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Will The Housing Market Crash By The End of The Year? - What banks don't want you to know - YouTube
Channel: Proactive Thinker
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In the last 2 years, it seemed like house
prices will never fall.
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They kept rising like there is no tomorrow.
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It was one of the significant rises in house
prices in the history of the market.
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Imagine an asset that rises in value by 1
or 2 percent suddenly rose by over 20 percent.
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Whoever got a mortgage in 2020, took one of
the best decisions of his life.
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Not only did the price of your house appreciate
drastically but you also fixed your mortgage
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rate at a historically low rate.
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Buying a house through a low mortgage rate
is probably one of the best ways to build
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wealth.
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You are going to pay for rent anyways, so
why not pay for the mortgage and generate
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wealth over time.
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Even if you arent going to live there, if
the mortgage rate is low enough, renting it
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out will not only cover the mortgage payments
but would also generate some income.
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But that has changed in the last couple of
months.
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As the fed is tackling inflation, house prices
are beginning to shake.
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You no longer can get a 3 percent mortgage
rate.
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5 or 6 percent is the new normal.
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When it comes to mortgage rates, a single
percentage point already makes a huge difference,
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leave alone 2 or 3 percent.
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The average downpayment in the US is just
6 percent.
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A half-million dollars house including taxes
and fees at 3 percent would equal around $2,979.
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If we take the exact same house but a 6 percent
mortgage rate, the price would shoot to $3,824.
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The difference is remarkable, especially if
you are planning to rent it out and turn it
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into it a source of income.
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But that's just one part of the story because
the other is - that house prices are declining.
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Experts were warning all of us that this is
not sustainable and house prices one way or
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another should collapse.
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It was turning into a bubble that would eventually
burst.
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It's both good news and bad news depending
on whom you are asking.
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If you are a homeowner, you want to keep watching
how the price of your house keeps rising,
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but if you are a homebuyer, finally you can
consider buying a house since you don鈥檛
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have to bet and overpay for your house.
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So let鈥檚 find out, will house prices keep
declining?
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will the market completely collapse by the
end of the year?
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Is it the right time to buy a house or not?
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We will answer all of these questions and
many more, but before we do that, give
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this video a thumbs-up.
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Let's look at what happened in short.
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When the pandemic hit the world, the fed was
so worried that the economy would collapse
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that it instantly lowered the rates to literally
0 percent, especially after March鈥檚 stock
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market crash.
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Low-interest rates led to low mortgage rates
which pushed demand to increase, at the same,
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the pandemic slowed down supply chains which
created a shortage of materials in the market
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and decreased the supply of houses in the
market.
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On top of all of that, people were worried
to sell their houses since the future seemed
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unpredictable which further lowered the supply.
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And what happens in a market where there is
so much demand but so little supply?
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Prices shoot through the roof.
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It seemed like a bubble in the beginning,
and it is to a certain extent but there is
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always a ceiling to how high prices can rise.
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Now, let's ask a different question.
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What happens when mortgage rates rise?
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Not only that will slow down the demand but
also push banks to approve smaller mortgages.
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Let's go back to the example we talked about
in the beginning.
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If the bank would approve you 3K dollar payment
monthly payment on your income, at 3 percent
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you could have got a half-million dollar house.
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But now at 6 percent, you no longer can afford
half a million dollars because at a 6 percent
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mortgage rate, you have to make enough money
to be able to make a $3,800 monthly payments,
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which again lowers the demand and eventually
leads to prices to decline.
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But not everything is so crystally clear.
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How would prices keep declining when there
is worldwide inflation because of the reasons
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we have already discussed in one of the previous
video.
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A general increase in prices will increase
the price of materials to build new homes
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which will overall increase house prices.
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Inflation isn鈥檛 going to stop anytime soon.
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It will take the fed at least a year to bring
it down to 3 or 4 percent.
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Regardless, if we look at the numbers, the
median house price has already decreased and
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this has a psychological effect.
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When house prices are rising, people rush
to buy homes afraid that if they don鈥檛 buy
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now, they will have to overpay in the future.
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But the absolutely opposite happens when prices
are declining.
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When people realize that prices are cooling
down, they wait until they reach their bottom
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line.
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The only problem is that no one knows where
is that bottom line.
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That eventually leads to lower demand which
pushes prices to decline further.
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The fed is playing with fire here.
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It鈥檚 trying to control inflation but at
the same time not to cause a recession.
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It鈥檚 a very dangerous game that can easily
backfire.
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The question is, how high the fed should raise
the rates to tackle inflation?
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According to experts, the fed should raise
the rates to at least 2.5 percent to bring
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inflation down to a meaningful rate.
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Imagine if a 0.25 percent increase in march
already caused such a huge spike in mortgage
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rates, what kind of spike will an increase
by another 2 percent will cause?
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The last time mortgage rates rose so swiftly
was in 1994.
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In late 1993, rates were less than 7 percent.
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By December 1994, they had surged to 9.11
percent, a jump of more than 2 full percentage
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points in less than 12 months.
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Maybe, the fed is trying to play out a similar
scenario here.
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Anyone who understands how the fed works,
knows that it ain鈥檛 going to drastically
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raise rates unless it鈥檚 a disaster like
the 2008 crash where the fed had to raise
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rates to cool everything down.
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It was a mistake since that surge in interest
rates created a catastrophe in the market.
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If the fed was a bit more careful and slowly
raised rates that would bring house prices
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down over time, the crisis wouldn鈥檛 have
been so bad.
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So the fed would rather let inflation slightly
get out of hand than slow down the economic
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machine.
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That鈥檚 why many investors believe that inflation
will last for another 5 years.
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Maybe not at 8 or 9 percent but something
around 5 or 6 percent.
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There are many reasons to back that claim
and we didn鈥檛 include there, what would
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happen if China suddenly would start a full
invasion of Taiwan.
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The shortages that war is going to create
are beyond anyone's imagination.
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Inflation is going to be so high that even
if the fed raises rates to 10 percent, it
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wouldn鈥檛 make any difference.
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Lets hope that never happens.
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The main question is, will the market crash
by the end of the year?
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The answer is - probably NO.
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It鈥檚 true that the supply of homes is back
to pre-pandemic levels and mortgage rates
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are rising.
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But that鈥檚 not enough.
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There was already a shortage of homes in the
market prior to the pandemic, so restoring
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the supply to the previous level isn鈥檛 going
to make a huge difference.
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Will prices keep declining?
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Probably yes!
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In fact, it's already happening.
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And might continue to happen until the end
of the year.
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But, didn鈥檛 a 20 percent increase in house
prices created a bubble?
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Well, 1 out of 5 dollars in the economy was
printed during the pandemic, you can鈥檛 expect
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to throw that much money into the economy
and expect prices to remain the same.
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It鈥檚 just one of the consequences of the
printing press.
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After each crisis, there is a gold rush where
everything rises dramatically but then at
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some point stabilizes.
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We had our gold rush.
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Whoever earned a fortune, good for them, whoever
didn鈥檛.
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Well, maybe next time.
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But until then, give this video a thumbs up
and subscribe.
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Thanks for watching and see you in the next
one.
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