Transcription
A lot of people were betting on lower interest rates this year to be able to continue the housing market from breaking. And right now, we're actually seeing the opposite happen, and it's drastically changing what's going to happen through the next six months of this year.
We are seeing interest rates continue to move up, basically every single day since March, right? We had this massive downturn in March, and then all of a sudden, we saw interest rates continue to move up. And this is because what we're seeing internationally with Iran, with oil prices, and with the new Fed chair coming in, the market is getting nervous about the mortgage rates. We're actually seeing a lot of mortgage rates move all the way to 6.6 to 6.7.
Now, obviously, financial gravity is what is happening, right? Because when you have rates go from 2% basically to 6 to 7% within a few years, that is complete financial gravity for assets that are backed by debt, specifically real estate. And that is why the real estate market is really starting to go under pressure, and we're starting to see a lot of distress start to pop up that's underneath the surface that the media is not covering and they're not talking about. And frankly, if mortgage rates continue to go up from here, we could see a really devastating market moving forward.
So, this is what's happening with the 10-year Treasury, which is connected to the 30-year mortgage because people stay in their house on an average of 8 to 12 years, and that's how long they keep their their mortgage if they decide to sell or refinance or something like that, and that's why they're connected. So, this is why we track the 10-year Treasury directly. So, we are continuing to see again, mortgage rates move up, and it's really changing the market.
Now, a lot of people were again saying they're overly optimistic, the bulls saying, "Hey, rates are going to come down. The housing market will stabilize. Things will get better." It's just not true. Look at this, the futures market is now pricing in 1.5 rate hikes by year-end, and that's after Trump's pick got into the Fed position as the chairman. And so, we're seeing again, the implied rate likely going to be moving up by the end of this year. We're We're thinking another 25 rate hike, another 25 rate hike. And if we have these rate hikes that actually happen over the next couple months here going into the end of the year, that will absolutely crush the housing market because we're already in a straight-up affordability crisis.
And already, before we even see this type of rate hike or continued interest rates move higher, we're seeing motivated sellers, right? So, this comes from Parcel Labs, and it describes the national motivated sellers by state. You can see the areas where people are starting to cut their prices. So, you could see in Florida, 42.9%, Texas, 48.7%. There's a lot of folks who are cutting their prices because prices are simply too high. I even had my agent yesterday who was arguing on X that price does not impact affordability. Of course, it does. It's like the number one thing. Uh, you know, he's like, "Oh, to make it more affordable, we just need more could rates to come down." For sure, it'll impact the payment, but you need the price to come down as well. That's obviously why people are cutting their price. They don't cut their price because it's not making it more affordable. It is making it literally more affordable. It's the most important factor other than interest rates that impacts the sales velocity of what we're going to see for real estate moving forward.
But you can see it's not the same everywhere, right? In the Northeast, there's not as many distressed sellers. And in the areas of the Sunbelt, you can even see Colorado is a big one. Arizona is a big one. People are starting to cut because they're realizing that the prices just went up too fast in such a short period of time, and wages did not keep up.
The other thing that we're seeing, which I'm going to talk about, is migration patterns are changing drastically as people are searching for lower housing costs, and they're not moving to the areas that they were moving to before. And of course, when you see price cuts, what you generally see after that is the headlines, right? You're starting to see foreclosure filings in the first half of 2026. A lot of this has to do with the workout programs that were started in 2020 that kept people in their houses if they had distress, and it didn't end really late until I think it was September of 2025. So, we saw this massive wave, you know, obviously from 2008, and we kind of stabilized after 2012 um to like a normal rate of foreclosure, and then we just the market was just on fire for basically a decade and a half, and prices just continued to skyrocket. So, you're not going to have as much distress when prices are going straight up. Uh, and then obviously 2021 was the bottom, and now we're starting to see it creep up.
Well, during 2020 to 2025, a lot of people are like, "Oh, you know, there was no foreclosures during this time period. The market's completely good." No, no, no. We had workout programs where if people missed their payment, they lumped that payment on the end of their mortgage in, and that's what they're working through right now. And that program became a lot more difficult to jump through hoops in 2025, uh, late in 2025. So, in a lot of states, if they're a judicial state, it takes a year to go through the foreclosure process, sometimes more, even short sales and stuff like that. And so, it's going to take time for this distress that's underneath the surface to like actually come up to the surface. And this is where a lot of people don't understand because they don't understand what happened during this time period. We had these workout programs. It's very easy to call the bank and get a modification or lump it on the back end of the mortgage. And now we're going to start seeing foreclosures move up every single year, probably moving forward as those programs became a little bit more challenging to extend and pretend.
It's no different than what we're seeing on the commercial side, where there's tons of extending and pretending. There's so much distress on the commercial side, you would not believe it, but the banks keep saying, "Oh, we don't want to take the property back. Let's extend. Let's extend." Uh, or the investors are shoveling cash in. So, we're still seeing foreclosure activity. It's going to accelerate moving forward for these reasons. And it's something that you need to keep an eye on if you're a seller because if you're in an area where there was a lot of distress or there's distress to come up, especially around new construction where there's a ton of buyers from 2021 to 2023, this could really, really impact you.
And that's where I'm talking about. Where is the distress actually showing up? Well, it's the people who bought with low down payments at the absolute peak of the market. That should be no surprise to everyone, right? Obviously, if you bought in 2019 and your property went up 60% since then, you're not in distress. You can probably sell, you have a lot of equity as as long as you didn't do like a cash out refinance or something like that. The people who have the the issue are those who are in this cohort here, 2021 to 2022. The third 73% of foreclosed debt in 25 to 26 was originated during the peak zero interest rate policy years. And those positions are the ones that have the issues. Now, I would go even further to say those ones in that area um are going to have the most distress, the ones around new construction that are basing building phase two, phase three, phase four. That is ultimately where we're going to see a lot of distress, where people are going to be trapped in their property, they're going to be competing to sell their house with other new construction in the area. So, I think this is going to be a vintage year type of crisis. It's not going to be every year type of crisis just cuz there were so much gains from those who purchased in those prior years. But then again, just cuz work out programs are expiring, so we're going to see distress come from that angle as well.
So, we're also seeing this other phenomenon, which is rage quitting, right? So, inventory has been flattening out, you can see right here for just a little while. The gray is the normal range, right? So, we're getting back into the normal range of inventory. We had this massive demand shock because of zero interest rates. Once interest rates changed directions in March 2022, you obviously saw the inventory start to move another direction. And if rates continue to move up, they will continue to push inventory higher because people can't afford to purchase the inventory. So then prices will drop.
So usually what happens is transactions stall, which we've already seen where at Great Financial Crisis level of transactions moving, then you start to see the inventory build. That is what you're seeing here on this chart. And then you start to see the price cuts, which is what you saw on the chart before. But sellers are very sticky. They always believe that we're still in 2021, 2022 time frame. It's no longer that way. Houses are sitting longer on the market. They're doing price cuts. They're competing with builders. All of these factors are starting to create this phenomenon of rage quitting, which basically people are trapped in their house. They get upset that they can't get the price that they want when they list it. They blame their realtor. They blame the market. They blame everybody except for their price or the condition of their house. And they yank it off of the market and they turn it into a rental property and become an accidental landlord. Then you see rents start to collapse and vacancies start to increase because there's all these new new inventory that's coming on the market that people didn't expect before. And so these are the outcomes that we're seeing across the board.
So while this is an interesting chart and it looks like things are stabilizing, it's actually not. It's because of this rage quitting phenomenon. People are withdrawing or canceling or terminating their listing hoping to relist it next year at an even higher price, which is insane, especially if you're in the Sun Belt. Obviously, if you're in the Northeast, your circumstances are different. Real estate's very local. But in the Sun Belt, obviously, that's not a very good strategy. Especially because demand is weakening. You could see obviously that demand is starting to move down. Mortgage applications are down. Pendings are down. Mortgage intent is down. And this is during busy season, okay? We are in the top of the market for the year right now. And it will continue to move down moving into the end of the year, right when school starts in August. We see a a demand drop basically 35% going into December. So we are going to see the number of closed transactions even slow down more. That means inventory will start to increase even more moving forward, and that'll put pricing pressure on real estate, which is an absolute good thing. We need prices to come down. It's totally artificially inflated by the zero interest rate policy of the government. Tons of mom and pop investors coming in and gobbling up a ton of real estate and turning them into rentals, restricting the supply, and builders under building for quite a period of time.
But now, the builders have built the inventory. They just built it at the wrong price point. They built them in the five to 700 to 800,000 dollar price point here in Florida when we need them around 400,000 dollars or less, so we actually have starter homes for people who can afford them at today's price points and today's interest rates. That didn't happen because the margins to build, you know, a 700 or 800,000 dollar house is literally 10 times the amount that you'd make building a 300,000 dollar house, and that's just how it is. So, the builders are incentivized to build at those price points, and that's causing a housing mismatch. So, we don't have a housing shortage, we have a housing mismatch what's going on in the market today. And this is one of the indicators of what's to come.
So, everybody keeps saying that market's going to get better better better better. Guys, it's not going to get any better at this point. You can see that the days to go under contract, to go pending are taking longer and longer, especially in the Sun Belt. This will start to fade upwards as time goes on because again, mortgage interest rates moving up are like financial gravity. I don't see any reason why mortgage rates would start coming down unless you experience job loss. And if job loss starts to happen, then it's obviously not good for the housing market cuz if you don't have a job, it's really hard to buy a house and unless you have cash. So, those are one of the things that we're looking out for, but look, things are changing. It is not getting better, it's getting worse every single day, and the affordability crisis is a massive issue, right?
So, the household income needed to afford the finance purchase of a typical valued home is $93,000. Obviously, when rates move up and they have since January, rates move up, it actually becomes even more. I think it went up about $15,000 from the time this chart came up. It's like $93,000 and now it's like $105,000 that you need to be able to afford a typical valued home in the United States. And so, not a lot of people make six figures in the United States as a family. And the median household income in Florida is closer to $68,000. So, there's a massive more than basically around 30 to 40% gap in what you need to earn versus what the household income it needs to be for you to be able to purchase one of these medium price home priced homes. And so, people are just sitting in there renting, they're negotiating, they're trying to find a path to minimize their housing costs because your housing cost is often your largest expense out of your budget. In Florida, it's up to 38% of your income goes to your housing costs, which sucks. It leaves very little left over after you have to pay for taxes well. So, this is something that worth paying very close attention to these ratios here.
So, we're paying attention to the inventory that's coming on, the number of transactions that are going through, and the affordability that comes through to see what's going to happen next in the housing market. And again, this doesn't happen overnight. Real estate's an a liquid asset. It takes time for prices to correct. This isn't going to be something where you're going to see a crash in a single year or anything like that. And as we referred to earlier, there's a lot of extend and pretend out there, right? This is Beanie Brandon, Brandon Turner, who lost investor capital. There's another big investor out there that lost a $50 million of investors capital. And so, there's a lot of stories out there that are starting to surface that this kind of distress happened about a year ago, and these people are still very bullish on the market even though they're like basically wiping their investor slates clean because they have to be. They have to have a positive outlook, otherwise they would they they think that mortgage rates will drop and it'll save them. They have to have this outlook, otherwise their entire net worth, which their identity is usually tied to their net worth, basically evaporates and then they go inward and they disappear. And we're seeing a lot of people right now, especially in the syndication space, they're disappearing. They just they they had no skin in the game, they raised a bunch of capital from investors, they lost the capital from investors, and then they literally just disappear from the face of the planet. And this is why every time there's this bull market, these retail investors or net worth folks come in here and they just give money to anybody and they're not actually great operators. They've just been in a in a long bull run for the last 10 to 15 years and they have this illusion that they're wonderful operators when really just prices and rents skyrocketed. And right now, you can only tell if somebody's good if they're crushing it during a down market. And sadly, there's not many people I know of and in all my investor groups who are absolutely crushing it in this type of market and taking advantage of the distress that's out there.
So, just a year ago, we saw Pulte out there and say pushing Powell, "Hey, we need to cut in July. We need to cut in July." So, we can't imagine the difference that we're experiencing today where, you know, we're actually seeing rates move up. The administration has kind of moved away from this pushing the the Fed from cutting. We haven't actually seen that, but they're trying to get mortgage interest rates down as much as possible. If you remember the Freddie Fannie purchases of $200 that they said, "Hey, we're going to reduce mortgage rates as much as possible." But honestly, the exact opposite has happened. Why? Because $200 billion is a drop in the bucket. The market is so massive, the government doesn't even have control of it at this point. Of course, they buy all the mortgages and then sell them, but they need an end buyer to be able to actually purchase these mortgages that are held by the government and insured by the government. And so, those folks aren't pulling up, and so what we're seeing is people are seeing real estate as a more risky asset class and mortgage rates are continuing to move up. I think they're going to continue to move up going into the end of the year. I hate to say that cuz I'm in real estate, too, but if that happens, we're going to see an acceleration of prices come down and more inventory sit on the market.
And just so you know, mortgage rates account for a large, a vast majority of home price appreciation. So obviously, if the rates go start going the other direction, it's going to make the asset prices fall, right? So we've had 40 years of falling mortgage interest rates, right? This is the blue line, 30-year fixed rate average, you know, since 1990. We've seen these rates come down, and that has pushed prices up because you basically just changes the formula for what your monthly payment's going to be. But now prices are at such an insane level, it no longer makes sense for people to be able to purchase, especially when you have mortgage rates bounce off of the bottom and move back up. So we are truly in an affordability crisis.
You have to understand that mortgage rates really drive the housing market because we live in a payment economy where people go to the bank and the bank maxes out their payment and says, "This is the maximum you can afford." A lot of people live on the maximum, unfortunately, and if you live on the maximum during a great financial crisis or near the top, it's a massive problem, and that's what we saw from the 2021 to 2022 cohort, and that's why you see there's a lot of foreclosures coming through during that time period with people buying. Now, most economists estimate that declining mortgage rates accounted for 30 to 60% of total home price appreciation since the early '80s. I've seen reports that go all the way up to 80%. A buyer able to afford a $1,500 monthly payment could now borrow $110,000 at 18% interest or $355 at 3% interest. So you can obviously see what you can afford to borrow, afford, keyword, to borrow is primarily dependent upon what the interest rate is at the time, and that determines what your purchasing power or the ability to to make those monthly payments can be. So again, it just shows you the drastic change on how interest rates can manipulate what you can actually buy.
Now, there's been studies done on this, too. The 7 30 to 70% of price appreciation is due to rates, right? The Federal Reserve did a study on this, which said 50% of home price growth is due to falling mortgage rates. You saw Harvard come out say 35 to 40% Goldman Sachs said that 1% point drop in rates increases the price by 12 to 13% over time. Well, obviously if we go the other way, and there's 1% increase in rates over time, then you'll see the prices drop 12 to 13% over time. So, we've gone up from 3% to 7%. That's 4%. That's a 40% drop, according to Goldman Sachs study that they did in 2022. So, they even say from 1981 to 2021 rates fell 15%, which would predict a compound price increase exceeding 100% purely from rate declines. And that's exactly what we saw.
So, the mortgage rate is determining what is happening in the housing market. The other factors, obviously, and there are many other factors, are income growth, land constraints, which we see obviously in the Northeast. That's why the Northeast is keeping up, population growth and household formation, which honestly is not doing so great right now, investor activity, basically fell through, tax incentives, which we just got the accelerated depreciation from the Trump administration at 100%, so we saw that come through with the BBB, construction costs and material inflation, those were really high and they've been coming down, but we're seeing the majority of the basically what drives the market is the mortgage rates, okay? But there are other factors that influence it, but we need to understand that rate rates going up this much, according to Goldman Sachs model, means that prices will come down over time. It's just that it's just the inverse.
And obviously we're seeing like a lot of inventory come on the market. We're still seeing people say, "Hey, it's a bull market." Obviously, these are sales people. You need to understand the difference of where you get your information from. If you're getting your information from the mainstream media or let's say a news article that constantly just pushes housing and says it's going to do great, it's going to do great, those are paid media sources, okay? These are people who are financially incentivized to say things are good doing well to trick you into buying their overpriced asset. They represent builders, they represent title companies, mortgage companies, all of this stuff. Do your research yourself. Follow channels like this. If you need a top real estate agent for your market, reach out to me. I'm more than happy to put you in touch with them. If you're searching for real estate in Florida, go to our website movetomomentum.com. You can see what's actually happening with the economics on the ground. Um, and we're happy to build out that database for you so you can make a better financial decision. This is not financial advice. We're just giving you the data so you can make the decision for yourself. But look, this is So what happens next, right?
If we have a 4-point rate jump, it implies a 40% affordability impact, which has been offset by constrained inventory and strong demand, but over time this pressure still weighs on price growth. And we're seeing that we're seeing prices come down here in the Sun Belt. My projection based on my financial analysis being a former real estate investment banker shows that prices could fall over the next five or 10 years. I don't know. Timing is impossible with this stuff, but we can tell you how overvalued it is according to historical context. But if my projections show that we see a 31 to 42% decline over the next few years in Florida, and we specifically have these migration issues where it's become so unaffordable for people where they stop moving here and actually are starting to do inverse migration and going back to where they came from originally. So I'd love to hear from you. What do you think will happen? What do you think will happen this year with interest rates? Are you following it as closely as I am? Drop below in the comments. If this is your first time to the channel, I appreciate a like and a comment as well. And what will it look like over the next six months going in until the end of the year? Do you follow my prediction that we're going to see transactions stall, inventory climb, and prices fall along the way? Or are you seeing something different in your market? Love to hear from you. Drop a comment below. We're always learning from each other and I'll see you next week.