Reaction & Commentary
This tiny decline to start the year is a drop in a bucket compared to what’s happened since the turn of the decade almost three years ago the world got hit with an event that shook up everything in the economy real estate included from March 2020 to June 2022 the price of a
Median home went up by 43 percent as measured by the case Shiller Index this unbelievable rise was never thought to be possible investors rejoiced as they cashed in on millions in this super growth era owners celebrated by pulling out record high equity and buyers grew desperate watching as month after month
Prices just got worse and worse after 27 straight months of near parabolic growth the market finally took a breath in June 2022 this past summer the case Schiller topped out as I mentioned earlier it had increased by 43 percent since March 2020 the story was finally starting to change
Prices for five straight months have declined falling 3.6 percent from the peak to many this seems like nothing in comparison to what happened in years prior in fact for prices to fall to pre-pandemic levels the case Schiller will need to drop an additional 28 so what’s the story here well while a 3.6
Percent drop is barely noticeable to buyers there is mounting evidence that this right here is the start of another housing depression similar to the one we saw in 2008. the evidence for this can be found in shocking new data that is being updated every single week for example the newest case Shiller release
Revealed that prices have now declined for five straight months this may seem like no big deal but if we Trace history we can see that this type of decline rarely happens in fact since 1986 which is the earliest reading I could find for the case Schiller the market has almost
Never dropped more than three percent the only exceptions are 2008 and this small 3.05 percent drop in 1990 so while this tiny blimp on the graph looks like nothing it’s extremely significant showing that something big has changed in the markets many experts speculate that we are in what they call the denial
Phase of the crash you have a lot of people who are private sellers refusing to budge on prices and maintaining this illusion of a market while it may be frustrating as a buyer we know from previous crashes that it’s not the private sellers that are the price
Sellers in any real estate market they are almost always the last to move the group that moves prices in most markets is almost always the builders the builders are multi-billion dollar corporations that move thousands of units per month and have whole teams dedicated to setting prices they understand the demand and Supply better
Than anybody else and have a much higher incentive in moving prices down in order to move inventory we saw this past quarter that almost every single serious Builder has moved prices down and included incentives like rate buy Downs in order to get people to buy so while
The case Schiller graph looks okay it’s not really indicative of what’s going on on the ground right now the most recent earnings reports from Builders reveal some pretty serious issues within the market so while the effects of these actions will take some time to move into the existing Home Market it’s undeniable
That these developments in the new home space will have an effect just imagine if you were purchasing an existing home and a new one down the street suddenly slashed its price by 20 putting it on par with the existing one you were looking at it will almost certainly sway
Your decision to buy as there is always a premium between the existing stock and the new stock new homes are always the ones that anchor prices unfortunately while the evidence in regards to a new home slow down is pretty clear it’s still not something that will suddenly erase all those post 2020 gains
Overnight the truth about real estate crashes is that they take a really long time to get rolling let’s quickly take a look at the last crash to get a sense of this pace but before we do I would love for you to take a moment to hit that
Like And subscribe button if you’re enjoying the content thus far my last video got over 2 000 likes and I will look for this one to hit that elusive 3000 number okay so going back to the last crash the last time prices peaked was in July of 2006 from that point
Values would begin their long decline but at a snail-like pace one year from this point in July of 2007 the case Schiller was down only 1.95 so just to put that into perspective we are down more in these five months than what happened last time in one whole year
Even if we look at two years past this point July 2008 we were only down 10 percent in fact it would take the case Shiller five years and seven months to complete its collapse bottoming out in February of 2012 after a 27.4 percent drop and then following this collapse it
Would take an additional five years to return prices to this 2006 Peak making the entire thing from start to finish a cycle that ran for 10 years and 6 months in summary what I was trying to demonstrate with that example is that home values don’t drop overnight it’s a
Very slow process that starts with the builders and flows down throughout the market until all the greed is flushed out of the system and of course it isn’t linear it’s filled with frustration regret greed and plenty of bounces at the end of the day however the market is
At a Crossroads for Generations now owning a home has been part of the American dream and right now that dream is under Threat by simple math to demonstrate this fact I made my own graph using data from the U.S Census Bureau the fed and the U.S Department of
Housing what I did was simple I took the median home sale price for each year starting in 1997 and plotted the payment you would need to cover to purchase under the assumption that you put down 10 percent and pay the national average for taxes and insurance PMI included of
Course I integrated the average interest rate for that year as well and then I divided this number by the median household income what I got is essentially an affordability chart for simplicity’s sake all this chart does is essentially plot the percentage of monthly income the average American will
Have to pay had he bought an average house in that year it’s a measurement of affordability and as you can see it’s hovered around 39 for most of the last 25 years in the run-up to 2008 we saw this measurement jump all the way up to
46 it was at this point that buyers and the entire banking system threw in the towel forcing prices and interest rates to collapse affordability improved hovering around 35 percent for many years following 2008 before slowly creeping back up to the average then in 2020 we saw the unthinkable occurred the
Measurement moved straight up and just kept going and going the median American who bought a home in 2022 is now paying over 52 percent of his gross before tax income on the mortgage we are now well above the relative prices of 2008 and if that was the worst real estate bubble
This country has ever seen you have to ask yourself what is different about this one the simple conclusion is that this cannot continue given current income levels prices and interest rates one of these three factors has to give if we look at history incomes are unlikely to rise to catch up to these
Other variables and interest rates are going to stay elevated if you believe Jerome Powell’s own words in which he has explicitly stated that the FED will continue to raise rates throughout this year with that understanding that leaves only one variable left prices and looking at this chart it’s easy to see
Why so many are calling for a crash it’s simply become unaffordable to own a home despite the fact that unemployment is at near record lows and incomes have done very well over the past five years so in summary without demand from normal everyday Americans it’s going to be increasingly difficult for Supply to
Stay low and once the inventory situation begins to unfold we’re going to see prices given as well this process usually takes years to play out but once we see a turn as we did this past summer it’s a sign that we could be entering a long painful bear Market that we will
See play out in the coming year starting with the Builders first if you watch my last video where we reviewed the earnings reports for some of the nation’s largest residential home builders the evidence is clear Builders are slowing down slashing prices and increasing in incentives and that action
Will now begin to flow into the rest of the market what we saw this past summer is very similar to the summer of 2006 and the next three years maybe headed into that same direction thank you guys for watching as always please make sure you hit that like And subscribe button
If you enjoyed the video and make sure you leave a comment below letting me know what you’re seeing in your local markets to start the year
