WARNING Housing Market Freefall Possible | What You Need to Know

Home prices can totally collapse. You don't think it can happen? It did in 2008. For a mighty fall, you need to have a ton of distressed homeowners that can't make their mortgage payments because homeowners will walk away if the bank's about to foreclose on them and they have little equity to protect. I mean, why wouldn't they? When sellers have to sell, they cut their prices and soon all home prices collapse because those were the comparables. Well, can this happen today though? Let's look because there is an indicator and you can see it coming. Hi, I'm Keith Weinhold, Forbes Real Estate Council member and host of one of America's longest running and most listened to real estate shows. I'm speaking from personal experience. Back in 2008, I owned my home and eight rental properties at that time. And back then, lending standards were so loose that you could get a loan for 100% of the value of your property or even more like 110%. That's even if you had a say 550 credit score and zero income and zero savings. I'm not kidding, that really happened. Well, that's what people did and they often got an adjustable rate loan. Well, when that interest rate adjusted higher and those people's payments went from say $1,200 up to $2,400 overnight, they couldn't make the payment and we had a foreclosure crisis on our hands leading to a down drain in prices and a complete collapse. That era's borrowers soon found themselves both underwater because the loan balance was more than the home's value and they were also swimming in a pool of oversupplied homes and they were just willing to walk away. So they did, they lost their home. The homeowner had no equity in the home. Remember this 100% loan and no good credit score to protect either? So what? So there was an oversupply of homes, even rentals then, so they just went and rented. Well, that even hurt the responsible borrower because in that case, those dropping values became the comparables for their home too. All right, well, are there any cracks in this armor today? Well, besides being undersupplied of homes in most markets, that's the opposite of 2008. Today's homeowner is house rich. They have substantial equity to protect. Before we look at that, by the way, equity is the difference between the current value of your property and how much you owe on the mortgage. So a 500K home with a 300K mortgage means that you've got 200K in equity. And in fact, today, the average US home equity position just hit a new all-time record of almost $312,000 for mortgaged borrowers. And to put this into perspective, do you know how astounding this is, first of all? 312 in equity today, that's about the same as the overall capital value of the entire asset. The home was just in the middle of 2020, not really all that long ago. Home values were 317K then, but that's about the average equity position now. So a big cushion that borrowers are sitting on and don't wanna walk away from. And you're a keen viewer and listener, so if you listen closely, you'll note that I said borrower's equity. So that means that this 312K of equity, that doesn't even include the four in 10 American homeowners that own their home completely free and clear with no mortgage. Pretty amazing. Hey, go ahead and drop a like on the video if you like how I'm breaking it down for you so far. You don't have to, although I would really appreciate the like. Here's the breakdown by state. That's the average equity position per homeowner. Hawaii leads at 701K. Let's look at this. There's a lot happening here, so just focus on the fluorescent orange line with me. That's the average loan to value ratio corresponding with the numbers on the right. It's about 42%. A simpler way to say this is that the loan balance is just 42% of the home value. And I wanna make this easy, so said another way, the flip side of this is 58%. So what's this mean? Among mortgage borrowers, the average equity position is 58%, and that means that people are more than halfway to being paid off. The next one down, look at the more dull peach color line. Mortgage debt has gone up, but really that's about the same once you adjust for inflation. And then the gray is that high equity position and how quickly it's risen. Let's look for more signs of trouble out there on the landscape. Unlike 2008 times, today's mortgage borrower is credit worthy because they had to jump through hoops and meet stringent mortgage loan underwriting criteria in order to get a loan. And there are really four pieces here. This era's borrowers had to prove that they have assets and income. Second, their average credit score is an amazing 758. Third, almost everybody has a fixed rate loan. Today, their interest rate cannot adjust. And finally, 60% of today's borrowers still have a mortgage rate of under 4%. And they got those from back when rates were low in 2022 and earlier. So with low mortgage rates, this means that their payments are low and affordable, and that payment amount is fixed in concrete. So inflation cannot touch that payment. Now, if a mortgage borrower does get into trouble, they're gonna fight like heck to avoid losing these lofty 300K plus equity positions. But still, could today's borrower get in trouble in some other way? Well, the unemployment rate is low. It's been under 5% for a long time now. How about inflation and wages? Like, isn't that eating up the middle class? Yeah, there's definitely been some hardship, but due to high demographic demand for housing and low supply, when inflation was higher than wage growth a few years ago, home prices rose anyway. Well, today that's flip-flopped. Wage growth for these mortgage borrowers is higher than CPI inflation. That actually eases affordability somewhat. Okay, so less trouble there. All right, well, let's look at the ultimate indicator, really the precursor to a housing crash. Let's see how well these borrowers are really doing. We'll know if they're making their mortgage payments if the foreclosure rate is low, meaning that banks are not repossessing homes. Right, well, here's the number of foreclosures going back to 2005. Gosh, look at that rate of increase. How fast they're climbing in 2006, 2007, and 2008. That was an alarming indicator of the coming collapse. Then let's look at the right. Today's, we have tiny foreclosure numbers. And by the way, that really low dip starting in 2020, that was during mortgage loan forbearance, when homeowners really could not be foreclosed upon. And today's foreclosure rate is 13% lower than it was a year ago. In fact, outside of the forbearance aberration, the foreclosure rate is lower than it's been in decades. Home prices have been rising nationally, and I expect that to continue. In fact, I revealed GRE's National Home Price Appreciation Forecast just a few weeks ago, and I told you by what exact percentage home prices will rise by this year. You can watch that one right here. Prices should keep going up. I mean, sellers are always trying to get the maximum amount of dollars when they sell their property. And in fact, home equity is now American's number one wealth source. Did you know that? Yeah, it recently surpassed retirement accounts. And most homeowners have benefited from the greatest wealth generator of all, as long as they have a mortgage loan. That greatest wealth generator is not compound interest, it's compound leverage. And this is all a hedge against a 2008-like fire sale of homes that was prompted when borrowers couldn't make higher mortgage payments once their teaser interest rates reset higher. So really the bottom line is that today's homeowners are in remarkably good financial shape, stabilizing prices in the single family to fourplex segment. And of course, there is the fact that the rate of return from home equity is always zero, always. And if you don't know why, I'll share that with you shortly. But like I mentioned earlier, listen to me on the Get Rich Education audio podcast every single week while you're driving or exercising or doing something with your hands. It's different from this content. Find Get Rich Education on Spotify and Apple Podcasts, or you can just download the free Get Rich Education mobile app right now to listen. We've got the QR code on screen for you there if you prefer. How much would you invest in something that could never go up in value, only go down in value, and your funds wouldn't be liquid either? Well, nothing. That sounds absolutely awful. I just described home equity. I break that down for you in this next eye-opening video right here.