The Next Housing Crash - 5 Signs Every Millionaire Should Know!

The Next Housing Crash - 5 Signs Every Millionaire Should Know!

What happens when house prices rise through
the roof? They collapse! Because, unfortunately, that's how it works. Last year house price increased by double
digits. If you compare that to other assets such as
stocks, that might not seem high; however, a double-digit rise in real estate is a sign
of a bubble. The housing market didn't emerge yesterday
like cryptocurrencies. It's a well-established market that grows
by around 2 percent annually to catch up with inflation. However, when prices started rising slightly
faster as they did in 2008, the market crashed. With such low interest rates, it was not easy
to sit aside and not take a mortgage, or at least refinance your house because even a
one percent difference in your mortgage rate is going to make a huge difference in the
long run.

Let's say rates do rise a full 1 percent by
the end of the year. How much does a 1% difference in a mortgage
rate make? If your loan is 200K dollars, a 1% difference
means you will pay an additional $35,935 over 30 years. That's a lot of money if you ask me, and we
didn't even take into account the opportunity cost of that money, which means how much that
money would have grown if you have invested it. A 1 percent difference on a 200K dollar loan
equals an additional $239, which equals 518K dollars if you invest it in the s&p500 for
30 years, assuming you will get a 10 percent rate of return in the long run. Imagine if you negotiate and get a slightly
lower rate. You will end up with an extra half a million
dollars when you retire. I think that's something worth considering.

What if your mortgage is 300K or 400K dollars? That number would be significantly higher. If you borrow $400,000, you will pay an additional
$71,870 in interest over 30 years or $477 every month. If you count the opportunity cost, it would
equal $1,035,720. that's why whenever you take a mortgage, the
number one thing you should pay attention to is your mortgage rate. So when the fed lowered interest rates to
almost 0 percent. Everyone who had the opportunity to get a
mortgage did actually take a mortgage which led real estate prices to rise significantly
in the middle of a pandemic. Real estate prices didn't just rise, but they
rose faster than income, which means fewer people can afford a house now, but because
mortgage rates were so low, it still made economic sense to buy a house. But what happens when mortgage rates will
rise? Which eventually will happen, the demand will
significantly slow down, which could cause real estate prices to crash.

Another factor that we have to consider is
rent prices. Usually, rent prices go hand in hand with
house prices, sometimes one grows faster than the other but not by a huge difference like
it happened last year. Which led man experts to believe that we might
be repeating the same path as we did in 2008. If the fed didn't intervene last year, then
we definitely would have had a real estate collapse since most people wouldn't be able
to pay off their mortgages. Most people live paycheque to paycheque, and
the only reason they qualified for that mortgage is because they had a constant stream of income. But when millions of people suddenly can't
make their monthly payments, the bank will freak out and start selling these homes to
make up the payments, but that means there will be an oversupply of houses in the market
which will drive the price down, which will crash the market.

The U.S. has already experienced that. Therefore the government said – listen, guys,
you can take one year break from your mortgage payments even if you can afford it. That was the main reason why the market didn't
collapse, but what happens when the forbearance period is over, and the economy hasn't entire
recovered yet. When people have to make their mortgage payments,
but they don't have the financial ability to do that. The pyramid will finally collapse! Especially since prices were rising faster
than ever, and that creates the expectation of future rise. That expectation attracts speculators who
invest in the market, hoping to profit from the rising prices. This further increases demand and prices,
causing the bubble to stretch and grow. And on one beautiful day, it's going to burst. In 2008, mortgages were not regulated much,
so banks started giving loans randomly. I am not saying that sarcastically, but that's
literally what happened. Mortgage underwriting got so sloppy during
the housing bubble that some lenders were giving out "ninja" loans—no income verification,
no job verification, nothing. On the other side, developers were building
houses faster than the U.S.

Population could occupy them. It took a while, but eventually, prices plunged,
people defaulted on their mortgages, and the U.S. economy crashed, helping bring down the
global economy with it. When values crashed, some of these homeowners
were unable to keep making payments. And they couldn't sell the home for the amount
they owed. Banks didn't care much since they would take
these mortgages, bundle them together and sell them to investors in the form of securities. That's why these banks kept calling people
to convince them to take a mortgage and didn't even require them to provide any documentation. It made sense because everyone thought that
home prices will always rise, isn't that what your parents told you! However, the unexpected happened! If you give it a closer look, the housing
market today is nothing like in the 2000s.

bank

No one is getting a mortgage unless they can
prove that they can pay it off. Secondly, The homeowner vacancy rate is 0.9%,
the lowest in the U.S. since 1956. In other words, there's a shortage of houses
this time, not an excess. And when there is a shortage of supply in
the market, the price naturally rise. Since the 2008 crash, home builders were very
careful because the banks have been heavily regulated since then so there was no point
to keep building new houses unless there is a clear demand for them. No one expected that suddenly there is going
to be a pandemic, and the fed will lower interest rates to 0 and mortgage rates would plummet
to the bare minimum. Remember at the beginning of the video where
we talked about how big of a difference does a single percentage makes in the long run? That's why so many people jumped to buy a
house.

So even though home prices rose significantly,
smaller mortgage payments still attract buyers. However, we also have to consider that 1 in
10 homeowners with a mortgage is behind on payments, according to the U.S. Department
of Agriculture, which could lead them to default on their loan. Of course, the forbearance program is going
to be extended, but even if it's not, most homeowners have accumulated substantial equity
in their homes, so they could sell them and pay off their mortgages in full with no sweat,
which wasn't the case in 2008 when the fall in prices caught people off-guard with big
mortgages and little or no equity. What's going to happen to the real estate
market is entirely based on how well the fed is going to manage it. If the fed carefully lowers interest rates,
there might not be any crash except that prices will stop rising or may experience a small
decline.

But there won't be anything close to a crash. We also have to understand that the real estate
market is not like the stock market that moves up down every single day. It's a well-established market that moves
extremely slowly, and if anything like a crash is on the horizon, it's definitely not happening
this year. No one knows the future, and I could be entirely
wrong. Since we have recently came out of a real
estate crisis, it's difficult to imagine that another one is on the horizon less 2 decades
later.

Meanwhile, if you have a mortgage and you
haven't refinanced yet then you are missing an opportunity because getting a low fixed
rate for 30 years is the best thing you can wish for. No matter what happens to the market, even
those who didn't sell their houses back in 2008 still saw their houses rise in value
over time.

So anyone who got a low fixed 30 year old
mortgage rate should be fine in the long run. By the way, we have a made a video on why
everyone should invest in real estate on our second channel where we have explored the
hidden benefits of investing in real estate. Please go and check it out. Make sure you subscribe to that channel. And now give this video a thumbs up if you
have enjoyed it and subscribe if you are new around here. Thanks for watching and I will see you in
the next one.

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