Housing Market Update: American Dream Turns Into American Nightmare!

housing market update the american dream turns into the american nightmare i'm gonna explain this to you in three simple fast steps step number one let's start with some shocking data we're going to go right to the charts this chart is of home prices in the united states adjusted for inflation we go back to 1990 all the way to 2019 on the left it's a percentage from a hundred percent up to 150 percent i want to point out 1998 this is key the reason this chart only goes back to 1990 and the typical chart that i use goes all the way back to 1900 as you'll notice the prices from 1900 all the way to 1998 adjusted for inflation are pretty much the exact same so we can start right here from 1998 because that's when housing prices go berserk we all know what happens lending standards decrease home prices go up up up we get this massive bubble that peaks out in 2006 and comes crashing down to 2012 oddly enough you'll notice almost right on the historic trend line going back to 1998 and all the way back to 1900. since 2012 prices have continued to go up to where in 2019 they were just as high as they were in 2006 in 2020 they're even higher so anyone that would argue that we're not in a housing bubble right now in 2020 would also have to argue that we weren't in a housing bubble in 2006. i think that's a pretty tough argument to back up with the data let's move on to the next chart we've got income average incomes of the middle class and this goes from 1990 to 2019. starts at 5 000 a year goes up to forty thousand in nineteen ninety right about twenty five thousand and this is adjusted for inflation nineteen ninety eight that key year right about thirty thousand goes up and down a bit to where we are here in 2019 at thirty 34 000 you'll notice an increase of four thousand dollars or 13 adjusted for inflation but home prices from 1998 to 2019 have gone up by over 50 percent so how on earth can that happen how can we have incomes only go up by 13 but prices go up by 50 percent as most of you would guess it starts with interest rates mortgage rates since 1981 have gone down consistently so for the past 40 years we've been in a down cycle of mortgage rates and to put this into context if you would have purchased the equivalent of a 300 000 home back in 1981 your mortgage payment would have been almost four thousand dollars in some cases even higher than four thousand dollars but today to buy that three hundred thousand dollar house your monthly mortgage payment would only be fifteen hundred dollars that's what gives the average american that much more purchasing power to afford these higher and higher prices but it doesn't stop there that wouldn't explain everything because mortgage rates went down dramatically from 1981 all the way to 1998 and housing prices were pretty much flat same thing from 2006 to 2012. mortgage rates went down dramatically in that time frame yet prices went down so we have to take it a step further dig a little deeper to do that let's go right to the internet this is from a website called marketplace.org where susan wachter who's a professor of real estate and finance at university of pennsylvania's wharton school describes the history for down payments of housing in the united states according to wachter before the 1930s most mortgages were short-term and non-amortizing a home buyer had to either pay off the whole house and lump sum after a few years or roll over the loan at a new rate of interest down payments on the other hand were typically more than 30 percent then the government created the federal housing administration or fha which backed mortgages but required a 20 percent down payment after world war ii the department of veterans affairs and the fha adopted a 30-year fixed-rate standard by the mid-1950s most mortgages fit that description since the 1950s the 20 has remained the average down payment with the exception of the run-up to the financial crisis in 2008. in other words the down payment to buy a home all the way up to 1998 was always around 20 if not higher throughout us history then in 1998 the amount of down payment required as a percentage got lower and lower and lower and we can see this in a chart of down payment trends starting in 2000 they're about 7 percent so from 1998 to 2000 they'd gone from 20 all the way down to 7 and they bottomed out around 4 in 2006 no surprise there but i'd like to point out that from 2013 to 2016 where this chart ends the required down payment has gotten lower it's gone from seven percent to six percent and i would assume that the down payment is even lower today in 2020 but the main takeaway from this chart that i think is crucial is that we realize that the down payment required running up to the bubble in 2006 was between seven and four percent way way lower than the 20 percent that had been required historically now many people think that we're not in a housing bubble now because lending standards are so much more strict but the data doesn't back up the narrative when we can see that the down payment required today is still around six percent the average of what caused the housing bubble in 2006 and again 14 lower than the typical 20 most people that are bullish on the housing market that have this claim that lending standards are a lot tighter make it seem as though the average down payment now is the same as it was back in the good old days of 20 but that's just not true it's nowhere close to 20 percent it's 14 lower all the way down to 6 percent very similar to the way it was between 2004 and 2006. now you may be saying to yourself yeah george i get it but i kind of understood that before and although the data is disturbing it's not exactly shocking oh but wait there is more this is the key that nobody is talking about and you need to understand to make sure that you're protecting your financial future we go to a chart of the price per square foot for new homes that are sold you can see this is an aggregate total of home prices in the united states have gone up by 50 percent like we said before but look at the square foot price starts off about 115 in 1990 and this is adjusted for inflation it goes up a little bit comes back down and it's gone up but it hasn't gone up close to 50 percent it's only gone up maybe 20 or 30 percent and this makes sense when you look at the next chart which is the average home size of a new home in the united states we go back to 1973 to 2013 goes from 1500 square feet up to 2500 square feet in 1973 the average new home built was about 1500 square feet you can see today it's all the way up close to 2500 square feet and it's going higher and higher and higher understanding these dynamics is the key to understanding why the housing market which is usually the american dream is going to turn into the american nightmare and i'm gonna connect the dots and go over the end game in steps two and three step number two now it's time to start connecting the dots so we can see how this might play out long term so in step number one we realize that the only homes that are being built right now to a certain extent are these larger homes are getting larger and larger and larger why are the home builders doing this why wouldn't they create smaller homes that are more affordable well it's going to go back to their regulations and their costs increasing their profit going down so if you're a home builder why would you consciously make a decision to build a bigger home because that's the only way that you can make profit all these politicians come out and like to demonize home builders as if they just don't want to create affordable housing they don't want to do it they're just mean they're these greedy capitalists that just hate poor people that's not true the only reason they don't create affordable housing is because they can't make a profit so the houses continually get bigger and bigger and bigger as the regulations go up and we can see this illustrated very well in areas like houston versus los angeles let's go to a recent forbes article that discusses this in more detail government caused artificial scarcity is the main reason why according to the u.s census bureau california has the nation's highest supplemental poverty rate at 19 percent proportionately 29 percent higher than a place like texas that the average rent in houston is 996 dollars versus los angeles where the average rent is two thousand four hundred and twenty dollars this illustrates a big challenge for the working poor i would add middle class as well and a lot of people right now like your friend and family member fred would say yeah george but everyone makes more money in los angeles so it all works out not really look at the income figures people in houston on average make almost as much money as people in los angeles in these big cities in california so it's not an income issue again it's a regulation issue if you get rid of the regulations let the home builders build there'll be plenty of supply to keep prices down and i can confirm this with my own personal story i've built homes from scratch specifically in portland oregon back in 2014. i purchased a lot right in the middle of town it was a bigger lot i subdivided it on one of the lots i built a brand new home the city came to me and hit me with regulation after license they went so far as making me pave the road in front of the house just to get the permit to build as though that's my responsibility and it gets even crazier than that but there is at least fifty thousand dollars worth of additional fees just to start the building process above and beyond the license so what i had to do is sit down with my architect go through the numbers and figure out how big the house needed to be for me to actually squeak out a profit as a result the house had to be over 2500 square feet i can tell you from personal experience this is what's going on in places like california oregon washington and all these urban areas that are leaning left and again i dislike the right just as much as the left but the bottom line is the left favors these restrictions that make housing prices go up so the bottom line here is the housing market has really been divided into two completely separate components i like to think of it as housing market one and housing market two housing market one is specifically for the one percent of earners housing market two is for the rest of us the 99 percent and if builders are only building these bigger and bigger mcmansions for the rich because that's the only place they can make money the supply is going to continue to go up it's going to track demand if not exceed demand therefore the price per square foot would stay pretty flat we saw that in those charts in step number one on the flip side we have housing market number two for the 99 percent well their supply is staying the same there's no more homes being built yet demand because of population is increasing substantially therefore what happens is the price per square foot goes up and up and up but let's remember what's happening because of the fed is the wealth of the one percent is increasing dramatically because feds quantitative easing money printing the fed put they're driving the stock market higher that's their game plan so the wealth or the purchasing power of the rich in the one percent increases while the price they're paying per square foot stays the same and of course it's the opposite for the 99 their wealth and income is staying flat if not going down so they have decreased purchasing power while at the same time their price per square foot continues to go up that's why if we look at the overall numbers we might see that housing prices have gone up by 50 percent adjusted for inflation going back to the chart in step number one but really if we get down to the nitty-gritty for the rich their prices have remained flat maybe up 20 percent or down in some areas where for the rest of us our prices have gone up by probably 80 percent if not a hundred percent so owning or renting for the majority is becoming completely unaffordable we're owning and renting for the minority the rich is becoming even more affordable and what does this give us not just the average joe but now the average joe is pissed rightfully so an editor go ahead and throw up a chart that illustrates exactly what i'm talking about this is one of the most shocking charts i've seen in a long time usually what you have is if home ownership increases then occupancy for rentals of course will increase as well because you have more people shifting over to either buying or renting now what we're seeing in 2020 especially is home ownership is going through the roof 68 percent while at the same time the occupancy rates are plummeting so how is it possible that occupancy rates are plummeting while at the same time home ownership is going through the roof and the only way that can happen is if there's more and more people that want housing and less and less housing actually available step number three let's take this to its logical conclusion and unfortunately i don't like to say this because i'm an american i always root for the united states but the only thing i see playing out long term is a massive increase in homelessness and again i don't like to say that i'm just calling a spade a spade and for those of you who think i'm being a little hyperbolic let's just walk through the logic going back to step number two we remember the wealth and income or the purchasing power of the 99 percent is pretty much staying the same if not decreasing while prices and rents are going up and up and up because demand is increasing with the population but the supply is staying the same if not going down because we have no housing stock that's being built in this price point or at this size unfortunately if this line is going up and this line is staying flat if not going down the outcome is going to become more and more people that can't afford to put a roof over their head and california again is a perfect example of this let's go to a recent chart that shows how unaffordable this area actually is for the people living there the median home price in california is 596 000 almost 600 grand that's a 3 000 a month mortgage payment so to qualify for this you have to be making a hundred and twenty six thousand dollars a year not exactly middle class and look at san francisco just to afford the average home in san francisco you need to be making over 200 000 a year look at your mortgage payment almost 5500 a month unbelievable and you compare this to the rest of the united states where you only need an income of 57 000 to be able to afford the average home and we know that this is not a result of higher incomes it's a result of higher regulations increased costs for builders and we can go right back to comparing houston with san francisco or los angeles and we can pull up another chart of the number of homeless people per 10 000 residents and it would come as no surprise that california is almost on the top of the list at 33 homeless people per 10 000 residents but the common denominator that you see with states like washington oregon california hawaii new york is extremely high building regulations which make it cost prohibitive for builders to build quote unquote affordable housing or smaller sized homes you compare that with a state like texas louisiana alabama georgia where it's very easy to build a house and therefore it's very affordable to buy or rent therefore very few homeless people but unfortunately i don't think it ends with just an increase in the homeless rate in the united states remember we have drugs that are being legalized and i'm all for legalizing drugs but the bottom line is you put more drugs out there and you can have more and more people using them especially if we have an increase in homelessness and we have an increased unemployment rate long-term stagflation due to the cerveza sickness and everything that's going on with the economy so we have structurally high unemployment long term we most likely have higher drug use and we have housing becoming more and more unaffordable of course the situation just gets worse and also we've got this push the societal narrative towards defund the police so let's think this through you have a higher rate of unemployment more homeless more drugs and less police that equals gotham city you're gonna have a massive increase in crime unfortunately so what are some potential solutions i'm sure right about now your friend and family member fred is saying yeah george i get it those states do have some problems like california washington oregon but their politicians are so forward thinking they're so progressive that they're going to come up with an outside of the box solution you're just stuck in the past you austrians are just too stubborn you libertarians the progressives and the socialists they're going to come up with a plan to eradicate homelessness just you wait and see to dive into this deeper let's go right back to the internet as you would expect their main solution is just to build housing for all of the homeless people the state funded housing projects but a lot of these politicians are coming to the realization that due to their own policies that restrict builders from building more housing stock in affordable housing ironically it prevents them from building more homes as well so the bay area council of economic institute estimated the per unit cost of building various types of homeless housing in northern california it starts with a temporary cabin which i think would be totally adequate but of course the politicians on the left think that's totally inhumane as if it's better for the homeless people to be sleeping in a tent on the sidewalk even emergency shelters clock in around 75 000 converted motels at about a hundred thousand and keep in mind this is per unit not for the entire converted hotel so i have no idea how it would be possible to spend a hundred thousand dollars to convert one motel room into a living space for a homeless person but leave it up to california to make it happen and then if you just build them a brand new house the price clocks in at about 450 grand and i hate to make light of it and laugh but i think it's so ironic that these politicians are getting a taste of their own medicine now they understand what it's like for these builders to try to build quote unquote affordable housing when you've got so many regulations that just to build one house costs 450 grand and to give you some perspective usually a house just a simple house would cost maybe a hundred and fifty dollars a square foot minus the land so if you think a thousand square foot house costs 450 dollars a square foot to build that is all land and or regulation and the same group that put out this chart notes that there is one problem permanent supportive housing is really expensive to build no kidding in los angeles a recent estimate from a city auditor put the median cost of building one unit at more than five hundred and thirty thousand dollars a new project coming online in san jose is estimated to pencil out at roughly four hundred and seventy thousand dollars per unit the outrageous price tags aren't just driven by land costs it's a shortage of construction labor and a prolonged city approval process are also to blame but take it from me someone who's actually built houses from the ground up in areas like portland oregon the shortage of construction labor is not the main problem it's the outrageous land prices created by all these crazy building codes and it's all of the regulations brought down by the local governments so state housing is not a viable option unless they want to increase taxes even higher which would drive more and more taxpayers actually out of the state they're going to shoot themselves in the foot they're backed into a corner where they really don't have any options the other thing they could do of course is lower regulations so the free market can come in and actually create housing at a profit i don't see that as probable unless you get these crazy politicians or unless the narrative in states like california oregon and washington completely do a 180 probably not likely in the near term or you could see people solving this problem by having more and more individuals living in the same square footage very similar to what they do in europe and south america but that means the standard of living is going to continue to go down so what can you do how can you take control over your own situation the first thing is to be cognizant of what's happening in the world around you don't go whistling by the graveyard realize that if you live in one of these states your state is moving in the direction of gotham city very quickly but unfortunately in this story there is no batman it's only going to get worse if they continue to pursue these policies that got them here in the first place i would suggest considering pulling the ripcord as soon as possible and getting out of dodge and i realize a lot of you can't do that there's personal issues that are involved but i think as long as you understand what's going on and do what you can do to the best of your ability you're going to be better prepared for the future to protect yourself and your family from what's going to happen and that's going to be an increased level of homelessness most likely drugs and the crime rate going through the roof and unfortunately this is the part of the housing market that nobody is talking about but watching this channel you understand that you need to start thinking these things through you need to understand the data to see where the puck is going in the future and i think in a lot of these states in urban areas the american dream of owning a home is going to turn into the american nightmare of increased homelessness for more content that'll help you build wealth and thrive in a world of out of control central banks and big governments check out this playlist right here and i will see you on the next video

Channel: George Gammon

Views: 119,951

Rating: 4.9151816 out of 5

Keywords: housing market, housing market crash 2020, housing bubble, housing market crash, housing bubble 2.0, housing bubble 2020

Id: re27CWJDdME

Length: 27min 53sec (1673 seconds)

Published: Fri Sep 25 2020