about a quarter of a percent

in the second half of next year that's

what this change from basically zero to

point three means

uh and uh and you can see right here

these are the dates so i'll do a quick

little cleanup right here there you go

you got the dates here 2022 2023 2024

right

previously we didn't have projections

for 2024.

we had nothing here we had 0.6 here for

23 and we had no increase for 2022.

now we're expecting to see an increase

in rates in the second half or 2h we

call that second half of 2022

and then another two rate increases in

2022 and then more rate increases in

2023.

so

what can we now expect in terms of real

estate prices and how quickly do these

these change here well let me show you

that really quickly but first quick note

if you like the information in this

video consider checking out my programs

on real estate investing do-it-yourself

property management or real estate agent

sales there are also other programs i'm

making youtube videos and stocks linked

down below but these three are very very

popular for real estate investors

because you get all of my experience as

a real estate broker real estate lender

contractor property manager and real

estate investor all combined in these

programs so that way when you're

negotiating deals you're negotiating

loans you're doing refinances you have

questions

whatever these programs are your

encyclopedia building wealth with real

estate check those out link down below

there is a coupon code that is expiring

friday it is in the description down

below and then pricing will be going up

to understand sort of the federal

reserves rates and this isn't so

terribly important but i'll go through

it really quickly this is where we sit

right now with rates at the fed these

are different from mortgage rates

10-year treasury rates are different

from mortgage rates as well they just

tend to go in the same direction

well after we get our first bump we'll

be at 0.25 to 0.5 so this is going to be

what we expect to see in the second half

of 2022 then we're going to see 0.75

to

oh sorry we're going to see 0.5

to 0.75 this is going to be 2023.75

to a 1 23 right here and then we might

see an additional

three rate increases

here in

2024

so 2024 might look a lot like

1 to

1.25

1.25 to 1.5 and then 1.5 to 1.75 this is

approximately the sort of schedule of

these increases that we're expecting

that's at the federal reserve

this is going to push up the 10-year

treasury yield or at least that is the

expectation and expectations can get

fulfilled by people who trade this

market if people think that this line

here is going to go up

then they can short

treasury yields because as prices go or

short treasuries that is because as

prices go down in the treasury's market

which would mean their shorts pay off

yields go up okay that technical part

doesn't matter so much what really

matters more is that you know there's a

direct connection between what the

federal reserve is doing

the impact that is going to have on the

treasury market and then the impact that

is going to have on mortgage rates so

let's now take a look at a chart of

mortgage rates and let's do a little bit

of calculating

so we can kind of see all right what do

we think is potentially going to happen

to those real estate prices over time

all right so here's a chart of mortgage

rates so you can actually see when those

treasury yields shot up here in february

to april we did see mortgage rates go up

but they are still at record lows right

like who cares it's 3.13 versus the 2.86

now like big deal right that's not that

big of a movement

so what is a recent example where i was

also making youtube videos about the

federal reserve increasing rates

and potentially hurting the real estate

market because mortgage rates were going

up the answer is

2018. so we're going to jump on over

here to a five-year chart and we're

going to look at 2018 this summer of

2018 specifically and what we want to do

is also pull up the

fed funds rate

we can do

uh fed reserve

st louis right there we go

and we're going to go ahead and put this

rate chart up next to this

so this here is the fed funds rate this

is what i was talking to you about and

this is where we sit right now at

essentially zero

and you can see the fed funds rate got

regularly pumped specifically over here

because this is the last time we started

really raising rates was in 2016 in 2017

more aggressively in 2018

but the market had a pretty severe

reaction in the summer of 2018 going

into 2019 and so what happened is the

feds stopped raising rates and then

eventually lowered those rates before we

even got to the pandemic when we hit the

pandemic rates went to zero but the fed

slowed down on their rate increase and

then actually reversed before the

pandemic because they had gone a little

too crazy with raising rates too fast

and over here you could see that play

out in mortgage rates mortgage rates

went up from three point eight three

percent to a one point a high of over

one percent more

until of course the fed reversed course

they lowered their rates they chilled

out a little bit and we saw those

mortgage rates come back down

okay so how does this affect real estate

prices well here's the thing there's a

rule in real estate called the rule of

10x

for every one percent change in a

mortgage interest rate we would expect

and i'm going to spare you the math for

doing this but you can fact check this

yourself by using a mortgage calculator

and play with the payment just remove

things like property taxes and insurance

and things like that just look at

principle and interest and change the

interest rate by about a percent and

then consider how much of a difference

in price you have to have to change the

affordability of that property usually

and this is rough but but it's pretty

close and tends to be pretty consistent

usually when rates go up one percent on

mortgages

which is obviously pushed up by the fed

funds rate which pushes up treasury

yields right

then real estate uh prices tend to go

down by about 10

so rates go up one percent prices come

down about 10

when we had that surge of rates about

one percent in the real estate market

there in the summer of 2018 we saw real

estate prices tank about 12

in a matter of eight

weeks

it was crazy i was actively selling real

estate and dealing with that price drop

every single day like it was so in my

face

but anyway this one percent increase in

rates reduces affordability by 10

percent

all right so how do we compare this to

what we've got going forward well we set

this all up to come to this conclusion

right now we saw real estate prices do

this

now we're seeing real estate prices

level which means we might be at a more

potentially normal priced real estate

market with rates stable where they are

at let's just say

one percent growth per year just because

we've had this incredible run let's say

we level out at about one percent growth

just for the next couple years as people

or maybe even five years who knows you

could have slower real estate

appreciation going forward now for the

next few years as people start being

able to afford pricier homes and

actually get into these by their wages

going up their incomes going up their

savings going up more inventory coming

on the market whatever right

so let's say we're expecting uh you know

to level out for the rest of the year or

maybe the next 12 months that's

something more like a one percent real

estate appreciation rate or you know

what let's be generous let's call it

three percent appreciation right fine

doesn't matter so much what number we're

looking at here we're trying to figure

out how much of a difference we're going

to have so this is what's called your

tailwind when you have price

appreciation that's a tailwind right

that pushes prices up but now if the

federal reserve is going to bump

interest rates we're going to get a

headwind now we expect the first bump of

about a quarter of a percent to come the

second half of 2022

and the last time they raised rates

about a quarter of a percent was in

2016. and we could see that right here

you could see this bump from november of

2015 into 2016. had about that quarter

of a percent bump in the fed fund rate

that translated over here oh it looks

like you need a trial over here to get

in past the five year chart well we're

going to skip that right now so instead

let's just look at a different

bump here so let's go over here to

november 2017 and here we got a

different bump so between november and

december of uh 2017 and 2018 we got

about that quarter percent bump so let's

look at 2017

and uh

november

of 2017

over

here going into the earlier part of the

year

right about here feb looks like we had

roughly a quarter percent bump look at

that

december over here sitting at about 3.9

percent beginning of the year sitting at

closer to once we get to february 4.25

percent pretty similar had a little bit

of flatness uh before that

uh it looks like mortgage interest rates

were relatively flat here between july

and november and that's kind of what we

see here as well look at that july and

november mortgage rates flat and that's

kind of what we saw uh over here as well

this sort of flatness

and it's not always it's not always the

case that you're going to because see

here right you can see between november

of 2016 uh and july of 2017

right here you had a bump but a little

bit of an over push see how quickly

mortgage rates spiked up and then they

kind of took a little longer to come

back up but anyway the point is you're

probably going to see about that quarter

of a percent mortgage rate increase

sometimes though if the market fears

that it's going to be more aggressive

the market might try to start pricing in

things a little bit too fast too early

so you could actually get a worse over

correction and that's kind of what you

saw here and why you got a little bit of

that trickle up or trickle back down

here before you move back up again but

anyway the point is see about a quarter

of a percent move at the fed

probably going to correspond to a

similar quarter percent move in mortgage

interest rates unless the market gets

fearful rates go up even more which is

possible okay so now let's go back over

to the ipad here and translate that

let's say real estate prices are moving

up three percent a year and now we get

our first bump in the second half of

2022 we get a point two five percent

bump we would expect real estate prices

to actually go down two and a half

percent which means we basically

eliminate roughly eliminate our home

price appreciation just with that one

bump

now

as we mentioned on the prior page here

we expect in 2023 two more bumps well

this right here could be representative

of an additional

five percent decline

but we'll be in 2023 so maybe there'd be

another three percent appreciation we

might end up in 2023 with negative two

percent real estate pricing

and we get to 2024 they keep pushing

rates and we get another three moves

there that would be like a seven point

five percent headwind minus that three

percent uh a tailwind pushing up prices

we could see a potential four and a half

percent decline in real estate prices

so this just gives us a quick sort of

rubric

now the big question is what is that and

this is the part that we do not know the

answer to okay we do not know the answer

to what this uh this supportive tailwind

number is going to be see if we draw a

sort of a schedule out here in terms of

what we just drew we saw uh if we're at

three percent of an increase per year in

let's say 22 23 24 we do three percent

each year here

we saw that we're going to have those

potential headwinds of seven and a half

percent two and a half percent here with

the one bump and a minus a five percent

over here that would be a uh net roughly

net positive over here but here we'd be

losing in pricing right that's what we

just did

what if though because of

the eviction crisis and more houses

potentially coming on the market

which home listings are slowing down

right now but you've got an eviction

crisis you've got this potential that

maybe people think the real estate

market has topped then it's time to

start offloading some real estate you've

got some other concerns that could come

to real estate what if we don't get that

top line

movement of home pricing

having a three percent tailwind what if

instead of a three percent tailwind we

stayed flat

at zero percent growth because people

are tired of paying the higher prices or

we get more inventory or whatever we get

to a more balanced market whatever that

reason might be well now if you have no

tailwind of three percent appreciation

per year and the fed's going to raise

rates up through about 2024 and then

supposedly they gotta wait there then we

can actually see real estate prices

decline two and a half percent in 2022

five percent in 2023 and seven and a

half percent in 2024 until stabling or

stabilizing again which would mean a lot

of this big run that we had over the

last year

could go away so let me give you an

example in terms of what this might look

like in terms of housing pricing hop on

over here do a quick calculator let's

say prices come down we don't have any

tailwinds at all no appreciation zero

percent and so housing prices go down uh

two and a half percent

uh that would bring us from seven

hundred thousand dollars to six hundred

eighty two thousand dollars we come off

another five percent that would bring us

down to six hundred forty eight thousand

dollars and if we come off another

seven and a half percent point nine two

uh five there we go that would bring us

down to five hundred ninety nine

thousand dollars we could literally see

a seven hundred thousand dollar house

become a six hundred thousand dollar

house again in the next three years

because solely because of natural action

by the federal well it's not natural

action but action by the federal reserve

leading mortgage rates to go up it's

nothing natural about it

and again the only thing that prevents

that is the real estate market having a

tailwind and ideally a stronger tailwind

for example let's say we had a four

percent uh tailwind real estate was

expected to appreciate four percent well

let's play this out so real estate goes

up four percent in 2022 now your 700 000

house is 728 000 but we got that five

percent headwind now we're going down

one percent in 2023

and the year after that we'd be going

down let's say four percent uh tailwind

again we take off a three and a half

percent loss that difference between

seven and a half and three that's three

and a half percent so nine six five

point that would bring us down to about

695 000

so you could literally see real estate

pricing

be flat

over the next three years essentially

because of this action by the federal

reserve

i think it's it's pretty blatant

and simple the way this works uh i don't

want to oversimplify it though because

there's so many more factors at play

a big factor that's also at play is and

we've got to recognize this is there is

a housing shortage we uh have about

about a five million home housing

shortage that is we need five million

more homes when we created i think we

created this is somewhere around 12

million new households uh and uh we've

only created about seven million homes

for those folks in that same time frame

that's a huge shortage and housing and

construction are very slow building

permits are very slow it's impossible to

build in california it's obviously not

impossible but california is hugely

failing at providing more homes but

you're having the same issue throughout

the country you've got

input cost inflation for materials for

building you've got a labor shortage you

know who's graduating high school today

going hey i want to be a you know

contractor not as many as people who

want to be you know programmers or or

maybe sales people

so you've got big big issues

in

how much housing stock we have

and that lack of housing is what gives

us our tailwind that's what gives us

that potential three percent of four

percent appreciation per year but you

can see with the federal reserve's

actions here

we are going to have some issues coming

to real estate pricing and it's just

better to know that now

and personally i think hey if you can

start refinancing some properties to

lower interest rates now

uh now is probably the time to do that

worth mentioning so you want to

refinance recommend doing that sooner

rather than later

anyway folks thank you so much for

watching this video if you found this

helpful consider subscribing to the

channel and check out the programs

linked down below on building your

wealth including uh programs on property

management real estate investing and

folks we will see you in the next one

goodbye

[Music]