The Housing Market Is Completely F*d

Graham Stephan

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Video Summary

Mortgage rates have surged to nearly 7.5%, a 20-year high for long-term treasury yields, making borrowing significantly more expensive. Investors can now earn more from government bonds than from rental properties, prompting a reevaluation of investment strategies. This shift, driven by inflation, rising oil prices, and massive government debt, is putting immense pressure on the housing market, potentially leading to a collapse in either interest rates or home prices.

The bond market is experiencing a collapse as investors sell off government debt, driving yields up. This forces the U.S. government to pay more to borrow money, exacerbating the national debt and creating a cycle of higher rates. The housing market is already seeing a sharp decline in sales and an increasing gap between sellers and buyers, with many sellers resorting to concessions and price cuts. While national median home prices are still slightly up year-over-year, adjusted for inflation, they are falling. The situation could worsen if rates remain high, making homeownership unattainable for the average person and potentially causing landlords to exit the market, further impacting prices.

Short Highlights

Mortgage rates have surged to nearly 7.5%, with long-term treasury yields at over 20-year highs.
Government bonds now offer higher returns than rental properties, shifting investor behavior.
Inflation remains above 2.5% for 65 months, and oil prices are over $100 a barrel.
The U.S. national debt is over $40 trillion, with annual deficits around $2 trillion.
Home sales have plummeted, with significantly more sellers than buyers.
Home prices, adjusted for inflation, are falling despite nominal increases.
Two main scenarios loom: a best-case scenario with falling inflation and rates, or a worst-case scenario with escalating conflict, higher rates, and market destruction.

Key Details

Skyrocketing Mortgage Rates and Treasury Yields [0:00]

Mortgage rates have climbed to nearly 7.5%.
Long-term treasury yields have reached levels not seen in over 20 years.
Borrowing costs have dramatically increased across the economy.

"mortgage rates have just surged to nearly 7.5%."

The Bond Market's Inverse Relationship with Yields [1:35]

Bond prices and yields move in opposite directions.
When investors sell bonds, prices fall, and yields rise.
Rising yields signal low demand for government debt, forcing higher interest rates to attract buyers.

"So when investors want to buy bonds, bond prices go up and yields go down."

Economic Repercussions of Higher Treasury Yields [2:48]

Higher yields from government bonds make other investments, like stocks and rental properties, less attractive unless they offer substantially higher returns.
The U.S. government, as the largest borrower, faces significantly higher costs as interest rates rise.
Maturing debt must be refinanced at higher rates, increasing the national debt and prompting demands for even higher returns from investors.

"Because if the safest borrower in the world suddenly has to pay more, then everything else in the economy suddenly has to readjust around that number."

Three Forces Decimating the Bond Market and Housing Values [4:03]

Inflation has persisted above 2.5% for 65 months, with oil prices exceeding $100 a barrel.
Rising oil prices, exacerbated by geopolitical tensions, contribute to inflation and necessitate aggressive action from the Federal Reserve.
The U.S. government is running approximately $2 trillion in annual deficits, requiring constant issuance of new debt amidst declining buyer demand.

"With the first being number one, inflation is back."

Impact on the Housing Market: Sales Plummet, Prices Stagnate [7:44]

Rapidly rising mortgage rates initially cause sales to fall before home prices drop.
Homebuyer demand has reached unprecedented lows, with mortgage applications at early 1990s levels.
There are 53% more sellers than buyers, leading to concessions and price cuts, especially in certain markets.

"See, here's the thing. When mortgage rates rise this quickly, home prices don't fall first. Sales fall first."

Potential Scenarios for the Housing Market and Economy [12:03]

A best-case scenario involves falling oil prices, declining inflation, and a stable Federal Reserve policy.
A worst-case scenario includes sustained high oil prices, escalating conflict, further rate hikes, and potential destruction of housing and stock markets.
While a nationwide housing collapse is unlikely due to homeowner equity and low-rate mortgages, prolonged high rates could lead to increased inventory and price reductions.

"Best case is that we negotiate a way to open the Strait of Hormuz, oil prices fall, inflation declines, the Federal Reserve doesn't have to raise rates, and eventually everything slowly begins to come back down to normal."