The Housing Crisis: Why and when will Prices Fall?

hey everyone kevin here i read a piece in the economist over the weekend it was a really incredible piece on maybe why housing is acting the way it is and i wanted to give you some of the bottom lines are from this so first they observed that the housing's been going up pretty much everywhere in the 33 countries that they were tracking in sort of their housing indicator all of them are up you've got the united states up 15 percent new zealand's up 20 percent and the reasons they give which this is a comment that i regularly get on on the channel is like why why are housing prices up why are they so high and the reasons that they give are that people have record levels of savings which is true we have record levels of savings here in the united states as well we haven't seen savings like we have right now since the 1970s which we also or when we also had a very high period of savings which is also kind of ironic and counterintuitive because it's like wait a minute saving great like like yields that you can get on your savings are super super low right now why would people be saving more and partially it's because of this big wealth transfer that that has been happening uh from the government to to people and people are getting more money whether it's through unemployment or through stimulus or through their jobs or they're just not spending as much because our economy is not as open now i know that doesn't apply to everyone but in aggregate sort of on average american savings rates are higher and we're seeing that in other parts of the world as well the economist also referred to well so they use that as one way to say hey people are saving more they have more capacity to put money down as a down payment usually a big roadblock for people when they want to buy real estate is coming up with that twenty percent down payment because they believe they need the twenty percent now many people also know that you don't need twenty percent you only need like three and a half to five percent which is how i started i started with nine thousand dollars which a sidebar note here is also really annoying when there are comments that are like oh my gosh kevin you're you're just like the the wealthy landlords who are taking advantage of all the housing like wait a minute wait a minute i started with nine thousand dollars bought my own little house with now my wife you know 50 50 going into this and building our wealth by fixing the thing up and slaving over it we took all the risk we took all of the potential of failing making two thousand dollars a month each to make a two thousand dollar a month payment yeah it was bad but we did whatever we could to get into real estate and housing and well as we started making more money we added more and more rental properties and houses because it's a wonderful way to take crappy beat up fixer-uppers that nobody wants to live in and actually turn them into nice properties that people want to rent so i don't know there seems to be this this obsession with all landlords are bad but i feel like taking on a whole lot of risk okay uh to provide rental housing and we provide high quality rental housing too and i mean knock on wood but we we want to come across as always as uh very nice landlords to work with but anyway uh another reason going back to sort of the the piece here uh the economist cited in addition to high savings is one of the reasons that prices were going up uh they also cited a a reversal of trends and originally before the pandemic we had a trend that was decades long of a shift of people moving to the cities because that's where the higher paying jobs were in fact before the pandemic i would regularly say look if you want to make more money go move to a big city like where are you gonna get paid more to change an outlet if you're an electrician in the middle of ohio or in san francisco in downtown san francisco there's no doubt there's no question in my mind that you're gonna get paid more in a city for oftentimes doing the same thing but that is now really reverse and we're starting to see actually we've been seeing for the last year a complete reversal of a decades-long shift and the reason for this uh the economist cited is people realize wow even if i have to commute a little further i might not have to commute every day anymore even if we have to commute to the office two or three times a week i don't have to factor in commuting every single day of the week anymore five days a week uh because maybe we can have work from home days or maybe maybe we work from home most of the time and we only sometimes come in or we don't come in at all and so this reversal of the suburbs is really creating a complete a supply and demand shift that we've never really seen before in the last decades and even home builders haven't even built for because nobody anticipated that a decades-long trend to the city would turn into a decades-long or i shouldn't say decades long would turn into a trend now out of the city so covet really screwed things up as well which definitely hurts supply and demand and this is not saying that cities are losing value no don't get me wrong like cities are they're gaining in price as well maybe not at the rate that the suburbs are though uh and so we're saying real estate all across the board go up but that that's an interesting reason too so you had high savings combined with people wanting to move out to the suburbs then obviously and this is the no brainer one and incredibly low interest rates which this is also not just the no-brainer but it's also a risk factor so low rates are not obviously con super controllable by us unless we get a 30-year fixed rate loan and we lock them in but we can a lot of times when we're out shopping right now we see wow i can get a 3.3 30 year fixed-rate loan i mean three months ago you were able to get a 2.75 percent uh amortized fully amortized so you own the home after 30 years 30-year fixed rate on so even if rates double or triple it doesn't matter you're still paying that low rate and so people are basically land grabbing these low rates in in part not only because they are low when things are more affordable but also i honestly think that most home buyers right now are like i don't think rates are going to stay this low uh forever so let's land grab now get low interest rates now lock in lower interest rates and then when we have those lower interest rates locked in hey if rates go up no problem we're locked into a happy monthly payment that we can afford now the problem that comes out of that is as rates go down prices go up for every one percent rates go down price tends to go up 10 percent uh in real estate pricing really can be heavily influenced by rates obviously it definitely ties to affordability and rents don't tie to that which is very weird like rents rents go up at their own pace uh which in my opinion based on my research has been a lot slower than what housing prices are going up uh but that's because of that crazy volatility like when rates go back up we won't necessarily see rents come down either we'll we'll see every market is different but at least right now the trend is housing prices oops and rent prices are like normal path it's crazy so you get this big sort of wedge right now but people are still buying again to lock in those extremely low rates now is it a risk factor that yeah rates are going to go up and then prices will come down sure totally but a lot of the people who are buying right now are people who don't care about the short term they're not trying to speculate on real estate over 80 percent of the buyers in most areas are home buyers they're not institutions they're not investors they want to buy a home to live in it so most of the competition when you're competing for a single family home is not an investor it's not some foreign buyer it's a local buyer like you or somebody in your community trying to compete against you eight out of 10 times it is somebody like you in your community a family or whatever trying to compete uh for that property uh there you know to to cast it as this invisible enemy of this investor or this foreigner who's coming in with all this cash is actually incorrect now how do maybe your competitors get cash to beat or win deals with cash offers well oftentimes it's because they've already been on the train of real estate and they've built up equity in either stocks via margin or or can draw on their equity by a margin on stocks or they've built up equity that they can take a credit line against or they have business lines of credit most people who are buying cash right now are just refinancing as soon as they close cash is just sort of a way of rearranging their credit lines uh buying cash and then basically refinancing later which is exactly what i did uh this summer i bought there was one particular house i didn't have the cash for i really wanted the deal and they said they'd only go with it if in i cash offer i'm like oh my gosh what do i do i actually pulled margin out of robin hood 50 000 a day which was the max margin i could pull out of robin hood uh and then until i had like 525k and i used that to buy the property cash and then i fixed it up and a month later i refinanced it and locked in a 30-year fixed-rate loan and then paid off my margin again now that's risky but it's also an option now of course that hurts people who are just getting started who haven't built their assets or built their wealth yet and that sucks but that's just the competitive environment that we're in right now see like low housing prices unfortunately there it's not like there if there's a societal reason for them to be high or to be low even though we want to say like hey look somebody making 50 000 should be able to afford a house that might not necessarily be true especially if you're living close to a city or you're living really close to public transportation or you're living at a coastal city in some cases if you're making a lower income unfortunately that does mean you have to kind of broaden your scope and maybe move inland more but fortunately that is offset by the benefit of now hopefully less commuting and yeah i mean it's it's definitely tough but that kind of reshuffling is something we're seeing it's kind of similar to what happens in my opinion when all of a sudden tech stocks go in favor all of a sudden tech goes in favor tech and ev go in favor tesla goes to a thousand bucks i mean a lot of people going mad and this tesla's not affordable anymore it's not affordable stock anymore i thought it was expensive at 600 now it's a thousand this sucks it should be less so i can buy more sure i want tesla to be less too so i can buy more this doesn't mean it's going to happen so anyway then the the economist goes on to say that there are a lot of cities and municipalities and even central banks that are worried about exuberance in real estate however the economist actually counters this by saying that house prices today don't actually threaten market stability the reason for this is they found that of the top 30 bank actually might have been 33 which i guess that might mean that they tracked top 25 countries for uh for real estate pricing but anyway ignore that part there so they tracked the top 33 banks and they found that if real estate declined 25 all of a sudden like interest rates shot up two and a half percent let's say housing prices fell 25 the economist found that the top 33 banks around the world would still have 50 percent more cash than they did going into the recession on top of that borrowing is actually surprisingly restrained because underwriting is so tight now they didn't go into much more detail on this but i do recall a wall street journal article that i've also reported on before and the wall street journal article said of the people who are doing refinances back in 2006 seven and eight when people were refinancing ninety percent of people were doing cash out refinances so they were taking their equity out of their home rather than just lowering their rate so when you hear cash out literally it's like you're getting cash out of your piggy bank of your house today of the people doing cash out refinances only 30 percent of people are doing cash out refinances so you got way less of this speculative borrowing even though it seems insane you have way less of the speculative borrowing then the economist found that new lending at high loan to value level so ltv so high ltv would be like five percent down because you have a high loan 95 to your down payment five percent uh or ten percent down fifteen percent down those would be high ltv loans in great britain they found that uh new high ltv lending is one third below the top limit for high ltv lending so as a country they have a limit that says we will not do more than this many high ltv loans and right now we're one-third below that which is is interesting because really you're just seeing higher quality uh higher uh you know lower debt individuals borrow and is that is that necessarily fair to everyone no of course not i mean the the median wage worker gets screwed probably anybody almost working uh hourly unless they're in tank is is getting getting screwed uh well maybe i shouldn't say hourly because there are a lot of people who do get paid a whole lot of money hourly like think of some attorneys so maybe that's not the better way to put it i would say more the people who definitely are getting screwed are or anybody in direct touch with the public whether that's and i hate to say it but police firefighter retail hospitality teachers it's very unfortunate uh and a lot of cities are considering affordable housing programs and expanding on affordable housing programs to help try to solve this imbalance but really what we need and i tweeted about this and this is sort of my belief is separate here from the economist and i always like to separate you know when i uh when something's my opinion versus uh when uh you know when it's from an article so uh let me jump over here so here's what i wrote on twitter which follow me on twitter if you don't yet it's at real meet kevin on twitter take a look at this uh okay here we go housing affordability is bad it robs people of the ability to build wealth with housing this is true like building wealth with housing so so so important uh wishing for a housing crash however is misguided and there are a lot of people like i want it to crash so i can finally buy real estate but that's misguided sure could prices crash sure but at least right now i think it's it's like wishful thinking anyway then housing will go down as rates rise but for now a mega crash like 2008 is unlikely no prices can't keep going like this forever this imbalance we're seeing it won't go on forever we're going to build more we expect housing starts at the end of this week when they come out to come in a lot higher i think they came out on thursday and uh we do expect that in in a few years these supply shortages will really balance out we're really going to see that flattening hopefully sooner than the next two years but we're really going to see that flattening of this this madness in the real estate market the real solution to the housing crisis better transportation like elon musk's loop around vegas but also out to the suburbs like think about it if you could just if you didn't need a car and you could just hop in a tesla loop and it just zipped you over to downtown and then back out to the suburbs my gosh you wouldn't need to own a car you could live further away it wouldn't make that much of a difference the tesla automation loop is is really going to be a game changer and i think a lot of people are under uh estimating how important it is more and this is why i'm so heavy in tesla too more housing stock via 3d printed homes or conventionally built homes but more of it we need more homes it's very simple there is a massive shortage of homes we just need more and better education when people graduate high school today they can't get a decent job that's broken america's high schools are broken we should be teaching employable skills in engineering trades sales data tech and more not lady macbeth that's how you begin fixing housing unfortunately those those are dynamics that are going to take decades decades to solve and and so yeah i mean when will the future of affordable housing come back i don't know i really don't know and it is unfortunate again yeah maybe rates will go up but here's the problem even if rates go up two percent and housing crashes 20 okay well they're just going to be just as unaffordable for the person who can't afford a home today it's like hey prices went down 20 but oh my gosh the payment is the same as if it were 20 higher right like if you're hoping for an interest rate crash and you're waiting to buy real estate for an interest rate crash you're not going to be getting a better lot if if the only reason is interest rates uh going up and again the types of people buying homes right now aren't the ones that are at a high risk of defaulting they're not no income no asset no job loans right these are highly qualified individuals who are able to buy right now and it's much to the chagrin of many of the people who want to be buying uh to be building their wealth which is what i've i've built this channel on building your wealth and getting started with zero and that's why i have a real estate investing course that teaches you the fundamentals of going from zero to millionaire it's also why i have a stock investing course that teaches you the fundamentals of investing not just copy this trade or that very important anyway uh let's see what else do we have here oh uh the economist also mentioned that a lot of supply coming will help but you're going to end up seeing a lot of that supply also being built outside of coastal regions and the reason for that is outside of coastal regions you have much more lacks building standards and so expect a lot more housing to come up yes in the suburbs and away from those those more concentrated areas where city regulations are much tougher and i cannot agree more city regulations or something else around the coast but anywho check out that coupon code down below for the programs helping you build your wealth the real way uh by uh in investing properly with stocks and real estate check those programs out down below folks thank you so much for watching and we'll see in the next video [Music]

Channel: Meet Kevin

Views: 167,103

Keywords: investing, stocks, stock market, real estate, money, making money

Id: SZOjhsi1bvg

Length: 17min 41sec (1061 seconds)

Published: Mon Apr 12 2021