How Bad the Real Estate & Housing Crash Will Be.

is the housing market definitely going

to crash in this video we're going to

answer that question after all mortgage

rates have gone from a sweet and juicy

2.6

for a 30-year fixed rate loan all the

way up to now the national average of

about 5.6

for that same 30-year fixed-rate loan

that three percentage point difference

tends to translate to about 30 percent

in buyer purchasing power

so does that mean we're going to see a

2008 style real estate crash or real

estate price is even going to come down

at all that's what we're going to talk

about in this video but remember that

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sooner you join the more value for

dollar you get so at first glance we're

starting to see some of the signs that

prices may begin to cool not only are we

seeing inventory levels shift to the

upside and we're seeing inventory growth

year over year shift in a dramatic

fashion especially in the west where in

many states in the west housing

inventory has increased anywhere between

40 to 100 percent though we're not

seeing as much of that shift in the

northeast at the same time if we look at

the average list to sell ratio we're

starting to see the white line or 2022

rotate to the downside we're also

starting to see the percentage of active

listings with price drops increase

throughout the entire country and in

specific areas like seattle miami

florida san francisco boise idaho and

places like austin texas areas that have

been previously very very hot and so

when we combine all of these aspects we

look at okay well three percent increase

in rates that is going to reduce buyer

purchasing power

we've got inventory that is starting to

go

up as inventory goes up and there are

less potential buyers there's more

competition and so in order for a

property to sell we tend to have to see

price drops

on active listings increase and we've

seen all of these rates have gone up

buyers have gotten canceled out of the

market we've actually seen cancellations

up 15

year-over-year

this is a substantial increase in the

number of cancellations and potentially

represents just the beginning of people

losing their purchasing power but then

also the opportunity for them to have

much more choice because as inventory

skyrockets and people have more choice

they might think to themselves well if i

wait longer i don't have to fomo in fact

now i just have not fear of missing out

but i have fear of getting screwed so

i'm going to sit around and wait to see

how this plays out so we've got

cancellations going up we've got rates

going up we've got inventory going up

we've got price drops going up on active

listings the next thing that is likely

to happen is we're actually going to

start seeing close prices as once deals

actually close we're expecting to see

those closing prices finally start

rotating down and then if you get people

like tucker carlson talking about how

month over month home prices are

actually falling in addition to

inventory going up then you could create

actual panic

but

i hate using the phrase this time is

very different from 2008 in 2008 we had

a substantially larger percentage of

people on adjustable rate mortgages in

the neighborhood of 30 to 40 percent who

actually had massive impacts of interest

rates going up now we're closer to five

to seven percent we also now have

qualified mortgages and the average

credit score of a home buyer is about

100 points higher than it was in 2007

and 2008 and we no longer have no income

no job no asset loans or ninja loans

with teaser rates and crazy high

adjustable rates when the teaser rates

expire leading people into foreclosure

we're also in a place now where yeah

foreclosures are starting to go up but

they're actually going up to levels that

are substantially lower than where we

were prior to the pandemic so is it

possible that the housing market won't

crash that maybe it'll just soften

and the answer to this in my opinion has

to do with the trajectory for the

10-year treasury yield because mortgage

rates tend to follow the 10-year

treasury yield if lowe's is right and we

had excess demand of 27

and buyer purchasing power has just been

reduced by 30

via interest rates going up three

percent then we can kind of wash out

that excess buyer purchasing demand with

that reduction in purchasing power and

potentially get to a state of economic

equilibrium in the housing market which

basically means flat prices for the time

being but not necessarily a crash

and the only way i would foresee a

larger kind of correction is that

mortgage rates continue to trend up

which is possible if the 10-year

treasury goes from three percent to four

percent because folks perceive the fed

as having lost control of inflation and

inflation numbers keep going up then we

could see mortgage rates go to the

direction of six and a half to seven

percent this would decrease buyer

purchasing power an additional 10 to 15

percent which could correspond to an

additional decline in home prices of 10

to 15 percent if on top of that we then

compound this with the fear or panic of

the mainstream media talking about home

price reductions it's entirely possible

that we could see price reductions in

the neighborhood of 20 to 25

which would basically take us back to

levels of right before the pandemic so

that kind of bubble run of the 2020 and

2021 years would sort of evaporate with

a correction of about 20 to 25 percent

in real estate prices but again this

would in my opinion really require that

treasury yields stay high longer and

potentially go up even more now while

this is absolutely possible analysts

overhead goldman sachs don't necessarily

think the trajectory is that rates are

going to explode we're currently sitting

at about 3.2 percent for 10-year

treasuries and they expect that ten-year

treasuries will run up to about 3.3 and

kind of stay flat around 3.15 for the

next couple of years

next couple of years having rates around

3.15 percent means that maybe for the

next two years mortgage rates are stable

around five and a half percent but if

that just brings us to an equilibrium

market it might not be enough of a push

to the downside to actually get home

prices to substantially full again we

probably need to see somewhere around

6.5 to 7

for maybe a year year and a half to

really see home prices start getting

pushed into that negative 10 to negative

20 range maybe even as much as negative

25 in case we get a fomo cycle or rather

i should say a real fear cycle not fear

of missing out which is fomo but just

straight up f

fear cycle right now there is a caveat

to this we expect rents to stay high now

this can do two things if rents stay

high they might increase the number of

people who want to invest in real estate

so you get more investors investing in

real estate means more bottom feeding if

prices start ticking down which actually

helps prices stay up again because

you're introducing that new buyer demand

as a rents increase more people going in

to buy real estate however higher rents

could mean that the owner's equivalent

rents which are the measure

or the measures of inflation related to

the consumer price index for rents if

that owner's equivalent rent stays high

and rents continue to go up in cpi where

rents make up 33 of the inflation rating

then the fed might actually have to get

more aggressive and increase interest

rates more potentially leading mortgage

rates to finally go up to that six and a

half to seven percent range and that's

how we get our real estate price fall

but if the fed doesn't react to high

owner's equivalent rents and you get

more investors buying because rents are

up then you could be in a situation

where you actually do have flat or

modest appreciation in real estate

there's no guarantee that with certainty

real estate prices are going to go down

now some folks are saying hey you know

what how do i apply this to myself well

there are few trains of thought number

one train of thought is if you own real

estate you just hold and the reason you

hold is every time you sell real estate

you're going to pay somewhere between

seven to ten percent in fees and then

you're going to pay your capital gains

taxes on top of that either long or

short term so you could be spending a

lot of money dumping real estate when

you're not necessarily guaranteed to see

a decline in prices

those and this is why a lot of folks say

hold and a lot of other folks say hey

while i hold why don't i just pull a

bunch of equity out which is another

thing that we're seeing is households in

q1 of 2022 withdrew the most equity that

we have seen withdrawn since

2007.

so obviously people are preparing with

cash which is one of the best hedges in

an uncertain and recession recessionary

excuse me style of market so one idea is

hold and maybe just refinance to take

out cash tax free and prepare using real

estate as a piggy bank

other folks who have not bought real

estate yet say you know what i'm going

to wait until i find some fearful

sellers and if i find some fearful

sellers maybe i can buy one of those

fearful properties get a little bit of a

discount maybe we don't necessarily have

market wide price decreases but we have

opportunities to buy good deals because

people are fearful that real estate

prices will be coming down that's the

potential as well the third option which

is the most risky is to sell and either

wait

or what some people are doing is they're

selling and then they're buying stocks

and the reason they're doing that is

because stocks have already compressed

substantially and even though stocks

might compress a little bit more by some

accounts anywhere between four to ten

percent further compression a lot of

folks say hey well if i could go from

the top of the real estate cycle to a

temporary bottom in stocks let me load

up in stocks and then who knows maybe in

the future what will actually happen is

we'll actually see

stocks

rebound maybe they'll go down again a

little bit but we'll actually see stocks

rebound and that rebound could happen at

the same time as real estate prices fall

so if real estate prices were to

compress that 10 to 15 percent and then

stocks were up let's say

40 or 50 percent here well now what

you've done is you've moved from real

estate at the top to stocks at a low and

then you potentially go from

stocks at a higher level to now real

estate at a lower level now that is

extremely advanced and i don't recommend

it for anyone because this is

essentially timing the market and even

though it is possible to time the market

it's a lot easier to do so with real

estate it is very very risky and you

expose yourself to a lot of taxation

risk as well but this is the point of

the video where the most important thing

to think about is

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thanks so much