Reasons Why The Housing Market Won't Crash

Welcome to c2c Mentors LLC month of July 2023 newsletter,

1) Mortgage Rates Will Fall Back Down

Although mortgage rates have come up from their 2020 bottoms, mortgage rates will likely start heading back south in 2023 and 2024 as inflation peaked in mid-2022. The 2022 mortgage rate spike was huge no doubt. But it's only temporary.

Interest rates have been coming down since the 1980s thanks to information efficiency, technology, global coordination, and learnings from previous cycles. Productivity gains have also been massive over the years.

All the economists and lenders who have urged you to take out a 30-year fixed-rate mortgage because rates might go up have been proven wrong. In 10 years, they will be proven wrong again if they continue to encourage a 30-year fixed mortgage.

2) Inventory Will Remain Depressed For Longer

COVID has permanently increased the intrinsic value of real estate. When billions of people began spending more time at home starting in March 2020, the appreciation for a home's utility went up. Not only were homes protecting homeowners and their children from COVID, they provided a safe place for millions to play and work as well.

During perilous times, we hold onto what we treasure most. This is why real assets like homes held their value while stocks crashed 32% in March 2020. Unlike a home, you don't need stocks to survive.

3) Potential Homebuyers Are Richer Post-Pandemic

The current potential homebuyer is likely much richer today due to a rise in stocks. The S&P 500 returned 16% in 2020. The NASDAQ returned 43% in 2020. Practically every single stock index went up in 2020. 2021 was another great year for stocks. Too bad 2022 erased a lot of gains.

Further, the current potential homebuyer likely held onto their job during the pandemic. As a result, there was little-to-no income disruption as millions of people worked from home or found ways to make money from home.

Take a look at your own stock portfolio and net worth since January 2020. Chances are high you are up at least 10% since the start of the pandemic. Unfortunately, 2022 has been a bear market in stocks, which will dampen demand.

With more wealth from stocks and day job income, the buying power of homeowners has increased. With stocks continuing to go up and unemployment levels continuing to go down, homeowner demand will continue to increase.

4) Domestic And Foreign Institutional Demand Is Increasing



There is a clear increase in demand no from institutional real estate investors for rental properties. With a decline in interest rates, investors everywhere are looking for higher-yielding investments. We're not only seeing investors bid up real estate prices, but dividend stocks, and cash cow online businesses as well.

Technology has also made real estate syndication deals much easier to form. Capital raising is more efficient. Doing research online is easier. Signing documents and transferring funds is no longer a headache. As a result, institutional real estate funds are only going to get bigger, not smaller. More capital brings more competition.

The next uptick in demand will come from foreign institutional investors who buy up cheap American property. COVID helped serve as a throttle in 2020 and 2021. However, that throttle will soon be released. Foreigners are also hungry for yield. They have also experienced record-high stock prices while also amassing pent-up savings.

If Americans don't buy our own homes, foreigner real estate investors will buy our property for decades to come. Be forewarned. Foreigners will once again start buying up properties in international cities like San Francisco, NYC, Los Angeles, Seattle, and Boston.

5) The Federal Reserve And Federal Government Are Pro-Homeownership

Never fight the Fed or the Federal Government. If you fight the Fed, you will end up losing a lot of money. If you fight the Federal Government, you will likely get fined or get thrown in jail.

Given the Fed and the Government are pro-homeownership, it is only logical to invest in real estate. President Biden and Congress have clearly signaled their willingness to spend an endless amount of money on stimulus spending.

Besides the implicit support from the Fed and the Government, we have favorable real estate laws in place:

• Mortgage interest deduction
• $250K/$500K tax-free profits
• Programs for first-time home buyers
• Mortgage moratoriums
• 1031 Exchange
• Historical bailouts of homeowners and big lenders



If you want to make money in real estate, you must put any negative beliefs aside about the Fed and the Government. Be politically agnostic and face reality.

Most of the time, the people who are most vocal against real estate are the ones who cannot afford to buy property, sold property at the wrong time, or didn't buy property when they could have.

6) Demographic Tailwind

Fannie Mae estimates there are 88 million people in the millennial generation. This is the highest number I've ever heard reported of people born between 1980 – 1999. The millennial generation definition seems to be getting larger. But, the point is there is a huge population of 22 to 41-year-olds who are in their prime home-buying years. All the previous talk of the millennial generation renting for life is turning out to be BS.

A good life tends to be the same as it ever was for most people – find a partner, own a home, start a family, work hard to provide for your kids, retire with a paid-off home, etc.

Millennials have been late to the home buying trend due to more education, more student debt, delayed unions, and more competition. But for the past 5+ years, millennials have been the largest percentage of buyers. This trend will likely continue for another 10+ years.

As an investor, it's generally a good idea to invest in long-term trends. Positive demographics are a long-term trend worth riding. Once you invest in a positive trend, you don't have to worry as much about the minutiae. You just need proper exposure.

7) Multi-Generational Wealth Transfer



The Boomer generation (born 1944 – 1964) is one of the wealthiest generations in history because Boomers have been able to invest in the longest bull market in history. As a result, Boomers have an estimated $30 trillion in wealth they will be transferring to their children when they die.

However, given how rich the Boomer generation is, they will likely transfer more of their wealth while still living in order to enjoy the benefits of their giving. The revocable living trust business is booming with the Boomers!

8) Homeowner Equity Cushion Is Massive

$21 trillion in homeowner equity with $11 trillion in debt is like having 65% equity in your home and a loan-to-value ratio of only 35%. Most first-time homebuyers put down 10% – 20% for a loan-to-value ratio of 80% – 90%.

If you have 65% equity in your home, your equity buffer is so large that you will likely never have to fire-sale your home through a foreclosure or short sale. You will do everything in your power to find ways to keep paying the mortgage to keep all your home equity from going to the bank.

9) Household Debt As A Percentage Of Disposable Income Is Low

As long as a homeowner can service their debt and pay property taxes, the homeowner will never lose their home. Given it's been much harder to get a mortgage or refinance a mortgage since the Global Financial Crisis, homeowners have had to increase their down payments. As time went on, incomes increased, homeowner's equity increased, and mortgage debt decreased.

Today, we find ourselves in a scenario where U.S. household debt service as a percent of disposable income is at its lowest level for over 50 years. Part of the decline most certainly has to do with a continued drop in interest rates.

10) Moderate Inflation Is Good For Real Asset Prices

Real estate is one of the best inflation hedges given housing costs are a key part of inflation Inflation whittles down the real cost of debt. Further, inflation acts as a tailwind to boost rent and property prices.

With the latest inflation print at ~8%, and the average 30-year fixed rate mortgage at ~6.5%, borrowers are experiencing a negative 1.5% real mortgage rate! When you have negative real mortgage rates, you want to responsibly borrow all you can to buy a real asset that will benefit from inflation due to rising rents.

If possible, an inflation investor should go long healthcare, higher education, and real estate. Too bad none of us can buy private colleges that raise tuition by 7% a year! But at least we can buy healthcare stocks that gouge us every month, a primary residence, rental properties, and stocks.

11) The Amount Of Funny Money Is Exploding



Every 40+-year-old investor learned his or her lesson from the 2000 dot com bubble. When you've had a multi-bagger homerun in names like Tesla, Bitcoin, and more, you convert some of those funny money gains into real assets like real estate. You most certainly do not roundtrip your Pets.com and Webvan stocks to zero!

As the mania for crypto, NFTs, Reddit YOLO stocks, and growth stocks rages on, more money will smartly find its way into the housing market for diversification.

At the end of the day, these huge gains will be converted to buy things that improve the quality of an investor's life. In other words, real assets like real estate, art, wine, cars, and so forth. Otherwise, it's all kind of pointless.

12) Credit Is Still Very Tight

When the dotcom bubble burst in 2000, real estate began to outperform until about 2H2006. That is when the euphoria hit its peak as banks lent to anybody with a pulse. Thankfully, lenders were forced to raise their tier 1 capital ratios and lend much more prudently since the 2008-2009 Global Financial Crisis.

Nowadays, only people with high credit scores and solid financials can get a mortgage. When I refinanced my mortgage in 2019, Citibank and Wells Fargo would only give me the best rate if my credit score was above 800. When I took out a new purchase mortgage in 2020, Wells Fargo required an 800+ credit score again.

13) Rents Rebounded In Big Cities

One of the reasons for housing bubble concerns is that cap rates compressed to unattractive levels. As a result, a lot of capital flocked towards 18-hour cities where cap rates are higher. At the end of the day, a home price cannot keep going up indefinitely without rental price growth.

During the pandemic, we saw rental price compression in some of the most expensive cities in America. However, rent prices are now rebounding and will likely continue to rebound as people come flocking back. A continuous rebound in rent bodes well for home prices.

14) The Cost To Build Housing Is Rising

You may have heard that lumber prices are up 3X in one year as demand outstrips supply. Therefore, framing costs to build a house are up at least 2X as lumber accounts for 70% of framing costs. To build a new 2,000 sqft house, framing costs might be up $70,000 – $100,000. There are supply-chain shortages in many finished products as well. Expect delays.

15) Selling Costs To Sell A Home Are Still Too High

If the cost to sell a home dropped to $0 like stock trading, I'm certain there would be a lot more supply of homes for sale. However, many realtors are still able to charge a 5% – 6% commission to sell a home despite the internet. Therefore, the real estate industry is self-throttling, which is actually beneficial for homeowners who never sell.

16) Potential Long-Term Capital Gains Tax Hike

President Biden wants to raise the long-term capital gains tax rate from 20% to 39.6% for households who make over $1 million. If you are a long-time homeowner sitting on more than $1 million in capital gains beyond the $250K/$500K tax-free profit exclusion, then you may end up holding onto your home for longer. As a result, home inventory should decline.

It’s already difficult enough to move out of a home you’ve lived in for 40+ years. Why would you then sell it to pay a 43.4% capital gains tax (includes the 3.8% Net Investment Income Tax)? Instead, it's best to hold onto your gold mine forever and pass it down to your children when you die.

With lower housing inventory due to a higher capital gains tax rate, housing prices should continue to stay elevated.

17) Higher Conforming Loan Limits Improve Affordability

The Federal Housing Finance Agency (FHFA) increased the conforming loan limit for 2022 by an astounding 18% to $647,200, up $98,950 from 2021’s limit of $548,250.

In higher-cost areas, the new loan limit increases to $970,800, or 150% of the baseline loan limit. This ceiling applies to residents of Alaska, Hawaii, Guam and the U.S. Virgin Islands, as well as areas in which 115% of the local median home value exceeds the baseline conforming loan limit.

These record-high increases are great for homebuyers because conforming loan rates are generally about 25 basis lower than nonconforming loan rates. As a result, housing demand, especially for homes priced up to 120% of the conforming loan limits should remain high.

18) War Is Making Real Estate More Attractive



Sadly, Russia's invasion of Ukraine has made people look towards owning more hard assets like real estate and gold. Bond prices move up and mortgage rates go down as well. As a result, real estate becomes a highly coveted asset class during times of war. I really hate that I have to add this 18th bullet point about real estate.

CC: Financial Samurai 

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