Will the housing market crash, or has war in ukraine delayed this well in this video we're going to talk about just that? Look in previous videos on the real estate market. We've made it very clear that as interest rates come down, individuals purchasing power goes up, and that means people can afford to pay more for homes to get in. That leads prices to go up which, which ultimately leads more people to say, wow. I should get into real estate because look prices just went up double over the last seven years or 20 within the last year.

I'm missing out fear of missing out it's not a good feeling, so people buy before the feeling that prices might continue to go up. But what happens if interest rates start going up a lot of folks point to this 60s and 70s and say: ah, when interest rates go, while prices can still go up problem with comparing to the 60s and 70s is? This is really when the 30-year mortgage started? Taking 10 down payment loans and 5 down payment loans and even as low as 3.5 down payment loans, so sure, while wages went up and interest rates went up and there was a lot of inflation, home prices still went up. It could be entirely related to the fact that loans were a lot easier to get. You could qualify for a lot more money in the 70s just like today, you could qualify to pay more for a house because interest rates are lower.

You could still do that. Three and a half five 10, 15 20 down. If you want so it's really uncertain in terms of what happens when interest rates go up, are we definitely going to see home prices go down generally? The only thing we can point to is actual math, and that is without any changes in our policies, that is, we're still doing 30-year mortgages. We're not making loans easier or harder to get assuming loan standards stay flat, unlike what happened leading into 2008 right in 2006 and seven loan standards got loosened and even though we were walking into a recession partially caused by this housing, madness home prices ballooned.

Why? Because it was easier to get a loan, and so this is why sometimes looking into the lens of history is so complicated, because truly this time is different in the 60s and 70s loan standards changed in 2004 to 2006 and seven loan standards loosened both these instances. You had loan standards loosening leading to prices going up, but the only thing that's really led prices to go up over the last 12 years has not been lone standards getting looser if anything, they've gotten harder through the dodd-frank act and many of the other regulatory reforms. After the recession to try to prevent the great recession from happening again, the only thing that's actually happened has been. Interest rates have gone down, so the question is: with loan standards stable and interest rates going down.

We obviously expect home prices to go up so now, if interest rates go up which they have been going up, they ticked up substantially from about an average of 2.7 to an average of 3.7. That's one percent in just the last three months. Is it possible that home prices will start coming down? Well, this depends again, it always depends. First, it's worth noting that with basic basic math that you can do on a mortgage calculator, we find that purchasing power tends to go down about 10 for every increase in 1 interest rates.

So that means if interest rates go up. One percent people's purchasing power goes down 10, but that does not necessarily mean real estate. Prices have to go down 10 so drawn out. This is very simple: when we go from 2.7 interest to 3.7 for an average 30-year fixed, that should lead to a decline of about 10 in prices, but that doesn't really work when at the same time, you have so much demand that you might actually have demand That outpaces supply by let's say 20, so now you're only really reducing some of this, some of the cream off the top by 10, but you still have more demand than you actually have supply, so prices can still trend up.

So it is my opinion - and this is where it's very important - that we talk about and make it clear. This is my opinion. It is my opinion that for us to actually see a shock to real estate prices - and after i tell you this opinion, i'm also going to tell you how to potentially insulate yourself from no matter what happens for us to actually see a shock to real estate Prices, we probably need to see interest rates, go up a total of about two and a half percent. That way interest rates would go from december of 2021 of about 2.7 percent december 2021..

We'd see interest rates all the way up to a new level of about 5.2 percent, which sounds really really expensive, but we're not too far off of that i just refinanced a few investment properties at 4.25. Investment properties tend to have a higher interest rate anyway. So we're not that far off of this, with treasury yields currently sitting at about 1.9 on the 10-year treasury and historical treasury yields sitting closer to 3, which mortgage rates tend to track or follow. At least we can easily see that additional move from where we sit.

Now, 3.7 to 4.7 and potentially even 5.2. If this happens, then we would have seen about a 25 move in uh purchasing power to the downside, so this would represent minus, because interest rates went up 2.5 percent. This would represent a minus 25 percent purchasing power movement for home buyers. That is substantial.

In my opinion, that is the level where we get to actual negative real estate appreciation, and this is where some interesting things are going to happen, and this is, of course, where we have to talk about how to insulate ourselves. If the federal reserve needs to continue to raise rates at a high at a pace of about 25 basis points every about six weeks, it's probably going to take us about nine months to a year before we actually get to that sort of level. Now that 25 basis, point hike does not directly correspond to mortgage rates. My guess it's going to take us about nine months to 12 months to actually get to about 5.2 percent real estate interest rates.

The longer it takes the better and the more smoothed out. Any kind of potential pain would be and the more balancing we get between supply and demand. Now the big issue, in my opinion, is this: if we end up getting to an average of a 5.2 percent mortgage rate, even if it's just temporary somewhere between a year to two years of these elevated mortgage rates, while we wait for inflation to head back down And the federal reserve then eventually to u-turn back down and we start seeing interest rates come back down while we wait for that to happen, it is entirely possible that this negative 25 burn to borrowing a recession, of course, to real estate prices could end up offsetting That anywhere between, let's just say, excess demand of 15 to 20 percent of excess demand in real estate prices. This this gets washed by the pain of real estate prices coming and potentially seeing that purchasing power compression of 25 and then, where things get really interesting, is when we have the first reports of negative real estate pricing.

Honestly, even if it's just prices falling one percent, one of the big things that happens when real estate prices start falling, they just slightly start you turning down. It starts with one percent turns into five percent. One of the big things that comes out of this is all of a sudden fomo dries up. You go from a seller's market to a buyer's market, because buyers no longer fear missing out because the longer the they wait, potentially the lower prices end up getting.

So, while these percentages are really just used as an example here, the point is when we hit the moment, where cnn and fox start talking about falling real estate prices, because interest rates have gone up. Whenever that happens, the likelihood of us having a seller's market still will go down. We will see that buyer phone will evaporate. Buyers who are on the fence are more likely to be patient buyers who are in deals or negotiating or likely to dig their heels and more, and that means we're likely to see a reiteration of median home prices come down, and this is where there's always the Concern of is there a risk of investors who ultimately believe in let's say two three, four or five years that inflation will be transitory? Is it then possible that investors who are buying real estate like hedge funds as an inflation hedge, say, you know what we've peaked on pricing we're starting to see? Maybe inflation head down because rates are finally higher? Maybe now it's time to sell and we'll buy back in later, and so how do we apply this? Because that's obviously a potential downside risk here does not necessarily mean we're going to hit a recession.

Uh recession would be a topic for a totally different video. Obviously, if we had a recession, this would be this would have an accelerated odds of happening, but what we got to understand or think about rather, is how we protect ourselves. So, in my opinion, there are a few things to do. First, let's go through the scenario of let's say we are not homeowners, so we're not home owners or we do not own rental property.

In my opinion, the best way to insulate ourselves if we're thinking about buying real estate and we want to get real estate is make sure we do what i always talk about and that is buy a wedge deal, see here's the thing. If you're, looking for a property and you're trying to find something, that's staged a flip. It's move-in ready, it's new construction. I promise you, you are paying at the top of the market and i can look at the pictures and if it's clean and moving ready, you're paying top market prices, it's very difficult to get a discount when these properties are listed on the market.

If you get it off market before it hits the market, maybe you can get a discount. You get an off market deal. That could be a good opportunity, but let's say this is the chart of real estate prices right now, if, if this is where we are right now, you're buying right here, if the property is on the market, it's on the mls, it's on zillow it's on redfin. It's properly marketed it's properly listed and it looks move and ready you're buying there.

Now, if you can get a property, that's stinky and gross like let's say it's got: good windows and a good roof and a good plumbing and electrical system. But it's got old nasty carpet, it's got ugly paint or wallpaper or stains on the carpet. The kitchens and bathrooms or the old cabinets are kind of gross they're, a little sticky and stinky or whatever these are properties. You could usually negotiate under market value.

Now that does not necessarily mean you're getting it for less than this price. For example, i just bought a property for that was listed for 995 000 and i paid 720 000 for the property. Now i expect the property is going to be worth nine hundred thousand dollars, so i bought the property a hundred and eighty thousand dollars under market value or twenty percent under market value. Now i expect i'm going to have to spend about forty thousand dollars fixing it up, but that doesn't change the fact that i got the initial price, twenty percent on a market value and i'm still going to be up a hundred forty thousand dollars in room.

That is in potential profit because i bought a stinky and gross house. So it's okay to pay above list price, but you generally don't want to pay market or above market. So, for example, 20 below means. I'm really buying right here, and this right here is the wedge, because that 20 gives me insulation.

If i now am stuck with a 720 000 house plus 40 000 into it, and it's a 760 house and the real estate market drops ten percent. Now my nine hundred thousand dollar house is worth eight hundred ten thousand dollars, but it's okay, because i'm only into it for nine sixty. I still got a fifty thousand dollar cushion and that's why i like buying fixer-uppers and then renting those fixers out, airbnb them or living in them. Those are the best ways to insulate yourself, whether you're, not a homeowner or you are an investor now uh or not an investor.

Yet what is the second best thing that you could do to insulate yourself? Well, this is going to go a little contra to what a lot of people like to hear, but personally, i believe that, first of all, you should have no consumer debt whatsoever, no consumer debt, absolutely at all, but in my opinion you should have the max available Real estate debt re debt as long as it's covered by rents, that is, if you could potentially refinance a rental property and your tenant pays the mortgage for you or you're, paying less than 25 of your monthly expenses for your own home, and you could refinance that And that refinance is considered in that that is your your housing cost is very, very low. Then it's okay, in my opinion, to maximize your available real estate debt closer to the top of the market. Why would you do that? Well, don't do it to buy stupid stuff like a boat or a plane or a jet ski or new clothing or a vacation. That would be a big mistake.

Take the money and, if you're going to refinance it's very, very, very delicate. I hate recommending this because then people in the comments start saying stupid stuff like oh, you want us to take out debt going into a recession. That's so stupid, hello, it's very stupid to take out debt and then buy, spend it on stupid, stuff and walk into a recession. But if you take out cash and you park it somewhere, you're not going to look at it park it in a brokerage account somewhere and in the event the market goes dirty and now market prices fall.

You've got cash available to go, buy the dip in real estate prices come down 10. It's a lot easier for you to negotiate on deals because prices, maybe even only came down one two, three percent, but that fomo is gone. That's the time to strike! Now it's gon na be so much easier for you to get wedge deals because nobody else is buying those wedge deals, because people are a little bit more afraid. You know once and again we do not have to see a big crash.

I honestly do not think we are going to see any kind of real estate crash like where we see minus 35 anytime soon, like we saw in the recession or 45 percent for certain commercial or multi-family buildings. I don't see that happening, but i do think even a one to five percent drop. A little bit of a slow down would not only be welcomed for a lot of folks, but it's very very likely to lead to the reduction of that fomo and make it a lot easier to get in. So what are some things that you want to consider right now? Well, number one always patience! Okay, number! Two! You want to look for those wedges wedge deals number three! You want to eliminate consumer debt, because if you have too much consumer debt, it becomes impossible for you to qualify for the real estate that you want to buy anyway.

Remember you as an individual as an individual, have great opportunities to buy homes, especially considering the fact that you could bank hack. We talk about all the stuff in the real estate course that i've linked down below. We do have a coupon code expiring for those programs. In about a couple of weeks, anyway, you're welcome to check this out talk about all these different strategies, but you could bank hack again with a low down payment move in for a year and move on to the next one right.

But anyway, patients wedges get rid of consumer debt, and this is really advanced okay, so i'm gon na put pro only pro, only not to be confused that you know noobs start doing this. Okay, so if you're a noob, do not do this. Okay, this is where you take out uh the um, we'll call it the uh, the war chest yeah and that's the war chest of of good debt that is paid for by either your capacity to make payments on your own property or your tenants. Okay, so things to consider about the real estate market coming up now, it's also worth talking a little bit briefly about what we talked about at the beginning of the video uh, which is ukraine.

Okay, the crisis in ukraine is delaying this potential rise in interest rates and that's also very important to know so when the disaster ends in ukraine, it's likely that 10-year treasury bonds are going to jump again, wouldn't be surprised if we see 2.1 2.25 2.5 percent. Very, very quickly, we get a negotiated end of the war in ukraine. Those 10-year treasury yields are going to spike. Personally, i'm actually shorting 10 uh 20-year bonds right now, because i expect that uh, essentially i'm going to make money, because the value of these bonds is going to go down as yields rise now.

I know that sounds crazy and this kind of goes into the whole bond thing, but basically, as bond prices fall yields go up topic for a different video okay. Anyway, the point is i'm making a bet that we're going to see these rates go up. It will be delayed by ukraine, but i do expect it to come. I do expect it to happen, so stay tuned, buckle up and folks.

Thank you. So much for watching this video see you next time goodbye.