The Truth about the Coming Housing Crash.

hey everyone me kevin here so i've been

thinking a lot about the real estate

market and what could the future of the

real estate market hold and there's this

really interesting question that came up

and it's taken me quite a while to do

research on this because it's pretty

in-depth but we've got all the answers

that we're going to summarize here so

the claim housing doubled in the 1970s

as interest rates doubled

because wages went up and so i thought

this was really interesting because

really the conclusion there is inflation

will make investors more rich and in

theory we've heard this idea before that

real estate and i've said this too that

real estate over time tends to return

a little bit of a higher rate than

whatever inflation is which in some

sense makes people look at real estate

and say hey well then real estate must

be an asset class that does well during

inflationary times so we did a little

bit of looking into this and tried

thinking okay well where could this go

wrong or is it correct and the answer

was quite interesting hey gabe what's

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mckevin.com learn more okay so let's get

into this here's what we found

so uh what did housing prices do well

housing prices uh from from when we had

these inflationary periods in the 1970s

housing prices went from about 23 000

per home to about 73 000 or about 2.7 x

and wages over that same time did go up

about 2.3 x during 10 years and what was

interesting was if we overlaid

what the average sale price of a home

was in the united states with inflation

what we found

was every time we had higher levels of

inflation or a recession real estate

prices did slow their growth but they

did not necessarily turn negative see in

the early 70s real estate prices came

down with the recession of the early 70s

but they only disinflated in 74 in 80

and 82. all three of these being

recessions where real estate prices

actually went up while we were in a

recession and while we had high

inflation what happened though was as

inflation went up and as interest rates

went up we just saw the rate of price

growth slow so prices basically went up

less quickly for example if we look up

year over year i'll look back rather

year over year home prices are up about

20 percent well now we've got this high

inflationary environment interest rates

have gone up a bit i would expect to

have large headwinds against real estate

prices going into 2023 and maybe 2024.

but we'll talk more about projections

and is it possible that real estate

prices could actually turn negative

we'll talk about that

but first

i think one of the big big conclusions

and this is sort of a preconclusion

because there's a danger here we're

going to talk about one of the

conclusions was from some of this

initial research was that sure it is

true that housing

prices doubled while rates were going up

and inflation was high but we were able

to correlate that inflation slows home

price growth or leads to a short-term

decline in the event there's a recession

and if there's a recession prices don't

necessarily have to fall in real estate

remember recessions don't necessarily

mean bear markets recessions just mean

that consumers spent less even just

fractionally less than they did the year

before two quarters in a row so a

technical recession does not necessarily

mean you have a 2008 style housing bust

but there's a little bit of a problem

with looking back at the 70s and

unfortunately this is where the data

gets a little bit more complicated where

it's extremely difficult to parse this

out but we're going to come to an

ultimate conclusion here in just a

moment but we've got to look at the

danger so here's the danger

fannie mae freddie mac ginny may and uh

to some degree fha although fha was

created during the new deal in the 1930s

that most of these the

government-sponsored enterprises they

actually started loosening and

simplifying requirements to get into

real estate in the 70s

so in the early 70s to the late 70s this

is when we actually popularized the

30-year mortgage and

well back in before the 1930s nobody was

even doing amortized loans home loans

were like short-term loans just like a

regular kind of car loan almost 30-year

mortgage really got popularized uh after

the 50s and then almost mainstream in

the 70s take a look at what else

happened in this in the 50s in 1956

we got private mortgage insurance now

here's what private mortgage insurance

is every time you buy a property with

less than 20 down you have to pay

something known as private mortgage

insurance basically think about it like

this let's say

this is just an easy way an easy trick

to calculate this

let's say a lender went to you and said

hey i can get you a home loan right now

for 3.5 percent and you're like that

sounds great i like it i'll take it but

i want to put down 15 percent instead of

uh 20 so let's assume this is 20 down

well they might say okay no problem

you're gonna pay a half percent extra in

pmi to be able to put down that 15

well now it's as if your interest rate

because they're calculated the same way

though they're calculated independently

it's as if your interest rate is four

percent so it was a little more

expensive but you're able to get into

home ownership uh for for less money

down and usually the biggest impediment

for people getting into a home isn't so

much the interest rate it's usually the

down payment and so we didn't actually

get private mortgage insurance to really

enable loans under 20 down until

1956

and it wasn't until

1971 the start of this boom cycle that

we got

five percent down loans and so now the

data really gets skewed because now we

take a generation of

home ownership between the 1930s and 50s

where everybody's putting 50 i'm sorry

everybody's putting 20 down or they're

just getting used to the idea of a

30-year fixed rate fully amortized loan

now you get to the 70s and they say hey

why don't we just do

5 down which again just became a thing

in 1971 at the same time as we were

essentially at the bottom of real estate

prices here in 1971 and so the question

is is it possible that real estate

prices could have stayed above this

black line the black line here meaning

growth anything below the black line

meaning prices actually failure over

here right is it possible that prices

went up every single year because

remember this is not a chart of

accumulating prices accumulating prices

look a lot more like this when you look

into the fast this is just the

year-over-year gain that blue line there

and so why did they not turn negative

well it's entirely possible that home

prices didn't actually turn negative

because we were now introducing uh a

whole new cohort of buyers who yeah

wages were going up but that didn't

necessarily mean people had 20 down

payments but you had more people able to

buy homes with five percent down and

potentially afford more expensive homes

yes because when wages go up you can

qualify for more but that does you no

good if you're not saving so now

americans were able to be consumers at

the same time as homeowners with very

low down payments so now this really

brings us to

today 2022

and so what's the potential going

forward well the big issue that we're

facing right now is quite simple we're

facing high inflation and a rising

interest rate environment in the

environment we're in right now we know

that the 10-year treasury bond which is

something that mortgage rates tend to

follow

the 10-year treasury bond has gone to

about two percent and at about two

percent we have mortgage rates of about

four percent

and it's entirely expected that the ten

year will eventually go to three percent

which will mean mortgage rates will be

somewhere around five percent

now if this happens so this is the ten

year here if this happens we would

expect at least an additional ten

percent headwind in real estate prices

plus the fact that we just recently hit

four percent so we're really looking at

about a two percent interest rate shock

in a matter of probably about six months

uh and that's because interest rates

went from probably somewhere around uh

2.88 and they might go as high as around

4.88 this two percent shock can

translate to about a 20 decline in real

estate prices now that doesn't

necessarily mean that prices are going

to come down 20

because prices could actually still go

up 20

versus this down 20 now you zero out and

prices stay flat that explains why

sometimes you could actually just see

prices go flat and not actually go

negative even during recessions

now there's something unique though

that's happened since the russia

crisis and that is that the 10-year

treasury bond has actually become a safe

haven asset people who are concerned

about the uncertainty of emerging

markets or equities like stocks or

investing in other countries or even

other currencies are fleeing in at least

in some part to the 10-year treasury or

other treasury bonds

and when people flee to treasury bonds

what they do is they actually drive the

yield on the 10-year down so even though

we recently hit two percent we're

expecting to hit three percent right now

we're trading around 1.88 so we've

actually dropped a little bit so my

expectation is while the russia ukraine

crisis evolves we probably won't see

massive headwinds to real estate maybe a

little bit of a slowing but probably not

massive headwinds when we start getting

back to this 10-year treasure and maybe

we get peace in in ukraine which let's

pray to god that happens and everything

chillax is with russia it's quite

possible that we could start that path

running back to that three percent

10-year and that could potentially be a

short-term peak in real estate pricing

now does that necessarily mean we're

heading into a recession

no i think the biggest thing that could

drive us into a recession is actually an

overly aggressive federal reserve where

the federal reserve decides to rug pull

us and says we've got to fight inflation

and one way that they can fight

inflation

is by making sure that rates are so high

so quick that we end up crashing stocks

we end up reducing aggregate demand we

force a recession and inflation

evaporates if that happens and people

start looking back and going oh my gosh

real estate prices are falling at the

same time as rates are going up that's

possibly when we could see some real

estate headwinds now how much would we

actually expect in the worst case

scenario that the fed has to force a

recession i wouldn't expect probably

anything more than 10 15 of a correction

if that and that's solely because

the only driver for real estate prices

heading down in my opinion would be

either fear of the fed which i expect

would be temporary or transitory uh and

and these rates going up and once the

inflation is sort of squeezed out of the

system through a potential recession do

you think real estate is an excellent

long-term investment and i don't know if

it makes sense to sell and pay the

capital gains taxes and try to time the

market in real estate unless you have a

better opportunity to come up or a

better opportunity coming up and this is

why i always resort back to in my

programs on building your wealth like my

real estate investing course link down

below or my do-it-yourself property

management course link down below

there's a reason why i always resort

back to finding the wedge see the

beautiful thing about finding the wedge

deal or wedge deal is in whatever market

you're in whether it's multifamily or

single family is your goal is you know

if this has been our market this last

bit here let's say this was march of 20

and this has been the market here is

even if we do end up having up to those

10 20 headwinds i wouldn't be surprised

if we ended up having some form of uh

of a future real estate cycle like this

where we have a little bit of a

depressed cycle here and maybe this ends

up looking something like a 10 to 20

percent decline at most

rather than something more severe like a

30 to 35 percent decline and again the

reason for this why why

no longer am i expecting something like

this to potentially happen

because of the russia ukraine crisis the

federal reserve is much less likely to

force that recession to get inflation

completely squeezed out of the system

because when we have war happening and

geopolitical concerns there's too much

uncertainty and the last thing the fed

wants to do is deal with a recession

while there's a war happening it's

unlikely now if this war ends quickly

hey maybe we have to reanalyze and look

at that discussion again but right now i

expect the fed be pretty chill be

accepting of higher inflation for longer

be pretty dang patient this could change

pretty quickly but right now i'm not

horribly concerned that this is in our

future

this could be in our future uh so we'll

see what happens and i'll keep you

updated but these are my latest thoughts

on real estate make sure to check out

extra via the link down below and the

programs on building your wealth link

down below and folks we'll see in the

next one thanks bye