What's up everyone? It's Tom And today we will be talking about the U.S housing market and more specifically about the possibility of a real estate crash in the US, which some experts claim may end up being as one of the biggest in modern history. Home sales in the U.S are quickly approaching the lows of March 2020.. home sales volume in the US dropped 7.7 in November alone. Now, there is a seasonality in home prices in the US with families moving primarily during the summer months as you can imagine.

So this is why winter time is usually the off season for Real Estate. But here's the problem with that valid argument. you still have to consider this: Home sales have declined in the US for 10 straight months, including the summer months. For a drop of 35 year over year, this is a 10 month decline.

The longest stretch we've seen in the past 25 years, and home prices will drop in December as well. so this trend will persist now. The last time we have seen similar numbers in new home sales was in 1999 just before the 2000 crash, so we know that sales volume in the US is dropping like a stone, but prices are still holding up nicely. The median sales price of houses sold in the US in the third quarter was 450 000, which is pretty much identical to the second quarter of 2022.

So everything is fine. Well, not exactly because these figures they got to be taken in context. in February 2020. right before the pandemic, the median price was 320 000.

Within one year, it jumped by 20 to 380 000. It jumped almost 20 percent in the following year as well to 450 000, which is a 41 increase in just two years in the median price of all homes sold in the US. But then all of a sudden, between the second and the third quarter of this year, the curve went absolutely flat. Prices have not gone up and the first time in two years.

Now for those of you who can't see it, this would be the textbook example of how a housing crash starts. Not saying that it will happen, but this is how it happens when it happens. First, you get a bubble. we got that with a 40 increase in real estate prices in two years.

Then you see a decline in the volume of sales as interest rates start climbing which we just got. Then prices start to flatten which also just happened. And then as prices start dropping, all hell breaks loose as sellers are stampeding to the doors trying to get out with something. Now if you've been following my channel, and in case you haven't, here's an opportunity for you to subscribe right now because you're going to get a lot of interesting stuff like this.

A few weeks ago, I Talked about how Blackstone the largest private read in the world is now limiting redemptions from its 70 billion dollar real estate fund due to massive surge investors trying to get their money out. Here's what I didn't show in that video and this is an even bigger issue. It seems that Blackstone was not an isolated case at all. right after Blackstone Starwood Capital If 15 billion dollar fund and the second largest private rate in the world also notified investors that it was restricting withdrawals similarly to Blackstone.

Now, the data shows that the rest of the private REITs are in the same boat as well. Just a year ago, during the fourth quarter of 2021, privately held reads paid out 380 million dollars in redemptions. One quarter later, it went up to 880 million, then to 2.8 billion. and finally in the third quarter of 2022, we had 3.7 billion dollars of redemptions from non-publicly traded.

REITs That's a 1 000 increase in withdrawals from private real estate funds within less than a year Nine months and the trend is only getting stronger. So why are investors of top of the line real estate funds are taking out their money? And why are new home sales down 35 year over year? More importantly, does this mean that the next Real Estate crash is now inevitable? Well, you're not going to like my answer, because what happens to the real estate market is going to be heavily impacted by the monetary policy of the Federal Reserve at least in the next couple of years. Generally, they have an inverse relationship, meaning that when one goes up, the other tends to go down and vice versa I'm sure you all have friends like that now. Low interest rates have always been very accommodating to mortgage takers.

It's quite simple, right: when interest rates are low, potential home buyers get to borrow more money at a cheaper rate, which naturally drives up demand for housing and increases prices. This party mode causing the housing market to absolutely unhinge from fundamental analysis and valuations has to end at some point, because like any other party, at some point it has to come to an end. And that end usually happens when the script flips and the interest rates start climbing. Then the borrowing becomes much more expensive, which reduces demand and drives down real estate prices.

Now, when Paul Volcker took over the chairman of the Federal Reserve in 1979, the United States was battling one of the worst cases of inflation in history. Volcker believed that raising interest was the necessary evil. It would make borrowing more expensive and will surely slow down the rate of economic growth in the US, But it would also reduce inflation significantly. So he kept raising and he kept raising all the way to 20 interest in 1981..

Now Volcker's actions made him an absolute Legend. The rate of inflation, which was at around 13 in 1971, fell to just three percent in just two years. Although the US actually went into a deep recession in the early 80s, Paul Volcker is still widely regarded as having saved the US dollar and the economy, but re-establishing The credibility of the Federal Reserve. So that raises the question.

What happened to the real estate prices during those years of elevated interest? Well, during those few years, the average 30-year mortgage in the US went up to a whopping 18 in 1981, which is three times higher than the current rate of 6.8 percent. Now, data from the National Association of Realtors Existing Home Price Index shows that the median price of an existing home in the US during those times declined by 25 from 1979 to 1982 25 Now existing home sales during those years declined from a peak of six and a half million in 1979 to 3.5 million in 1982. It declined of 46 in volume. Now, there are plenty of other examples, but you get the point: Interest rates have and always had a significant impact on the demand of housing, the number of property sales, and naturally home prices.

One might argue though, that the Paul Volcker days were too extreme for us to draw any conclusions about what's going on right now, because Walker was, you know, the most aggressive Fed chair in modern history and Pal is the transitory guy, right? How can you even compare? well? let's test this assumption with actual data. In his tenure, Volcker raised rates by nine percent. In two years, that's a four and a half percent increase per year in average. Now how different is pile from that? Powell Started with zero percent in the beginning of 2022, and he ended it with 4.25 percent.

Not that much different at all. In fact, the current pace of interest rate increases is the fastest we have seen in the US since Volcker: Faster than 1988, Faster than 94, Faster than 2000, Faster than 2004. Definitely faster than 2015.. So I would say there's a hell of a lot of similarities between Volcker and the 1981 era and the current 2022 situation.

So unless the Federal Reserve dramatically changes its policy and decides to ease the pressure 2023, we're headed into a very, very similar real estate market that we got in 1981 when it dropped 25 percent. Now, the question is How Likely is the Fed to slow down its current pace of interest rate increases? Because the current rate is the highest we've seen in 15 years. Inflation is slowing down, so there is a chance that we are at the tail end of this. but it's as much of a chance as the Miami Dolphins winning the Super Bowl next year possible, but extremely improbable.

Why? Well, we're still a long ways away from being back at normal. Inflation did come down significantly over the last half of 2022, going down from 9.1 in June all the way to 7.1 in November. But it's simply too little too late. The current seven percent inflation rate is still a multi-decade high and remains three and a half times higher than the two percent inflation fed is actually targeting.

So unless the FED will accept a high rate of inflation as normal, Dropout will continue to be extremely aggressive. now. The current interest level is the highest since December 2007. And it seems to be just the opener of what's to come in his December speech John Powell The guy who makes car salesmen seemed credible and whose sole purpose is to sugarcoat the situation said that he expects two percent inflation to happen in 2025..

So at the most optimistic scenario which he's peddling, this means High interest for another two years from now, and as long as the Federal Reserve keeps raising interest at the fastest Pace In the last 40 years, the housing market will continue to be squeezed by higher mortgage rates. The average rate on a 30-year fixed rate mortgage right now is 6.8 percent, the highest since 2008, and double than what it was just one year ago. And with higher interest rates in 2023, this means one thing. This is not getting any better in 2023, or anytime soon.

at least not for the housing market. Having said that, you might think that I'm gonna say that the market crash of Epic Proportions is absolutely unavoidable, but that's not exactly the case. I'm going to surprise you, a real estate market slowdown will happen. This is a foregone conclusion at this point.

It will go as far as the FED will take it with its restrictive monetary policy. I Just showed you how. But will we see a 2008 level of Crash Not very likely. You see, there's a lot of backstops that should prevent a real estate slowdown from developing and graduating to a full-on massive real estate crash.

Lending standards have become much tighter. Following the lessons we learned in 2008, we don't have a lot of bad loans out there like we did in 2008. In the final quarter of 2021, we had one trillion dollars of new mortgage originations, with 67 percent of borrowers having a credit score of about 750 and higher. Add that to the fact that the majority of homeowners have locked in rates at about four percent or less.

Even if prices fall, most of these existing borrowers will still be fine. They'll be able to pay their mortgages, not to mention the fact that more than one-third of U.S homes are owned with zero mortgage. Now this scenario is very, very different looking than the one. I Remember from 2008 and it seems to have a lot of safety mechanisms preventing a massive crash.

Also, if you add that to the fact that we have a supply shortage right now in the US, you're probably more likely looking at a drawdown of anywhere from 20 to 25 like we've seen the vulgar days than the proper full-blown market crash in real estate like people are advocating for Now I'm not one to sell you drama just for the clicks. I'm the one to give you nuanced analysis and the truth is, nobody really knows, including myself. but these are the facts. This is the data.

All I'm here to do is give you that so you can decide for yourself. Now if you enjoyed this video and you get some value out of it, I Would really appreciate it if you hit the like button and more importantly, subscribe to the channel every subscriber counts. Thank you so much! And if you want to join our community it's five dollars per month. You get to join our Discord Our Patreon would love to see you there.

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