"I Lost Everything": The Reality of the Modern Housing Crisis

Well, I have to admit, guys, it feels pretty good to be back home in Miami Beach. It is very warm out here. I mean, not hot, but like the most shocking part coming from the Bay Area and every day is just like so mild and cool for the most part. And then coming back here and feeling that humidity again and just like it's warm no matter what time of the day it is, is the most shocking part. But it's good to be back. Today, we are going to talk about some real-life situations that people are facing when it comes to homeownership. We're going to go over a story of how a woman is barely avoiding foreclosure right now after losing a job, and we're also going to talk about what can really happen to you when your mortgage rate resets with an adjustable-rate mortgage, because this is happening to a lot of people right now. Both of these scenarios are. And I think it's important to go over these things to make sure that you don't end up in one of these situations and you can prevent all of this before it's too late. So this first story is about a woman who lost her job, couldn't pay the mortgage, and now she lives in a shed in her backyard and has to rent out the main house in the front yard on Airbnb just to stay afloat. And she's really learning the real estate lessons the hard way right now. She bought a $400,000 house just one year ago in central Texas, and now she's living in a 100 square foot shed in her backyard with no running water so she can rent the house out. And she says even after having hundreds of guests that the rental income still falls short of covering her mortgage overall, guys. I mean, does that sound familiar? I mean, this isn't even an Airbnb story, but a lot of people bought Airbnbs. I've gone over this a few times recently thinking, oh, we're going to have this Airbnb and we are just going to crush it and make all kinds of money. But this woman's renting out the house on Airbnb full time and it's not even enough to cover the monthly mortgage payment. Now here's what happened. She made a very small down payment, and her monthly payment is about $4,000 a month. on this house okay but a year after buying it she found out she was going to get laid off and that she was going to get two months severance pay and that was it so she went from being a data science manager to driving for lyft and uber she's been through interview after interview without getting hired also sounds pretty familiar with all the job market stories we've covered she had very little savings and a lot of credit card debt So she filed for unemployment and started renting out the house on Airbnb to help make the payment. So this woman has literally made every mistake in the book that I warn people against making. She bought a house with a very small down payment, which means no equity. Not even talking about that in this story. Maybe she's even upside down on it by now. Who knows? But she's got no equity, which also means her monthly payment is a lot higher because she put a small down payment. She has credit card debt. She had very little savings. Listen guys, if you have very little savings and you are putting down the lowest amount down payment on a house just to be able to buy, you are not really qualified to be a home buyer. Your bank or your lender might tell you that you are because on paper, the numbers work because of your W-2 income job. But in reality, for your own financial future, you're not truly qualified. And I'm not saying that to be mean or to be a jerk. I'm just being honest. I'm being realistic, like looking at how tough it is to be a homeowner these days and the amount of problems people have to face financially when being a homeowner. You're just not ready. That's the God's honest truth. Now, things got so bad for her that she ended up having to cash out her entire 401k in order to try to prevent losing the house in foreclosure. So just when you think things can't get any worse, it can, because now you have no retirement savings either. She also says she was 30% underwater, so here we go. She owed more on the mortgage than the house was worth and describes herself as being 30% underwater. That is pretty bad, guys. So that made selling an impossible choice. The only way you can sell in this type of situation is if the bank approves you for a short sale. Otherwise, you can't sell unless you're willing to bring that 30% difference to the table. So let's do some quick math here. That means her $400,000 house became a $280,000 house. So unless you're gonna be bringing $120,000 to the closing table, And paying your lender that extra $120,000, you're not selling the house. And most likely, a lender might not even approve a short sale with these drastic figures here. Maybe, maybe not. It's really at their discretion. And she was so broke that she ended up building this shed in the backyard herself. She had to take an $8,500 loan to do it. And she did all of the work herself. She, you know, built the foundation, the floor and the roof herself. She added an outhouse, an outdoor shower and fencing. And she has no formal training on any of this, but she learned how to do all of it from YouTube. Thank God for YouTube, huh? And she says even on her best month. Okay. When there was a music festival in town, she was able to clear $6,516 gross income on this property. And you might say, well, that's pretty great. Her mortgage is only 4,000, right? And she reached a 96% occupancy rate, almost impossible for any rental to reach a higher occupancy rate than that. But here's how it masks out. The Airbnb deducted $619 in fees. And then there were seven cleanings at about $100 each. That's another 700 bucks. So that left $5,198 before the mortgage, utilities, and other expenses. So she says the combined utilities for the house and the shed are about $550 a month. And she says homeowners insurance pushed up her monthly mortgage payment by $400 a month recently. And that still wasn't enough. To cover all of the expenses of the house, guys, even at full occupancy, the property earning the maximum amount that it probably even can. So right now she's in this stage where she's still trying to figure out if she can even keep the house. And by the way, one thing I've noticed so far being back in Miami is these mega mansions are just going up everywhere, guys. I've already noticed at least three or four new ones, that being one of them, on my way back from the airport and now walking through the neighborhood for the first time. It's just insane. But the people who have money are completely unaffected by this economy, right? So right now, she's trying to come up with other ways to earn income. Apparently, the reason why we found out about this story is because she recently started posting about this on social media, and she gained a little bit of traction. So she might be able to turn it into something, but a lot of people don't really do it long term or really turn it into a career like I have, but it is possible. She says she's also working on a new data analytics project, she's been walking dogs, so basically just different side hustles to try to keep afloat. But here's the kicker. Looking back, she wishes she would have kept the mortgage under 30% of her income and budgeted more realistically for repairs on a 100-year-old house. Man, do I know all about that. One of my rental properties that we sold a few years ago, was a 100-year-old house. And let me tell you guys, every single month, something needed to be fixed or repaired on that property without fail. She's at the point now where she would be comfortable letting the house go if things don't improve in the next couple of years because she's already at her limit, right? She's driving for Lyft. She's doing a bunch of side hustles. She's cashed out her retirement savings and She's pretty much facing this dilemma of how much more am I going to spend and how much harder am I willing to work to keep a house I can't even afford to live in. I mean, this is a really... Eye-opening story, and I think it's a great lesson for especially younger buyers out there who aspire to become a homeowner. The real lesson here is you don't want to rush in too early. A lot of real estate agents, maybe your parents, lenders, will always tell you, oh, the best time to buy real estate was yesterday. The second best time is today. meaning that well the longer you own the house the more equity you're going to build up over time but that advice doesn't really apply in this market unfortunately things have shifted a lot if you buy right now there's a good chance you could go underwater in the next few years many markets have only just begun seeing price declines guys we are only at the first stage of this housing market downturn that's probably going to last a whole lot longer than the 2008 crash did because the economic circumstances are a lot different this time. So rushing in now can put you in bankruptcy, in financial ruin like this woman. Look, she lost her retirement savings. She lost her good paying job. She is now hustling. Multiple different side hustles and still not even making enough money to pay the bills on this house. Like my guess is, especially since this house is located in Texas, she probably will end up losing it to foreclosure unless she's just that really resilient type of woman that can push through as long as times are tough until she needs to in order for things to get better. But she She might have to wait 10 more years, maybe longer for the market to recover. Be able to maybe sell that house for a profit or see the rents go up in any meaningful way. And even if it does, the expenses are going to rise along with it. Or what if the municipality where she has this house bans Airbnbs like we're seeing happen in New York and other places? Oh, sorry, you can't rent your house on Airbnb no more. I guarantee you that would be the final nail in the coffin for someone like this. But you see, the real moral of this story is that When you get in to any type of property, whether it's an investment or a place that you plan on living in prematurely, and you don't truly have the finances to back it in tough times, this is the end result. It just is. And a lot of people are in this situation right now that you don't hear about on the news. And because of what we just covered in this first story, that's why I suspect this is starting to happen in this next story, which is that HELOC balances just hit a new milestone that we haven't seen since 2005. What happened is balances on home equity lines of credit rose $23 billion in the third quarter of this year to $481 billion total, which is the biggest quarterly increase since 2005. Well, that was already leading right up to the financial crisis that we had in 2008. Even more interesting is that the news is painting this picture as well. The reason this is happening is because about 50% of mortgages still have a rate that's 4% or lower right now. And when a new mortgage costs more than that, plenty of owners would rather borrow against their homes than give up a cheap loan. Well, that's a nice, pretty little story with a ribbon on top to explain it, but most homeowners who are borrowing against the house do it because they need the money. People don't borrow against the house strategically most of the time in order to parlay that money into a better investment or anything like that, and really, This is just one part of the entire household debt story. I'm going to do an entirely separate video about this because we have a lot of new information about some of the household debt numbers. But total household debt rose $334 billion in the third quarter to $19.1 trillion, a new all-time high, while mortgage balances increased $257 billion. And lenders also raised the total credit available on HELOCs by $31 billion, which is a sign that banks are happy to offer more of these lines of credit. Yeah, they are. You know why? Because the collateral is still there. These lenders know when they're handing out those HELOCs that if you can't pay for some reason, they can easily take your house and you don't have to worry about selling it most of the time for a big loss because so many homeowners have a lot of equity. I mean, you have to have equity to borrow with a HELOC because that's what it is. You're borrowing a portion of your equity. That's why it's called a home equity line of credit. They say so far the borrowers have been keeping up and the share of HELOC balances that are moving into serious delinquency fell to 1.17% and a year ago it was 1.27%. So that's not terrible. People are paying those loans for now. But about 5% of all household debt right now is in some stage of delinquency in the third quarter. And of course, anybody with a brain who owns a house and has a HELOC loan, the HELOC is going to be the last thing you're going to stop paying because you need a place to live and nobody wants to lose their house to foreclosure. That's going to be last resort type of thing. But the average HELOC rate in late September was 8.19%. And In 2024, it was 9%, so it's a little bit lower. These HELOC rates can actually range anywhere between 6% to 18%. So it's not like it's cheap to borrow this money against your house, guys. This is not cheap money. And basically, these HELOCs work more like a credit card than a regular loan. You know, borrowers draw from it during a draw period that lasts anywhere between three to 10 years, and that during that time, you're paying interest only. And then... You must repay what you used after that period is up. And then your payments can jump pretty substantially depending on how much you borrow. And that's probably one of the reasons I suspect that the delinquency rates are still low because people still have very low HELOC payments and haven't seen those principal payments kick in yet. And guess what? These rates that home equity lines of credit charge you, they move like a credit card. They are not fixed. They are variable interest rate loans. So if interest rates start going up again, Because treasury yields start spiking again, well, that means your HELOC loan payment is going to go up too. Now, in order to get one of these HELOCs, a borrower usually needs to have at least 15% to 20% equity in their home as a minimum and a credit score of about 680. And most lenders are capping your loan-to-value ratio at 85%. And a lot of non-bank lenders are now requiring initial draws of 80% or more, which means you're paying interest on the money right from the get-go, even if you don't need it yet. So if you're taking one of these HELOCs, you better be sure you actually need that money. Otherwise, you're needlessly setting yourself up for another monthly payment that no one needs. But these loans are attached to the property, guys, and if you don't pay it, You will get foreclosed on, and I imagine over the next few years, as the economy is continuing to stay in rough shape and people's wages don't keep up with the cost of living, you're going to see more people lose their homes who have these loans to foreclosure because the payments are going to jump. And... Some people aren't going to be able to afford it, and that can easily happen in this second scenario too. We talked about this a little bit in another video, but I want to cover it some more, talking about adjustable rate mortgages, because this is a great example of what can happen when you have an adjustable rate mortgage. Okay, here's a story about a hypothetical 57-year-old engineer with $850,000 in his His 401k and a seven. year adjustable rate mortgage he took out in 2020, which means the loan resets next year in 2027. And according to the Wall Street Journal, there's about 186,000 adjustable rate mortgages that are going to reset in 2027. And some borrowers are facing payment increases as much as a 43% increase. So it's not like a little bump. We're talking a major adjustment in payments. So this guy hopes that a hardship withdrawal from his 401k will cover the increase, but a higher mortgage payment probably won't qualify you for the hardship withdrawal. And they're assuming his initial interest rate on the adjustable rate mortgage was 2.75%. And if his payment today is $3,500 a month for his mortgage, a 43% increase takes it up to $5,005 a month. That's $1,505 more each month, guys. Over just a one-year period, that's an extra $18,600. Well, I hope your salary bump got hit with at least that much of an increase, because if it didn't, well, I guess you're going to be losing the house. And to make matters worse for someone in this situation, you might not even qualify for a hardship withdrawal from the IRS because the IRS defines a hardship as an immediate and heavy financial need. And the withdrawal also has to be necessary in order to satisfy that need. And a higher mortgage payment doesn't automatically qualify for this, which is kind of surprising. For housing, usually the rules are the payment needs to be needed in order to prevent eviction or foreclosure on the mortgage. And your plan also has to even allow hardship withdrawals in the first place. And the IRS rules limit how much can be taken out. And you see already, this is already going in a bad direction, right? Like if you're talking already about borrowing or taking a withdrawal from your retirement money to be able to make your house payment, clearly you've already bit off more than you could chew and getting that house, whatever price it was with that adjustable rate mortgage in the beginning was probably not a great idea. Here's the other catch with this. Hardship withdrawals count as ordinary income. The IRS says most planned distributions are fully taxable, and at 57 and still working, you would generally owe the IRS's 10% early withdrawal penalty as well. So assuming he takes the withdrawal in 2027, he files a joint tax return as married, and the entire amount falls into a 22% federal tax bracket, for 2027, that $18,000 that he needed to borrow, What actually cost him about $26,600 just from the taxes alone. About $5,800 goes to federal income tax and about $2,700 for the penalty, which totals about $8,500 in tax before any state taxes. Well, you better hope he lives in Florida or Texas or Wyoming or one of the other no-income tax states so you don't get taxed three times at least. Now, there's also something called the rule of 55 and other mumbo jumbo that goes along with taking one of these 401k hardship withdrawals. But we don't need to get into the minutia, guys. The point of this is to just... show you that, look, even when you feel like you're doing everything right at the time, things can still spiral out of control when it comes to owning a home. And yet everybody's still so desperate to become a homeowner. It's still a major goal of a lot of young people that want to get on the housing ladder as if it's some sort of rite of passage or essential in life. And people who are thinking that way are still smoking dope from 50 years ago. You know, like that high is It is over, it's gone, man, it's gone. No, the old rules no longer apply in this economy and this housing market. You can easily buy today and be upside down tomorrow, even if you put more than 10% down, even if you put 20% down, which is what I recommend everybody do. I think I want to get one of those. Looks pretty cool. Even fun to have one of those in California too. If you're relying solely on your job, you don't have any backup savings or any real plan B in case things don't go well with the home, you could easily lose it to foreclosure, just like the first woman that we talked about. There's so many things that can go wrong. And with how much cheaper it is to be a renter these days, you really got to scratch your head and wonder, why am I doing this? You know, you really need to be in it for the right reasons. You need to be in it with a very strong financial profile and be ready for the things we're talking about because this is happening to real people, guys. Even though this second story was a hypothetical example, it's happened to many people. It's going to happen to 186,000 people next year. But I really do think a lot of people are starting to get the hint. You know why? Because we just got some recent sales data for October and home sales just fell to a 16-year low. We haven't seen home sales this low since 2010, and that was basically when the dust was settling after the 2008 housing crash. Nobody, I remember, I was in the business, guys, nobody wanted to buy back then because everybody was still a little bit afraid and unsure, you know, has the bottom fallen out yet, you know? Could this get actually worse? Can we still lose equity and be upside down if we buy today, just like people who are buying right now? And the answer was yes. Depending on where you lived, you could. You could buy in 2010 and by 2012 be upside down on your mortgage. The only upshot is by 2012, then prices were starting to go back up and you might be able to recover if you could hang in there long enough. But you see, These are all factors that are outside of your control as a homeowner. And a lot of people think that I talk about this stuff to scare people out of buying. It's quite the opposite. I talk about this so you are informed when it comes to buying and you know exactly what you're getting yourself into and any issues you might face. That way, you're ready. I don't want you to fail. I want you to have a successful home buying situation. But here's what happened. Sales of existing homes fell 5.5% from the previous month and were down almost 9% year over year from last October. And... We're at a 3.75 million existing home sale pace if it were annualized, guys, which is probably going to put us at one of the lowest years on record going back decades if it ends up staying at this pace. It's already back to 2010 pace, but it could end up going a lot lower than that. And of course, you know, this news story just likes to blame the interest rates. That's all they ever have to say about it. So boring, you know, but clearly these stories that I covered covered in this video. Are the real reasons why the home buying activity has slowed down? People are becoming aware of what they're getting themselves into, potential problems they could face if they do this too soon. A lot of people have probably already seen a friend or a neighbor or a family member, somebody they know actually maybe lose a house to foreclosure or run into financial trouble after becoming a homeowner. A lot of people have been seeing their friends and neighbors lose jobs and seeing how hard it is to bounce back from that if you're not financially prepared. And then, of course. The elephant in the room is the high prices that we're still facing along with high interest rates, along with a record high cost of living. What a shocker that people aren't rushing out to buy a house right now. And when I look at stuff like this, guys, I'm telling you right now, this is only the beginning. These are the types of stories we started to see happen back at the beginning. of the last housing crash and the reality is the housing market's already been in a crash for the last few years depending on the market you're in. Some markets haven't even felt it at all yet so we could still see things like this happening for at least another five more years maybe even 10 with how slow this downturn seems to be happening. People are actually doing a better job of hanging on this time financially than last time. We don't have this massive collapse yet in stock prices, We don't have the 10% unemployment rates. And we don't have the mass amount of foreclosures that we had back then. But you start seeing all the cracks form and little by little, it's starting to creep into more and more segments of the population. So let me know what you guys think about this. I hope you enjoyed my first cloudy Miami day back home. And of course, there'll be many more to come. So if you enjoyed this video, make sure to subscribe to the channel. And if you don't want to wait for my next video to come out, check out this one on the screen right over here, and I'll see you in the next one.