Transcription
The housing market is starting to crack after seeing years of booming prices, and now some people are getting concerned. Morgan Stanley says you should prepare for a market slowdown. Bank of America says Americans are getting worried about the housing market, and Newsweek even said no one is buying a new house, so be careful.
But describing the housing market in such broad strokes is very difficult because the housing market is local. For example, Florida and Texas are seeing their housing prices fall, while states like Michigan and Ohio are seeing their housing markets holding strong. That's why in this video, I want to give you a real update on what's going on in the housing market and what might be coming.
Let's start with some data. Take a look at this. According to the Fed, the median house in America is selling for around $416,000, which is quite a bit lower than the end of 2022 when the median house was selling for $442,000. But it's still way higher than where we were in the beginning of 2020 when the median house was $329,000. That means the median housing price has fallen by around 6% between 2022 and 2025. But the median house in America is 27% higher than where it was back in 2020.
But the reason why this is so unique is because in 2020 and 2022, you could get a mortgage for 3 1/2%. In 2025, getting a mortgage is 6 1/2%. To put some numbers on this, if you bought the median house in America in 2020 and you put 20% down and you got a 3 1/2% mortgage, your mortgage payment would be around $1,200 a month. If you bought the same house in 2022 when home prices shot up, you could still get a very low mortgage at around 3.5%. You put 20% down, but now your mortgage payment would be around $1,600 a month. And then 2025 rolls around. Home prices are higher than we were in 2020. It's a little bit lower than where we were in 2022. Home prices have fallen by around 6% according to the Federal Reserve Bank. But now you can't get a 3.5% mortgage. You have to get a 6 1/2% mortgage. Now, that same house is going to cost you $2,100 a month. That's 30% more than what it would have cost you in 2022. Even though the house in 2025 is 6% cheaper, you're borrowing less dollars. But because you have to pay 6 1/2% instead of 3 1/2%, you're paying for a cheaper house, but you're paying more money every single month, assuming you're putting 20% down.
But let's dig a little bit deeper as to why home prices are falling. Now, yes, we've been covering this in Market Briefs. Again, Market Briefs is my free financial newsletter for investors where every day my team is breaking down what's happening in things like the housing market, stocks, crypto, global markets, and our own economy into a fun, witty, and easy-to-read newsletter. We have hundreds of thousands of investors that are reading Market Briefs every morning. And as a bonus, when you join Market Briefs, you'll also get my investing master class where I'll walk you through how you can get started as an investor and find hidden investment opportunities before everybody else. All of this is complimentary. So, if you want to get Market Briefs plus my investing master class for free, all you have to do is click the link down in the description below.
The most obvious reason why we've seen home prices fall in pockets around the country is because more people are selling their houses and less people are buying. What do I mean? Well, according to Redfin, there are 33.7% more sellers than buyers. And we haven't seen a gap this big between sellers and buyers since 2013, which was the tail end of the great financial crisis.
Now, the reason why this matters ultimately comes back to supply and demand. Because the price of anything, whether it's a house or a stock, depends on how many sellers and buyers you have. When you have more sellers than buyers, when you have more supply than demand, that generally pulls home prices lower because now sellers have to fight against each other by cutting their home prices to sell their houses. When you have more buyers than sellers, more demand than supply, well, now the buyers have to fight against each other by bidding wars. And that pushes home prices up. So, we have to understand what's going on with supply and demand. And what we've been seeing happen recently is that supply has been outpacing demand. We have more sellers than buyers.
Now, one of the reasons why we're seeing more supply now is because for a long period, people didn't want to sell their houses because they didn't want to sell their houses during a time where mortgage rates were high. But a lot of sellers are now saying, "Okay, it looks like the housing market is kind of going to stay here. So, now we feel more comfortable selling our houses because it doesn't look like 4% mortgage rates are coming anytime soon." On the flip side, we've been seeing demand fall because a lot of buyers are saying, "Yeah, you know what? I don't think I can afford these high home prices and a high mortgage rate. So, I'm just going to sit on the sidelines." So, this has been pushing some demand out while more supply has been hitting the markets. And you can't really blame the buyers either. I mean, if we take a look at the mid-1970s, the median house in America would cost around 2 1/2 times the median annual income versus today, the median house in America is about five times, actually a little bit more than five times the median household income. And today we have a two-person household versus in the mid-1970s it was generally a one-person working household.
But that's not all. If we go back to supply, we're seeing an interesting thing happen when it comes to new construction because over the last number of years we've been seeing a lot of new construction get started and now we're seeing in 2025 more of the new construction completing. And it looks like developers are having a tougher time selling that new inventory that's hitting the market because according to the reports, we have the highest number of unsold new homes in 15 years.
And this is where a lot of people try to get into the prediction game of, is the housing market going to crash? Are home prices going to fall even further? And we'll talk about what's going to influence housing prices in just a second. But I want to remind you that if you are thinking about buying a house, buy a house that you can afford. Don't try to time the housing market. The game is to remember that the house that you live in is an expense. It's a liability. It's not going to make you rich. Sure, it's nice to own a house free and clear, but if you look at the wealthiest people in the world, they never talk about how they became wealthy because they paid off their house. They became wealthy because they owned real assets: rental property, stocks, businesses. If you own a house, that's great. I want you to own a house that you can afford. Don't just buy a house because you think that's what's going to make you wealthy. So, if you want to afford the house, make sure you can afford the down payment, the monthly payment, and the moving costs.
But now let's talk about what's going to actually move the housing market tomorrow and next week, next month, and next year. And this is where we have to pay attention to mortgage rates. Because if mortgage rates were to fall tomorrow, chances are demand would go back up. There are two factors that influence mortgage rates. It's the Federal Reserve Bank and then its Treasury rates.
Let me start by explaining the Federal Reserve Bank. The Federal Reserve Bank is the central bank of the United States, and they don't have the ability to change your mortgage rate, but they have the ability to influence your federal funds rate. Now, what's the federal funds rate? This is the interest rate that banks charge one another when they lend each other money. So, you can kind of think of the federal funds rate like the wholesale rate that banks borrow money at. So, when banks lend you a mortgage, they have to get that money from somewhere. They're borrowing that money. And when that cost of borrowing money, the federal funds rate, goes down, that gives your bank the ability to charge you a lower mortgage rate. And right now, the Federal Reserve Bank says that they are not interested in cutting interest rates because they're still concerned about tariffs and what tariffs can do to inflation.
Now, we know that President Trump wants to see lower mortgage rates. And there's been a lot of talk about changing the chairman of the Federal Reserve Bank to get lower mortgage rates, but as of today, the Federal Reserve Bank does not want to cut interest rates. Maybe we'll see some interest rate cuts by the Federal Reserve Bank later in 2025, but we really don't know how much and how many. However, if and when the Federal Reserve Bank starts cutting interest rates, that's going to put downward pressure on mortgage rates as well. And a recession could trigger the Federal Reserve Bank to cut interest rates. And if it's just enough time, the Federal Reserve Bank could start cutting interest rates because the Fed has said that maybe they'll start cutting interest rates later in 2025. And if they don't, well, President Trump has essentially said that he will replace the chairman of the Federal Reserve Bank in 2026 to somebody who'd be more advocative to cutting interest rates.
The second part you want to pay attention to is a treasury. Now, this one's going to be a little bit complex, but I'll keep it as simple as I can. A treasury is a loan that you can make to the United States government, and the government will pay you back with interest. And you might be wondering, well, what the heck does that have to do with anything? Because when you lend money to the United States government, that's considered a risk-free investment because the United States government is backed by the United States economy. It's backed by the United States military. And so when you have this risk-free investment, a bank who is considering giving you a mortgage has to compare what their investment options are. They're going to compare lending money to you. They're going to compare lending money to your broke cousin Bundy. And then they're going to compare lending money to the United States government.
Now, your broke cousin Bundy is clearly a risky investment. And if the bank wants to lend your bro cousin Bundy money, they're going to charge your bro cousin Bundy a very high interest rate, but the United States government is very risk-free. So, the bank is going to expect the lowest interest rates from the bank. And what we've been seeing in 2025 is that Treasury yields have generally been rising. Why have they been rising? Because investors have been concerned about tariffs. They've been concerned about inflation. They've been concerned about the economy, which has been pushing these treasury yields up.
Now, let's piece this together. If these treasury yields have been rising, now your bank is looking at their investment options and they're saying, "Okay, yeah, clearly you're broke cousin Bunty, bad investment, too high of interest rates." But the United States government is paying out these higher interest rates, which means if we're going to lend money to you, who is more risky than the United States government, we're going to have to charge you a higher interest rate because the government is paying a higher interest rates. So when you're looking at where mortgage rates are going, you can take a look at these Treasury yields, which are influenced by economic factors. When investors are concerned about inflation or tariffs or the economy, you can see Treasury yields rise. And if Treasury yields rise, so do mortgage rates. If Treasury yields fall, well, that gives your bank breathing room to charge you lower interest rates as well.
So when it comes to understanding where will mortgage rates go, you want to pay attention to what the Federal Reserve Bank is doing. Again, we'll be keeping you posted on Market Briefs. And then you have to pay attention to what's going on with Treasury yields. And when you understand these two things together, you can get a better understanding on where mortgage rates are going. And while we can't exactly predict where mortgage rates are going to go, what we do generally know is that if and when mortgage rates go down, that could help influence demand by bringing more buyers into the housing market.
So this is what you want to pay attention to when you want to understand where the housing market is going and then weigh this demand against the supply because if you have more buyers and sellers, or demand and supply, that generally pushes home prices up. When you have more supply than demand, more sellers than buyers, that generally pulls housing prices lower.
So with that, I hope you have a better understanding of what's going on in the housing market and what might be coming. And if you enjoyed this video, the best thank you is to share this video with a friend or a colleague to help spread the financial education. Thank you so much for watching. If you make $80,000 a year from your job, you need to make $80,000 a year from your investment income to be able to quit your job and live your life without changing anything you're doing. With your job, you have to go into work every single day to keep getting paid. With your investments, once you put your money to work, it'll keep paying.