Falling Rates Drove 80% of Home Prices. Now That's Reversing.

We are in one of the largest asset bubbles in history. And the reason is because we've had these interest rates that have been falling for the last 40 years, spiking almost every single asset class across the world. And now it's coming due and we're starting to see this show up. There's a lot of distress under the surface that still hasn't come out into the marketplace. Let's dig into what is going on, why it's happening. If you're a real estate investor, a buyer, a seller, or a real estate agent, this information will blow your mind. The number one piece of information is that 80% of price appreciation has been because of falling mortgage interest rates. It is not because there's just natural demand and the supply is there to catch it. It's because the rates have been manipulated for years and years, decades, and decades. And the low rates have pushed prices higher and higher.

What happens when you can't make the interest rate any lower? Well, this is what we're seeing. This is a article that came out by John Wake, who's a housing researcher. He says that 80% of house price appreciation since 1990 was due to falling mortgage interest rates. So, what the happens when we go to zero and then raise the rates higher? Well, I'll show you exactly what happens. This is a sad story. This is somebody who I know. His name is uh Brandon Turner. And there's a lot of pain under the surface. There's a lot of people who bought commercial real estate at a rapid rate from 2020 to 2024 and then they got this short-term rate financing on floating rate debt and then the debt only lasts 3 to four years and then they have to refinance. Well, that's easy when rates are going down. You can make a fortune with this type of business model. But when the rates are going straight up, I mean, they're going straight up from 3% to 7%. Now, they've kind of settled between the 6 to 7%. this kind of worst case scenario happens and the investors lose all of their equity and they don't have enough money to bail out the project. The numbers no longer make sense as even with rents going higher.

That's what Brandon on social media is saying. He lost $15 million of LP limited partner investment because he didn't prepare. He didn't prepare for downside risk. There was so much speculation during this time period because of these artificially low interest rates that just spiked everything to the next level. So this is saying on a deal where rents went 30% higher when they bought the property and we sold it at 95% of occupancy. How does this happen? And so this is exactly what happens with the mortgage rates move. So did you underwrite the deal? Did you get caps on your property on your debt to prevent this type of floating rate debt to happen? And by the way, there's more than a trillion dollars of this debt out there right now that has to be refinanced this year. And this is what we're talking about. There's going to be a lot of pain in the marketplace that comes over the next few years, this year and next year that is there. It just hasn't surfaced yet. And now it's starting to surface with viral information just like what we're seeing here. And these, unfortunately, a lot of these capital razors, they're just that. They're talking heads. They're good at telling stories. They're good at social media. and they collect all this money from people. But who is the actual operator who's going to operate the deal because being good at media is completely different and selling education is completely different than actually operating a real estate deal.

And so I think this is just a warning signal of what's to come. This is obviously a smaller deal. I think it was like 75 million. There's people who raised billions and billions of dollars to buy during this time period that do have these floating rate debt. again 1 trillion that's coming up due where there's going to be a lot of pain coming down the pipeline from what we're seeing right now. So look and this is why the government is freaking out almost a year ago the US director of federal housing FHFA was begging for rate cuts. This is why you see Trump out there begging for rate cuts. They're begging for a bailout of the real estate market because they know how powerful lower interest rates are to the real estate market. But obviously when you go from 3% to 6% or 7% rates, it just crushes demand. It brings it all the way back down and then the inventory continues to stack.

And that's what we're seeing price cuts after price cuts after price cuts. And that's especially true happening in the Sun Belt areas. So they're begging for a year. Now, did it work? No. We haven't seen interest rates move down. In fact, we've seen rates go down to 6%, back to 6.75%, and now we're back down to 6.5%. A lot of what's happening with war and oil prices spiking is something to do with this, but they have not been able to use all of their tools in their tool belt. They've been trying absolutely everything to get rates lower and they've been unsuccessful in doing so. And here's the chart I think that's really important to understand. Here's the 30-year fixed rate mortgage on the blue line and the red line is the Case Shiller National Home Price Index. You can see as the rates are moving down, the prices continue to move up.

Now, when rates moved down to a certain level and we had this massive speculative bubble in 2008, we're now seeing it happen again and the rates continue to drift lower and lower. And this is where again we've hit rock bottom. What happens when you see that pivot point where it moves start moving exactly the opposite way. That's what we're seeing right now. and it doesn't go up in like a straight line or anything like that, but it's going to bounce around up 1%, down 1%, and it's going to move across the board with what's happening with the economic factors in the marketplace. But ultimately, you have to ask yourself as a real estate investor, and this is what was missed from these other people who are raising capital. What would happen to my portfolio if rates went up another 3% from here? How do I protect myself from that downside risk? That was what was completely missing from these folks who were raising capital out there and trying to manage these projects. And here's another question to ask yourself.

If rates didn't fall that much, where would prices be? So in 1990, the principal and interest payment on a $100,000 property at 9.9% interest would be $870 per month. The PNI payment on a $300,000 house at 2.7% would be 1227 per month. So although house price appreciation appreciated 200%. We went from 100 to 300 monthly PNI payments only increased 41% due to the lower interest rates and then because wages keep up with that. It makes sense the numbers make sense because wages are keeping up with what the payment is and we live in a payment economy. But what happens when the wages don't keep up with the payment because mortgage rates are now going the other way. So certainly if mortgage rates have remained at 9.9% houses prices wouldn't have increased as much as from 1990 to 2020. But how much less? It could be a tremendous amount less. Most economists estimate that declining mortgage rates accounted for 30 to 60% of the total home price appreciation in the early 1980s. Example, a buyer was able to afford a 1,500 monthly payment to borrow 110,000 at 18% interest rate or 355,000 at a 3% interest rate. So, I'm basically just explaining to you that it's very very important what happens with these mortgage interest rates is driving the real estate market today.

There's so many marginal buyers who are on the edge waiting for rates to come down so they can go out there and purchase. Then there's all those people who did purchase had this stupid slogan called marry the house date the rate which is one of the dumbest things. I actually called it out in one of our meetings and one of our agents got so mad that he left the company because I called out this. I was like here's why it doesn't work because if prices come down you can't refinance. Okay, what happens if mortgage rates actually move the other way? It's a dumb slogan. It's only meant to just convince buyers to buy houses that they never should have been buying and they're not down. They're basically avoiding what are the downside scenarios of buying right now at this high interest rate and at this extremely high price relative to what just happened in the last few years. So, we're still pricing real estate at 3% rates, but rates have now moved to 6.5%.

Well, every 1% increase in the interest rate translates to about a 10% decline in purchasing power. Over time, that should play out to a 35% decrease in prices. And that's what we're starting to see. Prices are starting to come down. You're getting the price cuts. It happens slowly because real estate's in a liquid asset class, but it is happening. It's happening across the board. Now, look at this. Several studies have modeled this type of price appreciation due to falling rates. In 2005, the Federal Reserve came out with Greenspan and Kennedy that concluded declining rates and easier credit standards explained 50% of real home price growth from 1995 to 2005. Rates driven. Harvard study and Moody's analytics, 35 to 40% of real estate appreciation from the 1980s can be attributed to falling borrowing costs. And Goldman Sachs even more recently in 2022 modeled the sensitivity of housing prices to rates and found that a 1 percentage point drop in rates increases prices 12 to 13% over time. This is exactly what we're talking about. Now, what happens when that changes? So from 1981 to 2021 rates fell 15 percentage points which would predict a compound price appreciation exceeding 100% purely from rate declines. Okay. So if you're a real estate investor, real estate buyer, real estate seller, a real estate agent, the number one metric to track is mortgage interest rates. Where are they now and where are they going in the future, which nobody has a crystal ball, but right now we've seen them bounce off the bottom and they're starting to move up. Inflation is starting to peak its head. We've seen a great thing happen over the weekend where we're working with Iran and basically they're believing that there's going to be a deal which they've believed for months now. But if there is an actual deal, oil prices will come down. That will help some. But will it be enough to get the market moving again? Probably not. We would need to see probably another 1% decline in rates to really start to get transactions to move through. Now, what attributed to the other 40 to 70% of the price appreciation? income growth, which unfortunately has not been that great with AI concerns. Who knows what'll happen in the future. Land constraints and zoning, this is big in the Northeast. This is why the Northeast is not falling so much right now because they didn't overbuild during this massive speculation phase. Population growth and household formation is massive. And by the way, in Florida specifically, we would probably say migration is one of the number one factors because it drives the majority of the housing here, investor activity and speculation, which has all but died.

Okay, we are seeing the large institutional investors move out of the way. I mean, it's still happening at a local level, but it's not happening at the levels that it was happening before. It's probably down about 50% or even 70% in many markets across the United States that had that speculative bubble. The numbers just simply don't make sense anymore. Tax incentives and policies are massive and construction costs and material inflation. So, those are the other factors that impact this home price appreciation. And a lot of these are changing right now as well that could also put stress on the housing market. Now here's the personal testament to what happened with speculation and syndications. We had this is Jacksonville, Florida. This is where I am. We had so much speculation in our marketplace and our inventory has increased 3.7x times since the bottom of 2020. Now, what happened was mostly those people are buying around 2021. They're not here anymore. They're not buying anymore. those folks that got those low interest rates and purchased that demand is completely gone. And so what we're seeing is basically inventory every single month stack on the market, stack on the market. Now, recently you might have seen that inventory has gone lower in Jacksonville. Well, part of that is because sellers can't get the price they want, they rip the house off the market and they put it up as a rental and they become an accidental landlord. So now we have inventory coming up on the landlord side. The only thing that's driving our market now is still wealthy people are relocating from the northeast, from the west, from other cities, and they're still finding Jacksonville relatively affordable compared to where they're coming from. But that is changing very quickly and the relocations are starting to slow down. That is why we're starting to see price cuts across the board in a lot of areas of Northeast Florida. And this is going to be a trend that I think we're going to see going into the end of the year. It feels pretty good right now because we're in busy season. We're in May. April, May, June are usually phenomenal months, including July. And then in August hits, when school starts, it drops by about 50%. So, we're not going to have a clear picture of where things are headed until the end of this year. So, let's check in in a couple months and see where that's going. But just for right now, using Goldman Sachs elasticity of the 12 percentage change per point increase, the 4 rate jump implies that we're having a 40% affordability impact. And if you're a buyer, you're absolutely feeling this. And if you're a seller, you need to rerun the math for what a buyer would pay for your house at today's mortgage rates, which so far is offset by constrained inventory and strong demand. But over time, this pressure will weigh on price growth. And actually, Zillow just came out with a new report revised down again that we're actually expecting 0.0% price growth this year for prices across the United States. And so this is a huge change in direction. Everybody was up 1 to 2%. Now they're saying we're at 0% and who knows what they'll come out with next. But my projection based on my investment models that I used in investment banking was a price drop here in Northeast Florida of 31 to 42% from the peak of October 2022, which is when we saw peak prices. And it'll decline possibly over the next decade because we have structural issues including the silver tsunami with the aging demographics that are slowly passing away and it's creating a trickle of supply that comes on the market. in addition with migration issues of Florida no longer being as affordable as it once was, which is causing people actually change their migration pattern to coming to Florida and actually go out to the Midwest. So, we still have a bunch of older people moving to Florida and buying cash, and that's wonderful. And then the young people, unfortunately, are not coming to Florida anymore as much. They're still coming, but they're actually going out to the Midwest to try to find where their wages will make sense with the shelter costs. And so, we're seeing a lot of dynamic changes from across the board. Now, what happens next? Nobody really knows. I'm going to keep you updated on this channel to share what I'm seeing on the ground. But we have a new Fed chair coming in, Kevin Warsh, who has now officially taken over as the Fed chair after being nominated by Donald Trump. He's historically been viewed as a hawk. He's been critical of inflation and ultra loose monetary policy, which is why it makes this a very interesting pick. Now, he's repeatedly criticized the Fed's massive balance sheet expansion and post-covid policy response. Now, at the same time, he's been nominated by Donald Trump. And Trump obviously wants to put somebody into the Fed that he can control and have them push lower rates. But unfortunately, that's structurally not really the way it works because there's 12 voting members on the FOMC. And so, just because the chair wants to go one direction does not mean that the other 11 people will fall in line. especially with what's happening right now with inflation cuz we have another inflation report out this week and the last one that came out was not so good and caused rates to continue to move upward. So inflation pressures are reaccelerating right now. But what Warsh is walking into a situation where the market expected a Trump dovish Fed, but macro backdrop may force them to stay tighter than investors hoped and this could really hurt the housing market. If we see rates stay at this level or go even higher, you're going to see more stories like the one I shared at the beginning of this video, and you're going to see a lot more of them because the distress is already there. If they can't refinance, cash in refinance, make the deals work, then they're going to have a massive problem likely by the end of the year. I'm guessing you're going to see a couple stories every single month come out with these large investors that raised capital and they used their social media influencing and then their capital completely disappeared. And it's sad because it's other people's money. And whenever you're investing other people's money, if you have no skin in the game, you're collecting management fees, you're collecting all these different types of fees for the property acquisition fees, etc. And you can charge basically whatever you want if the investor is not paying attention. They can get totally swindled out of major fees and then when the money when the deal goes south, the person in charge of the deal who underwrote it basically incorrectly doesn't lose anything. they get to keep all their money and this is why there's a huge disconnect in the principal agency problem when you invest with other people and so please be very careful I have lots of diligence things I've made mistakes myself doing the same exact thing like investing with people who don't have the experience don't have the knowledge to get the deals done I've made the mistake I got caught up in the hype as well and it happens it happens to people but when you're raising other people's money it's a whole different level than investing your own money and I'd like to say for those folks I feel bad for you if you're an LP investor you have very limited options. But this is why you need to underwrite the deal yourself. You cannot trust what you see on social media. And that should just go to say for everybody. So overnight borrowing goes to 1%. What happens? We're going to have massive asset growth, inflation of all things. Dollar becomes worth less. And in combination with the BBB, this could cause a massive monetary supply expansion, which we're going to likely see moving forward. So why lower rates in today's market? And I have this question for everybody. while housing is primarily impacted by almost every other asset class is at all-time highs. So, is this actually going to happen or could long-term rates actually just continue to move up? So, let me ask you, do you think that the government is actually going to be able to pull this off? And will Trump actually be able to pressure Warsh into lowering interest rates against the Fed's policy and their mandates? And do you think he's actually going to be able to pay it off? I'd love to hear from you down below. As always, give me where you're from, your location, what you're seeing on the ground. If you need a top real estate agent in your area, I know 80% of them don't sell a lot of real estate, and I'm more than happy to get you in touch with one of the best agents in your area. So, reach out to me. My contact information will be down below. Thanks for watching and I'll see you live on the next one.