Hey everyone we kevin here, look. I know there are a lot of you who do not necessarily trust the federal reserve, especially after jerome powell's transitory faux pas, but researchers. A substantial amount of researchers over at the dallas federal reserve just put together a warning for the entire u.s housing market. The market may be in a bubble and we're going to take a look at the research that they're looking at and what they suggest in terms of how bad a potential crash or correction could be in housing.

Now keep in mind. The federal reserve employs over 2 000 researchers, whose goals are to signal these sort of red flags. Now, there's an ongoing joke that hey economists have predicted 11 of the last two recessions but hey. I always think it's worth heeding warnings when we get warnings, especially if we've been feeling some of these things and having suspicions, and then we start getting information that either says our suspicions are correct or wrong.

In this case, i've been warning of potential issues coming to the housing market since january, and i've been putting my money where my mouth is selling some of my real estate trying to refinance early before rates started skyrocketing and even going as far as taking a million Dollars and shorting treasury bonds by the way, all of my trades and every single move i make in uh either real estate or the markets is disclosed to course, members in the links down below stocks in the stock side, college stocks and psychology, money group and real Estate in the real estate investing group - but of course we talk about these in the course member live streams anyway, but folks, let's get into this piece because it's pretty wild, take a look at this okay, so real-time monitoring find signs of brewing housing bubble. Now i'm going to just simplify this and go through some of the big things they talk about here, but what they notice here is that the housing market really strengthened, notably starting in early 2020.. In other words, we had this sort of appreciation of home prices. Doing this since about 2012, but then we've really seen this sort of almost exuberant bubbling up of home prices and we're wondering what's the sustainability of this right.

One of the big things to also keep in mind is one what you can do when it comes to housing. Is you can track a data speci generally with your real estate agent? You have to be really on top of this and i'm going to be releasing some updated statistics on this in a future video. But what you really want to do is you want to track the month over month, differences in mls data, and if you ask your real estate agent for this information, you could see changes in your local market pretty dang quickly. You want to pay attention to these because right now everybody still feels like the housing market is booming.

In fact, every time i make a video like this people leave comments like you're crazy, the market's still booming the market's doing fine. Okay, all right, i'm gon na look at the early facts. All right. We know that rates are up.

We know we don't expect rates to come down anytime soon, even if war ends we're still focused on inflationary concern, potentially somewhere between 7 to 17 federal reserve rate hikes. We don't have a u-turn anywhere in store. In 2018, we had a u-turn in store. Remember at the end of 2018, the fedu turned on rate hikes, so so there are definitely some issues here, but what we're looking here at are uh statistics from the federal reserve.

What are they looking at right, and so they talk about how? Obviously, this run-up has different causes, but what's more important to me is what they suggest here is how you can end up having rising home prices, leading home prices to actually diverge from market fundamentals, as guess, what existing investors and new investors buy more real estate because Of fear of missing out, you literally have the federal reserve here, citing fomo as a risk factor for the real estate market, and they measure this with two specific charts which i'm going to show you in just a moment. But it's important before we go to those to know that what they say is important to focus on is any sign of exuberance in a market because exuberance takes what they call non-linear courses when it comes to the path of real estate price appreciation. And then, of course, crashes, so linear appreciation would just be kind of like this. Okay, three percent home price appreciation per year.

Right, non-linear would be something like we had our three percent, but then we get into some bubble or exuberant phase and any time we get into these exuberant phases. This is where you can have all of a sudden. These sharp and sudden declines before you sort of have this recovery and then, of course it depends how long that recovery is. Is it a quick v-shape? Is it a longer, you know maybe more nike swoosh-ish style recovery right, but anyway so uh.

The indicators they've put together here shockingly in my opinion, see this is the part where they talk about non-linear exuberance, but don't worry so much about that. What's shocking about this is the data that they put together on these charts that i'm going to show. You now really only go back to the third quarter of 2021 and i promise you out of every indicator i'm looking at this has only gotten worse. So whatever you see here, if what you see in these charts makes you nervous the data's gotten worse and it should make you more nervous, we'll see, but take a look at this.

So this here is a chart of real housing prices. Okay, great they've gone up and they bubbled up sort of here in the 2000s, and then we had the bust over here and great they've kind of been up since then. Fine that doesn't tell us much. But what's this gray section because it certainly doesn't signal a recession, because the recession was like over here right.

So it doesn't what this grape box here signals is actually a period of time during which the federal reserve believes that real housing prices adjusted for inflation are above the 95 confidence interval that we're in a time of exuberance, and so they they give a lot of Tests for this, they they talk about all the indicators they use here, uh and when they put these indicators together, their formula says any result above a 95 threshold signifies 95 confidence of abnormal explosive behavior or housing market fever, or in other words, exuberance and fomo, and So this is the fomo chart that there was fomo between the period of 1998 and about 2007 that we briefly had fomo over here at the beginning of 2018, which is crazy because you could actually go back to my videos at the beginning of 2018. And i talk about how uh oh it feels like the housing market is shifting. We actually ended up having a brief decline of about 12 percent. The real estate market still ended a positive that year when the fed u-turn, but we had a brief decline in real estate prices following that exuberance and it's crazy to see their chart sort of aligned with exactly the videos that i was making.

Because i didn't see this chart, then it's kind of a cool chart uh, but anyway, so now, they're saying here we are again in this exuberance phase, and so you can see that at the bottom here see this sort of red line that goes across the bottom. Here this dotted line that red line says anytime. Real home prices are above that sort of 95 confidence interval we're in a period of potentially a bubble in the making right or that people are being a little too fomo ish when it comes to real estate. Now, look i'm a big fan of buy and huddle real estate and i'll talk about some of the ideas that i have regarding what to do with real estate towards the end of the video.

But let's see what else they say. So this is chart number one chart number one is yeah: okay, we're seeing signs of exuberance the second chart that they refer to. So i should actually put number two. So this is number number one right here.

This is real house prices and their level of exuberance. So chart number one here so in this chart, what we actually have is a fundamental price to rent ratio. Now we know rents have popped up a little bit lately, but not as much as housing prices, and so when we look at the fundamentals - hey based on interest rates based on costs for actually being a landlord, what should rents be? You can see? There are periods of excess where home prices have actually substantially exceeded what rents are and we're seeing that again right here, look at that! You saw it over here in 8788. You saw it over here top out in about 2007 and you're, seeing that excess above fundamental rent value happen again, this next line below it here is basically just a way of of charting how much excess there has been, and so, if we only chart the excess Or the price to rent exuberance, along with the price, to rent fundamental exuberance, we can see we're definitely above again that 95 line here in 2000 to 2007 and again right here.

So, in other words, a second chart saying based on rent fundamentals, things are getting a little heated right now, but then there's a third chart - and this is quite an interesting one, because this one isn't as alarming. But there might be a reason why it's actually not alarming and why it really should be take a look at this one. This one takes individuals, disposable income, how much extra money do they have and how do prices relate to their disposable income and when they factor their individuals, real disposable income into this chart anytime, we've been over a level of 95 confidence has been another sign or another Element of evidence that we're in sort of a housing bubble, starting to form right again, we had that over here substantially between 2003 and 2007 makes sense. That's when we had a real big, uninterrupted period of these problems above that 95 interval right, but wait a minute.

Why are we not above that now? Well, the federal reserve has an idea. Listen to this. The delay in elevation of this exuberance statistic is partly the consequence of a surge in real disposable income during the pandemic that led to slower growth rates of this chart. In other words, this chart didn't move up as much as it should have, because of why folks stimulus, the surge in disposable income is mostly associated with pandemic, related fiscal and monetary stimulus efforts and reduced household consumption arising from mobility restrictions and lockdowns.

If disposable income increases turn out to be transitory, as fiscal stimulus wanes and the federal reserve reverses its accommodative monetary policy, recent patterns in this chart may prove to be less useful for determining a bubble. In other words, in other words, this chart may be overly conservative. So now you have these three charts here, where the federal reserve is saying, uh-oh red flag, starting to see a little bit of a sign of a bubble, mind you again, this is only taking data from q3 2021.. This is what i hate about like this.

Research is sometimes they're, just they're behind they're. Behind the curve like i try to be at the forefront of the curve, but this is corroborating the shift that i'm seeing right now, especially with interest rates and softening in the market already. Okay, anyway, number two. This chart right here with price to rents.

The number one chart, of course, the real house price sign of exuberance again price to rent over here, and then this conservative chart about price to income. Okay, interesting and so then they talk about how hey look. We've had a lot of reasons here for prices going up low interest rates, supply chain disruptions, stimulus, programs and prices that have been fueled by a fear of missing out wave of exuberance. Now they do say bottom line in terms of a correction and then i'm going to talk sort of about my opinion here and - and this is also kind of aligned with what i've said they say here based on president present evidence.

There is no expectation that a fallout from a housing comp correction would be comparable to the 2007 to 2009 financial crisis. This is where values went down 40 right in terms of magnitude and gravity. That's because household balance sheets are in better shape. Credit scores are in better shape, borrowing everything's in better shape right, but that a housing correction could still come and we've got some red flag indicators here now.

Here's something that we talked about with course members this morning and we regularly have these sort of deep dive discussions. Consider this really quickly. If you bought a house for 350 000 and your equity in that house was thirty thousand dollars, you put thirty thousand dollars down when you bought it and ignoring principal pay down here. Let's say that house is worth six hundred thousand dollars down well folks, that would mean you have two hundred eighty thousand dollars of equity in this property right.

Well, what happens if the housing market doesn't go down? 40, like in 2008, right, let's just say, the housing market goes down 20 percent. Well, a 20 reduction would mean you've lost 120 000. That doesn't mean your net worth went down twenty percent. In fact, your net worth just went from two hundred eighty thousand dollars down a hundred.

Twenty thousand dollars went down to a hundred, sixty thousand dollars for your equity in this property, assuming this was all you're not worth here right. That actually represents about a forty percent decline. So look at that multiplier. I mean it's the same thing in stocks when you're using leverage right, but your your equity is evaporating substantially faster.

So a 10 decline could divide, evaporate your equity by 21.5 right just as an example, and so that has implications to how people feel about their own personal wealth and how much they're willing to spend, and that has potential implications for stock earnings right. So so what do you do in this scenario? And uh federal reserve basically ends up just by talking about how these are warning indicators? Okay got it so so what do you do in the scenario? Well, at this point it does seem a little bit late to to refinance. So, in talking with course, members i sent alerts that i was refinancing as much as possible, starting in the third week of january in the first week of february, and then that was potentially also a time to start selling some properties. But i'm not a big fan of selling properties unless you have a better opportunity to go to i'd, rather potentially take a little bit of that equity out and have it ready in the event, i can go shopping for more real estate right now.

It's gotten a lot tougher to do refinances now it might be a little too late, because rates are already so high, so it might make more sense to do nothing now, i'm not also a big fan of selling, because if you sell you're, probably gon na you Know take a you're already gon na take a beating on rates being higher and you're, probably looking at somewhere between seven to eight percent in selling costs, repairs, commissions, escrow, title all this crap and then we're gon na potentially pay taxes and then we're gon na put The money right so unless you have a solution for all of these things, taxes where you're gon na put the money, you have a better opportunity and you wan na try to time the market. It probably doesn't make sense to actually do anything now. While i can't give financial advice being a real estate broker, ironically, we can actually give real estate advice and and in this market, if i were to give real estate advice to a client, i would say, hey look. I don't necessarily think it's a terrible time to buy, but i would hold for good deals if i found a good fixer-upper, something that could insulate me in the event that there was a somewhere between a 5 to 15 percent drawdown in real estate prices over the Next, 18 months during the fed hiking cycle, i would want to be prepared for this, so i would only want to see somebody going into real estate who could withstand that kind of a shock.

You know something like this is going to put them upside down because they're they're doing you know hard money, loans and they're yolo betting that that everything's going to be fine, then i then i'd be a little bit more nervous. I would want to make sure that i'm insulated against this kind of potential downside, but it's also entirely possible that the fomo cycle continues, and this is where we don't have a crystal ball. We can't guarantee but look how long the fomo cycle lasted over. Here i mean quite frankly, if you just - and this is, if there's an upshot - i mean look at this.

If you took this section over here, well, what if you compared that to like 98 to 2 000. - maybe that means the fomo cycle keeps going for another six years and we're nowhere even close to tops right. No, i mean, if you overlay rate hikes uh, who knows maybe that changes your opinion, but these are things to be aware of and if you ever want to ask questions directly to me about real estate check out joining those courses on building your wealth link down Below and folks see in the next one thanks so much goodbye.