This is BAD for Real Estate.

hey everyone me kevin here yesterday we

talked about how housing market

inventory was starting to inflect up and

that we've got a substantial move up in

the amount of homes on the market with

price drops we went into detail in that

video yesterday in that video called the

housing market crash has started but

today we have even more information even

more detail that's going to provide

color to us in terms of how high do we

actually think interest rates are going

to go how high do consumers think

interest rates are going to go and how

much of an impact is the federal

reserve's quantitative tightening going

to have on interest rates we've got

answers to all of this along with some

more data points that we got to talk

about let's start with some of these

data points and then get into some of

the answers so first

we know that the founder of the real

estate case-shiller index suggests that

memories of a housing market bubble may

be coming back soon

then we see demand destruction in lumber

which is heavily driven by the housing

market and how much people are actually

building new homes specifically home

builders but it's no surprise that when

home builder sentiment falls 17

that we also see demand destruction in

lumber and lumber now hitting a

nine-month low dropping four percent

today and essentially plummeting back to

earth now lumber prices had skyrocketed

during the pandemic uh and uh in 2021 as

a home building went crazy but some say

that lumber prices falling could be a

leading indicator that yup real estate

markets are definitely slowing down what

else do we have we've comments

everywhere whether it's on the bloomberg

terminal in the comments section down

below on youtube or in real estate news

websites like inman news whatever

everyone in the industry inside the

industry seems to be talking about the

clearest day slowdown that's happening

whether it's in lending and building in

sales you name it then we've got

mortgage volume down 31

year over year 18 quarter to quarter

that is q4 to q1 and

you might be thinking well i mean that's

going to include a decline in refinances

and you're right about that purchase

volume though down at 12 year-over-year

but also purchase volume for loans down

18 in the first quarter compared to the

fourth quarter

this is the fastest decline that we've

had in eight years however home equity

line of credit loans going up this is a

good thing nice thing about home equity

lines of credit is during high interest

rate environments and you wanting to

take money out of a property you can

take money out of property with a home

equity line of credit but not use it

until you need it which means you're not

actually paying those higher interest

rates until you need the money so i'm a

big fan of he-locks he used to be a big

fan of relocks rental property lines of

credit but those are almost impossible

to get right now

so these are some updates on what's

going on here but the big thing that i

want to talk about now is what we

actually expect during a tightening

cycle from the federal reserve where do

we think mortgage rates are going to go

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right so what do we got here we got peak

10-year treasuries when are we going to

hit a peak with a 10-year treasuries and

why do we care about the 10-year

treasury 10-year treasury sitting right

now at about 3.04

when we were last at this level in 2018

in about may of 2018 what happened

mortgage rates capped out at about five

and a half percent this is roughly where

we sit right now mortgage rates at five

and a half percent

ten-year treasury is just above three

percent we expect this to

stay connected that is if we see the

10-year treasury yield go to say

3.25 or 3.5 percent will probably start

hitting the range of 6 to 6.25

in mortgage rates and remember every

percent that mortgage rates go up real

estate purchasing power goes down by 10

so substantial move especially since

rates have already gone from about 2.5

to 5.5 that's already a 30 decline in

purchasing power we go to six and a half

there'll be another 10 decline in

purchasing power but anyway so we

tracked this 10-year treasury and so

what we want to know is how much higher

do we think the 10-year treasury is

going to go in a fed quantitative

tightening cycle and to get an answer on

this

is very very difficult but we have an

estimate and it comes from the atlanta

fed take a look at this document right

here this is a printout from the atlanta

fed and uh we we get sort of i'm just

gonna give you the bottom lines here

because this is a pretty difficult read

but anyway we got some bottom lines that

if we get secular

stagnation that is we see a stagnating

economy while at the same time we have

high inflation

the fed's going to find it very

difficult to figure out exactly where to

keep rates and in the short term we

could see rates and the 10-year move

higher but in the long term we think

that

federal reserve rates could once again

go back to zero that long term in my

opinion probably gonna be somewhere

around 2024 2025 where we see the fed go

back to a zero percent lower bound on

the fed funds rate that'll bring this

10-year treasury back down right so

that's nice that's good opium for the

long term you know 2024 2025. but what

is the tightening cycle now going to do

well we hop on over here and the

expectation at least from

the federal reserve panelists

is that quantitative tightening right

here in pink will likely have a moderate

effect on market rates perhaps raising

the 10-year treasury yield by somewhere

between 25 to 30 basis points so going

back to here that means the quantitative

tightening cycle

alone which is just beginning just

started june 1 is pretty much guaranteed

to give us

3.25

10-year treasury yields

but

if we get a miss on this and this

panelist is wrong and the tightening

cycle actually has a larger impact it

wouldn't be shocking to see a 3.5 to

3.75 so we're definitely going to get

some more headwinds here in the 10-year

treasuries which once again translates

to mortgages which once again translates

to purchase demand

mortgage volume for refinancing less

money flowing into the economy for

stocks and purchasing more deflationary

pressures less demand for lumber and

that potential slowdown in real estate

prices

now what are consumer expectations as in

terms of where do consumers think

mortgage rates are going to go and

when when do we think that we're going

to have a potential bottom of the market

and then the recovery right so let's

talk about that but what i would do want

to do is mention that if we end up

getting

any kind of reduction in prices in real

estate or real estate prices end up

softening we go flat for let's say six

months to a year and then we kind of

start you turning back up either way in

my opinion because real estate is

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extra 150 back okay so what do we got to

talk about here consumer expectations

for inflation so this is a little scary

because this doesn't really align with

my thesis that we could end up having

some kind of federal reserve u-turn by

2024 which would generally align with

the idea that hey if the fed drops rates

again we get the 10-year treasury to

come back down and then maybe we see the

housing market kind of continue on its

way of what we've seen which is nice

home price appreciation right well the

problem here is that consumers are

expecting that by 2025 we're actually

going to have mortgage rates of 8.2

fact check that google it okay consumer

expectation mortgage rates by 2025 type

that into google type in 8.2 percent

you'll get endless articles on this and

it's quite remarkable that

the course that we have here for the

10-year treasury would really only be

consistent with about six to 6.25

mortgage rates but there's so much fear

in the market

that mortgage expectations are that we

could see rates as high as 8.2 percent

now ironically and this echoes what mr

schiller said yesterday ironically that

could actually lead to some temporary

buying of individuals wanting to get

into homes and rush into homes around

this five and a half percent mortgage

rate where people are paying about half

of a point right now to get this kind of

mortgage rate which is pretty expensive

already uh and and if people are buying

now we could see a temporary kind of

buying at peak if these folks lose their

jobs we could end up having problems

especially uh if prices do end up

falling or we even trend to the sixes or

even seven percent mortgage rates that'd

be incredible 8.2 by 2025

this implies that we could end up

because real estate lags right we get

8.2 mortgage rates in 2025 this implies

that we could be in

for

four to five years of pain or flatness

mixed in there for real estate that's

pretty substantial though if that is

true which i really think we're probably

only going to be in for about maybe two

years of pain right so this is the kevin

estimate and this is sort of the

consumer sentiment estimate based on

mortgage expectations here either way

if we have this kind of pain in the real

estate market either way there'll be

some big buying opportunities that we

want to take advantage of and that's why

you want to check out those programs on

building your wealth link down below

make sure to get 50 off uh while you

check out as well but another thing that

i want to show which i think will be

very interesting

is uh we've got this forecast

here from the financial times on screen

now

and this is the financial times present

forecast on home price growth if you

look at the bottom right you can see

that for the eurozone and the united

states they're not actually forecasting

a decline in prices so

even though we have all of this data

right here that's pointing to a definite

slowdown in real estate and my

expectations that we're going to see

some form of a decline in prices my base

case scenario is 10 to 15 percent of

declines in home prices off of peak

and a potentially worst case we could go

to 20 to 30 percent declines but if we

go back to this chart here

we can see that the financial times

isn't actually expecting any kind of

home price negativity yet now i actually

think this could be dangerous because if

i go to

the next slide that i have here we

already see and we talked about this

yesterday as well we see inventory

levels shifting in just the last six

weeks with any area in blue

seeing uh in light blue somewhere

between zero and twenty percent

inventory increases well over zero

percent obviously to have any color to

it otherwise it'd be gray uh and then in

the darkest blue sections we get

anywhere between a twenty to fifty

percent increase in inventory levels uh

and some of these red areas here are

actually still seeing decreases in

inventory but you can see you've got

parts of florida over here you've got

parts of the rocky mountain area here

we've got california and so what's

fascinating to me is that you can have

economists suggesting oh don't worry

everything's fine

there's no housing bubble yet data's

pointing to the potential for declines

so this is another concern that i have

is what happens when we actually start

getting this

when we actually start getting home

price declines what happens in that case

is there a potential for

individuals to panic especially as

mainstream media starts going hey look

what happened everybody look what's

going on and so this is why i think we

want to be as prepared as possible

that's why i keep saying now is the best

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much for watching and we'll see you the

next one good luck