The Housing Crisis: Why and when will Prices Fall?

hey everyone kevin here i read a piece

in the economist over the weekend

it was a really incredible piece on

maybe why

housing is acting the way it is and i

wanted to give you some of the bottom

lines are from this so first they

observed that the housing's been going

up

pretty much everywhere in the 33

countries that

they were tracking in sort of their

housing indicator

all of them are up you've got the united

states up 15 percent new zealand's up 20

percent

and the reasons they give which this is

a comment that i regularly get on on the

channel is like

why why are housing prices up why are

they so high

and the reasons that they give are that

people have

record levels of savings which is true

we have record levels of savings here in

the united states as well

we haven't seen savings like we have

right now since the 1970s

which we also or when we also had a very

high period of savings

which is also kind of ironic and

counterintuitive because it's like wait

a minute

saving great like like yields that you

can get on your savings are

super super low right now why would

people be saving more and

partially it's because of this big

wealth transfer that that has been

happening

uh from the government to to people and

people are getting more money whether

it's through unemployment or through

stimulus

or through their jobs or they're just

not spending as much because our economy

is not as open now i know that

doesn't apply to everyone but in

aggregate sort of on

average american savings rates are

higher and we're seeing that in other

parts of the world as well

the economist also referred to well so

they use that as one way to say hey

people are saving more they have more

capacity to put money down as a down

payment

usually a big roadblock for people when

they want to buy real estate is

coming up with that twenty percent down

payment because they believe they need

the twenty percent

now many people also know that you don't

need twenty percent you only need like

three and a half to five percent which

is how i started

i started with nine thousand dollars

which a sidebar note here is

also really annoying when there are

comments that are like oh my gosh

kevin you're you're just like the the

wealthy landlords who are taking

advantage of all the housing like wait a

minute wait a minute

i started with nine thousand dollars

bought my own little house

with now my wife you know 50 50 going

into this

and building our wealth by fixing the

thing up and slaving over it

we took all the risk we took all of the

potential

of failing making two thousand dollars a

month

each to make a two thousand dollar a

month payment yeah it was bad

but we did whatever we could to get into

real estate and housing

and well as we started making more money

we added more and more rental properties

and houses

because it's a wonderful way to take

crappy

beat up fixer-uppers that nobody wants

to live in and actually turn them into

nice properties that people want to rent

so

i don't know there seems to be this this

obsession with all landlords are bad but

i feel

like taking on a whole lot of risk okay

uh to provide rental housing

and we provide high quality rental

housing too and i mean knock on wood but

we we want to come across as always

as uh very nice landlords to work with

but anyway

uh another reason going back to sort of

the the piece here

uh the economist cited in addition to

high savings is one of the reasons

that prices were going up uh they also

cited a

a reversal of trends and

originally before the pandemic we had a

trend that was decades long

of a shift of people moving to the

cities because that's where the higher

paying jobs were

in fact before the pandemic i would

regularly say

look if you want to make more money go

move to a big city

like where are you gonna get paid more

to change an outlet if you're an

electrician

in the middle of ohio or in san

francisco in downtown san francisco

there's no doubt there's no question in

my mind that you're gonna get paid more

in a city for oftentimes doing the same

thing

but that is now really reverse and we're

starting to see

actually we've been seeing for the last

year a complete reversal of a

decades-long shift and the reason for

this uh the economist cited is

people realize wow even if i have to

commute

a little further i might not have to

commute every day anymore even if we

have to commute to the office

two or three times a week i don't have

to factor in commuting

every single day of the week anymore

five days a week

uh because maybe we can have work from

home days or maybe

maybe we work from home most of the time

and we only sometimes come in or we

don't come in at all

and so this reversal of the suburbs is

really creating a complete

a supply and demand shift that we've

never really seen before in the last

decades and

even home builders haven't even built

for because nobody anticipated that

a decades-long trend to the city would

turn into a decades-long or

i shouldn't say decades long would turn

into a trend now out of the city

so covet really screwed things up as

well which definitely hurts supply and

demand and this is not saying that

cities are losing value no don't get me

wrong like cities are

they're gaining in price as well maybe

not at the rate

that the suburbs are though uh and so

we're saying real estate all across the

board go up

but that that's an interesting reason

too so you had high savings combined

with people

wanting to move out to the suburbs then

obviously and this is the no brainer one

and incredibly low interest rates which

this is also not just the no-brainer but

it's also a risk factor

so low rates are not obviously con super

controllable by us

unless we get a 30-year fixed rate loan

and we lock them in but we can

a lot of times when we're out shopping

right now we see wow i can get

a 3.3 30 year fixed-rate loan i mean

three months ago you were able to get

a 2.75 percent uh amortized fully

amortized so you own the home after 30

years

30-year fixed rate on so even if rates

double or triple it doesn't matter

you're

still paying that low rate and so people

are basically

land grabbing these low rates in in part

not only because they are low when

things are more affordable

but also i honestly think that most home

buyers right now are like i don't think

rates are going to stay this low uh

forever so

let's land grab now get low interest

rates now

lock in lower interest rates and then

when we have those lower interest rates

locked in

hey if rates go up no problem we're

locked into a happy

monthly payment that we can afford now

the problem that comes out of that

is as rates go down prices go up

for every one percent rates go down

price tends to go up 10 percent

uh in real estate pricing really can be

heavily influenced by rates obviously it

definitely ties to affordability

and rents don't tie to that which is

very weird like rents

rents go up at their own pace uh which

in my opinion based on my research has

been a lot slower than what housing

prices are going up

uh but that's because of that crazy

volatility like when rates go back up

we won't necessarily see rents come down

either we'll we'll see

every market is different but at least

right now the trend is

housing prices oops and rent prices are

like normal path

it's crazy so you get this big sort of

wedge right now but people are still

buying again to lock in those extremely

low rates now

is it a risk factor that yeah rates are

going to go up and then prices will come

down sure

totally but a lot of the people who are

buying right now

are people who don't care about the

short term they're not trying to

speculate on real estate

over 80 percent of the buyers in most

areas are home buyers they're not

institutions they're not investors they

want to buy a home to live in it

so most of the competition when you're

competing for a single family home

is not an investor it's not some foreign

buyer

it's a local buyer like you or somebody

in your community

trying to compete against you eight out

of 10 times it is somebody like you

in your community a family or whatever

trying to compete uh for that property

uh there you know to to cast it as this

invisible enemy of this investor or this

foreigner who's coming in with all this

cash

is actually incorrect now how do maybe

your competitors get

cash to beat or win deals with cash

offers well oftentimes it's because

they've already been on the train of

real estate and they've built up equity

in either stocks via margin or

or can draw on their equity by a margin

on stocks or they've built up equity

that they can take a credit line against

or they have business lines of credit

most people who are buying cash right

now are just refinancing as soon as they

close

cash is just sort of a way of

rearranging their credit lines

uh buying cash and then basically

refinancing later

which is exactly what i did uh this

summer i bought

there was one particular house i didn't

have the cash for i really wanted the

deal and they said they'd only go with

it if in i cash offer i'm like oh my

gosh what do i do

i actually pulled margin out of robin

hood

50 000 a day which was the max margin i

could pull out of robin hood

uh and then until i had like 525k and i

used that to buy the property

cash and then i fixed it up and a month

later i refinanced it and locked in a

30-year fixed-rate loan

and then paid off my margin again now

that's risky

but it's also an option now of course

that hurts people who are just getting

started who haven't built their assets

or built their wealth yet

and that sucks but that's just the

competitive environment that we're in

right now

see like low housing prices

unfortunately

there it's not like there if there's a

societal

reason for them to be high or to be low

even though we want to say like hey look

somebody making 50 000

should be able to afford a house that

might not necessarily be true especially

if you're living

close to a city or you're living really

close to public transportation

or you're living at a coastal city in

some cases

if you're making a lower income

unfortunately that does mean

you have to kind of broaden your scope

and maybe move inland more

but fortunately that is offset by the

benefit of now hopefully less

commuting and yeah i mean it's it's

definitely tough but

that kind of reshuffling is something

we're seeing it's kind of similar to

what happens

in my opinion when all of a sudden tech

stocks go in favor

all of a sudden tech goes in favor tech

and ev go in favor tesla goes to a

thousand bucks

i mean a lot of people going mad and

this tesla's not affordable anymore it's

not affordable stock anymore i thought

it was expensive at 600 now it's a

thousand this sucks

it should be less so i can buy more sure

i want tesla to be less too so i can buy

more

this doesn't mean it's going to happen

so anyway then

the the economist goes on to say that

there are a lot of cities and

municipalities and even central banks

that are worried about

exuberance in real estate however the

economist actually

counters this by saying that house

prices today

don't actually threaten market stability

the reason for this is they found that

of the top

30 bank actually might have been 33

which i guess that might mean that

they tracked top 25 countries for uh for

real estate pricing

but anyway ignore that part there so

they tracked the top

33 banks and they found that if real

estate declined

25 all of a sudden like interest rates

shot up two and a half percent let's say

housing prices fell 25 the economist

found

that the top 33 banks around the world

would still have

50 percent more cash than they did going

into the recession on top of that

borrowing is actually surprisingly

restrained

because underwriting is so tight now

they didn't go into much more detail on

this

but i do recall a wall street journal

article that i've also reported on

before

and the wall street journal article said

of the people who are doing refinances

back in 2006 seven and eight when people

were refinancing

ninety percent of people were doing cash

out refinances so they were taking their

equity out of their home

rather than just lowering their rate so

when you hear cash out literally it's

like you're getting cash out of your

piggy bank of your house

today of the people doing cash out

refinances only 30 percent of people are

doing cash out refinances so you got way

less of this

speculative borrowing even though it

seems insane you have way less of the

speculative borrowing

then the economist found that new

lending

at high loan to value level so ltv so

high ltv would be like

five percent down because you have a

high loan 95 to your down payment five

percent

uh or ten percent down fifteen percent

down those would be high ltv loans

in great britain they found that uh new

high ltv lending is one third

below the top limit for

high ltv lending so as a country they

have a limit that says we will not do

more than this many high ltv loans and

right now we're one-third below that

which is is interesting because really

you're just seeing higher quality

uh higher uh you know lower debt

individuals borrow and is that

is that necessarily fair to everyone no

of course not i mean the

the median wage worker gets screwed

probably anybody almost working uh

hourly unless they're in tank is is

getting

getting screwed uh well maybe i

shouldn't say hourly because there are a

lot of people who do get paid a whole

lot of money hourly like think of some

attorneys so maybe that's not the better

way to put it i would say more

the people who definitely are getting

screwed are or anybody in direct touch

with the public

whether that's and i hate to say it but

police firefighter retail hospitality

teachers it's very unfortunate uh

and a lot of cities are considering

affordable housing programs

and expanding on affordable housing

programs to help try to solve this

imbalance

but really what we need and i tweeted

about this and this is sort of my belief

is separate here from the economist and

i always like to separate

you know when i uh when something's my

opinion versus

uh when uh you know when it's from an

article

so uh let me jump over here so here's

what i wrote on twitter which follow me

on twitter if you don't yet it's at

real meet kevin on twitter take a look

at this uh

okay here we go housing affordability is

bad it robs people of the ability to

build wealth with housing this is true

like building wealth with housing

so so so important uh wishing for a

housing crash however is misguided

and there are a lot of people like i

want it to crash so i can finally buy

real estate

but that's misguided sure could prices

crash

sure but at least right now i think it's

it's like

wishful thinking anyway then housing

will go down as rates rise

but for now a mega crash like 2008 is

unlikely

no prices can't keep going like this

forever

this imbalance we're seeing it won't go

on forever we're going to build more

we expect housing starts at the end of

this week when they come out to come in

a lot higher i think they came out on

thursday

and uh we do expect that in in a few

years these supply shortages will really

balance out we're really going to see

that flattening

hopefully sooner than the next two years

but we're really going to see that

flattening

of this this madness in the real estate

market the real solution to the housing

crisis

better transportation like elon musk's

loop around vegas

but also out to the suburbs like think

about it if you could just

if you didn't need a car and you could

just hop in a tesla loop and it just

zipped you over

to downtown and then back out to the

suburbs my gosh you wouldn't need to own

a car

you could live further away it wouldn't

make that much of a difference

the tesla automation loop is is really

going to be a game changer and i think a

lot of people are under

uh estimating how important it is more

and this is why i'm so heavy in tesla

too

more housing stock via 3d printed homes

or conventionally built

homes but more of it we need more homes

it's very simple

there is a massive shortage of homes we

just need more

and better education when people

graduate high school today they can't

get a decent job that's broken

america's high schools are broken we

should be teaching employable skills in

engineering trades

sales data tech and more not lady

macbeth

that's how you begin fixing housing

unfortunately those those are dynamics

that are going to take decades decades

to solve

and and so yeah i mean when will the

future of affordable housing come back

i don't know i really don't know and it

is unfortunate

again yeah maybe rates will go up but

here's the problem even if rates go up

two percent and housing crashes 20

okay well they're just going to be just

as unaffordable for the person who can't

afford a home today

it's like hey prices went down 20 but oh

my gosh the payment is the same as if it

were 20

higher right like if you're hoping for

an interest rate crash and you're

waiting to buy real estate for an

interest rate crash

you're not going to be getting a better

lot if if the only reason is

interest rates uh going up and again the

types of people buying homes right now

aren't the ones

that are at a high risk of defaulting

they're not

no income no asset no job loans right

these are highly qualified individuals

who are able to buy right now and it's

much to the chagrin of many of the

people who want to be buying

uh to be building their wealth which is

what i've i've built this channel

on building your wealth and getting

started with zero and that's why i have

a real estate investing course that

teaches you the fundamentals of

going from zero to millionaire it's also

why i have a stock investing course that

teaches you the fundamentals

of investing not just copy this trade or

that

very important anyway uh let's see what

else do we have here oh

uh the economist also mentioned that

a lot of supply coming will help but

you're going to end up seeing a lot of

that supply also being built

outside of coastal regions and the

reason for that is outside of coastal

regions you have much

more lacks building standards and so

expect a lot more housing to come up

yes in the suburbs and away from those

those more concentrated areas where city

regulations are

much tougher and i cannot agree more

city regulations

or something else around the coast but

anywho

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folks thank you so much for watching and

we'll see in the next video

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