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  • Should you invest in real estate now?!

  • If you turn on the news, besides the pandemic, everyone is talking about the housing bubble.

  • Experts are warning that the housing market will crash in 2021.

  • And as a piece of evidence they bring the example of the 2008 crash that 2020 is following

  • the exact same patterns so the housing market should crash again next year.

  • And this is pretty interesting because if we are in a bubble that will burst next year,

  • it will present a golden opportunity for a lot of people to jump in and make a fortune

  • because a housing bubble means that houses will be sold at a fraction of their real price

  • once the bubble burst.

  • Imagine at $200,000 home that you wanted to buy is suddenly on sale for 70 or $80,000

  • and interest rates are so low that you can get it immediately if you can make the downpayment.

  • Doesn't that sounds like a golden opportunity?

  • Everyone likes investing in real state because for some weird reason we believe that real

  • estate prices will always rise however we have seen countless times that's not the case

  • and house prices can actually drop.

  • To figure out if investing in a real state now is a good idea or not we have to understand

  • a few things.

  • Do home prices always rise?

  • How housing bubbles area created?

  • And finally when exactly the market will crash?

  • Before we move on.

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  • And now lets get back to the video.

  • The 2008 Crash - The mother of Housing Bubbles

  • One of the tools the fed has at its disposal to control the economy is the interest rate.

  • When the economy is rising too fast, the government intervenes and raises interest rates to stop

  • the flow of capital into the market so that the economy doesn't turns into a bubble,

  • because high interest rates means borrowing money becomes expensive which means less people

  • would borrow money which will result in less spending.

  • And vice versa.

  • Thats known as Monetary policy.

  • So back in 2000s, when the dot com bubble burst, the stock market lost almost 5 trillion

  • dollars of market cap, the economy was in a recession, so the fed lowered interest rates,

  • From around 3 percent to 2.5 then to 2 percent all the way down to a little over 1 percent

  • to encourage everyone to borrow money and spend in order to get back the economy on

  • its knees.

  • And it worked, by 2003 the economy began recovering, by 2006, the stock market reached its pre

  • dot com crash level.

  • But low interest rates means low rate of return on government bond and interest on fixed despots.

  • It no longer made sense for investors to buy government bonds or keep their pile of cash

  • in the banks since inflation would slowly eat it away especially when a few years ago,

  • they made unbeliever returns during the dot com bubble, the s&p500 rose by over 400 percent

  • from 1995 to 2000.

  • So investors were looking for a new opportunity, a safe and rising investment to throw their

  • money at and real estate seemed like a great idea, but investor don't have the time to

  • deal with individual buyers so financial institutions came with a brilliant idea.

  • Since interest rates were so low, everyone was buying a house, so financial institutions

  • would take these mortgages, bundle them together and sell them to investors in forms of shares.

  • These investments [proved to be really great, but banks run out of financially responsible

  • people to loan mortgages but investors still wanted to buy these investments.

  • So banks started giving subprime mortgages or mortgages to people with really low credit

  • scores, people didn't necessarily have enough income to keep making the mortgage payments.

  • Why?

  • Because they would take these mortgages, bundle them together and sell them to investors.

  • Low interest rates and rising home prices kept attracting more and more investors.

  • The reason why these investments appeared so seductive is because the investors argued

  • that, even if they would default on their loan, its not a big deal, the bank can get

  • back the house and sell it and since home prices were rising, they would still make

  • a profit, it seemed like the perfect investment.

  • So the banks gave mortgages to everyone, that inflated home prices to unbelievable heights,

  • but at some point one of the borrowers defaulted.

  • So his home was put on sale, then the second one, then the third.

  • Soon, there were so many homes on sale but not enough buyers, and home prices began to

  • fall.

  • When people saw that their 500K dollars mortgage house is suddenly worth only 250K, it stopped

  • making sense for them to keep making mortgage payments so they walked away from them.

  • Now there were even more houses on sale, driving home prices even lower.

  • So the banks were left with a lot of worthless mortgages that no one wanted to buy so they

  • went bankrupt one after another.

  • but how is this all related to the 2021 crash?

  • Well, the government intervened and saved the big banks in return that they would tighten

  • their regulations and won't randomly give mortgage unless they have high enough credit

  • score and are able to make the monthly payments.

  • For sometime, they did, if in 2010, you would try to get a mortgage, the banks would require

  • you endless number of documents to prove you are financially responsible and you have a

  • stable job that will allow you to make mortgage payments on time.

  • So, Home price returned back to their pre crises level by 2012.

  • The only reason, the market would crash again is if house prices will start rising dramatically

  • again and there won't be a demand to meet it.

  • In the last 8 years, home prices did actually rise but mortgages were no longer given to

  • irresponsible borrowers.

  • In fact, In 2016, the FED stepped in and raised interest rates from 0.25 to 0.5 so that it

  • wont turn into a bubble.

  • By 2019, interest rates were at 2.5 percent.

  • Borrowing money became expensive, although the number of mortgages dropped to a certain

  • extend, but the demand was still there so prices kept rising.

  • - Covid-19: The crises that suppose to crash the housing market

  • When the pandemic stopped the economy, it was clear that the housing market is going

  • to crash, because overnight millions of people lost their jobs which means, they won't

  • be able to continue making their mortgage payments and default on their mortgage which

  • means, suddenly there are going to be too many houses in the market as it was back in

  • 2008 so home prices will start falling which means the housing market will crash.

  • But what we didn't take into account is that, the Fed just recently went through a

  • housing crash so it knew how to stop it.

  • First of all the government distributed stimulus checks to help everyone to pay the bills.

  • The government granted financial aid to businesses who retained their employees so most people

  • could keep paying the bills, including their mortgage.

  • And to seal the case, the government intruduced a forbearance plan which basically means,

  • you can put your mortgage payments on hold until 2021.

  • And that means that non one is going to default on their loan this year, and by the next year,

  • a vaccine is hopefully will be available and everyone will get back to work and keep making

  • their monthly mortgage payments.

  • but why in the middle of a pandemic, home prices are still rising?

  • Remember, in the beginning of the video we talked about How the fed lowers interest rates

  • during recessions to help stimulate growth.

  • Well, that's exactly what they did.

  • The fed lowered rates to 0.25 percent which made borrowing money more affordable so the

  • demand for homes rose while the supply didn't.

  • Is the market overvalued?

  • Probably!

  • But its definitely not a bubble.

  • Once the 2020 rollercoaster will end and life will get back to normal, home prices may depreciate

  • to what they really worth, but that might not happen next year.

  • Of course if you take individual cities like San Franciso, New York City, or LA, home prices

  • might be slightly more overvalued.

  • But that's pretty much about.

  • it.

  • So, is it a good idea to invest in real estate now?

  • Probably no since the market is slightly overvalued and a correction might happen next year, on

  • the other hand, timing the market isn't a great idea either, especially the housing

  • market since house prices don't jump up and down like stocks so you might end up waiting

  • a few more years.

  • And now its your turn, do you think we are in a bubble?

  • Will home prices crash next year?

  • Let me know in the comments below.

  • And that's it for today.

  • Make sure to give this video a thumbs if you have enjoyed it.

  • And if you are new around here, smash that subscribe button and the bell besides it,

  • thanks for watching and until next time.

Should you invest in real estate now?!

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Massive Housing Crash Ahead - Should You Invest in Real Estate Now?

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    Summer posted on 2020/11/14
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