21:46
Hello everyone! With you, Graham. I never thought I'd be making this video, but the housing market situation.Okay, seriously, mortgage rates just skyrocketed to almost 7.5%. Long-term Treasury bond yields have risen to levels we haven't seen in over 20 years. And as a result, borrowing has become significantly more expensive. Not to mention that with interest rates rising so rapidly, you can now earn more on government bonds than investors can on rental properties. Think about it. Why should you deal with tenants, property taxes, insurance, repairs, and loans when you can get more from the government by doing absolutely nothing? And when enough people start telling themselves
exactly that, the consequences can be huge. That's why we really need to discuss why interest rates are skyrocketing out of control, what impact this will have on our entire economy, and most importantly, what it is likely to do to house prices. After all, if this continues, the housing market could approach the point where either interest rates or house prices will collapse. Before we begin, if you appreciate these kinds of breaking news videos, it would be really important to me that you hit the like button and subscribe if you haven't already. It's completely free, takes a split second, and as a thank you, here's a picture of a hamburger. So thank you very much, and also a big thank you to Rocket Money for sponsoring this video, but more on that later. So, to
understand what's happening, why interest rates are rising so quickly, and what this means for the entire market, we need to talk about Treasury bonds. The point is this: whenever the United States needs to borrow money, it issues Treasury bonds, which essentially means: " Lend us money; "We will pay you a fixed interest rate on a regular basis, and at the end of the term we will return all your money in full." This is generally considered the risk-free rate of return because, let's be realistic, the government will never default on its debts. So pension funds, insurance companies, retirees, banks- they all buy it as a safe source of capital, knowing that they're getting a fairly risk-free return on their money. But
recently, bond prices have been Here's the point that most people miss. Bond prices and their yields move in opposite directions. So, when investors want to buy bonds, their prices rise and yields fall. But when investors start selling bonds, their prices fall and yields rise. Or, if that sounds too confusing, just imagine that the bond is worth $100 and pays $5 in interest. If many investors want to buy these bonds, the price could rise to $125 for the same $5 in interest, giving a 4% yield. But if demand is low, investors may only offer $80 for that $5 interest, which already gives a 6.25% yield. That's why every time you see headlines about a jump in yields, it means investors are selling off government bonds, demand is low, and suddenly
yields have to rise to attract more buyers. And, as you might have guessed, this is a red flag. Because if the most reliable borrower in the world is suddenly forced to pay more, everything else in the economy must immediately adjust to that figure. For example, once investors can earn more than 5% from the government, they start asking themselves, " Why buy stocks? Why buy rental properties? Why invest in this company if these interest rates aren't earning me significantly more than I could already get from the government?" However, this is just the tip of the iceberg, as the largest borrower in the world is the United States. And when interest rates rise, our debt suddenly becomes significantly more expensive. This means that when our debt
is paid off, it is replaced with new debt at today's higher rates, making our national debt worse, and investors demanding even higher returns for the additional risk, and this continues until eventually something breaks. And that, of course, is what leads us to the bond market crash. You see what the matter is. Bond prices fall only because investors are no longer willing to borrow money at the interest rates they previously accepted. Of course, a few years ago, borrowing money at 3% was quite acceptable. But now investors are factoring in inflation, higher oil prices, government spending, rising deficits, and huge amounts of debt that constantly need to be refinanced. Not to mention that three specific forces are
simultaneously hitting the bond market and destroying housing values. The first of them is that inflation has returned. Unfortunately, inflation has remained above 2.5% for 65 consecutive months. Oil prices, with Bank of America warning that they could soon reach $150. This means that the Federal Reserve will have to act aggressively to lower prices before inflation gets out of control, which leads to point two-rising oil prices. As I mentioned a moment ago, oil prices are back above $100 a barrel, and at the worst possible moment, negotiations to open the Strait of Hormuz have broken down again. In addition, it is reported that the conflict will escalate after the midterm elections, which could further raise oil prices, inflation, and
interest rates. The situation is also made worse by point three: the US government is drowning in debt. The fact is that we have an annual budget deficit of about $2 trillion. We spend significantly more than we earn, which means that the Treasury must constantly issue new debt to pay for all expenses at a time when buyers demand higher yields. In other words, the US is trying to get rid of debt at a time when no one wants to buy it. So, the yield should increase until someone finally agrees to buy it out. But the higher yields get, the more pressure is put on the housing market, the stock market, the banks, and the government's own budget, and that's when it stops being a bond problem and turns into a full-blown financial crisis. That's why
you're here to learn about how bad things could get, what impact it will have on the markets, what happens next, and most importantly, what you can do today to stay one step ahead. However, before we get to that, it's worth noting that none of this matters if you don't take care of the basics. The reality is that it doesn't matter if the market goes up or down 20% if you don't save enough to take advantage of future opportunities. For example, I literally do everything I can to track every expense I make and cut back on those that I don't absolutely need. And one of the best ways to do that, without exaggeration, is through our sponsor Rocket Money. For those who don't know, Rocket Money is a personal finance app that helps you see all your accounts in one
place. You can connect your accounts, track your spending, create your own budget, and see subscriptions you may not even realize you're still paying for. Personally, I believe that one of the easiest ways to improve your financial situation is to simply understand where your money is going. Because I promise you, it's these small $10 or $20 purchases that add up over time, and Rocket Money gives you a much clearer picture. Additionally, they recently launched Rowan by Rocket Money-an AI- powered financial assistant that's available right in your messages. I've been testing it for the last few weeks and it's just incredible. Rowan can alert you to things like
overdrafts, excessive spending, low account balances, and potential savings opportunities before it becomes a more serious problem. Again, especially in a market like this, the more you control your spending and savings, the more likely you are to be able to take advantage of future opportunities. All you need to do to get started is go to rocketmoney.com/graham, scan the QR code on your screen, or click the link in the description below to sign up today. Once again, the link is below, the QR code is on the screen. Thank you very much, and now let's get back to the video. So, when talking about the current situation, the impact of higher rates on the entire economy, and most importantly, what to do about it, we first need to talk about
house prices. The thing is, when mortgage rates rise so quickly, house prices don't fall immediately. First, sales fall. And that's exactly what we're starting to see. In fact, demand from homebuyers has fallen so low that we are in uncharted territory, and mortgage applications have fallen to levels not seen since the early 1990s. Additionally, Redfin just found that there are 53% more sellers than buyers-the largest gap in their history. And in cities like Nashville, Miami, Houston, Orlando, and Las Vegas, there are more than two sellers for every buyer. That's why in these regions, almost half of sellers now offer concessions just to close the deal.
This month, 38% of developers lowered prices, and the average cost of a new home fell 8.8% compared to last year. However, despite all this, remember that the national median home price is still 2.1% higher than a year ago, simply because most owners would rather not sell their home than sell it at a loss. But with inflation at 3.4%, adjusted for inflation, housing prices are indeed falling, but it's happening much more quietly. However, in my opinion, this is where the danger lies. If mortgage rates remain above 7 % for an extended period of time, or dare I say, rise even higher, it will be impossible for the average person with an average income to afford an average
home. Additionally, landlords may soon reach a point where they start asking themselves, "Why should I even manage this rental property if this is the first time in 20 years that I can just buy government bonds and make even more money?" If this happens, then yes, more lower-priced offers may appear on the market, which will start to drive down prices overall. But remember, with interest rates this high, for a buyer to have the same monthly payment as they did at the beginning of this year, home prices would have to fall by about 14% to balance out what they are paying today. This is the brutal math that the housing market has faced. So, speaking of how this affects the rest of the economy, my own thoughts on what's happening, and the
dangers that no one seems to be talking about, we need to discuss the debt spiral. The reality is that higher interest rates are not just affecting the housing market. They are literally reevaluating the entire economy, starting with the national debt. As for this, the crazy thing is that the United States just crossed the $40 trillion debt mark less than 5 months after surpassing $39 trillion. And in the first 11 months of the fiscal year, we paid over a trillion dollars in interest. That's more than we spent on Medicare, more than we spent on the military, and that's a little over $3 billion every day, and that amount is only growing.
Furthermore, much of this debt was taken out many years ago at low interest rates and is coming due soon, meaning it will have to be refinanced at today's higher rates. How much will it cost, you ask? Well, every 1% increase in the $ 32 trillion debt owned by the public increases that interest by $320 billion. dollars. And that also means more debt, more money printing, more inflation, higher interest rates to compensate for that inflation, more debt, and even more money printing. You get the point. We also have number two: retirement accounts. This is something that very few people talk about because for decades retirees have been told that bonds are a safe asset for your portfolio. They should be safe when the market crashes, but now long-term
Treasury funds have closed at their lowest levels ever, down more than 50% from their 2020 peak. Or, as one consultant puts it: "For many clients, the bond portion of the portfolio is the only part that's falling." This brings us to point number three: bonds compete with stocks. Right now, for every $100 you invest in the S&P 500, these companies are expected to earn $5.20. Except, well, look at this. Treasury bonds are also guaranteed to yield $5.20. So at some point, investors have to ask themselves, "Should I invest in the stock market and maybe get 7%, or should I get a guaranteed 5%+ return by buying
U.S. Treasury debt?" And finally, as I mentioned earlier, number four: bonds will compete with rental properties. Now, generally speaking, it is more profitable to borrow money from the government than to buy real estate to rent. So, think about it. If you're a landlord with $500,000, you could be making $26,000 a year right now buying government debt, or you could take a risk on tenants, insurance, property taxes and make $24,000. What would you choose? That's why, according to Reventure Consulting, real estate investment has fallen by about half in the last 4 years. And why, if rates remain so high, the only way for the math to work is for prices to fall. So, in terms of my thoughts on what's happening and where we're headed, here's what you
came here for. In general there are only two scenarios for what happens next. Best case scenario-we agree on a way to open the Strait of Hormuz, oil prices fall, inflation decreases, the Federal Reserve doesn't have to raise rates, and eventually everything gradually starts to return to normal. Worst case scenario- oil stays above $100, the conflict escalates, the Fed raises rates even more, and mortgages hit 8% before you know it, which will destroy the housing market, the stock market, retirement accounts, you name it. That would be bad. That's why it's impossible to predict the future, but if rates stay as high as they have been, or even go up, then yes, home prices will definitely suffer. But I don't think this will lead to a nationwide
collapse of the housing market. Remember, this is not 2008. Back then, people were given loans they couldn't afford. And when prices fell, they were forced to sell. Today, on the other hand, homeowners have significant equity. They have mortgages with low interest rates that they are not going to give up. And if rates remain high, many will simply decide not to sell, and those who do decide will likely wait longer on the market, giving buyers a little more negotiating leverage. Of course, a lot depends on where you live, as markets with a lot of new construction, an excess of sellers over buyers, and investors who bought only for cash flow will be
significantly worse than where supply is limited. But on a national scale, I think the biggest risk is simply time. The longer mortgage rates stay above 7%, the longer sellers have to wait, the more the number of offers on the market increases, and the more often sellers have to lower prices if they lose patience and just want to sell, which is obviously a little better for buyers. Of course, maybe this is what will bring buyers back into the market, because when prices drop enough or rates drop, the monthly payment will start to become acceptable again. And maybe that's how it all ends. So personally, I wouldn't panic that the housing market would crash in an instant, but I also wouldn't buy anything with
the expectation that prices would go up forever. In my opinion, this is the first time in a long time that buyers are starting to get some benefits. So, if this is about you, I can only advise: be patient, make suggestions that fit your situation, and despite everything, press the " like" button and subscribe if you have n't already. So, thanks for watching, and as always, if you want early access to videos like this, as well as bonus content that I don't make available to everyone, become a channel sponsor-among other things, you'll also get priority responses to comments. I see them all as notifications on my phone. So, if you're interested, join in.
Thank you very much, and see you next time.
