The Housing Crash is Starting.

Kevin here we've got a big update from

Mr Schiller himself and a housing

warning that he gives we're going to

talk about my projections in terms of

what's going to happen with the real

estate market but we're also going to

look for some cracks that are starting

to pop up I've got some big charts here

that are showing some concerning signs

and their leading indicators that you

want to pay attention to I'll also give

you some guidance in terms of where to

look for leading indicators and what are

lagging indicators but first let me give

you a heads up as to what Mr Schiller is

saying right after I mentioned that if

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let's talk about Schiller's warming

warning so first Mr Schiller mentions

that because interest rates have moved

up as much as they have uh and they've

set the signal to home buyers that uh oh

interest rates are rising he believes

that we could see and usually real

estate takes a few months to really know

what had happened so sometimes finding

those leading indicators is hard but he

believes we're going to when we look

back and we get all the data we're going

to have seen an initial surge in home

buyers and this is really interesting

that we would see an initial surge in

home buyers right after rates started

going up which would really put us at

seeing a surge in buyers probably

somewhere between February to April and

this surge that he talks about is

problematic because this surge comes in

potentially pays Peak pricing but also

feels justified in paying Peak pricing

because the people before them paid the

prices that they're paying the

difference is the people before them

bought Homes at maybe 2.8 percent for a

30-year fixed and now people are paying

5.6 paying as much as a half of a point

to be able to secure that loan that's

half of a percent right of of your

purchase price it's a lot of money it's

expensive so anyway if we do have this

initial surge of people rushing to try

to buy homes because they think that

interest rates are going to go up to

eight percent which you might think hey

who actually thinks rates are going to

eight percent well if you look at the

University of Michigan consumer

sentiment index consumers believe that

real estate mortgage rates will hit

eight percent within the next couple of

years and so the Schiller argument that

we're going to see this surge over here

in February to April is kind of

problematic because we'll see rates

actually go up to 5.6 percent where we

are now but we don't actually see home

prices come down yet in other words it's

we're going to see this potential lag or

this sort of bobbing in the market and

this is kind of what the market had been

doing if we go over here this is about

2020 over here we got our pandemic over

here so we'll write covid here we got

this temporary little Cova dip that was

really only for about four to eight

weeks that we saw any kind of noticeable

dip in real estate and then of course

we've had this stimulus induced and zero

percent fed funds rate induced inflation

uh driven real estate home price

appreciation surge boy that was a

mouthful and we've kind of arrived to

these crazy prices where home prices are

up in some cases 20 to 35 percent year

over year and so we're kind of here at

2022 and we're seeing this bobbing

happening right now we're seeing that

happening now in the data and so

Schiller makes this argument that this

bobbing could actually be extended

rather than immediately oh no rates went

up so quickly rather than immediately

seeing a drop you see a little bit of

this extended surge of buying because

people think well may as well get in now

at 5.6 before rates get to eight percent

okay interesting a problem though Mr

Schiller says is that right now folks

really don't have the feeling that there

could be a housing bubble but soon he

says the memory of of a bubble and the

memory of the bubble popping in 2008

will start coming back and potentially

heavily weigh on the housing market

leading prices to head down now we're

going to talk about some leading

indicators and why we might believe in

the trajectory that we've got drawn here

we're going to talk about these I just

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historically that's been home ownership

all right going back over here to Mr

Schiller and kind of this projection

over here me I personally believe I want

to separate myself from Schiller here

for a moment I personally believe that

Schiller is right about this initial

surge kind of propping up the market a

little bit here but why do I believe

that we're going to see this decline

here well when you see interest rates go

from 2.8 to 5.6 percent roughly a three

percentage move we know that we're going

to see a 30 decline in purchasing power

that's because for every one percent

that rates go up purchasing power goes

down 10 so that's easy right three

percentage Point difference 30

purchasing power Lowe's conducted a

survey and they believe based on their

research that excess demand for homes is

somewhere between 20 to 28 this means

that purchasing power will probably kill

all of the excess demand that we have

for Real Estate

but what happens if inventory starts

going up that's when we actually start

seeing prices go down because that

inventory could then provide more supply

for us we actually see prices drop now

let's take a look to see if we start

seeing or starting to see any of those

sort of changes let's go ahead and go to

the iPad over here and let's take a look

at this first chart that I'm going to

pull up right here this is the percent

of active listings with price drops look

at the black line folks the black line

right here is

2022 compared to all of the other years

we have just as interest rates started

going up shot to the highest amount of

active listings with price drops pretty

much at any point with the exception of

this tiny little bubble right over here

tiny little uh spot there the exception

of that point there we are at the

highest levels of active listings with

price drops that we have seen in 2019

2021 and

2022 so far now I like to remove 2020

itself because it's a weird pandemic

here it's not good for seeing kind of

consistent real estate movements so

that's a big red flag and if you start

getting into specific areas you're

starting to see new listings also creep

up we're not seeing that at the national

level yet this last chart here this is a

national level and the fact that we're

seeing active listings with price drops

on all Metro within all Metro areas it's

a big problem you zoom in though to

little city or individual cities and you

can learn a little bit more about what's

happening in individual cities and start

seeing inflection points there here

we're seeing housing inventory new

listings in in Austin Texas actually now

surpass any point in 2021 2019 or

2022. it's starting to happen we're

seeing more price drops we're seeing

excess buyer demand go away we're seeing

more properties get less listed now

we're not yet seeing that nationally so

when you look at new listings nationally

here we're not yet seeing that we're

kind of in line with prior years as you

can see the black line right here in

line but if you know this if if this

data because it's a four week moving

average that this data is set on if this

data in about another four weeks or so

starts showing a little bit of an

inflection point to the upside here

we're going to have some potential

issues for the real estate market so

let's jump back over here to the

Whiteboard and understand what we

potentially have ahead of us in my

opinion what we have ahead of us are

first of all the understanding of

leading indicators we have to know that

inventory drives what happens in real

estate and interest rates these are the

two big things that affect the market

we're starting to see the change we're

starting to see inventory build up we

know rates have gone up so we're seeing

these already but if we want to look for

statistics we have to be very careful in

using any of the Fannie Mae or National

Association of realtor numbers because

they tend to be somewhat delayed it's

okay to look at them and understand them

but they don't tend to be good leading

indicators they're more lagging

indicators they're usually about two

months behind which is not great for

example at the end of May we just got

the March data and it's like oh yeah no

that's not the kind of dad I want that's

like way old right two month old now

that's crazy but that's the way they do

it in real estate it's nuts real estate

moves a lot slower than the stock market

you have to remember that so one leading

indicator that you can look at is the

home builder the new home builder sales

so sales for new homes in May the survey

expectation was that we were going to

have 748 000 new contracts signed for

new homes we only ended up getting 591

000 that is 21 Below estimates and it is

16 lower than the month prior which is

actually shocking for May oh well that

was actually April data released in May

but for for April we have the spring

home buying surge usually you would

actually expect to either meet the

survey or be greater than the month

before that but we were substantially

lower than the month before that so

another red flag leading indicator here

so what does all of this mean well in my

opinion what this means is you don't

necessarily want to rush to sell real

estate because if you sell real estate

you're going to immediately take

somewhere between an eight to ten

percent haircut on the price of the

property plus taxes right you got to pay

commissions commissions could be four to

five percent even if you sell the home

yourself so what maybe you'll save two

percent well that's why we got a range

of eight to ten percent here but either

way you got to pay the other agent you

gotta pay escrow title fees of about one

percent you've got to set aside money

for fixing up the property vacancy

transition moving moving a tenant giving

a tenant money to move out whatever it's

a disaster homes cost money to sell and

they take time to sell so uh eight to

ten percent is probably what you would

suffer if you sold but let's say you did

sell and then you did pay the taxes

because you thought you were going to

have better opportunities either buying

the dip in the stock market which you

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I'm going to be doing with real estate

in the program as well because my goal

is to ride the wave down I don't know

how far we're going to go down with real

estate prices but if I had to guess I

think this bottom is going to be

somewhere between 10 to 15 percent this

is sort of my base case scenario I do

think there is a worst case scenario

though that we end up 20 to 25 percent

lower in home price prices now

unfortunately for renters this isn't

going to be much of a benefit for you

because as home prices potentially come

down I actually expect rent prices to

continue to go up because rent prices

still haven't caught up to the

incredible surge of home prices we've

had so I expect to see some sort of

softening and asset valuations like real

estate prices rents still going up as

more people decide to rent longer

there's a tighter supply of rental homes

and individuals who sell their home

potentially just go to rent that's

absolutely something that happens so the

inventory is coming we're already seeing

that data the demand is gone the rates

are higher expectations are that rates

are going to continue to go higher I

don't actually believe that rates are

going to go to eight percent I think

they'll probably say between five and a

half to six percent so I think a lot of

that removal of purchasing power has

already happened but worst case scenario

I'm only looking at about 20 to 25

percent and I think that's that's a

lower chance of happening here but the

reason I don't think we'll see a 2008

style crash is because with

substantially more qualified borrowers

today than we ever had before with the

ability to repay and if you understand

Dodd-Frank and any of the regulations or

how difficult it is even to get to a

mortgage if you've gone through a recent

refinance or mortgage application you

know how difficult it is I don't think

we're going to see this kind of disaster

I don't really foresee a foreclosure or

repo crisis with the exception of maybe

the most recent buyers buying here if

they lose their jobs at the same time as

buying a peak we could potentially see

some of that but not a lot in the

backlogs so what do we expect well 10 to

15 percent is more my base case scenario

it's also possible that real estate

prices just kind of do the what was

thought was going to happen in 2006 the

oh prices will just level off and we'll

have zero percent home price gains for a

couple years sure that's entirely

possible but I'm looking to be shopping

once we get the data that we're at the

turning point so I'm not buying now not

buying the dip now looking for that

turning point and then as you know make

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in the next one thanks so much bye