How the Fed destroyed the Housing Market

we need to talk about how the Federal Reserve of America has destroyed the housing market making it impossible for the regular American to afford a home because even though home prices have started to come down over the last year they are still at nearly the highest level of all time even higher than they were at the peak of the previous bubble in 2006 and to understand how we got to this point where prices are so high all you need to do is look at interest rates and in particular you have to go back 20 years to post 911 post.com bust America because that's when Alan Greenspan the head of the Federal Reserve in the early 2000s did a historic interest rate cut that changed everything in the housing market and economy forever and it occurred right after 2000 when the short-term federal funds rate was six percent Greenspan cut that fed funds rate down to one percent in O3 and basically since then the FED funds rate only averaged 1.3 and that long-run interest rate suppression is what caused home prices to become unmoored and to become detached from the fundamentals when I say fundamentals what I'm talking to you about as a home buyer are income and wages where something started happening in the early 2000s where the home prices the yellow line they started growing much faster than the blue line which was income and wages and you know we had that big bubble in the mid-2000s and 06 and prices crashed now then we had another big bubble that peaked in O2 prices are starting to come down they're still way too high but really what I want to point you to folks is here the blue line income growth over the last 50 years in inflation-adjusted terms has only been 24 meaning home prices have grown about four times faster than the rate of income growth and that's why it feels so expensive to buy a house prices went up for so long faster than your incomes that you look at a house and you're like I can't afford this right and it's a situation that was not the case historically if you go back 100 years on the U.S housing market prices never really went up above income which makes sense because ultimately it's your your income is a home buyer which dictates your ability to afford the down payment and mortgage payments unless unless the Federal Reserve steps in and starts manipulating interest rates like in the last 20 years if the FED suppresses interest rates all of a sudden that plows more people into the housing market it makes investors want to buy homes and make certain home buyers more able to afford homes in the short term when the mortgage rates go down which can cause the prices to go up and that's exactly what has occurred Greenspan rate cut in 2000 right and it was right after that rate cut where the home price growth went crazy and then the rates maybe went up for a year or two but basically stayed close to one percent for the next 20 years and that is what is allowed prices to grow now what do you notice rates have been going up and prices have started to go down but here's the frustrating thing about today's housing market is that we're coming out of 20 years of interest rate suppression where all the participants in the housing market whether they be buyers or sellers or investors they became conditioned to expect the FED to just bail them out whenever things got tough or difficult and so right now there's this idea in the housing market that that's still going to happen again and a lot of people are thinking one of two things number one is that Jerome Powell is going to Pivot and cut rates and make it easy for them to buy a house or to continue their investment program but more importantly number two is that due to all the Fed rate cuts and the FED stimulus people actually don't think a recession is going to be that bad and I honestly think that's the biggest reason why we're not seeing inventory grow as fast as we want on the U.S housing market and it's why new seller listings according to data from Redfin are down 21 year over year sellers don't want to list their homes right now which is an unfortunate development it's not one than I expected I thought these sellers wouldn't be as stubborn I thought they would look at the fundamentals and say hey it's time to get out of the market but they're not doing that and they're likely going to have to be forced to do it through some type of either major job loss some type of liquidity event because they have been conditioned by 20 years of low rates in fed bailouts to expect that that's not going to happen one way that you can really clearly understand what's going on right now in the housing market is by looking at Dr Horton the largest homebuilder in America here's the crazy thing that Dr Horton is doing they're offering their home buyers special interest rates a 5.25 fixed rate FHA mortgage when the 30-year fixed mortgage in America is trading at 6.6 percent and the way they're accomplishing that is by doing expensive mortgage rate buy Downs which is now negatively impacting their profits with their net income crashing by 35 year-over-year in the most recent quarter due to their higher cost of sales from these buy down and so I just want you guys to think about actually how crazy this is like the fed's intention with higher interest rates and higher mortgage rates is to suppress activity in the housing market in the economy more generally but what DR Horton and other Real Estate Investors are doing is they're just ignoring that and they're actually doing the opposite like they're accepting lower profits to keep the sales velocity going to keep the top line revenue looking good which is the opposite of what they should be doing in a rate hike environment in the beginning of a recession but they're doing it they're saying look we'll take the hit in the short term keep the business going and eventually you know the fed's going to cut interest rates and the economy is not going to get hit that hard and then business will be as usual but the problem that I'm starting to see is that the FED is looking less and less likely to Pivot and cut interest rates and in fact if you go to the betting markets on where the FED funds rate's going to be by the end of the year they're projecting that at the December 13th meeting the last one of 2023 they're projecting a 4.5 to 4.75 fed funds rate which is only uh 25 basis points lower than today and so if the betting markets are right and the FED only basically Cuts rates by 25 basis points between now and the end of the year that's going to mean mortgage rates are still going to be above six percent and that means that a lot of the builders like Dr Horton a lot of the investors that I know that are kind of accepting lower profits and lower returns to keep the train moving well they're going to start to have problems because at some point the people who are giving money uh to all these investors and Builders their shareholders are going to start asking and demanding for higher return they're going to start saying wait a minute why are you guys getting a lower return than I can get investing in a U.S treasury or buying a certificate of deposit give me my money back and when that capitulation occurs is when you're gonna see what I would call the real sell-off out of the U.S housing market where you see a lot of investors start to actually really sell their houses start to Discount their houses especially as the recession gets worse everyone and by recession getting worse I want to be clear what I mean I don't mean more layoff announcements I don't mean the stock market going down I mean specifically the unemployment rate going up which is operating right now at near a record low 3.5 percent we're gonna have to see this unemployment rate go up to create the type of force selling situations that really push prices down and we're really gonna need to see you know go from this blue shaded area more to this orange shaded area that you see that corresponds more with recessions and just to give some history folks I like to go back to 2006 2007 the last housing crash kind of the beginning of this last crash you can see the unemployment rate was low at a record low in April 07 then it started really going up by the end of 07 then in 08 the unemployment rate exploded and reached a peak of 10 in 2009 which is really which fundamentally pushed home prices down a lot in that last crash and there's actually a very defined timeline of events that occurred in that last housing crash in 2006 home sales collapsed in 2007 prices started to dip in 2 2008 prices collapsed as unemployment rates Surge and then foreclosure surge in 2009 and 2010 and that timeline is important to understand because a lot of people have it backwards they think the foreclosures increased first they think foreclosures caused that last housing downturn but no the foreclosures were something that simply piled on and made it worse and you can see that very clearly on this graph the green line shows the month of a month change in the k-shiller home price index it started going negative in 2006 by a little bit and then a little more in 2007 and then it was late 07 early 08 where we started to see bigger price declines and the biggest monthly price decline came in late 2008. now compare this to the amount of foreclosures the Foreclosure inventory as a percentage of total mortgages note that this was actually fairly low through 2007 right 1.4 percent it started to go up then in late 2007 to 2 percent which was still a level that was fairly reasonable it really wasn't until 2010 where the foreclosures really peaked at 4.6 of all mortgages coincidentally 2010 into 2011 is actually when we started to see some recovery in home prices in America and so those foreclosures are a lagging indicator and right now in America the Foreclosure rate is pretty low in 2023 overall now the mortgage defaults are starting to go up especially for FHA low-income low-credit borrowers but it's going to take some time for those increased mortgage defaults to percolate through the system and result in big increases in foreclosure inventory and most notably it's going to take layoffs and the unemployment rate going from something like 3.5 percent to seven or seven and a half percent to really cause the mortgage defaults and foreclosures to Surge because there's another aspect of government manipulation of the housing market that's led to the current situation and that was all of the Foreclosure bans that occurred during the pandemic according to the Biden Administration they kept nearly 2 million homeowners in their home during the coveted pandemic they're saying that there was 1.8 million FHA borrowers who received forbearance and thus weren't foreclosed on and 1 million of those borrowers actually received a plan to lower their monthly mortgage payment after their default which is crazy these people defaulted and in response the government lowered their monthly payment so let's just use the number of 1 million instead of 2 million say there was 1 million foreclosures that were prevented during the pandemic due to these moratoriums well then what what's that impact on inventory well right now according to realtor.com there's 563 000 homes on the market that's more than there were a year ago but it's still about 50 percent less than the levels of 1.1 million before the pandemic so we're 50 lower on inventory but if if we had those foreclosures if we had a million foreclosures that would have shot our active listening count on the market above where it was before the pandemic and so what you got to understand is that both the US government and the Federal Reserve in concert did everything in their power over the last three years and over the last 20 years to juice the U.S housing market to deplete inventory to cause prices to go up and now they're unwinding those things but we're not going to see 20 years of artificial suppression of interest rates in the associated investor and speculative Behavior we're not going to see that just get eliminated in a year and ultimately my fear is that the FED is going to end up actually breaking something in their fight to do this I think at some point they will eventually be forced to Pivot and when they are forced to Pivot it's not going to be this great event that all of a sudden is stimulative to the market it's going to be because something really bad happened and the unemployment rate ends up at eight or nine percent and there's big problems and I just also want to address something I know a lot of you guys have been watching my channel for a long time I started my YouTube channel in late 2020 and I made my first housing market crash prediction on YouTube in April 2021 two years ago at this point and a bunch of the predictions I've made in between have come true other predictions have not come come true or at least I've not come true yet and I think it can be frustrating for a lot of home buyers out there who have waited to buy a home to still see that the market is tough still really expensive still doesn't feel like a good time to buy and I think ultimately the question you guys have got to ask yourself is two things number one how long can you hold out right like how long can you hold out how important is it for you to secure a price that you feel like you can afford and to not overpay and be house poor that's question number one but then number two more importantly do you believe in the fundamentals you know this is the essential question because when we look at the fundamentals when we look at this graph comparing home price growth to interest rates we know that the longer that interest rates stay up around this level the more that inflation adjusted prices go down when we look at this graph comparing home prices to incomes we know that it's not sustainable to have home prices all the way up here at 92 growth since 1970 while incomes are only growing by 24 since 1970 adjusted for inflation this Gap is not sustainable it has never been sustainable in U.S history or do you believe that this time is different and that the the old school rules and the fundamentals that apply to the housing market economy don't apply anymore a lot of people are saying now that this time is different they say that due to the low inventory due to the investors buying the housing market prices will never come down but I'm personally very skeptical of this time as different arguments is the housing market over 100 plus years has been very consistent it grows at the rate of inflation and incomes and when it goes above that rate prices have to come down

Channel: Reventure Consulting

Views: 150,867

Keywords: Housing Crash, When will the Housing Market Crash?, Will Mortgage Rates Keep going up?, When will Mortgage Rates go down?, When will Home Prices go down?, Jerome Powell, Will Jerome Powell keep hiking interest rates?

Id: 0B_XedTFzP0

Length: 13min 23sec (803 seconds)

Published: Tue Apr 25 2023