The TRUTH About The 2023 Housing Market Crash

in 2021 when the housing market was booming most Financial experts in every mainstream media Outlet out there said that there's no way that this housing market boom could be some sort of housing market bubble now here we are today and not only are home prices falling but home prices are falling as some of the fastest rates that we've seen in a decade and now everybody's worried about a housing market crash now if you want to understand where we're going in the housing market you have to understand how we got here this is going to be a pretty comprehensive video and I highly recommend you watch this video Until the End because everything that I say is going to build on top of one another and it's going to help you understand exactly where we're going so if we back up a little bit and look at pre-2008 so this is before the 2008 crash this was when there was a lot of risky things happening you had the adjustable rate mortgages making a huge comeback that was where people could get a big teaser rate and then get a low mortgage rate for a home you also had a big movement for subprime mortgages so if you had a crappy credit score it did it matter you can qualify for a home it was easy to get a zero percent down payment mortgage so you had to bring no cash to the closing table to buy a home and on top of that you also had a big moment for Ninja loans no income no job no asset loans so even if you had no money you had no job you had no assets if you didn't have money for a down payment you could still qualify for a mortgage to buy a home then in 2008 that was when the party ended things came crashing down and at this time in 2008 this was when mortgage rates hit six percent so everybody who had an adjustable rate mortgage was able to get a very low teaser rate on their mortgage and then it started expiring in 2007 and then in 2008 that was when we saw a huge influx of new foreclosures and that was because now mortgage rates had jumped up to six percent for a 30-year fixed rate mortgage well the housing market continued to slide until 2012 because now in 2012 this was when the housing market hit the bottom and during this time the Federal Reserve Bank was cutting interest rates they were stimulating and they were inflating the economy by 2012 if you wanted to get a 30-year fixed rate mortgage it would cost you around 3.6 so quite a big cut from 2008 but it was a way to get the housing market moving again because now they needed to incentivize people the FED wanted to incentivize people to go out and buy a home and the way they did that was making very cheap and affordable mortgage rates then from 2012 until about 2018 we saw a steady growth in the housing market people started to buy homes again people were spending again the economy started to grow again and in 2008 if you wanted to go and get a home now it wasn't going to be 3.6 percent it was about 4.5 percent for a 30-year fixed rate mortgage because during this period now the Federal Reserve Bank wanted to pull back on all other interest rate cuts that they did between 2008 and 2012 and so now we started to see mortgage rates start to rise in 2018 and now it was four and a half percent to get a 30-year fixed rate mortgage well in 2019 this is when things started to get even more interesting because now in 2019 the economy started to slow down a little bit people started to see less investments into startups we started to see a slow down slightly in the housing market and people started to get worried about a potential recession because we saw the recession in 2008 it had been about a decade and now people thought that we were overdue for a recession again an economic cooldown but that was when in 2019 the Federal Reserve Bank actually got proactive and they started cutting interest rates to help stimulate and inflate the still pretty strong economy to prevent the strong economy from becoming a slower economy so in 2019 the Federal Reserve Bank cut interest rates three times in one year to start stimulating the economy and it also gave a boost to the housing market that's why in 2019 if you wanted to get a 30-year fixed rate mortgage on average over the year it cost three point nine percent if you wanted to get a mortgage then came the year 2020 and this is when things really started to get crazy because then the pandemic hit our economy was shut down and then the Federal Reserve Bank panicked and they started cutting interest rates the Federal Reserve Bank slashed interest rates to zero and along with that went down mortgage rates so the Federal Reserve Bank sets interest rates that the banks get to borrow money at and then based off of that Banks set the interest rates that you borrow money at so you have the mortgage rate which is what you pay and then you have the banks rate which is known as the federal fund rate which the Federal Reserve Bank sets so then in 2020 we sell mortgage rates fall we saw mortgage rates fall to about 3.1 percent because the FED wanted to stimulate this slow economy that we were seeing due to the pandemic and this move to stimulate the economy by the Federal Reserve Bank worked they cut interest rates and made it cheaper to get a mortgage and then people went out and bought homes in the year 2020 between 2020 and 2021 we saw home prices grow by 20.6 percent in one year while at the same time between 2020 and 2021 we saw wages grow only by 4.9 over the year so it's a home prices boom significantly faster than wages then came the year 2021 and mortgage rates continued to go down because we wanted to see more stimulus in the economy Banks were incentivizing people to go ahead and get a home and in 2021 if you wanted to go out and get a 30-year fixed rate mortgage the average rate over the year was just 2.9 percent well people wanted to again take advantage of the super low mortgage rates these were the lowest mortgage rates that we had ever seen in history so in the year 2021 we again saw the housing market boom in 2021 we saw the housing market grow by another 19 but wages only grew by 4 0.5 percent over the year now you can really start to see the discrepancy between home prices and income and if you see home prices grow significantly faster than income well it's going to make it naturally harder for more and more people to buy homes because homes are just much more expensive and people will eventually hit a breaking point where they just can't afford to go out and buy a home because they're just costing too much money now there were some really interesting things that happened in 2021 which contribute to the housing market slowdown in 2022. what are those things well inflation and not just inflation but people's opinions on inflation because if you remember in the beginning part of 2021 the Federal Reserve Bank came out and said that inflation is transitory and they expected it to essentially Disappear by the end of 2021 and because of that they said that there was no need for the Federal Reserve Bank to take any action to bring inflation down well of course by the end of 2021 we were told that inflation was not transitory however we were told that the 7 percent inflation that we saw in 2021 was the peak and then inflation was going to start going down so the Federal Reserve Bank didn't have to take any urgent action to bring inflation down and that allowed the Federal Reserve Bank to keep mortgage rates low for longer because they wanted to see the economy boom remember the Federal Reserve Bank wanted to grow the economy and they weren't worried about inflation in 2021 because we were coming out of the pandemic and so the FED wanted to see the economy grow and inflation wasn't an issue so they kept interest rates artificially low that were people could keep buying homes that way we could keep seeing growth in the housing market and could keep fueling this bubble in our economy and different asset classes and then came 2022. well before we get into 2022 you might be wondering if people thought that we were building a housing market bubble when we were in 2021 and the answer is no pretty much every mainstream media kept talking about how it is not possible that we could be building some sort of housing market bubble and you might be wondering but how it seems so obvious is that we could be building a housing market bubble well the answer is because the Federal Reserve Bank they said that our economy is so strong and they also said that this time is different so raising interest rates would not cause a Slowdown in the housing market 2022 was when we really started to see things change in the housing market when it comes to mortgage rates we saw mortgage rates go from about three percent in the beginning part of 2022 to about seven percent almost seven percent today at the time of me recording my video so we have seen mortgage rates more than double in this year alone which really is pretty unheard of in the mortgage Market the reason why mortgage rates have grown so aggressively in 2022 is because well inflation wasn't transitory like the Federal Reserve Bank thought it was going to be in fact it wasn't peaking in 2021 like the FED thought it was going to be we saw inflation hit a high of over nine percent in the middle part of 2022 and this is the economic War and the fight that the Federal Reserve Bank is playing and fighting thing where they want to bring inflation down and the way that they are doing that is by raising interest rates and one of the consequences of these raising interest rates are higher mortgage rates and higher mortgage rates hurt a housing market especially when the housing market has been propped up based off of these super low mortgage rates over the last few years so now home affordability has fallen to the lowest levels ever and people just don't want to buy a home that's why home sales Begin to Fall in February they continue to fall in March and then April and then May and then June and then July and now we have seen home sales Fall for seven consecutive months and for the first time we're also seeing home prices start to fall this is where now all those people that kept saying that inflation was transitory here who said that there's no housing market bubbly here are now starting to get worried about the housing market some people are still saying that the housing market is strong there's nothing to worry about you don't got to worry about a potential recession but some people more and more people are starting to say that it looks like that we're going to see a recession in 2023 and that a housing market along with other asset classes are gonna get hurt which has everybody wondering what's coming next in 2023 and 2024 and on now I want you to take a good look at this because I'm going to erase this and talk about the two different things that you want to pay attention to the two things that you want to be paying attention to are the housing market and then the housing market dominoes now I'm going to be diagramming this out right in front of you but if you want to stay up to date on what's Happening the best way to do that is by actually reading the housing market data and not just reading the headlines that are published by most of the mainstream news because those headlines are emotional and they don't always give you the full story so you want to be actually reading and studying the data that way you can make good smarter decisions for yourself now if you're not interested in doing that or if you don't want to spend all the time doing that then the next best thing would be to subscribe to something like Market briefs which is my free financial newsletter that I created to help investors stay up to date on what's happening on things like the real estate market the stock market the crypto Market inflation and the global economy it is a very easy to read news edit we don't use a whole bunch of complex terms so even if you don't have any sort of financial experience if you don't have a financial degree don't worry you're going to understand what's happening we make it super fun it's witty and the best part is it's free and you can read it in less than five minutes every morning so if you haven't already join Market briefs and I'll put the link to hike and join for free down in the description below and now let's start by talking about the housing market costs now when people are talking about or worried about a potential housing market crash because home prices and mortgage rates have gone up that's only the first piece of the puzzle so let's start by talking about that in 2020 the median home in America was selling for around 329 000 and if you put down 10 that would mean that you're borrowing 296 000 and back then you could get a 30-year fixed rate mortgage for 3.1 percent which meant your monthly payment was going to be 1264 dollars in 2022 home prices have gone up quite a bit since then now I'm talking about towards the end of 2022 well that same median home today a is going to cost you four hundred and forty thousand dollars so you're paying a lot more dollars to buy the exact same home if you put down the same ten percent well now you're gonna borrow about 396 000 meaning you have to borrow about a hundred thousand dollars more so not only do you have to pay more you also got to borrow more dollars but you're also going to pay a much higher interest rate to borrow those dollars today than you would have just a couple years ago so now you're gonna pay six point seven percent around today's time which means that your monthly payments are gonna go up to about two thousand five hundred and fifty five dollars a month which is double what you were paying just a couple years ago so the cost the real cost of home ownership has doubled for the exact same home in just a couple years and this also means that your property taxes are higher because your property taxes are based off of the home value so if the home value is higher your property taxes are higher your property insurance is higher utility bills are higher it's twice as expensive to buy the same home today than it was was a year ago and so if your income has not doubled since 2020 it is going to be more difficult for you to go out and buy a home which is why so many people are struggling to buy a home by the way for some context if this was the home that you could have afforded back in 2020 and your income didn't double maybe you saw a slight growth in income like most people did and you can afford a 1300 mortgage today well that means that you can only borrow a maximum of two hundred thousand dollars today based off of this mortgage rate of so many group of 10 down meaning the most that you can pay for a home is about two hundred and twenty three thousand dollars which is quite a bit lower than what it is here so this is the first part of the Domino that you want to understand which is people are having a tough time being able to afford homes because the cost of home ownership has gone up so significantly now while this rise in mortgage rates does make it more expensive for people to buy a home it also makes it more attractive for people to look for alternative options on how to buy a home what do I mean well things like adjustable rate mortgage edges because now we have started to see not only institutions talk about the benefits and the saving benefits of adjustable rate mortgages but we have seen adjustable rate mortgages grow to the biggest and most popular levels since the 2008 crash in September of 2022 we have seen the highest percentage of home buyers use an adjustable rate mortgage in the last 15 years why are people going back to adjust the rate mortgages because they cannot afford a home with 6.7 percent interest rates instead they see that the bankers say well if you can't afford this how about we give you an adjustable rate mortgage where you can get a mortgage for five to five and a half percent but what they don't tell you or maybe they do tell you but people just don't understand it's that this five to five and a half percent that you're paying for your mortgage isn't permanent it's something that you pay for the next five years this is a five to one arm which means that after five years your interest rate is going to readjust and it's going to readjust based off of what interest rates are and if in five years meaning in 2027 interest rates are higher than where they are today that means your mortgage payment is also going to be higher than where it would be if you were to go out and get a 30-year fixed rate mortgage today now of course five years is a long way out this is where many people are betting that I'm going to be able to make more money my home is going to be worth more or I'm not going to have any issue paying the higher interest rate or maybe the Federal Reserve Bank might cut interest rates and so it's a big bet for people to go out and take an adjustable rate mortgage and what we know is that the popularity and demand for adjustable rate mortgages is skyrocketing right now now the reason why this becomes so important today is because the Federal Reserve Bank is on a mission to bring inflation down how are they working to bring inflation down by raising interest rates they say that they're going to continue to raise interest rates until they can bring inflation down to two percent even if that means hurting the housing market even if that means hurting the economy and now that we are starting to see home prices go down that means if you don't have a lot of equity in your home you could potentially go underwater on your home and this is a situation that you want to start thinking about because the average home buyer is putting only a six percent down payment down on their homes meaning people who have bought a home recently in the last year or so only have six percent equity in their homes so if we were to see the Home Market housing market Fall by say 10 percent which really isn't that much considering the huge run-up that we saw in the last two years you're going to have a lot of people who are underwater on their homes now if you're underwater on your home and something happens to your income you don't have that much incentive to keep paying your mortgage because well you're underwater when you're underwater you don't have the same incentive you don't have the skin in the game that's the whole idea behind Equity is when you have equity in the home you have skin in the game so you want to keep making your payments because you want to protect the Equity that you have but if you have negative equity meaning you're underwater in your home that incentive isn't there so this is where now the worries about an economic slowdown can really affect the housing market because if home prices go down but people still have jobs then people aren't as likely to stop paying their mortgages because you still have an income but if home prices fall and people's incomes also fall well now you're underwater on a home and you don't have an income now what's your incentive to find a way to stay in that home and continue making the payments this is the concern in the housing market which brings me to number two the housing market Domino Banks aren't dumb are they greedy yes do they take risks absolutely however they also understand how to take calculated risks because when they sell a mortgage with a very low down payment you would think that that would be a high risk especially when you're in such a bloated housing market however this is where you have to understand a little bit of the housing market system to understand the whole domino of the housing market so let's say this is you right here would draw you with a nice mustache but as we like to call it in my native language Punjabi a much or for my female followers let's draw you a nice braid or as we like to call it my native language Punjabi a good you want to go out and buy a home so now you go to the bank and you say hey Bank we want to go out and buy a home well the bank is gonna give you money to buy the home but the bank isn't just going to hold on to your mortgage they're going to sell this mortgage off to somebody else that way the bank doesn't assume any of the risk so they give you this money for the mortgage and then immediately the bank is gonna sell your mortgage to this entity right here which is Fannie Mae and Freddie Mac Fannie Mae and Freddie Mac are the biggest purchasers of mortgages out there and they are sponsored and backed by none other than the United States government so they are backed by the government right here and the interesting thing is the government doesn't have any money remember the government isn't a for-profit entity the government generates their money from taxpayers people like you from your tax dollars so you go to work you run your Investments you run your business you make money and then you have to pay taxes to the government so now the government backs Fannie Mae and Freddie Mac which means the government is backed by people so the bank makes a mortgage and then they're going to sell it off here handyman Freddie Mac will buy these mortgages because they're backed by the government and the government's willing to do that because they're backed by you so the banker doesn't take any risk and what happened was in 2021 Fannie man's ready Max said oh home prices are going up a lot so what can we do well let's increase how much we're willing to insure and that Fannie Mae and Freddie Mac started buying mortgages up to a million dollars in some areas meaning that now Banks can make even more loans and they have more ability to sell it to Fannie Mae and Freddie Mac so Fannie Mae Freddie Mac are now opening up the doors to buy more mortgages from Banks which is why banks are okay being more risky with these mortgages because they don't take any of the risk a banker who is now selling the mortgage they just get a commission when somebody signs the paperwork they don't maintain or kick on any of that risk and so this is where you have to understand this whole idea of risk because Banks aren't taking on the risk Manny Man Freddie Mac aren't taking on the risk the government is kind of taking on the risk but the risk ultimately comes back to regular people why because regular people always bail out the entities when they fail now let's add one more layer to this about a minute ago I was talking about how as long as people have jobs they will have the ability to continue paying their mortgages and people are likely to pay their mortgages so long as the economy is strong well this entity right here Fannie Mae and Freddie Mac has talked about the economic slowdown they have said that they believed that we're going to be entering a recession however the recession will be mitigated because of the strong housing market that's what they said in the early part of 2022 and so what they're saying is that because the housing market was so strong in 2022 and is so strong that is going to cushion the recession that's the reason why the recession won't be bad that's the reason why so many people will not lose their jobs well this is now where you start to run into the chicken and egg dilemma or what's going to cause what because now if the economy does slow down and it does hurt the housing market now you start to create this negative spiral and this is where now you can start by looking at the lending business and the reality is lenders are getting hurt we've seen a number of lenders do Mass layoffs and we've seen other lenders completely shut their doors because people aren't interested in continuing to go out and buy a home and now you might be wondering why aren't home prices falling even faster if we're seeing the mortgage Market get hurt if we're seeing home costs go up so significantly well you also got to understand interest and intent and just human psychology because people are much more likely and much more willing to raise the price of their homes but the less like likely and less interested to cut the price of their homes so if you're listing a home for sale it's going to take you more nudging more pressure and more time to cut the price of your home as it would to raise the price of their home and this brings us now to another layer that I want to talk about to this whole onion and this revolves around the idea of something called the bespoke tranche opportunity or BTO so what this means essentially is how Wall Street is betting on the housing market so if you remember before the 2008 crash the real Domino for the whole housing market wasn't just home prices falling it was Wall Street betting on home prices falling and the amount of bets that you had institutions and insurance firms and Pension funds making on the housing market and so when you combine all these things together and then home prices started to fall and people stopped paying their mortgages the whole house of cards started to collapse well now we have a situation where home prices are starting to fall and you still have Wall Street betting on the mortgage mark in fact you have a whole bunch of synthetic or derivative Investments made on the housing market kind of like what we saw happen before the 2008 crash one of the examples of this is something called the bespoke tranche opportunity so before the 2008 crash you had all these mortgage-backed Securities and then you had something called cdos collateralized debt obligations and essentially what that was was it was a whole bunch of different mortgages that weren't put into other Investments so a lot of times these were not the best mortgages and they were put together into something called a CDO and then it was sold as a separate investment to other Bankers to other institutions and these cdos became a huge multi-multi-billion dollar industry well now we're starting to see another type of synthetic CDO one of them is called this bespoke tranche opportunity and essentially what this means is you take the CDO which is an instrument a type of investment that has a whole bunch of different types of mortgages in there and this lets investors now invest in a specific piece of the CDO so this is like a derivative of the CDO another type of investment on top of that which means essentially that you have a whole bunch of bets on the housing market again this is where now you have to understand what does all this mean well It ultimately comes down to what is the Federal Reserve Bank going to do if the Federal Reserve Bank stays true to their word to doing whatever it takes to bring inflation down that means they're going to have to raise interest rates significantly if they keep raising interest rates it's going to continue to become more expensive to buy a home as it becomes more expensive to buy a home home prices will have to correct sellers will not be able to sell their home at the same price today at an eight percent mortgage or a seven percent mortgage as they could have when they were selling the home at a three percent mortgage and so you would have to see some sort of Correction in the housing market now if that is coupled with people losing the jobs or seeing smaller incomes and they cannot continue to pay their mortgages and they're potentially underwater in their homes well then you could see people not paying their mortgages if people don't pay their mortgages well then you have all the Domino most that I just talked about but again it all hinges on people paying their mortgages or not but that is ultimately going to depend on what the Federal Reserve Bank is going to do we're seeing a huge influx of new adjustable rate mortgages we are going to see the cost and the effect of that in 2027 after the five years of the adjustable rate mortgage expires but between now and 2027 If the Fed continues to raise interest rates well that is going to continue to affect the housing market and that could cause a correction in the housing market but for the housing market to crash you now need people to be underwater and you need people to not have an income or to see a smaller income meaning now they don't have the ability to pay their mortgage and they're underwater which means it's much more likely for people to walk away and not pay their mortgages if that happens that could trigger a whole real estate meltdown but it's going to ultimately say this one more time depend on what the Federal Reserve Bank does over the next 12 months the next 24 months and if you want to stay up to date on what's Happening and understand what's happening while it's happening the easiest way to do that is just by joining Market briefs which is my free financial newsletter and I got the link how you can join down in the description below but again my focus Now isn't in real estate like it was before a few years ago I was Heavy in real estate now I was doing everything that I can there and a lot of opportunities were there I bought a property in 2021 I haven't bought anything in 2022 yet but my focus now is building my business because I see a bigger opportunity there for me than real estate that's why I've been kind of I'm still involved in real estate right but not the way that I was because you can earn more with your business if you put the attention the energy and the money into building the team and the resources

Channel: Minority Mindset

Views: 318,645

Keywords: minoritymindset, minority mindset, minority123, jaspreet singh, rethink rich, financial education, financial literacy, finances, stock market, stocks 101, how to invest, money management, investing 101, building wealth, how to manage money, financial advice, investing, buying stocks, housing market, inflation, wealth, passive income, personal finance, real estate, real estate 101, real estate investing

Id: q6C0-j2IJ1c

Length: 27min 13sec (1633 seconds)

Published: Mon Oct 10 2022