Housing Market Just Flipped – And It’s Worse Than 2008

Look, the media is going to tell you that prices are still going up because of the Case-Shiller Index, but that couldn't be further from the truth. In most areas of the country now, the market is turning from a seller's market to a buyer's market, and that pendulum is swinging very quickly. And the market is about to flip. So let's dig in what is causing this and what is likely to come up in the future. If you're a buyer, seller, or investor, this is really important So look, we are in the most unaffordable market in decades, and buyers are completely priced out of buying a home. So let's look at this. The median income to buy a home is now $12,000, up to $120,000 in some areas. And the median income is only $84,000. So the only people who are able to purchase would be a married couple, both of them working, or somebody who's older. That median age of a homebuyer today is 58 years old or higher in a lot of cases. So it's people who have already made their money or people who are currently working with dual incomes. And even then, it's very difficult with the amount of debt that they have, the student loans, the credit card debt, and other debt that they have, car loans and things like that. It is really tough. And that's why this chart is fantastic from Reventra. It says the median American household needs a $28,000 raise to afford a home. And it's getting worse. The affordability crisis is in full swing, and that is changing the dynamic. So yes, you can say nationwide that prices are going up, but the reality is that we need the prices to go the other way. And we don't need the government getting involved in bailing out the owners of these real estate assets. We need the prices to come down and revert back to normal so the next generation of homebuyers can get into the market. And let's dig in to see what's happening here. So this is leading us, frankly, to a breaking point where I believe that we could be seeing another 2008 type scenario. There's going to be some sort of event that happens in the macro markets that are going to impact and put people over the edge. I'm going to be talking about how foreclosures are up 42%. And that may not seem like a lot right now because we're at record lows, number of foreclosures, but there's a good reason for that. And I'll explain why that is. But for right now, this chart comes from Resiclub, and it shows that the estimated number of U.S. homebuyers and sellers actively in the housing market, it's 500,000 greater sellers than there are buyers. So when you have this type of inversion, and this makes sense, right? In 2022, in March 2022, the Fed started raising interest rates. You can see that over in this time period. And all of a sudden, it became super unaffordable for buyers. And then we saw sellers just jump up and look at this period, right? We had the zero interest rate policy in 2020. That made a ton of buyers. We had this massive spike of buyers and basically had so much demand that prices just skyrocketed here in Florida, more than 52% within a short period of time. And now we're seeing that basically revert, and we're going to have mean reversion on prices. Prices do take time to go up and it takes time for them to also come down. It doesn't happen within a year. It happens over a five or six year period. And I believe that we are headed into a downturn over the next three to four years because of this affordability crisis. In a lot of cases, it makes more sense to rent than to buy. So look, let's dig in what's happening on the seller side. So sellers are having a really interesting time because they locked in the lowest interest rates that they've ever had in history, right? A lot of sellers have two to 3% interest rates. And if they were to sell, they would have to go out there if they needed a mortgage and pay six to 7%. So why would they move? And this is causing us to actually have only 11% of people moved in 2024, the lowest mobility rate on record. It's because they can't trade their low mortgage for a high mortgage and get where they want to go because they're experiencing the affordability crisis that the next wave of buyers is experiencing. So they're trapped in their house. And so you can see this chart that comes from, it says 0.2 homes analysis. I like this chart. It's really interesting. And I think that this is a reality of a lot of people, especially the boomers that they're trapped in their house. Maybe they want to move, but they can't do it because they are tied to this low payment that they have on their house. So we're seeing a mobility slowdown and that is causing existing home sales to really grind along the bottom at the lowest level that we've had since the great financial crisis. And it's hard to say that, but we're already at those levels folks. So I know a lot of people say, oh, it's still sunshine and rainbows. I mean, we're already there at the levels from an existing home sales standpoint. We just haven't seen the price decline. So right. The first thing we see is inventory creep up. We see number of sales starting to slow down and you see transactions start to slow. And then you see the price decline. So that's generally how it works. And so look, we can see where the motivated sellers are. So you can see, obviously in the Sunbelt, that's where the majority of the motivation is. And a lot of these motivated sellers are also in areas where there was tons of new construction and speculation because there's speculation that people would continue to relocate during the shutdown years that we had and would come to Florida at those record rates forever, basically from the Northeast. And it just wasn't reality. It just pulled forward a couple of years of sales into a few years. And that just created this massive boom. And there wasn't enough inventory. The builders started building like crazy and they overbuilt again. And that's why we're experiencing, you know, a lot of sellers that are experiencing the most distress. It's around these areas where there was a lot of new construction. So this is what it says. It says the home sellers in the lower half of the U.S., also known as the Sunbelt, are the most desperate in the country. In Denver, Charlotte, Jacksonville, and a smattering of other Sunbelt markets, more than half of single family homes for sale have seen a price cut. This comes from Parcel Labs data. And so we're starting to see the inventory move up because of the overbuilding and because of the lower demand due to the affordability crisis. And this report comes to us from Business Insider. I think it's a really good visualization of what is going on in the United States. You can see the North is experiencing something completely different than the South. Now in the South, we are seeing inventory skyrocket. So to summarize, sellers are locked into their rates. It's causing a lock-in effect. They're not moving. Buyers are completely priced out, so they can't buy. And so all we're seeing is inventory move up. We're actually seeing a weird phenomenon called rage quitting, where sellers, when they can't get the price that they want, they get upset, they fire their agent, they withdraw their listing from the market, and they wait for a better market down the line. They are still motivated to sell. They're just saying, hey, I have a low rate. I'm just going to stay put. I'm not going to move. Totally understand. But the next logical step are for prices to come down over time. Again, it does not happen overnight. So look, you got to understand this about real estate. Why should you care about all this data? Well, the market shifts fast. And if you're in real estate, a fast period of time is six months. If you were listing your house six months ago, you would feel completely different than if you were listing your house today. It changes that fast in the pendulum, usually swings and overcorrects. So we overcorrected to the upside through the hype market, and now we're going to overcorrect to the downside during the shifting down market. Because when you're a buyer and you see prices start to move down, why would you buy? You're going to wait because you think tomorrow the prices will be lower, and that causes them to actually go lower. So a lot of this is sentiment from the consumers. And once the consumer sentiment has changed and the narrative starts getting out there that prices are starting to fall, that's when things really accelerate and start to move even quicker. We've also had foreclosures basically be non-existent for the last four years due to policies enacted in 2020, where you could have just had to do a workout. You miss a payment, you add it to the end of your mortgage, and you just do these workouts. Well, these workout programs are getting more challenging to navigate with all the rule changes that happened last month. And there's likely to be a lot of foreclosures that are going to hit the market Q2, Q3 of next year. And you're going to see that inventory come through. Now, a lot of the stress that came were people who bought in 2022, 2023, and 2024, where they bought the peak market. Probably the worst time to buy was at the end of 2022. That was likely peak pricing. And so those folks are coming to us saying, I'm underwater in my house already. There's phase two, phase three, phase four of the builders that are out there building their developments. And I don't know what to do. I can't sell my house. I'm competing against the builder who's offering a 3% rate, and I can't even offer that. So I'm going to have to drop my price by $100,000 to get out of the house. Sometimes it doesn't even sell when we drop it that much. So sellers are giving up on their pricing. They are capitulating. And we're starting to see prices actually go down a little bit here in the South. Across the nation, there's areas that are still going up. So it's not the same. Every market is completely unique. And each house in each area of a city has compensating factors that would prevent prices from going down. Again, the areas that are getting hit the hardest are the ones that are around new construction that overbuilt. A lot of that is in Florida and Texas and Arizona, definitely Colorado as well. And those markets that ballooned are starting to let the air out. So not only were the builders going crazy, but speculators such as American Homes for Rent, Progress Homes, Invitation Homes, First Key, these large hedge funds that would go up and gobble up these single family properties and turn them into rentals, they were like 35% of the purchases over a few period of years. And now they're net sellers of the inventory that they had bought because the rents are actually starting to come down due to these accidental landlords. Folks who bought during 2022, they call us up and they say, hey, I can't sell my house. I need to rent it. And then it becomes a rental. That's more inventory on the market for rentals. And then rental prices come down. We're seeing a lot of that. There's also this build to rent phenomenon where the entire communities are built to rent out. And then you have another community that's competing with your community on the rentals and rents are coming down. Further on the multifamily side, luxury multifamily apartments are being put up across the country and it's causing rents to come down. Now, this is all good for a consumer. If you're listening to this and you're a buyer or you're a renter, you're going to benefit from this over speculation. But over the last few years, you've been hurting from it. So this is a good, we need mean reversion and you should care about it. And the media is going to tell you a different story, but I'm going to dig into this. So the S&P Case Filler Index come out and yes, it shows that national level, we're starting to see gains, but the reality is you're seeing the gains become less every single month. So they're missing the whole story. This is a good report that came out from the experts. So this is July's results reinforced that the housing market has downshifted to a much slower gear. So this is somebody who actually knows what they're talking about. They're not saying prices go up, prices go up forever. This is a great report and prices are up. That's literally what real estate agents say, what the housing associations will say, all this type of stuff. But this is what the actual analysts say. It's downshifted to a slower gear. National home prices rose just 1.7% down from June's 1.9%. So it's going at a slower rate. In fact, this is one of the weakest annual price increases in the past decade, below the 2.7% rise in CPI. In other words, the US home values have essentially stagnated after inflation marking its third straight month of real housing wealth decline for homeowners. This reversal is striking. During the boom, home prices were climbing faster than inflation, rapidly boosting homeowners' real equity. Now the situation has flipped. Over the last year, owning a home has yielded a modest nominal return, but an inflation-adjusted loss. So they're saying, look, you're going to be losing against inflation your real estate asset. Well, prior to this report, there was this notion that you could have inflation reduce the value of your debt over time, and this would be a good thing. Well, now if your price is decreasing and your debt is the same, then it's definitely a big issue for you, and you're not benefiting from what people thought was, hey, real estate always goes up 3% to 4% every single year, so that way it's going to be better for me, and inflation will continue to be at 3%, 4%, 5%, 6%, 7% rate, which will just devalue the value of the debt. So there was this notion from investors that this type of market would continue forever, and it just was not the case. So here's where we're digging in. This is Melody Wright. She came onto YouTube. She's phenomenal. If you don't follow her, you should, but she was just sharing some of the data on the foreclosure starts. She's looking at the data, and there's a lot of media out there that will tell a different story, but the reality is that foreclosure starts are already up 42%. I mean, they just changed the rule a month ago. In their summary, they don't isolate the days only, just 30+, so I can't validate the jump I saw in client books, but how do I know one large player they don't have on their platform, and it matters. So look at the foreclosure starts. So it is pretty crazy to see that this is already happening, and we think that this will continue to move forward moving into next year. And so, sorry, actually, it says here total U.S. foreclosure starts are up 43.51% on a month-over-month basis, and we expect to see more foreclosures next year. Now, Warren Buffett, Berkshire Hathaway, and even Zillow are starting to say mortgage rates can't fall enough for Americans to afford a home. That's right. Prices need to come down in order for Americans to afford a home. Obviously, the government will do everything they can to reduce the interest rate so they can keep this market moving for as long as humanly possible. That's what the government does. They said that they want to grow out of this type of debt crisis that we have, which will actually make things likely worse because they're going to borrow money to try to grow and make the debt per crisis even worse. But they're saying even if we reduce the rates as much as humanly possible, it's not going to be enough to bring the next wave of buyers to come in. They just simply do not have the money, and they're loaded up with debt to be able to purchase a property. And there's a second lie on this, which is that, oh, and this was the case last time too. They said, well, there's so much equity in these houses that there will never be a crisis in real estate because so many people own real estate that are paid off. Well, yes, there's definitely people who own real estate that are paid off, and usually they're the older folks. So 75% of boomers basically, it's like 61 plus, but let's just put it all in that bucket of people over 55 years old, they own the majority of these mortgage-free households. And it's not the young people who are benefiting from this. It's the older generations that have had real estate, have owned real estate for a long period of time. They held it their 30 years, they paid it off. And now, sadly, there's 15.6 million baby boomers who will pass over the next 10 years. And those houses will have to trade hands and be settled by the estate, and a lot of them go up for sales. This is a lot more inventory that's going to come to the market and flood the market because usually the heirs to the estate don't want that asset. So a lot of these mortgage-free homeowners, their assets will basically get split up to either pay off other debts, or it'll be inherited by the next generation. Well, if we know anything from inheritance, people usually blow their entire inheritance within a few years. And it's usually not an automatic wealth builder because wealth is generated by habits, not just by handing people money. And so this will be a really interesting thing to play out. I don't think the amount of equity or the number of people who have equity in their home is going to matter. It's a supply and demand issue. And this is indicating to me that there's still a lot of supply that'll come through from the aging demographics and the lack of new demographics. Because if you think about in 30 years from now, who will be the next buyer of real estate will be the folks who are having kids right now. Well, people aren't having kids right now because they can't afford it. The percentage of people who are married and own a home by 30 years old has dropped from 50% all the way down to 12%. And that's for various... There's many reasons of why that is, but it continues to get worse every single year and every single decade because of this affordability crisis. And so I don't think we're going to have... The long-term demographic situation does not look good for the United States, despite having a lot of the mortgage-free households. So right now we're seeing a massive number of price cuts, surge, sellers overestimate the market. So sellers obviously want to get the highest price. They list their house. They don't get the price they want. They get super frustrated. And then their agent says, you need to cut the price. Definitely. Some sellers are resistant. Just take your house off the market. The ones who really need to sell, they do reduce the price. So look at this. Percentage of listings with price cuts, Arizona, 27%, Florida, 24%, Utah, 21%, Colorado, 21%. This is per month. And I'd be honest with you, it's actually a lot higher when we look at it on the ground. I mean, we're seeing this type of level of price cuts nearly every single week here in Northeast Florida. So the price cuts ramping up is good. We need more prices to come down for the next generation to come in. I do think if you're a buyer today, it does make sense to wait this out and see how far prices will go. We'll have a good idea probably mid-next year of how much the declines will go. And the worst thing you can do is buy pretty much at the peak of the market. So your timing on your purchase is extremely important. That requires you to get with a top agent who actually knows your individual market. If you need help finding a top agent, reach out to me. I'm happy to get you in touch with the best of the best. But I think this chart is a really good example of showing, hey, it is spreading. The price cuts are spreading. It's not just Florida and Texas at this point. There's other states that had overbuilding and had too much speculation where the prices just went way too high for the median wages. And look, we're in what's called a K-shape economy. So we all know that everything's hitting all-time highs, which makes no sense why the Fed would cut rates when everything's hitting all-time highs. Usually, you use that for a distress period, especially when inflation's at 3%. Their target's 2%. It doesn't make any sense to me why they would do that. But it sounds like they're going to do that this week. So you can see the consumer sentiment, just the average consumer. We're getting crushed. I mean, we're at really bad levels all the way down to the great financial crisis levels. And we're not in a crisis right now. So the consumer is feeling horribly. Meanwhile, the stock market is just skyrocketing. So this is a type of economy I think we're going to be in for some period of time. The AI could drive stocks higher for quite some time, and the consumers could feel really priced out. So we're seeing if you're wealthy, you're that top 10%. You're feeling great. If you're not part of the top 10%, you're feeling really rough on a day-to-day basis because of the inflation that you're experiencing with everything, health insurance, car insurance, house insurance, taxes, even just the grocery bills, utilities, et cetera. So this is a really interesting chart. This comes from Fred. This is the benefits to retirees, right? So Social Security and Medicare outlays as a share of US GDP has just been moving up. The homeowner equity as a share of US GDP has been moving up. But the per capita wages share of GDP is moving down. So you can see that people are basically getting, the working class is getting paid less. They're being taxed and the money is going to another generation where they're benefiting from people who own homes are benefiting and people who are older have their Social Security. Of course, people paid into their Social Security, although it's pretty much on its way to bankruptcy if we don't find some sort of solution. And the next generation won't likely have Social Security at the rate that we're going. So they're paying into a system they'll never see. And frankly, since people aren't having kids and you need more population and workers to be able to pay tax for the next generation, the generation that's paying in today is really unlikely to see Social Security. So what is this generation going to do? They're priced out of owning homes. They're not going to have these social benefits that are out there. And so they won't get this blue line or this green line when they're the same age. And so I kind of scratched my head and wonder what will things look like when you have a bunch of people who won't get these type of benefits and don't own homes and don't have the home equity that the current generation has. Not the whole generation, but a lot of them are the vast majority of owners of real estate. So I'd love to hear your thoughts on what you see on that end, but it is something that I really am concerned about to see in the next 30 years. And inflation is really bad for the working class who don't own assets. So this is a fun chart that came from an ex-post. I'm glad to see that official inflation is cooling. It just shows a line just going straight up, basically. And it's not cooling because of the nature of compounding. So 3% may not sound like a lot, but it compounds every single year. And if it compounds faster than wages, then it becomes a huge problem for the middle class. So what do you think? Is now a time for a healthy reset for asset prices? Do you think the government should step in and prop up all the prices again by cutting rates and continue to just push assets to the next level? And what can the next generation do to solve this type of financial crisis that they're currently experiencing? And how will they be set up for the next 10 to 20 years? I'd love to hear what you think and get your feedback. I love reading your comments and responding to them. It gives me a lot of great ideas to research and get you more information and put it in a digestible format. As always, you can get the link below and subscribe to my sub stack. I talk about things I can't talk about on YouTube. As always, thanks so much for watching. I appreciate you guys, and I'll see you next week.