How The Housing Crash Will Occur

Let's talk about the housing crash and what will be the causes of the potential collapse...

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I don’t know if you guys remember what happened around 2007, 2008 when it came to the housing market. Put simply, banks became loose with their lending policy, people borrowed a lot to buy a house, house prices shot up into a bubble and eventually that bubble popped.

Now the interesting / slightly scary thing is, that something similar is happening today. There is a comparable mix of ingredients right now in the housing market as there was almost 12 years ago and it’s about time someone talked about it…

So 2008, if you don’t understand what happened then, you need to go watch a movie called the big short. It’ll give you a good snapshot of how things played out. But basically it’s the story of how everything crumbles, people wanted to get rich.

So the brokers were getting rich, by finding as many people mortgages as they possibly could. The banks were getting rich, by selling these mortgages to institutional investor as something called collateralized debt obligations, for short CDO’s.

Now the thing you got to know is that a lot of these CDO’s were actually sound investments. They were mortgages that were paid by people with stable jobs and in stable financial situation. But a lot of these CDO’s were terrible. The people paying these mortgages simply couldn’t afford them.
So the inevitable happened, CDO’s caved in on themselves, investors lost money, the housing market fell apart and of course CDO’s got outlawed.

But that is until fairly recently when they invented something called the BTO. The bespoke tranche opportunity. It’s basically just a CDO but with a new name and a better reputation to it. Now just like CDO’s some of these BTO’s are good, but are lot of them are risky, and if mixed with the wrong market conditions, things can end badly….

The problem is that the market conditions that we are in today aren’t exactly great. There are a couple of factors, that make the housing market risky, which I’m going to go over now…

First, is interest rates. I want to take you back 60 or so years so that we can get a good overall picture of things. Now what I want you to do with this graph is look for the anomaly. The section that sticks out. Not anytime in this 65 year period has interest rates hit zero, until… 2009, just after the great financial crisis. And again in… 2020.

But why has the FED done this? Why have they pushed interest rates as low as they possibly can push them before it gets into the negatives?

They did this because they have to. They need it low to stimulate the economy. They need people to be able to borrow as much as possible so they can buy, spend, invest and keep the financial system ticking over. Or else a collapse might have already happened.

But there is a range of problems that comes with having low interest rates.

What you need to realize is low interest rates have a direct correlation to what mortgage rates are set at. If interest rates are low it becomes cheaper for banks to borrow money. Therefore they are able to give lower mortgage rates. Currently the interest rate is very low, consequently mortgage rates are very low.

Now this is important because if mortgage rates are low, it becomes easy to borrow money.

You see the long-term historical average mortgage rate is around 8%. So let’s say you earn $70k a year and you got a nice down payment ready. If the rate is 8% you can afford a house for $250,000. But if the rate is around 3%, which you can get today, with a good credit score on you, you can now buy a house worth $350,000. Aka $100,000 more…

Essentially with mortgage rates so low, you are able to borrow a lot more money. And do you think consumers are going to be cautious and not borrow this. Of course not. Generally speaking they borrow as much as they can...

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DISCLAIMER: It's important to note that I am not a financial adviser and you should do your own research when picking stocks to invest in. These are just some of my viewpoints, by no means would I recommend watching one YouTube video and then immediately buying that stock. This video was made for educational and entertainment purposes only. Consult your financial adviser.