The real estate market will it crash if so, when I’m gon na explain this to you in three simple, fast steps, step number one: let’s go over the new facts. Last week the government comes out with a two trillion dollar stimulus package. Part of the package is, homeowners, may not have to make a mortgage payment for up to one year as long as the loan is through Fannie and Freddie to understand how this may affect the real estate market, we need to start by understanding how mortgages are originated. It starts right here with the potential home buyer. He is looking at this gorgeous home that actually has a roof. That’S caving in on the right hand, side, but he doesn’t care about that, because he is handy with tools. He goes. He goes. The mortgage broker Mike. It says Mike, I need a loan Mike says I can make that happen goes to the bank. The bank gives the money to the new homeowner. The loan goes to the bank. The bank sells the loan before the ink is dry, write to Fannie and Freddie Fannie and Freddie give the bank the loan they pocket. The spread, Fannie and Freddie collects these loans from all over the United States and just bundles them together into this weird type of sausage. They take who’s from over here tails and testin stomachs noses, you name it and they just grind it all. Together into a mortgage-backed security sausage, the sausage goes into the market, then they try to find someone to hold the bag, whether it’s Fannie and Freddie. Sometimes it’s Goldman Sachs JP, Morgan they’re, trying to find a sucker. The sucker is usually the pension fund, so the pension fund gives the investment bank the money or Fannie and Freddie. They give them the sausage. The sausage goes onto the balance sheet of the pension fund once the pension fund has the loans or the Ridgeback securities and the homeowner starts. Making the payment insert mortgage servicer steve his job is to take the payments from the homeowner and distribute them to either fannie and freddie or to the pension funds that are holding the sausage on their balance sheets. If the homeowner doesn’t make the payments, steve is liable right now, he’s obviously in big big trouble. If those homeowners aren’t going to be making their payments for up to a year, so he’s got his hand out he’s got a sign that says I love bailouts. You can understand why, as of right now, the Fed hasn’t explicitly said they’re gon na bail Steve out, but I can’t imagine they won’t because he’s a very important part of the daisy chain. If he goes under Fannie and Freddie goes under and the pension funds go bust, what the Fed is trying to do now to prop up the market is they’re printing up as much funny money as they can and buying the sausages. If there’s more demand for sausages, the price goes up. Interest rates go down if the interest rates were to spike, like they normally would in the market. With this type of environment, where homeowners aren’t making payments, it would be just like the repo market September 17th. Last year the Fed can’t have that or it will blow up the entire system. They’Ve got to keep interest rates low. The problem is, it creates a lot of unintended consequences. The Fed brings down those rates. We go right back to mortgage broker Mike the problem. Is mortgage broker Mike usually takes 30 days to get paid, because once he does a deal with the homeowner, they agreed to a specific term. Let’S call it 5 percent if interest rates go up to 10 percent during that 30 day period. Mortgage broker Mike loses a lot of money because the value of the loan he just originated, decreases in value substantially, so he needs hedge his bets. So he goes into the market, buys hedges. So if interest rates do go to 10 %, he is okay, he’s not gon na get hurt, but if interest rates go down under 5 %, the value of those hedges go down as well. If it goes down to 3 % 2 %, because the feds creating more demand artificially driving interest rates low, it means the value of those hedges are decreasing so much it might trigger a margin call. So these brokers, like Mike, are going to the Fed right now and also asking for a bailout because they’re saying listen fit if you’d keep driving down interest rates artificially we’re all gon na go bust. If Mike goes bust, that means there’s a lot fewer loans. If any at all for new homebuyers, if there’s no more loans, there’s no more buyers, if there’s no more buyers the market tanks, the take away from step number one is: the Fed will do anything to keep interest rates low, and that means printing up limitless. Funny money to bail out everyone in the daisy chain, including Steve Mike Fannie and Freddie, the investment banks and the pension funds step number two: if we have a real estate crash, how low will prices go and how long will it take the market to bottom? To answer these important questions, let’s look at my favorite housing chart of all time. We go all the way back to the late 18-hundreds adjusted for inflation, our starting point right about a hundred stays very flat, so we get to nineteen ten or so then, prices drop substantially because better materials, more efficiencies prices, go right back up World War two because Of the supply shock and stay very consistent, all the way to 2000. Why is this because wages typically stay consistent with inflation? So since way, ages are how much you can afford to spend on a house. It would make sense that the home prices also stay consistent with inflation in a free market, simple supply and demand, as prices go up, demand increases. Builders see this, they come in, create more housing. Units brings the price down, and mortgage rates were very consistent from 1880. All the way to the 1970s, of course, we had a huge spike when Volcker raised interest rates and we’ve been in a down cycle since then. But if you look at the historic mean it stayed about the same more importantly, lending standards were very consistent. It wasn’t until the government came in and tried to lower lending standards by giving anybody a home loan that could fog a mirror. It wasn’t until then that we had this huge problem, combined with artificially low interest rates from the Fed trying to inflate another bubble to make up for the dot-com bust. This takes us to 2004 2005 2006. When we come into this huge bubble and prices come crashing. All the way down but notice, where they stopped right on their historic trendline prices, go all the way back up to where they are today in many markets higher than they were at the top of the last bubble in 2006. So the takeaways from this chart number one were in a huge housing bubble. That’S obvious hello, but also that prices don’t just fall out of bed. They don’t drop by 50 percent overnight. It takes a long time for sellers to readjust their price for years. It took in the last bust, so the main point that I want to get across to you right now is: I think the market will most likely go down by at least 40 percent, and it will take at least four years for the market to find a Bar, I think it’ll bottom pretty much right on its historic trendline. Why wouldn’t it when the tread line goes all the way back to the late 1880s and just as a reminder to be very, very clear. I’M talking about home prices, adjusted for inflation and the size of the home, we’ve got to compare apples to apples, and the last thing I want to point out is something I’ve been saying in all of my videos. Lately that shelter is greater than real estate on a moving forward basis. This is just my opinion. I think it’s the way it’s gon na play out, meaning that you’ve got to separate the housing market into two separate categories. Is it just a basic apartment or a basic house just giving you a roof over your head or is it something additional? Is it 10 acres? Is it a 5,000 square foot mansion? Is it a condo in New York that isn’t just a roof over your head, but it’s all this extra stuff and extravagance. I think moving forward, there’s gon na be a price paid for shelter, but I don’t think there’s gon na be a price paid for real estate, so you’ve got to look at real estate markets as separate entities. I’M saying that prices overall will most likely come down by 40 %, but of course I think prices in San Francisco as an example will come down a lot more than 40 %, and I think prices and more linear markets might go down a lot less than 40 % – this is just looking at the United States as a whole step number three: will the real estate market actually crash? We know from step number one how mortgages are originated and we know. I think that if we have a crash, the market will most likely go down over time by 40 percent, if not more, when you adjust for inflation and the size of the house very important, it’s an apples to apples comparison and if we get a crash, I Think we could it lasts that bear market and housing at least four years, but to understand the cross currents involved. So you can come to your own conclusion on what you think is gon na happen. Let’S go right to the whiteboard on one side of the equation. We have the Fed printing up all this funny money to support the mortgage-backed security sausage market. That means bailouts for Fannie and Freddie the bank’s service or Steve. The individual homeowners end mortgage Mike. So the good news is, I don’t see the credit market completely. Freezing up for mortgage-backed securities loans will most likely be available, but at what cost not necessarily interest rate, but I’m talking about what cost will society pay most likely? The value of the dollar goes down relative to consumer goods. This means a stagflation, airy type of environment. Let me go to the right: we’ve got the real economy. Let’S keep it super super simple. The government is gon na issue a lot more debt. That means the Fed monetizes the debt additional money supply in the real economy. But regardless of whether we go through a recession or a depression, we’re gon na have fewer businesses on the other side. That means less choices. So in this very simple example before the consumers had two options for food: the cafe or the supermarket, now they’ve just got the supermarket, so they’ve got more funny money in their back pocket due to the government’s stimulus program and there’s fewer goods and services. That means the prices at the supermarket go up at the same time, there’s a lot more regulations in the system. Why? Because a lot of the equity in the debt from the private sector has gone to the feds balance sheet. Basically, the government and the government’s coming in with all these bailouts there’s gon na be stipulation so the bottom line, no matter how you slice it, the government is gon na have a much bigger, say in the economy than they did. We, for this, creates a less dynamic economy kind of this zombie type of economy, where we have maybe a lost decade, maybe even two, not necessarily like Japan, that it’s deflationary. I think it could be more stagflation airy like we talked about before, so that means higher consumer prices, higher unemployment, lower productivity, because the regulations and higher interest rates – I know the feds most likely gon na cap the yield curve, but it’s going to try or the Markets gon na try to push interest rates up because of the inflation expectations and lower asset prices due to higher interest rates in a less dynamic economy, but I want to be very clear. This is just my base case. I could be totally totally wrong. There are no certainties, only probabilities who knows the Fed could come in and literally buy every house in America. I know it sounds crazy, but if you look at what they’ve done the last two weeks, I wouldn’t be a bit surprised. The reason I’m giving this information is so you can have all the facts you can know what’s going on and hopefully understand how all this works, so you can make better decisions for yourself and your financial future. The way I see it playing out, here’s the takeaway. It’S just a slow kind of grind lower over many many years, and it’s just gon na go lower in an inflationary manner, meaning that inflation is gon na go up higher than the prices of the homes the homes may be flat. They may be even going up, but inflation goes up at a higher rate, so in real terms adjusted for inflation. The prices are going down. I think the market looks a lot like Japan editor throughout the chart. We can see that it peaked out in 1991, but think about this. All the people in the Japanese housing market in 91 92 were most likely expecting it to recover. Well, they were waiting for their cover e for the next 15 years for more content. That’Ll help you build wealth in thrive in a world of attic controls. Intro, bye and big governments check out this playlist right here, and I will see you on the next video
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