Name: The real reason why the housing market is broken
Uploaded: 2025-08-19T18:22:07.000Z
Duration: 11 min 21 s
Description: Thousands of YouTube videos with English-Chinese subtitles! Now you can learn to understand native speakers, expand your vocabulary, and improve your pronunciation...

If you feel like house prices are getting out of control, then you are not mistaken.

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Over the last 5 years, house prices have grown way faster than they have ever grown in the  And that made buying a house almost impossible for the vast majority of Americans.

Some people say that when interest rates will be lowered, then mortgage rates will come down and that will make it accessible for people to again buy houses.

Mortgage rates are just part of the problem.

The entire situation is way worse than you think because the entire housing market is broken.

If you think that I am exaggerating, let me explain.

In 2019, right before house prices got out of control, the median household income was about 81 thousand dollars.

Well, if you compare that to the median house price, it was 327 thousand dollars.

Yes, there was a huge problem to buy a house because there is a huge difference between the median income and the median house price.

However, since then, the median house price have increased by 25 percent to 410 thousand dollars.

If you compare that to the median household income, that's 80 thousand dollars.

Basically, the median household income has decreased while house prices have increased by 25 percent.

Just by looking at these numbers alone, it's enough to understand why buying a house became almost impossible, but this is just part of the problem.

These data that I just showed you is entirely inaccurate.

If we want to know the real increase in house prices, then we have to take a look at the median price per square feet.

So if you take the exact same house in 2020 or the January 2020, and today, it's price have risen by 53 percent.

So the reason that the house prices have increased by 25 percent is simply because Americans began buying smaller houses.

If you can't afford a big house, then at least it's better to have something than nothing.

The average size of the house in America is 2286 square feet.

So if we take the exact same house in 2020, it would cost around 340 thousand dollars.

And now if we take the exact same house today, it would cost 519 thousand dollars.

And now take a look at your household income.

It is still the exact same 80 thousand dollars.

So it's not surprising that most people feel like buying a house book became almost impossible.

When your income stays the same, and one of your basic most important necessities, rising prices by about 53 percent, you are going to feel it.

Because it's not like a handbag or a car.

You need a roof over your head whether you want that or not.

Even if you don't have a car, you can somehow live with that.

You can go and get a significantly cheaper car.

You can even get a car for 5 to 10 thousand dollars.

If you are living in a certain city, then you have to buy a certain house, especially if you want that area to be safe, then the price of that house is going to increase drastically.

And if you look at the mortgage rates, then it gets a lot worse.

The vast majority of people buy their houses with a 30-year fixed mortgage, which makes absolute sense because most people don't have extra half a million dollars in their bank account.

In 2020 or 2019, and even years prior to that, the average mortgage rate was about 3 to 4.5  So let's take 4 percent the average mortgage rate.

If you would have bought the same house that would cost you 340 thousand dollars, your monthly payments would be around 1500 dollars.

Now let's compare that to the median household income.

If you take around 8 to 1000 dollars and you divide it by 12-month pre-tax, that would be around 6767 dollars.

So basically, the average household would spend around 24 percent or a quarter of their income on their mortgage payments.

Yes, but it's probably your biggest expense.

So that is sustainable to a certain level.

Let's take the exact same house and compare it to today.

The same house would cost you 519 thousand dollars, and the average mortgage rate is about 6.5 percent, although that's some people are getting 7 percent or even 7.5 percent, but let's take the best-case scenario, 6.5 percent.

The average payment on that house would be, or the monthly payments, a little over 3 thousand dollars.

Remember, the real household income hasn't grown.

In fact, it's slightly decreased since then.

That is pretty much half of your income directly going into your mortgage payments.

And that's why when the vast majority of people look at the basic math of buying a house with a mortgage, they don't want to be paying half of their income into the mortgage payments.

And this is their median household income, not individual income.

If you take individual income, then buying a house for the vast majority of people, probably 90 percent of Americans, is literally impossible at this point.

Now, when buying a house becomes so difficult, and most people cannot afford it, they still need a roof over their head, so a lot of the demand will be shifted and directed towards rental properties.

And that's why the demand for rental houses have grown drastically, which is why the median monthly rents have increased also by 50 percent since 2020.

So when people are complaining about super high rent prices, that's not because those landlords are so greedy, that's because the housing market is broken, those people cannot possibly afford a house.

Now, if the price to rent a place and buy a house are the exact same, why would people rent it in the first place?

They would rather get a mortgage and build equity over time, and at the end of the road, they will end up with a house, instead of renting a house for the entire life.

They are renting just because buying a house is almost impossible, so if you want rents to go down, then you have to make it possible for people to buy houses, that's when rent prices are going to go down.

House prices should not have increased so much in the first place.

If you look at house prices historically and you compare them to real household income, then they would grow pretty much at the exact same level.

Buying a house wasn't always the best of the investments, usually, you wouldn't make that investment in the first place, you would buy a house because you need a house.

And for your personal life, yes, it's a great investment, but for investors, it's a bad investment because house prices on average grow between 2 to 5 percent.

And the real incomes also grow on average between 2 to 5 percent.

So on average, if you are buying a house for yourself, it makes sense, but if you are buying it as an investment, it's a really difficult investment, you are not going to make a lot of money, it's a safe investment, but the return on that investment is really bad.

When your bank provides you with a mortgage, it usually takes all of these mortgages, turn them into mortgage-backed securities and will sell them to investors.

And based on the demand and supply on these mortgage-backed securities, your mortgage rate will be determined.

If a lot of investors would want to buy these mortgage-backed securities, then the rates on them are going to go down.

So if inflation is sustainable at around 2 percent, then it's possible to sell those mortgage-backed securities at 4 percent or 4.5 percent, which were the rates prior to 2020.

But in 2020, when covid19 has happened, there wasn't much demand for mortgage-backed securities.

And because the fed was afraid that the 2008 financial crisis could repeat, the federal reserve created artificial demand for mortgage-backed securities in the market and started massively buying them.

So they weren't purchased by investors, but rather by the federal reserve.

That brought mortgage rates to such a low level that it was a once-in-a-lifetime opportunity.

There was a period where mortgage rates for 30-year fixed mortgages were below 3 percent at 2.5 percent.

So getting a mortgage in 2020 and 2021 was literally a once-in-a-lifetime opportunity.

There were a lot of smart people who took advantage out of it, but at the same time, there were a lot of smart investors.

Imagine you are an investor, and you have billions of dollars, and then you have super low mortgage rates.

You will get a lot of mortgages and will start buying houses massively.

And that's when institutional investors started buying those houses, started getting mortgages from banks and buying houses massively.

So in 2020 and 2021, a huge percentage of the houses that have been purchased were purchased by the institutional investors.

Prior to 2020, there wasn't a shortage of houses in the market because a good chunk of those people were renting and a good chunk of those people were actually buying houses.

But starting from 2020, a good portion of those houses ended up in the hands of institutional investors who locked mortgages for 30 years at around 3 percent interest rate.

And now when mortgage rates are much higher, they're renting these houses, they're making a lot of money.

And that's why there is a huge shortage of houses in the market.

Prior to 2020, those institutional investors wouldn't get into that business in the first place because it was unprofitable business.

But because mortgage rates were artificially brought down by the Federal Reserve, it made sense.

Get this house for 30 year mortgage at 3 percent interest rate.

And now you are guaranteed to make a lot of money over the next 30 years because you know for a fact that there is not going to be another period of such a low mortgage rate.

So even if you bring down mortgage rates tomorrow to 4 or 5 percent, it's not going to fix the problem because house prices are already have increased by 50 percent.

Even if you lower mortgage rates to about 4.5 or 5 percent, that's not going to fix the problem because even at that rate, the vast majority of Americans will end up spending around 40 percent of their income on mortgage payments, which is why the entire system is And it was broken in 2020 and 2021.

If the same trend continued from 2019, we would not have this problem today.