Hey everyone kevin here in this video we're going to talk about exactly how much real estate prices are going to fall in the future. Now you might think it's crazy wait. How can we determine how much home prices are going to fall? Well, i'm going to show you with a rule of thumb in this video and some new insight that we just got yesterday, and this is very important. But first we've got to look at something that is becoming an inflection point in real estate right now, and it has to do with slowing down home sales and slowing down price appreciation.

Now this is not necessarily a bad thing. This is something that you would hope and is actually something that is natural around this time of year. In fact, let's start there, let's start at the redfin data center, it's very normal that after the summer we get a slowdown in the amount of new listings, especially as children go back to school. The red line here is 2020, which i think is a little bit of a a weird year.

We should say, but otherwise you see here in 2019 and 18, a consistent downtrend right around the time that school starts in terms of new listings. But what we also want to keep an eye on are median sale prices, and here what you'll notice is around this time of year, you usually have a moderation in prices or a decline in prices, and that's exactly what we're seeing here ever so slightly. The median home price sort of peaked around 361 thousand dollars and we're down just about one ish percent to about 358 thousand dollars at the same so so, in other words, good to sort of take a little checkpoint there and mention we got less properties being listed And the properties that are selling are starting to sell for a little bit less, even though less are coming on the market which oftentimes has been associated with well, if less listings are coming up in the market, that means more of a supply crunch right. But if we've got less listings coming on the market and we're seeing a little bit of a slowdown in pricing, then that's generally a consistent sign that prices are softening a bit.

We do the see. The same thing here in pending sales would make sense that pending sales would rotate down around this time of year, so this is pretty natural. Most important one to pay attention to here is the slight inflection point in this moderating of prices: we're not consistently going to the moon anymore, like we were really since uh, i mean january of this year and much of the end of last year. We saw a good bump, as well with the exception of really november december, when real estate does often also slow down okay.

So what does this have to do with the future? Well, in addition to seeing this sort of moderating in prices here on the redfin data center or in articles such as this one from reuters, which mentions that this is as of september 22nd. So this is a yesterday article. Don't worry this information you're going to get in this video is still going to be timely, even if you watch this in the future, but it does say here: existing home sales fell two percent in august. Housing inventories declined at 13.4 from a year ago and median home prices increased they're still up 14.9 from a year ago, but we're starting to see that inflection point right see.

The report from the national association of realtors wednesday showed the smallest share of first-time homebuyers. In more than two and a half years - and we are seeing a moderation in existing home sales, reflecting some easing of the buyer frenzy - okay, this makes sense. So what does this have to do with prices in the future, and how do we calculate how much real estate prices could potentially fall in the future? All right? Let's answer both of those questions, so the first one that i'm going to tackle is i'm going to give you information. That's going to help you recognize, ah, okay, so this is where we're potentially going to get some softness in the real estate market.

It has to do with interest rates and bonds, so mortgage rates in real estate are at record lows right now, but when the 10-year treasury bond rotates to the upside mortgage rates tend to go to the upside and we had a little bit of what we're calling A delayed taper tantrum, the federal reserve, said on wednesday that they do not expect to start tapering or reducing support for the economy until november. But then, at the end of next year, they're going to increase interest rates and even though we're not going to see that interest rate increase until the end of next year we're starting to see that movement in the treasury market already. This is the 10-year treasury market. Right here, this is what it looks like, and you can see on this one-month chart here that we're peaking at the highest level here in the last one month chart i'll remove myself for a moment here.

At about 1.43 now we've been much higher, as inflation fears were higher in earlier parts of the year, and so you can see we're really just starting to finally trend back up, but watching this is going to be a big indicator, because mortgage rates will rise and As mortgage rates rise, home affordability goes down now. That is a very, very important piece of the puzzle right here and that helps us understand how much real estate prices could come down. So what else do we know, as in terms of why we're starting to see the spike here in the 10-year treasury market? Why are we seeing this again and why did real estate prices not collapse earlier in the year when the 10-year treasury yield was higher? Well, very good questions that i kind of just asked myself. This particular rise here in 10-year treasury yields is worth noting was a very temporary cause.

This was based on fears of inflation, not longer term fears of rates going up, and so this was mostly a movement that impacted the stock market, specifically tech related stocks or kathy wood style stocks. This over here is, in my opinion, less concerning right now, the stock market and more concerning to the real estate market, and the reason it is is because of this year from the federal reserve. Now this is a little bit messy, so i'm going to erase this a little bit and we're going to clean this up together right here, the federal reserve is projecting that interest rates will have their first increase of about a quarter of a percent. In the second half of next year, that's what this change from basically zero to point three means uh and uh, and you can see right here.

These are the dates. So i'll do a quick, little cleanup right here. There you go. You got the dates here! 2022.

2023. 2024. Right previously, we didn't have projections for 2024.. We had nothing here.

We had 0.6 here for 23 and we had no increase for 2022.. Now we're expecting to see an increase in rates in the second half or 2h. We call that second half of 2022 and then another two rate increases in 2022 and then more rate increases in 2023.. So what can we now expect in terms of real estate prices and how quickly do these these change here? Well, let me show you that really quickly, but first quick note if you, like the information in this video, consider checking out my programs on real estate, investing do-it-yourself property management or real estate agent sales.

There are also other programs, i'm making youtube videos and stocks linked down below, but these three are very, very popular for real estate investors, because you get all of my experience as a real estate broker real estate lender, contractor property manager and real estate investor. All combined in these programs so that way, when you're negotiating deals, you're negotiating loans, you're doing refinances, you have questions whatever these programs are your encyclopedia building wealth with real estate check those out link down below. There is a coupon code that is expiring friday. It is in the description down below and then pricing will be going up to understand, sort of the federal reserves rates, and this isn't so terribly important, but i'll go through it really quickly.

This is where we sit right now with rates at the fed. These are different from mortgage rates. 10-Year treasury rates are different from mortgage rates as well. They just tend to go in the same direction.

Well after we get our first bump, we'll be at 0.25 to 0.5. So this is going to be what we expect to see in the second half of 2022. Then we're going to see 0.75 to oh sorry, we're going to see 0.5 to 0.75. This is going to be 2023.75 to a 1 23 right here and then we might see an additional three rate increases here in 2024.

So 2024 might look a lot like 1 to 1.25, 1.25 to 1.5 and then 1.5 to 1.75. This is approximately the sort of schedule of these increases that we're expecting that's at the federal reserve. This is going to push up the 10-year treasury yield, or at least that is the expectation and expectations can get fulfilled by people who trade this market. If people think that this line here is going to go up, then they can short treasury yields, because as prices go or short treasuries, that is because, as prices go down in the treasury's market, which would mean their shorts pay off yields go up.

Okay, that technical part doesn't matter so much. What really matters more is that you know there's a direct connection between what the federal reserve is doing, the impact that is going to have on the treasury market and then the impact that is going to have on mortgage rates. So let's now take a look at a chart of mortgage rates and let's do a little bit of calculating, so we can kind of see all right. What do we think is potentially going to happen to those real estate prices over time? All right, so here's a chart of mortgage rates, so you can actually see when those treasury yields shot up here in february to april.

We did see mortgage rates go up, but they are still at record lows right like who cares it's 3.13 versus the 2.86. Now, like big deal right, that's not that big of a movement. So what is a recent example where i was also making youtube videos about the federal reserve, increasing rates and potentially hurting the real estate market, because mortgage rates were going up. The answer is 2018., so we're going to jump on over here to a five-year chart and we're going to look at 2018 this summer of 2018 specifically, and what we want to do is also pull up the fed funds rate.

We can do uh fed reserve st louis right there we go and we're going to go ahead and put this rate chart up next to this. So this here is the fed funds rate. This is what i was talking to you about, and this is where we sit right now at essentially zero, and you can see the fed funds rate got regularly pumped specifically over here, because this is the last time we started really raising rates was in 2016 in 2017 more aggressively in 2018, but the market had a pretty severe reaction in the summer of 2018 going into 2019, and so what happened? Is the feds stopped raising rates and then eventually lowered those rates before we even got to the pandemic? When we hit the pandemic rates, went to zero, but the fed slowed down on their rate increase and then actually reversed before the pandemic, because they had gone a little too crazy with raising rates too fast, and over here, you could see that play out in mortgage Rates mortgage rates went up from three point: eight three percent to a one point, a high of over one percent - more until, of course, the fed reversed course they lowered their rates. They chilled out a little bit and we saw those mortgage rates come back down.

Okay, so how does this affect real estate prices? Well, here's the thing: there's a rule in real estate called the rule of 10x for every one percent change in a mortgage interest rate. We would expect - and i'm going to spare you the math for doing this, but you can fact check this yourself by using a mortgage calculator and play with the payment just remove things like property taxes and insurance and things like that. Just look at principle and interest and change the interest rate by about a percent and then consider how much of a difference in price you have to have to change the affordability of that property. Usually - and this is rough - but but it's pretty close and tends to be pretty consistent, usually when rates go up, one percent on mortgages, which is obviously pushed up by the fed funds rate which pushes up treasury yields right then real estate uh prices tend to go Down by about 10, so rates go up.

One percent prices come down about 10 when we had that surge of rates about one percent in the real estate market there. In the summer of 2018, we saw real estate prices tank about 12. In a matter of eight weeks it was crazy. I was actively selling real estate and dealing with that price drop every single day like it was so in my face, but anyway this one percent increase in rates reduces affordability by 10 percent.

All right. So how do we compare this to what we've got going forward? Well, we set this all up to come to this conclusion. Right now we saw real estate prices. Do this now we're seeing real estate prices level, which means we might be at a more potentially normal priced real estate market with rates stable, where they are at? Let's just say, one percent growth per year.

Just because we've had this incredible run. Let's say we level out at about one percent growth just for the next couple years as people or maybe even five years. Who knows, you could have slower real estate appreciation going forward now for the next few years, as people start being able to afford pricier homes and actually get into these by their wages going up their incomes going up their savings, going up more inventory coming on the Market, whatever right so, let's say we're expecting uh, you know to level out for the rest of the year or maybe the next 12 months. That's something more like a one percent real estate, appreciation rate or you know what let's be generous.

Let's call it three percent appreciation right, fine, doesn't matter so much. What number we're looking at here we're trying to figure out how much of a difference we're going to have so this is what's called your tailwind when you have price appreciation, that's a tailwind right that pushes prices up, but now, if the federal reserve is going to Bump interest rates we're going to get a headwind now we expect the first bump of about a quarter of a percent to come, the second half of 2022 and the last time they raised rates about a quarter of a percent was in 2016., and we could see That right here, you could see this bump from november of 2015 into 2016. had about that quarter of a percent bump in the fed fund rate that translated over here. Oh, it looks like you need a trial over here to get in past the five year chart.

Well, we're going to skip that right now, so instead, let's just look at a different bump here. So let's go over here to november 2017, and here we got a different bump. So between november and december of uh, 2017 and 2018 we got about that quarter. Percent bump, so let's look at 2017 and uh november of 2017 over here going into the earlier part of the year right about here, feb looks like we had roughly a quarter percent bump.

Look at that december over here sitting at about 3.9 percent, beginning of the year sitting at closer to once we get to february 4.25 percent, pretty similar had a little bit of flatness uh before that uh it looks like mortgage interest rates were relatively flat here between July and november, and that's kind of what we see here as well, look at that july and november mortgage rates flat and that's kind of what we saw uh over here as well, this sort of flatness - and it's not always it's not always the case - that you're Going to because see here right, you can see between november of 2016, uh and july of 2017 right here you had a bump, but a little bit of an over push, see how quickly mortgage rates spiked up and then they kind of took a little longer to Come back up, but anyway the point is you're, probably going to see about that quarter of a percent mortgage rate increase. Sometimes, though, if the market fears that it's going to be more aggressive, the market might try to start pricing in things a little bit too fast too early. So you could actually get a worse over correction and that's kind of what you saw here and why you got a little bit of that trickle up or trickle back down here before you move back up again, but anyway, the point is see about a quarter of A percent move at the fed, probably going to correspond to a similar quarter percent move in mortgage interest rates unless the market gets fearful rates, go up even more, which is possible okay. So now, let's go back over to the ipad here and translate that let's say real estate prices are moving up three percent a year, and now we get our first bump in the second half of 2022.

We get a point two five percent bump. We would expect real estate prices to actually go down two and a half percent, which means we basically eliminate roughly eliminate our home price appreciation just with that one bump now, as we mentioned on the prior page here, we expect in 2023 two more bumps well, this Right here could be representative of an additional five percent decline, but we'll be in 2023, so maybe there'd be another three percent appreciation. We might end up in 2023 with negative two percent real estate pricing and we get to 2024. They keep pushing rates and we get another three moves there.

That would be like a seven point: five percent headwind minus that three percent uh a tailwind pushing up prices. We could see a potential four and a half percent decline in real estate prices, so this just gives us a quick sort of rubric now. The big question is: what is that - and this is the part that we do not know the answer to okay. We do not know the answer to what this uh this supportive tailwind number is going to be see if we draw a sort of a schedule out here in terms of what we just drew, we saw uh if we're at three percent of an increase per year.

In let's say: 22: 23 24. We do three percent each year. Here we saw that we're going to have those potential headwinds of seven and a half percent two and a half percent here with the one bump and a minus a five percent over here. That would be a uh net roughly net positive over here, but here we'd be losing in pricing right.

That's what we just did what, if, though, because of the eviction crisis and more houses potentially coming on the market, which home listings are slowing down right now, but you've got an eviction crisis. You've got this potential that maybe people think the real estate market has topped. Then it's time to start offloading some real estate you've got some other concerns that could come to real estate. What if we don't get that top line movement of home pricing having a three percent tailwind? What if, instead of a three percent tailwind, we stayed flat at zero percent growth, because people are tired of paying the higher prices or we get more inventory or whatever we get to a more balanced market, whatever that reason might be well now, if you have no Tailwind of three percent appreciation per year and the fed's going to raise rates up through about 2024 and then supposedly they got ta wait there.

Then we can actually see real estate prices decline, two and a half percent in 2022, five percent in 2023 and seven and a half percent in 2024 until stabling or stabilizing again, which would mean a lot of this big run that we had over the last year. Could go away, so let me give you an example in terms of what this might look like in terms of housing. Pricing hop on over here. Do a quick calculator.

Let's say: prices come down, we don't have any tailwinds at all, no appreciation zero percent, and so housing prices go down, uh two and a half percent uh. That would bring us from seven hundred thousand dollars to six hundred eighty two thousand dollars. We come off another five percent that would bring us down to six hundred forty eight thousand dollars and if we come off another seven and a half percent point nine, two uh five there we go that would bring us down to five hundred ninety nine thousand dollars. We could literally see a seven hundred thousand dollar house, become a six hundred thousand dollar house again in the next three years, because solely because of natural action by the federal.

Well, it's not natural action, but action by the federal reserve leading mortgage rates to go up. It's nothing natural about it and again the only thing that prevents that is the real estate market, having a tailwind and ideally a stronger tailwind. For example, let's say we had a four percent uh tailwind real estate was expected to appreciate four percent. Well, let's play this out, so real estate goes up four percent in 2022.

Now your 700 000 house is 728 000, but we got that five percent headwind. Now we're going down one percent in 2023 and the year after that we'd be going down. Let's say four percent uh tailwind: again we take off a three and a half percent loss that difference between seven and a half and three that's three and a half percent. So nine six, five point that would bring us down to about 695 000.

So you could literally see real estate pricing be flat over the next three years, essentially because of this action by the federal reserve. I think it's it's pretty blatant and simple the way this works uh. I don't want to oversimplify it, though, because there's so many more factors at play. A big factor, that's also at play, is, and we've got to recognize this is there is a housing shortage.

We uh have about about a five million home housing shortage. That is, we need five million more homes when we created, i think we created. This - is somewhere around 12 million new households, uh and uh. We've only created about seven million homes for those folks, in that same time, frame, that's a huge shortage and housing and construction are very slow.

Building permits are very slow, it's impossible to build in california. It's obviously not impossible, but california is hugely failing at providing more homes but you're having the same issue throughout the country. You've got input. Cost inflation for materials for building you've got a labor shortage.

You know who's graduating high school today going hey. I want to be a you know, contractor not as many as people who want to be. You know, programmers or or maybe sales people, so you've got big big issues in how much housing stock we have and that lack of housing is what gives us our tailwind. That's what gives us that potential three percent of four percent appreciation per year, but you can see with the federal reserve's actions here we are going to have some issues coming to real estate pricing and it's just better to know that now and personally, i think - hey, If you can start refinancing some properties to lower interest rates now, uh now is probably the time to do that worth mentioning, so you want to refinance recommend doing that sooner rather than later, anyway.

Folks, thank you so much for watching this video. If you found this helpful, consider subscribing to the channel and check out the programs linked down below on building your wealth, including uh programs on property management, real estate, investing and folks, we will see you in the next one goodbye.