If you turn on the news, besides the pandemic, everyone is talking about the housing bubble.

Experts are warning that the housing market will crash in 2021.

And as a piece of evidence they bring the example of the 2008 crash that 2020 is following

the exact same patterns so the housing market should crash again next year.

And this is pretty interesting because if we are in a bubble that will burst next year,

it will present a golden opportunity for a lot of people to jump in and make a fortune

because a housing bubble means that houses will be sold at a fraction of their real price

once the bubble burst.

Imagine at $200,000 home that you wanted to buy is suddenly on sale for 70 or $80,000

and interest rates are so low that you can get it immediately if you can make the downpayment.

Doesn't that sounds like a golden opportunity?

Everyone likes investing in real state because for some weird reason we believe that real

estate prices will always rise however we have seen countless times that's not the case

and house prices can actually drop.

To figure out if investing in a real state now is a good idea or not we have to understand

a few things.

Do home prices always rise?

How housing bubbles area created?

And finally when exactly the market will crash?

Before we move on.

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And now lets get back to the video.

The 2008 Crash - The mother of Housing Bubbles

One of the tools the fed has at its disposal to control the economy is the interest rate.

When the economy is rising too fast, the government intervenes and raises interest rates to stop

the flow of capital into the market so that the economy doesn't turns into a bubble,

because high interest rates means borrowing money becomes expensive which means less people

would borrow money which will result in less spending.

And vice versa.

Thats known as Monetary policy.

So back in 2000s, when the dot com bubble burst, the stock market lost almost 5 trillion

dollars of market cap, the economy was in a recession, so the fed lowered interest rates,

From around 3 percent to 2.5 then to 2 percent all the way down to a little over 1 percent

to encourage everyone to borrow money and spend in order to get back the economy on

its knees.

And it worked, by 2003 the economy began recovering, by 2006, the stock market reached its pre

dot com crash level.

But low interest rates means low rate of return on government bond and interest on fixed despots.

It no longer made sense for investors to buy government bonds or keep their pile of cash

in the banks since inflation would slowly eat it away especially when a few years ago,

they made unbeliever returns during the dot com bubble, the s&p500 rose by over 400 percent

from 1995 to 2000.

So investors were looking for a new opportunity, a safe and rising investment to throw their

money at and real estate seemed like a great idea, but investor don't have the time to

deal with individual buyers so financial institutions came with a brilliant idea.

Since interest rates were so low, everyone was buying a house, so financial institutions

would take these mortgages, bundle them together and sell them to investors in forms of shares.

These investments [proved to be really great, but banks run out of financially responsible

people to loan mortgages but investors still wanted to buy these investments.

So banks started giving subprime mortgages or mortgages to people with really low credit

scores, people didn't necessarily have enough income to keep making the mortgage payments.

Why?

Because they would take these mortgages, bundle them together and sell them to investors.

Low interest rates and rising home prices kept attracting more and more investors.

The reason why these investments appeared so seductive is because the investors argued

that, even if they would default on their loan, its not a big deal, the bank can get

back the house and sell it and since home prices were rising, they would still make

a profit, it seemed like the perfect investment.

So the banks gave mortgages to everyone, that inflated home prices to unbelievable heights,

but at some point one of the borrowers defaulted.

So his home was put on sale, then the second one, then the third.

Soon, there were so many homes on sale but not enough buyers, and home prices began to

fall.

When people saw that their 500K dollars mortgage house is suddenly worth only 250K, it stopped

making sense for them to keep making mortgage payments so they walked away from them.

Now there were even more houses on sale, driving home prices even lower.

So the banks were left with a lot of worthless mortgages that no one wanted to buy so they

went bankrupt one after another.

but how is this all related to the 2021 crash?

Well, the government intervened and saved the big banks in return that they would tighten

their regulations and won't randomly give mortgage unless they have high enough credit

score and are able to make the monthly payments.

For sometime, they did, if in 2010, you would try to get a mortgage, the banks would require

you endless number of documents to prove you are financially responsible and you have a

stable job that will allow you to make mortgage payments on time.

So, Home price returned back to their pre crises level by 2012.

The only reason, the market would crash again is if house prices will start rising dramatically

again and there won't be a demand to meet it.

In the last 8 years, home prices did actually rise but mortgages were no longer given to

irresponsible borrowers.

In fact, In 2016, the FED stepped in and raised interest rates from 0.25 to 0.5 so that it

wont turn into a bubble.

By 2019, interest rates were at 2.5 percent.

Borrowing money became expensive, although the number of mortgages dropped to a certain

extend, but the demand was still there so prices kept rising.

- Covid-19: The crises that suppose to crash the housing market

When the pandemic stopped the economy, it was clear that the housing market is going

to crash, because overnight millions of people lost their jobs which means, they won't

be able to continue making their mortgage payments and default on their mortgage which

means, suddenly there are going to be too many houses in the market as it was back in

2008 so home prices will start falling which means the housing market will crash.

But what we didn't take into account is that, the Fed just recently went through a

housing crash so it knew how to stop it.

First of all the government distributed stimulus checks to help everyone to pay the bills.

The government granted financial aid to businesses who retained their employees so most people

could keep paying the bills, including their mortgage.

And to seal the case, the government intruduced a forbearance plan which basically means,

you can put your mortgage payments on hold until 2021.

And that means that non one is going to default on their loan this year, and by the next year,

a vaccine is hopefully will be available and everyone will get back to work and keep making

their monthly mortgage payments.

but why in the middle of a pandemic, home prices are still rising?

Remember, in the beginning of the video we talked about How the fed lowers interest rates

during recessions to help stimulate growth.

Well, that's exactly what they did.

The fed lowered rates to 0.25 percent which made borrowing money more affordable so the

demand for homes rose while the supply didn't.

Is the market overvalued?

Probably!

But its definitely not a bubble.

Once the 2020 rollercoaster will end and life will get back to normal, home prices may depreciate

to what they really worth, but that might not happen next year.

Of course if you take individual cities like San Franciso, New York City, or LA, home prices

might be slightly more overvalued.

But that's pretty much about.

it.

So, is it a good idea to invest in real estate now?

Probably no since the market is slightly overvalued and a correction might happen next year, on

the other hand, timing the market isn't a great idea either, especially the housing

market since house prices don't jump up and down like stocks so you might end up waiting

a few more years.

And now its your turn, do you think we are in a bubble?

Will home prices crash next year?

Let me know in the comments below.

And that's it for today.

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thanks for watching and until next time.