Hey everyone me kevin here, so i've been thinking a lot about the real estate market and what could the future of the real estate market hold and there's this really interesting question that came up, and it's taken me quite a while to do research on this, because It's pretty in-depth, but we've got all the answers that we're going to summarize here. So the claim housing doubled in the 1970s as interest rates doubled because wages went up, and so i thought this was really interesting, because really the conclusion there is inflation will make investors more rich and in theory, we've heard this idea before that real estate and i've Said this too, that real estate over time tends to return a little bit of a higher rate than whatever inflation is, which in some sense makes people look at real estate and say hey. Well, then, real estate must be an asset class that does well during inflationary times. So we did a little bit of looking into this and tried thinking okay.

Well, where could this go wrong or is it correct and the answer was quite interesting: hey gabe! What's our sponsor today extra if you want to also get into real estate, remember you need a great credit score, so go check out metkevin.com extra to build your credit score with a debit card that works. Like a credit card. You apply it to your existing bank. Account you don't have to open any new accounts.

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Real estate prices came down with the recession of the early 70s, but they only disinflated in 74 in 80 and 82.. All three of these being recessions, where real estate prices actually went up while we were in a recession and while we had high inflation. What happened, though, was as inflation went up and as interest rates went up, we just saw the rate of price growth slow, so prices basically went up less quickly. For example, if we look up year over year, i'll look back rather year over year.

Home prices are up about 20 percent. Well now we've got this high inflationary environment. Interest rates have gone up a bit. I would expect to have large headwinds against real estate prices going into 2023 and maybe 2024., but we'll talk more about projections, and is it possible that real estate prices could actually turn negative? We'll talk about that.

But first i think one of the big big conclusions and this is sort of a preconclusion, because there's a danger here, we're going to talk about one of the conclusions was from some of this initial research. Was that sure it is true that housing prices doubled, while rates were going up and inflation was high, but we were able to correlate that inflation slows home price growth or leads to a short-term decline in the event. There's a recession and if there's a recession, prices don't necessarily have to fall in real estate. Remember recessions: don't necessarily mean bear markets.

Recessions just mean that consumers spent less even just fractionally less than they did the year before two quarters in a row. So a technical recession does not necessarily mean you have a 2008 style housing bust, but there's a little bit of a problem with looking back at the 70s and unfortunately, this is where the data gets a little bit more complicated, where it's extremely difficult to parse. This out, but we're going to come to an ultimate conclusion here in just a moment, but we've got to look at the danger, so here's the danger fannie mae, freddie, mac, ginny may and uh to some degree fha, although fha was created during the new deal in The 1930s that most of these the government-sponsored enterprises they actually started loosening and simplifying requirements to get into real estate in the 70s, so in the early 70s to the late 70s. This is when we actually popularized the 30-year mortgage and well back in before the 1930s.

Nobody was even doing amortized loans, home loans were like short-term loans, just like a regular kind of car loan. Almost 30-year mortgage really got popularized uh after the 50s and then almost mainstream in the 70s. Take a look at what else happened in this in the 50s. In 1956, we got private mortgage insurance.

Now here's what private mortgage insurance is. Every time you buy a property with less than 20 down, you have to pay something known as private mortgage insurance. Basically think about it. Like this, let's say this is just an easy way.

An easy trick to calculate this. Let's say a lender, went to you and said hey. I can get you a home loan right now for 3.5 percent and you're like that sounds great. I, like it i'll, take it, but i want to put down 15 percent instead of uh 20.

So, let's assume this is 20 down. Well, they might say: okay, no problem. You're gon na pay a half percent extra in pmi to be able to put down that 15. Well now, it's as if your interest rate, because they're calculated the same way, though they're calculated independently.

It's as if your interest rate is four percent, so it was a little more expensive but you're able to get into home ownership uh for for less money down and usually the biggest impediment for people getting into a home, isn't so much the interest rate. It's usually the down payment, and so we didn't actually get private mortgage insurance to really enable loans under 20 down until 1956, and it wasn't until 1971, the start of this boom cycle that we got five percent down loans. And so now the data really gets skewed. Because now we take a generation of home ownership between the 1930s and 50s, where everybody's putting 50 i'm sorry everybody's, putting 20 down or they're just getting used to the idea of a 30-year fixed rate, fully amortized loan.

Now you get to the 70s and they say hey: why don't we just do 5 down which again just became a thing in 1971 at the same time as we were essentially at the bottom of real estate prices here in 1971, and so the question is: is It possible that real estate prices could have stayed above this black line. The black line here, meaning growth, anything below the black line, meaning prices. Actually, failure over here right is it possible that prices went up every single year because remember this is not a chart of accumulating prices. Accumulating prices.

Look a lot more like this. When you look into the fast, this is just the year-over-year gain that blue line there, and so why did they not turn negative? Well, it's entirely possible that home prices didn't actually turn negative, because we were now introducing uh a whole new cohort of buyers who yeah wages were going up, but that didn't necessarily mean people had 20 down payments. But you had more people able to buy homes with five percent down and potentially afford more expensive homes. Yes, because when wages go up, you can qualify for more, but that does you no good if you're, not saving.

So now americans were able to be consumers at the same time as homeowners with very low down payments. So now this really brings us to today, 2022, and so what's the potential going forward. Well, the big issue that we're facing right now is quite simple: we're facing high inflation and a rising interest rate environment in the environment, we're in right now we know that the 10-year treasury bond, which is something that mortgage rates tend to follow the 10-year treasury bond, Has gone to about two percent and at about two percent we have mortgage rates of about four percent and it's entirely expected that the ten year will eventually go to three percent, which will mean mortgage rates will be somewhere around five percent. Now, if this happens, so this is the ten year here, if this happens, we would expect at least an additional ten percent headwind in real estate prices, plus the fact that we just recently hit four percent.

So we're really looking at about a two percent interest rate shock in a matter of probably about six months uh and that's because interest rates went from probably somewhere around uh 2.88 and they might go as high as around 4.88. This two percent shock can translate to about a 20 decline in real estate prices. Now that doesn't necessarily mean that prices are going to come down 20, because prices could actually still go up 20 versus this down 20. Now you zero out and prices stay flat.

That explains why sometimes you could actually just see prices go flat and not actually go negative, even during recessions. Now, there's something unique, though: that's happened since the russia crisis, and that is that the 10-year treasury bond has actually become a safe haven asset. People who are concerned about the uncertainty of emerging markets or equities like stocks or investing in other countries or even other currencies are fleeing in at least in some part, to the 10-year treasury or other treasury bonds, and when people flee to treasury bonds. What they do is they actually drive the yield on the 10-year down.

So, even though we recently hit two percent we're expecting to hit three percent right now we're trading around 1.88, so we've actually dropped a little bit. So my expectation is while the russia, ukraine crisis, evolves. We probably won't see massive headwinds to real estate, maybe a little bit of a slowing, but probably not massive headwinds when we start getting back to this 10-year treasure - and maybe we get peace in in ukraine which, let's pray to god that happens and everything chillax is With russia, it's quite possible that we could start that path running back to that three percent 10-year and that could potentially be a short-term peak in real estate pricing now. Does that necessarily mean we're heading into a recession? No, i think the biggest thing that could drive us into a recession is actually an overly aggressive federal reserve, where the federal reserve decides to rug, pull us and says: we've got to fight inflation and one way that they can fight.

Inflation is by making sure that rates are so high, so quick that we end up crashing stocks. We end up reducing aggregate demand. We force a recession and inflation evaporates if that happens, and people start looking back and going. Oh, my gosh real estate prices are falling at the same time as rates are going up.

That's possibly when we could see some real estate headwinds. Now. How much would we actually expect, in the worst case scenario, that the fed has to force a recession? I wouldn't expect, probably anything more than 10 15 of a correction if that and that's solely because the only driver for real estate prices heading down in my opinion, would be either fear of the fed, which i expect would be temporary or transitory uh and and these Rates going up and once the inflation is sort of squeezed out of the system through a potential recession, do you think real estate is an excellent long-term investment and i don't know if it makes sense to sell and pay the capital gains taxes and try to time The market in real estate, unless you have a better opportunity to come up or a better opportunity coming up - and this is why i always resort back to in my programs on building your wealth, like my real estate, investing course link down below or my do-it-yourself property Management course link down below there's a reason why i always resort back to finding the wedge. See the beautiful thing about finding the wedge deal or wedge deal is in whatever market you're in whether it's multifamily or single family is your goal.

Is you know if this has been our market this last bit? Here? Let's say this was march of 20, and this has been the market. Here is even if we do end up having up to those 10 20 headwinds. I wouldn't be surprised if we ended up having some form of uh of a future real estate cycle like this, where we have a little bit of a depressed cycle here, and maybe this ends up looking something like a 10 to 20 percent decline at most, rather Than something more severe, like a 30 to 35 percent decline and again the reason for this - why why no longer am i expecting something like this to potentially happen because of the russia ukraine crisis? The federal reserve is much less likely to force that recession to get inflation completely squeezed out of the system, because when we have war happening and geopolitical concerns, there's too much uncertainty and the last thing the fed wants to do is deal with a recession. While there's a war happening, it's unlikely now, if this war ends quickly hey, maybe we have to reanalyze and look at that discussion again, but right now i expect the fed be pretty chill be accepting of higher inflation for longer be pretty dang patient.

This could change pretty quickly, but right now, i'm not horribly concerned that this is in our future. This could be in our future uh. So we'll see what happens and i'll keep you updated, but these are my latest thoughts on real estate, make sure to check out extra via the link down below and the programs on building your wealth link down below and folks, we'll see in the next one. Thanks bye,.