The 2021 Housing Crash | The Eviction & Mortgage Crisis.

now i know there's been some pain in the

market lately

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that coupon code before it expires but

now let's talk about a potential

mortgage and housing crisis because many

people have been asking me for an update

on this because well

that's what i do half of my net worth is

in real estate i got my start as a real

estate agent then real estate investor

then real estate broker

and then real estate investor it has

been a blast

i'll tell you there's nothing as simple

as swiping up on robinhood or maybe

weeble and making some trades but real

estate has

always been a big part of building

wealth for me and a big suggestion for

you to build wealth with because after

all if your net worth is under 500 000

you can generally make some big big big

returns in

real estate taking advantage of the

amazing institutions that exist in

america but we got plenty of

videos on that right now we got to focus

on is there going to be a housing crisis

and a mortgage crisis coming up first

after all we know

that tenants have not been able to be

evicted for over a year now

and biden has extended mortgage

forbearance and these eviction

protections through

june of 2021. at the same time mortgage

rates have

been ticking up slowly but they've been

at record lows

and so together we've seen fewer sales

hitting the market

and lower interest rates which basically

has been

leading to a frenzy in the real estate

market in december 2019 to december 2020

we've seen real estate prices skyrocket

13

which for those of us in stocks it's

like 13

but remember that is a highly leveraged

13 usually in real estate

so you can see some real outsized gains

in real estate but again this video is

about the market

and not on the fundamentals or the

principles of real estate

unfortunately things have been changing

a little bit lately we have seen the

10-year treasury yields

go up and guess what happens to track

the 10-year treasury yields very closely

mortgage rates and guess what also

happens when the

the 10-year treasury spikes and we get a

rapid acceleration in the 10-year

treasury yields

well tech stocks sell-off and so what

does that mean for kevin well that means

higher mortgage rates and all of a stock

sell off because they're all freaking

tech

most of them aren't but yeah i mean

these are

real issues right when rates go up real

estate becomes more expensive and in the

short term stocks can sell off

but not only are we potentially

concerned about rates going up

but we're also thinking hey as the

markets open back up again

more housing inventory should hit the

market because people won't be as

fearful of covid hey come on in my house

look at my house let's have an open

house again whatever

and maybe we'll see more properties

hitting the market

as our economy reopens at the same time

as maybe rates will be higher at the

same time as eviction

protections will expire the same time as

mortgage forbearance expires

we line it up like that it sounds like

we could have a pretty damn nasty

tar near mortgage crisis and real estate

meltdown i mean think about it

more inventory hitting the market

because of the opening higher potential

interest rates

means borrowing costs go up which means

prices go down

and if prices go down at the same time

as there's more inventory on the market

which accelerates the decline in prices

at the same time as eviction protections

expire which might mean

more landlords end up putting those

properties on the market for sale

some of them obviously will rent some of

them will decide to sell those

properties

which means even more inventory and

mortgage forbearance

ends which means people who don't comply

could potentially get

foreclosed on because now foreclosure

has become an option again for banks

we could see one heck of a brewski storm

in the real estate market so let's try

to break this apart a little bit and

understand okay

what kind of resilience do we have what

are the real risk factors here and what

do we think is actually going to happen

all right so to quantify this the first

thing we need to do is we need to

understand the classic rule that i

regularly teach in all my programs

i'm building your wealth which yes that

coupon code does expire

so take a look at that i linked it down

below but the programs

generally teach and i teach this on the

channel too this portion this matters

when interest rates go up one percent

real estate purchasing power goes down

10 percent

so you have what i call the rule of 10x

a half percent increase in mortgage rate

a 5 decline in real estate prices

and it's almost instantaneous so lately

a lot of people have been wondering hey

kevin

why is real estate gotten so expensive

well because interest rates have fallen

like 1.3 1.4 percent

ah imagine that real estate prices went

up 13

over the year it almost always lines up

to what's going on with the interest

rates now sometimes we do have an

acceleration of appreciation

above and beyond what the actual

interest rates are

but right now housing prices seem

largely driven by low interest rates

which is

obviously leading to a lack of inventory

as sellers adjust to those higher prices

because

the prices are like it takes a while for

the market to realize

oh we can get that oh we could get that

and it's usually because home prices

aren't actually dictated by the free

market which would be whatever

somebody's willing to pay

in and while it seems like they would be

kind of are but

they're also restricted they're anchored

by appraisals

when appraisals come in low people can't

actually get loans and use

those mortgage rates so oftentimes you

actually need appraisers

to be comfortable with the fact that

prices are going up to start appraising

properties higher to actually allow

prices to rise

so sometimes real estate prices going up

can be a little slower

whereas ironically and classically when

prices are going down

appraisers are more than willing to

appraise you for less

it's funny how it works and that's not a

slam on appraisers it's it's a slam on

risk right it makes sense

you want to be more risk adverse when

prices are going up and you want to be

more conservative potentially if real

estate prices are falling

anyway so we know that home prices have

gone up 13

year over year and we know that home

purchasing power

is highly highly correlated

with interest rates and we've got some

really

bad potential things coming where we

could see a lot more inventory

and a lot more pain coming to the real

estate market

all right so how resilient are we well

i'd like to refer

first to our first piece of evidence

okay this here is from the wall street

journal

borrowers cash out on homes when i first

read this

i got a little nervous because as they

say in the article from the wall street

journal

cash out refinances got a bad rap after

they exploded

in the run-up to the 2008 financial

crisis borrowers tapped their homes

like they were atms when home prices

plunged

they were left owning more than their

homes were worth

now in 2021 many economists expect

home prices to keep growing okay now

that's not exactly the line

that i was expecting but wait a minute

this is interesting

this article is actually also saying

that u.s homeowners cashed out

152.7 billion dollars in home equity

last year

a 42 increase from 2019.

wait a minute so you've got economists

saying okay maybe home prices will keep

going up

and interest rates are at record lows

and people refinanced

42 more

in aggregate than in 2019

that's a lot of refinancing and that's

the same kind of refinancing boom that

happened before the 2000

uh a real estate crisis i mean

many would argue real estate induced

great recession

that's scary in fact they say here

lenders churned out more mortgages than

ever in 2020

fueled by about 2.8 trillion in

refinances

according to data from the firm black

knight some borrowers viewed cash out

refinances as a way to cushion

themselves against an uncertain economy

last year

yeah i did do that others wanted to

build and redecorate

oh big mistake big big big big no no

but anyway this this sounds a little

concerning especially since they say low

rates the average rate on the 30-year

fixed rate mortgage being below three

percent led more people to refinance

so look i'm all for people lowering

their payment when you refinance but the

danger is when people basically break

the piggy bank of their properties as

prices keep going up

and they take more and more cash out of

their properties and basically what

they're doing is they're creating more

and more

debt they're ballooning their liability

and in the event that prices fall

we have an oopsy doopsy poop c scoops d

dd

and that would be really bad so how do

we put this

together like how could we quantify like

how bad

could the crisis get if people are

pulling out debt like crazy

and then we've got all these catalysts

for potentially more

inventory and more listings coming up on

the market at the same time as

maybe we'll see higher rates well take a

look at this

corelogic put together this awesome

report which they do monthly

and this is called their ltv and

homeowner equity report

and so loan to value is what ltv stands

for and it basically says hey how much

equity do people have in their homes in

other words how much net worth is in

their homes

if you have a hundred thousand dollar

house and you've got seventy thousand

dollars of debt

you have thirty percent equity and you

have a loan to value of

70 70 debt 30 equity so

the higher number the more risky

obviously

and if we look at the chart here in q4

2020 this is going to be kind of the

green chart here i'm going to hide

myself for a second

you're going to see that there are

actually some people who are underwater

they owe

over 125 percent of what their

property's worth it's a little less in

fact

all of these green bars are a little bit

less than the gray bars

which does mean that people have become

less underwater

as time is going on which is normal when

prices are increasing it's obviously bad

when prices are decreasing

but if we just grab all of these right

here

people who are basically over 90 percent

leveraged

we get about eight percent of all

homeowners that are this leveraged

that's because this line here is about

one percent

and you can add up the math if we go out

to about

20 we'll be able to add

these two new bars right here which is

going to give us somewhere around

six percent more people that means a 14

uh would be underwater if prices fell

for uh

20 excuse me and if we go out to 30

so if prices fell 30 we'd be able to

grab

these bars over here as well we'd be

adding about seven percent

and let's round up and say six percent

here so another 13

that would mean 27 percent of people

would be underwater so

this chart is basically telling us that

if prices

fall 10 so a decrease of 10

in prices we'd have about eight percent

of people under

water and that includes the people who

are already underwater

uh then we would have about if if prices

fell 20

we'd have about 14 percent of people

underwater and if prices fell

30 we'd have about 27 of all

homeowners underwater so this actually

now sets up a

very interesting scenario because if

mortgage rates go from three percent to

what they were before the pandemic

around four percent or the high threes

and

remember lately we've also been able to

get rates in the low twos which has

created some of this pricing pressure

because people have been getting rates

so cheaply if we see rates go from three

to four percent that's a one percent

increase

and what does a one percent increase

correspond to boom

ten percent decrease in property values

so simply by interest rates going from

three to four percent

we could see eight percent of houses

underwater in total that would be a

problem

uh you know and that's from where we are

now where uh i would say

under let's see that's two percent plus

a fraction

under like two and a half percent of

people are underwater so we could see

like a three x'ing of the people

underwater

just from interest rates going from

three to four percent and then seeing

prices come down

by the way quick note i know that the

real estate market is super competitive

right now and one of the things that i'm

doing to find listings off market

is i'm sending and i know that sounds

old-school but postcards so with

deal machine go to medkevin.com deals

and check out

deal machine it's a pretty amazing way

where i can just go on my phone

and click on all the multi-family

buildings or vacant buildings in my area

and actually reach out to them before

they potentially hit the market

and that's what i want to do so check

out metcalvin.com

deals but here's a little problem that

we have to talk about

if interest rates go from three to four

percent and prices fall

10 but inventory is still too low to

support

demand then the prices will actually be

propped up

by the lack of inventory and maybe we

actually don't see prices fall

maybe prices won't go up 13 again but

maybe it just

offsets the fact that property values

would be falling because there's so

little inventory

and that props up demand even as

interest rates go up and properties get

more expensive

something to consider now let's go back

here to the chart

because we've got some potential issues

here so in addition to

interest rates going up what if

biden lets the eviction moratorium lapse

and the foreclosure

moratorium lapse and we get a hot summer

selling season where we got a lot of

sellers starting to dump properties

what happens if those three things mix

together well then it wouldn't shock me

for us first of all to eliminate the

inventory shortage which means we'll

actually realize that ten percent

decline

but then we could potentially also start

that slippery slope of prices declining

more

and it's entirely possible that if we

saw at the same time as a foreclosure

crisis

which we don't expect there to be a

massive foreclosure crisis especially

since

mortgage forbearance programs are really

designed to keep people in their homes

we're not expecting there to be a lot of

foreclosures but

there will be some in addition to

evictions

we could start trending up to that 20

decline

region or or 20 decline in property

values region

that would put about 14 percent of

people underwater but

this cohort right here wouldn't be

heavily underwater

sure if you consider selling costs yeah

they'd be underwater

but they might not be forced to sell

so this is where let's take a step back

from this crazy chart that we've drawn

and let's let's put some thoughts

together here let's jump on over

so what do we got so far we have a

concern

we have a few concerns the first concern

we have is

interest rates going up it's a problem

it could create issues

the second compounding concern that

really needs to happen to see a mortgage

crash or a real estate crash or a

mortgage crisis

is seeing inventory go up if we see

those two things happen at the same time

an inventory go to the point of

saturation

to where there aren't enough buyers to

absorb all that because interest rates

are going off up at the same time right

those two interplay

if we see that yeah it wouldn't surprise

me that

at the bare minimum prices will

stabilize

and we won't see the increase so bare

minimum prices stabilize

if we see rates go to four percent price

is stabilized

the next scenario so let's call that the

base case scenario

is interest rates go to four percent

prices stabilize

if interest rates stabilize and

inventory floods the market

a la evictions foreclosures

or summer and people want to sell and

covet's over and people are dumping

their homes because they want to move

now we could get to that territory of

that 10 to 20 percent decline

and that could potentially self-fulfill

a little bit this would create a little

bit of an issue

and now we want to figure out okay how

insecure are people who are actually

doing

the refinances and the purchases right

now

because that's going to help us

understand if if we have a 10 to 20

percent shock

how resilient are the people who are

doing the refinances how resilient are

the people

who are buying homes right now and this

is where we can actually go back

to that original wall street article

because this is pretty fascinating

i'm going to ask you what you think the

conclusion is here

but there's a chart on here and it says

mortgage originations

by credit score quarterly and what i

want you to guess

is which credit score you think had the

most

refinances or mortgage originations

we'll lump both of them together which

credit score had the most

in 2020. so uh and we'll

have this charted so we'll get to see

the difference between prior years

and 2020. so do you think that people

with

under a 620 score uh under a 620 credit

score

had the most originations uh or did they

have the biggest spike

do we think that people between 620 and

659 had the biggest spike

how about 660 to 719 720 to 759

or the people over six or 760. which

group

do you think had the largest spike in

mortgage originations

and this is very important because

remember a higher credit score

implies more financial stability not

always

but remember credit score is a measure

of risk for banks they use your income

they use how quickly you pay off your

loans how much other debt you have

outstanding relative to your income

these are your history of paying later

on time these are all tools to determine

risk so the higher your score

the less risky of a borrower you are and

presumably the

more resilient you are so in other words

worst worst case scenario the people

doing

the refinances are people like what we

saw in 2008.

where everybody was taking cash out

somewhere in 2008 the people like

anybody doing refinances in 2006

7 90 of those people were taking cash

out of their homes

to to like use their homes as a piggy

bank and people were using

arm adjustable rate mortgages to

basically expose themselves to variable

interest rates rather than fixed

interest rates

and at the same time people were getting

loans that they actually had no ability

to repay right

things were pretty dang nasty in 2005 to

2008 with the people who could get loans

not very quality loans right lower

credit scores some cases

no jobs the ninja loans no income no job

no assets

if we saw that again we would expect

that people with

probably what six twenty six forty six

sixty 60 680 we would expect those

groups to be skyrocketing in mortgage

originations because

hey why not everybody's getting rich off

real estate so why not plow in money's

cheap it must be easy to get a home loan

and keep in mind when we look at this

chart too it also lets us know

how uh how tough lenders are like if one

group

let's say like the 620 group is

skyrocketing

and everybody else is just growing at an

average pace that's a sign that lenders

are loosening their criteria right that

lenders are being

looser and they're like we just want to

lend like let us just give you money

please we want to make more money and

fees

let's just get more people in even if

they're low quality and i'm not saying

low quality people i mean

lower quality in terms of higher risk

lower quality

loans is the proper way to say it i'm

not i'm not judging people's character

it's lower quality loans versus higher

quality loans

so so again if we see a spike in that

600

range that's a concern because then we

have a potential

for a perfect storm we have

lower quality loans going into a

potential higher interest rate

environment which will drive prices down

by the rule of 10x

which could compound with the end of the

foreclosure moratorium the eviction

moratorium and the fact that covet is

opening up or like

the economy is opening up again people

want to put their homes on the market

then you got some real poopy doopy

happening

that would not be good i could see a 10

to 20 decline compounding pretty quickly

in that kind of event

but what if the opposite were true what

if the people getting loans were

actually

the most highly qualified individuals

well then even if prices fell 10

or even 20 those individuals might not

be forced into a situation where they

have to sell

because all of a sudden their interest

rate went up maybe they still have

equity

or some equity or they have no

motivation to sell because they make

enough money at their jobs to support

uh their bills which probably means they

have a higher credit score so higher

credit score individuals

probably going to be more likely to

maintain their property

and this is all probability right we're

not we're not trying to say somebody

with like a 620 is guaranteed to go into

foreclosure where somebody with an 800

is not

but generally when we look at risk

scores this is a tool we like to compare

okay well let's get the actual facts

so we've got a lot of insight so far so

a lot of detail in this video

let's take a pause here take a quick

little breather take advantage of the

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take a little swig of some toppo chico

[Music]

let's hit the numbers this wall street

journal article

tells us that the borrowers who cash out

refinanced

in 2008 made up 90 of borrowers so

remember

90 of people in 2008 were taking cash

out

today or in 2020

one third of refinancers chose the cash

out option

one-third so around 33

that's actually a really good sign so it

means people who are refinancing

aren't necessarily taking a ton of cash

out of their homes like a piggy bank

they're actually just lowering their

monthly payment and

well that's a good thing because that

creates less risk okay so that's good

all right well what about what kind of

loans they're getting well it says here

that the average loan that people are

getting is a loan at a cost of under

three percent

fixed for 30 years and that's in

contrast to 2008 when people were

getting variable rate loans

which were potentially doing payable in

two years or the interest rate was going

to go up after

six months because they had these

introductory six-month teaser rates

that stuff doesn't exist anymore it's

totally illegal like people have to

prove they have the ability to repay and

you can't have these

crazy adjustments in payments those six

month peter rates are gone in other

words

okay that's good what about the credit

score

the median credit score of new refi's

last year

approached 800 near the top

of the scoring range according to the

federal reserve bank of new york

that includes refinances in which the

borrower didn't even take cash out

well that's a good thing

so what do we have all right well

we have a need for some more data and

then we're gonna draw some conclusions

i'm telling you

this is a data rich video and it's very

very important

folks what's actually happening in the

market right now let's take a look

let's jump on over to the ipad here see

exactly what's going on

this is redfin's chart of inventory

available

through december of 2020

through december of 2020 we are at the

lowest

levels of inventory we've pretty much

ever been in

in the last decade so we have ample

capacity

for inventory to go up and we'll still

not even be at the levels where we

previously were

on top of that since that chart ends in

december

redfin is so generous to provide weekly

inventory data for us

and they do indicate a nice increase in

inventory here from january going into

february this is good however

comparing this january and february to

2020s january and february inventory

this year

is still down about 20 percent so the

new listings hitting the market

right now at least are still 20

fewer than they were last year

so how do we put this data together

because this is a crap ton of data

well here's the way to look at it right

now

the real estate market seems insanely

resilient the people who are buying

homes

have equity the people who have homes

are not taking cash out at 2008 levels

and they're getting quality loans and

they're reducing their monthly payment

burden

when interest rates fall and they're

getting 30-year fixed rate loans

on top of that while we expect there

would be risks if

interest rates go up and we have low

quality borrowers

or low quality loans which we don't have

sure interest rates going up is still

going to be a potential risk

but it only gets compounded it only

becomes a problem

when inventory starts skyrocketing and

so far year over year

inventory is still declining relative to

last year

and on top of that just look at the

magnitude of the chart

the people who are doing all the

mortgages right now

are the really really well qualified

people the ones with the highest credit

scores

the top tier borrowers are the ones

getting loans

lauren had this to say refinancing

is a good financial decision and

certainly was a good financial decision

in 2020

and people with great credit scores tend

to make good financial decisions

so this totally makes sense these align

and lauren's not wrong i'm talking about

lauren my wife not any other lord

so when it comes to assessing will there

be

a 2021 mortgage crisis or housing crisis

we have to look at the data yeah there

are

anecdotes like me saying oh my gosh what

if the mortgage crisis

you know what if the mortgage

forbearance programs end what if

foreclosures come

what if evictions come there there are

these anecdotes that people are

refinancing like crazy

all of these things and we hear these

anecdotes that inflation is coming

and that rates are going up sooner than

we expect when we put these anecdotes

together guess what we get

a really good market crash video on

that's it real estate's going down

but when we actually peel back the layer

and we're like wait a minute

are we actually going to have inflation

well i've got dozens of videos on this

in fact if you want to watch my most

recent one on this

type into youtube meet kevin the coming

great depression

verse roaring twenties talk all about it

there

so we might not see inflation coming we

certainly

aren't seeing low quality borrowers

we're seeing the most

able to afford borrowers get loans

we're not even seeing them cash out

refinance as much as they were in 2008

instead they're just lowering their

payments and they're taking 30-year

fixed-rate loans

and on top of that biden's in office

who's probably just going to wave his

pen and go yo

mortgage crisis hell no not on my watch

and he's just gonna extend the mortgage

of forbearance programs if necessary

this isn't even to mention to

the fact that over the last two stimulus

packages we've gotten over

50 billion dollars in

rental aid for people who are back on

rent payments back on utility payments

back on housing payments if they're

landlords you can apply for

homeowner assistance utility assistance

rental assistance

like right now looking at the real

estate market and the actual data

especially with inventory numbers still

falling it seems

incredibly robust now that does not mean

immune what would it actually take to

crash the real estate market

honestly probably a two plus

percent increase in interest rates i

don't see that even

remotely happening until 2024 or 2025.

and then then we'll have to have a

conversation and i'm sure we'll have

another conversation between now and

then

but uh just what we're seeing right now

a lot of it is just anecdotes

and the more you peel back the layers

the more you're like

now i don't see a real estate crash

coming here anytime soon

anyway folks if there was a real estate

market crash

we all know we would buy the dip because

you're part of the amazing courses which

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folks thank you very much

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we'll see in the next one

[Music]

you