Is The Real Estate Market Going To Crash?
Hey, what's up, guys, I'm Dustin Heiner with Master Passive Income, and I'm super excited to share with you what I'm seeing in the economy and the real estate market, and how I'm getting ready for what I believe could be an incredible time to be an investor.
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I started my real estate investing journey in 2006, and it's starting to look a lot like the same conditions we experienced back then.
What's on the horizon?
I see the potential for a market crash or, at the very least, a significant correction. It's not just the real estate market; it's the entire economy that seems to be taking a turn. There are several key factors at play.
First, let's talk about inflation. Inflation has been on the rise for the past few years, and it's causing prices to soar. With higher prices, people have less money to spend, and this is putting a strain on the overall economy.
Inflation rates have varied from 10% to 9% year after year. Now, they're hovering around 3%, with the Federal Reserve hinting at pausing interest rate hikes. However, there's also the possibility of further rate increases down the line.
Another concern is the rising number of job losses, and we're witnessing banks closing their doors. These signs indicate that we're in for some turbulent times. But here's the exciting part: real estate investors like you and me are entering what could be the best time ever to invest in real estate.
I want to prepare you for what may be a forthcoming real estate crash or correction in the next six months to a year.
History Repeats Itself
I begin by emphasizing the intriguing notion that history often repeats itself, especially in the realm of economics.
I draw a direct parallel between the 2008 real estate market crash and the current economic conditions we find ourselves in.
As I reflect on the 2008 crisis, it's impossible to forget the severe economic downturn that unfolded.
During that period, consumer spending dwindled, travel restrictions became the norm, and businesses faced tremendous struggles.
Surprisingly, this challenging time turned out to be a golden opportunity for real estate investment. However, it's worth noting that my level of readiness back then wasn't as strong as it is today.
It seems as though we are entering the same economic setup that lead to the 2008 great recession and if you are prepared, you will make a LOT of money investing in real estate.
Take a look at the chart above. It shows the amount of banks failing and the total assets in millions and how they both show a correlation.
In 2005 & 2006 there were no banks failing, just like in 2021 & 2022. Then in 2007 there were 3 banks that failed and the following year, the total assets went from $0 to $373,589!
Same thing is happening in 2023 where there were 5 banks that failed and the total assets jumped from $0 to $548,705!
Only time will tell if history will repeat itself and lots of banks will fail in the coming years. You can find the chart here:
Inflation and Its Impact
One significant factor is inflation. Over the last few years, inflation has been on the rise, reaching as high as 10% to 9%.
While the Federal Reserve is currently reporting inflation rates around 3.5%, it's important to note that they have adjusted the criteria for measuring inflation, leading to a seemingly lower figure.
I know you have noticed the impact of inflation on everyday expenses, just like I have. The rising cost of living affects households, making it harder for individuals to save or invest.
Inflation has a direct impact on the economy's velocity of money. This term refers to how money moves between individuals and businesses.
When inflation is high, people tend to hold onto their money more, slowing down the velocity of money. This slowdown can have a cascading effect on the economy, potentially leading to deflation.
The Role of the Federal Reserve
Federal Reserve's role in managing inflation and the economy. The Federal Reserve primarily uses interest rates as a tool to control economic conditions.
By adjusting interest rates, they aim to either stimulate or slow down economic activity. In the current context, they are increasing interest rates to combat high inflation and cool down the economy.
However, higher interest rates come with their own set of consequences. For example, if you're looking to buy a house with an 8% interest rate, your monthly payments will be significantly higher than if you had a 3% interest rate.
This is one of the reasons housing prices have skyrocketed in recent years, as low-interest rates prompted more people to enter the market.
The National Debt
An aspect that cannot be overlooked is the national debt of the United States, which has reached astronomical levels, currently sitting at around $33 trillion. As the interest rates climb, the interest payments on this debt also increase.
This means more tax dollars are diverted to servicing the interest on the debt, leaving less available for other government spending and essential services.
The potential consequences of such a scenario are concerning, as servicing the interest on the debt becomes increasingly burdensome.
This not only affects the government's ability to manage its finances but also places additional strain on everyday taxpayers.
Failing Banks: A Troubling Trend
One alarming trend that is starting to emerge is the growing list of failed banks in 2023. Recently, Citizens Bank of Iowa was taken over by the FDIC, a clear indication of financial instability.
But it's not an isolated case. Several prominent banks have encountered similar fates in the current year.
Failed Banks in 2023:
- Heartland Tri-State Bank in Kansas
- First Republic Bank in San Francisco
- Signature Bank in New York
- Silicon Valley Bank in Santa Clara, California.
- Citizen Bank Iowa
These are significant institutions, and their failures are a cause for concern.
The Historical Perspective
To understand the significance of this trend, the historical data on bank failures. The numbers tell a compelling story. If we look at bank failures since 2009, there has been a noticeable pattern.
In 2009, 140 banks failed, followed by 157 in 2010 and 92 in 2011. However, in the years that followed, the number of bank failures began to decrease, reaching zero in 2018 and 2019. But the most recent data for 2023 reveals that five banks have already failed, hinting at a reversal of this downward trend.
What best expresses this is the representation of this trend using an FDIC chart.
The chart shows a correlation between the number of bank failures and the total assets of these banks. In 2008, when there were 25 bank failures, the total assets had skyrocketed to over $373 billion.
This jump in assets was followed by a surge in bank failures, with 141 in 2009. In 2023, the number of bank failures has gone up to five, and total assets have increased to $548 billion.
The pattern is eerily reminiscent of the lead-up to the 2008 financial crisis.
Real Estate Market and Interest Rates
Shifting the focus back to the real estate market, real estate prices have remained high, with sellers hesitant to lower their asking prices. Realtors often encourage sellers to hold out for better offers, contributing to the persistently high prices.
However, the Federal Reserve has made it clear that it aims to “break the back” of the real estate market, primarily by reducing interest rates.
It is interesting that I have seen a significant drop in real estate prices over the past six months to a year.
Although he characterizes the decrease as dramatic when compared to the soaring prices of the previous few years, this correction was inevitable. In my hometown of Phoenix, Arizona, where prices have fallen by 20% from the all-time high in early 2023.
The Role of Interest Rates
The Federal Reserve plays a pivotal role in the real estate market through its influence on interest rates.
While the Federal Reserve doesn't directly control mortgage rates, it does impact bank-to-bank interest rates, which subsequently affect mortgage rates. The recent increase in interest rates, orchestrated by the Federal Reserve, will likely contribute to a decline in real estate prices.
Moreover, this is very important. It is importance of considering not only supply but also demand in the real estate market.
While some may focus on low supply as a reason for high prices, high-interest rates are dampening demand. Buyers are reluctant to make purchases when borrowing is expensive, which could further contribute to a decline in property values.
Car Loan Troubles
In addition to real estate, the economy is showing even more trouble with the highest default rates on car loans in 10 years!
The rising number of individuals struggling to pay off their car loans. The implications of this issue extend beyond the automotive sector and may indicate broader financial instability among consumers.
Smart Stock Investments
While I primarily focus on real estate investing, I also emphasizes the importance of diversification.
I personally highlight the significance of surrounding yourself with knowledgeable professionals who can guide you in your investment decisions.
I suggest that by hiring a seasoned stock market advisor, he has achieved a 20% return on his investments over the past year. Just as he values expert guidance in his own investments, he underscores the importance of providing quality education and guidance to his students through “Master Passive Income.”
Shorting the Market: A Tactical Move
In the last six months, I have taken a strategic position by shorting the stock market. He acknowledges that this move has been profitable, but also cautions about the temporary dips that may be followed by market recoveries.
In particular, he highlights recent significant declines in tech giants like Google and Apple. While some investors may see these dips as buying opportunities, I believe that a bear market may be on the horizon.
As a real estate investor, being aware of stock market trends can help you gauge broader economic conditions and make informed investment decisions.
Key Strategies for Real Estate Investors
As you prepare to navigate the ever-changing real estate landscape, here is a set of key strategies that can empower you to seize opportunities:
- Education: The foundation of your success as a real estate investor is your knowledge. I encourage you to leverage his free real estate investing course to build a strong understanding of the industry.
- Access to Capital: Access to capital is crucial for seizing investment opportunities. Whether it's savings, a home equity line of credit, or private funds, having financial resources at your disposal can make all the difference.
- Active Investing: You must be an active investor. Waiting on the sidelines won't lead to success. Engage in real estate deals, build your portfolio, and start generating passive income.
- Deal Flow: To find great investment opportunities, create a system that generates a consistent deal flow. This could involve utilizing direct mail marketing or other channels to connect with motivated sellers.
By embracing these strategies and staying alert to market trends, you can position yourself to capitalize on the forthcoming real estate opportunities. The potential is vast, and with the right approach, you can make the most of this unprecedented era for real estate investing.
My thoughts, insights, and recommendations serve as a valuable guide for real estate investors in these ever-evolving times. You need to do your own homework though.
I'm showing you what I see and what I do. You need to make sure you talk to your accountant and laywers to make sure you are doing the right thing for you and your investing.
The economic landscape is undergoing significant shifts, and being prepared is essential to capitalize on the forthcoming opportunities. Whether it's understanding the trends in stock markets or adopting sound investment strategies, your success as a real estate investor relies on education, access to capital, active engagement, and a consistent flow of deals. The future is promising for those who are ready to embrace it.
If you're ready to thrive in the real estate market, remember that knowledge is power. With the right information and strategy, you can make the most of the best time ever to invest in real estate. Share your insights and spread the wealth to help others prepare for the journey ahead.
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