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  • 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" loansno 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.

  • 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.

What happens when house prices rise through the roof?

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The Next Housing Crash - 5 Signs

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    Summer posted on 2021/04/06
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