minority mindset: home prices falling faster? real estate market update

Home prices have begun to fall, but what's even more interesting that home prices are falling is the speed at which home prices are falling, because month over month, home prices have been falling faster and faster. Like in June, that was the first month that we saw home prices fall in 3 years, and it was the biggest monthly drop in home prices since 2011. Then in July, home prices fell again, and this time faster than they fell in June. It was the fastest rate that home prices fell since the Case-Shiller Index started in the 1980s. And then in August, home prices fell again, this time faster than they were in July, and again it broke another record in the Case-Shiller Index. Just so you know, the housing market data that we get is a little bit delayed, because in the end of October, we got the housing market data from August, and in the end of November, we're gonna get the housing market data from September. The reason why home prices are falling is pretty obvious. People can't afford to pay high prices and pay high interest rates at the same time. And Pulte has showed us the real effects of this. Pulte is one of the largest home developers in the nation, and in their latest earnings report, they said on October 25th, they said that their earnings dropped because people bought less homes, and because home cancellations were up. Now I'm kind of a nerd, so when I heard that, I got interested, and then I dove a little bit deeper, and I read the earnings transcript from the Pulte earnings call, and what they said is that their cancellations jumped up to 24% last quarter, and this is something that not many people are talking about, but it has some pretty significant impacts, because if you think about that, what that means is that in the last quarter, almost one out of every four people buying a Pulte home canceled their contract. Why did they do that? Because people got sticker shock when they saw the higher mortgage rates. Let me quickly show you what I mean, because one year ago, the median home in America was $411,000, and one year ago, you could get a 30-year fixed-rate mortgage at 2.8%. Now, if you took only a 90% mortgage, I'm saying only 90% because the average down payment in America is now 6%, but if you put down 10% and you finance the other 90%, that means your monthly payment would have been $1,520 a month. Today, that same median home is $454,000, and if you could get a 30-year fixed-rate mortgage at 2.8% and you put down 10%, now your monthly payments would jump up to $1,680 a month. Still quite a bit higher, but the problem is nobody's getting a 30-year mortgage at 2.8%. So what's happening is people are looking at the home, and they're saying, okay, that's $454,000, and instead of 2.8%, now you're going to pay 7%, and if you put the same 10% down, you got to put a little bit more money down, but your monthly payments are going to jump up to about $2,700 a month. This is the sticker shock that people are getting. People were okay with the higher prices if you could get a lower mortgage rate because the difference was nominal, but when you add now higher prices and higher mortgage rates, now people are paying like 80% more for their housing costs than they were one year ago, and so people are just turning away because housing affordability is crashing. It is so much more expensive to buy a home today, not just because of home prices, but because of mortgage rates. This is where homeowners are having to make a decision. Do I either just not buy a home right now, or do I downsize on how big of a home that I can afford? Because if you're looking at these numbers and you're saying, you know what, let's ignore the actual price of the home and let's look at what it's going to actually cost me, because maybe I can afford these numbers. I expect it to pay around $1,700 a month, and if I can afford to pay $1,700 a month, let's work backwards based off of the 7% mortgage rate that we have today. Well, if I can pay about $1,700 a month, that means the max that I can borrow is about $255,000, and if we follow the same numbers that I gave in this example where you're putting only 10% down, well, that means the biggest home that you can buy based off of the 7% mortgage is $283,000. This is how big of a home that you can afford if you can only pay $1,700 a month. That's quite a big of a downsize from the home price you were expecting to get or what you could have gotten a year ago, and this is where now people are saying, you know what, I'm just going to cancel my contract. I'm not going to buy a home right now, or if I am, I'm going to have to significantly downsize, and this has been putting a lot of downward pressure on home prices. Now, we have covered this story quite extensively in market briefs, so if you want to stay up to date on what's happening in things like the housing market and the general financial markets, I created market briefs as a tool for investors. That way, you can be aware of what's happening. That way, you can make better decisions with your money. It's completely free. I created it as a free resource. That way, you can be aware of what's happening because a lot of the traditional financial news sites out there are very confusing, so if you haven't joined market briefs yet, I'll put the link to how you can join for free down in the description below. The question that's going to determine the fate of the housing market is what's going to happen to interest rates next year and the year after that, and this is where you want to take everybody's prediction with a grain of salt because nobody really knows. The Federal Reserve Bank is the entity that's in charge of interest rates, and they're the entity that's going to determine what interest rates will be, and depending on that, mortgage rates will readjust. Now, you have everybody making a prediction. Like I just saw, the Mortgage Bankers Association came out, and they predicted that mortgage rates are going to fall to five point some percent in 2023. What is their basis for that prediction? Well, they predict that because the housing market is going to slow down, that the Federal Reserve Bank is going to U-turn and that they're going to start cutting interest rates. You have other people like Goldman Sachs that are saying, don't predict or expect interest rates to fall in 2023 because mortgage rates are not going to fall until at least 2024. Now, everybody here is just making a prediction, and we all know that these predictions are really as good as the trash can that they come out of because, well, these are just people's guesses, and most people have no idea of what's going to actually go in to this interest rate decision, and the thing that's going to ultimately determine this interest rate decision is what factors the Federal Reserve Bank is looking at to change interest rates, and as of today, now, this can always change, but as of today, the Federal Reserve Bank says that they're going to going to look at inflation numbers, and they're going to look at job numbers, and if inflation is high and job numbers are also high, they're going to keep raising interest rates, and so this is what we have as knowledge from the Federal Reserve Bank today, and now people are guessing that, okay, we'll see inflation fall or we're going to see job numbers go down, and people are going to lose their jobs, and so the Fed is going to U-turn, but there's so many different layers of complexity that are involved in this where you don't want to just throw out a blanket guess because there's so many different things going on, but the thing that you want to pay attention to is what will influence housing prices, and what is that factor going to be? Well, it's going to be interest rates. If interest rates go up, it's more expensive to own a home, which is going to push home prices down, and if you look around the world, you're going to see how hard it is to really predict what the central bank is going to do. Like, Canada has been facing one of the biggest bubbles in the world when it comes to the housing market, and in 2022, they've seen the prices of some of their housing markets fall by double-digit percentages. Well, in October of 2022, their central bank met, and they raised interest rates again for the sixth time, even though their housing prices have fallen so much. Now, some people in the Canadian economy thought that their central bank was going to raise interest rates even more aggressively, and yet other people who said that the Canadian central bank was going to start cutting interest rates because of what was happening in the housing market, and so you're going to have a lot of You can look at China. China has been facing a very difficult economy, and they've been facing a very difficult housing market, where their whole housing market has been imploding, and their central bank has been cutting interest rates as a way to start stimulating the economy. Again, the balancing act is inflation versus jobs. Today, the Federal Reserve Bank says the most important thing is inflation, and bringing inflation down, even if it costs people's jobs. But you have some people saying that the Federal Reserve Bank is going to flip, which is a real possibility, that if jobless numbers start to go up significantly, even if inflation is high, the Federal Reserve Bank could flip and start stimulating or start cutting interest rates. And this is where we don't know what they're going to do, but even if they don't cut rates, and even if they don't raise rates, meaning they keep rates where they are, it's going to put a lot of downward pressure on the economy. As of today, the Federal Reserve Bank is in a tightening cycle, meaning they're working to raise interest rates, and at this cycle, it takes time for these higher interest rates to be absorbed into the economy, into things like the housing market. Because right now, yeah, we've seen mortgage rates jump up to 7%, sometimes even higher than 7%, but the real effects of a 7% mortgage hasn't really made its way through the economy. That's going to be happening in the coming months. And if interest rates continue to go up, well, then mortgage rates could hit 8%. And if they hit 8%, that's also going to take time to be absorbed into the economy. And so this is where we have to understand that the Fed has three options. They can cut interest rates, keep interest rates the same, or raise interest rates. Raising interest rates and keeping interest rates the same is going to put downward pressure on housing prices. Cutting interest rates will put upward pressure on housing prices. And this is where you don't want to be trying to predict what the Federal Reserve Bank is going to do, but rather make smart financial decisions based off of your financial education. Because if you're thinking about buying a home, if you're thinking about selling a home, don't do it based off of the market. Do it based off of what's right for you. If you want to buy a home and you can afford it, you can afford the payments and you're buying something that's within your means, then by all means, go out and buy it. If interest rates fall, you can refinance and get a better mortgage. If home prices fall, well, at least you can afford the monthly payments. You're buying a home not to make money, but you're buying a home to make memories. Now, if we're talking about buying a as an investment, that's a completely different analysis because now you're buying the home for the sole purpose of making money. But this is where you got to understand the purpose of what you're doing with your money and understanding what you can afford and being smarter with your money. And part of that is being aware of what's happening. And the second aspect is being financially educated. Now, if you want to be aware of what's happening, Market Briefs is a free resource. And if you want to be educated on what to do, I have a ton of videos on my channel that go over financial education. That way you can be smarter with your money. That way you can make better decisions with your money. Now, you can really start to see the discrepancy between home prices and income. And if you see home prices grow significantly faster than income, well, it's going to make it naturally harder for more and more people to buy homes because homes are just much more expensive and people will eventually hit a breaking point where they just can't afford to go out and buy a home because they're just costing too much money. Now,