9 min read
We knew this was coming - The FED is starting a recession
By: Steve Olson on May 2, 2022 8:01:23 AM
Raw Video Transcription:
(00:00): What's up guys, Steve Olson here. I was sent this article a little while ago. I wanted to make a video about it sooner, but it didn't happen. I'm just now getting to it a little bit of time to digest it. I'm gonna share it with you right here. And it says the fed has made a us recession. Inevitable. What does a us recession inevitable? What does that mean? Why will the fed cause that? Well, I want you to think of, uh, a recession and a booming market, kinda like driving in a car and then having to break in front of a crosswalk, right? So you're driving down the road, the crosswalks coming up, it's a red light. We need to break before we hit it. There's a couple ways of the real estate market works. And the financial markets in general work way. Number one is, is we're way behind the stop sign or the stoplight.
(00:37): We can see the stoplight turning red and we slowly apply the brake that come to a very smooth stop. No panic, no worry. Like we just need to slow down. So we don't go through the red light, right? Because we know if we go through the red light, then everybody coming from our right and left are gonna hit us and bad things are gonna happen. The earlier that people see that red light, or even the light turned yellow or orange, depending on how you see the colors, uh, interesting debate I had with somebody a couple weeks ago. Um, but the earlier that you see that red light, the earlier that you can stop the earlier that you stop the less wear and tear you put on your brakes and the easier it is to stop. Now, when markets go nuts, there's still a red light.
(01:12): There's still cars coming across, but we see it later. And when we see it later, we have to press the brakes a lot harder, which makes it a lot more uncomfortable, which means we've gotta stop in a shorter distance and switch means we're going forward in our seats, which means, you know, maybe the tires squeal, maybe there's a noise. Everybody gets stressed out. But the hope is is that if we see it in time, we still break in the amount of time. That's kind of how we are in the economy right now, right? Interest rates were lowered. COVID hit the real estate market went crazy. Everybody started buying homes, the homes weren't getting rep replenished. There isn't enough for new builds to replenish and, and, and, you know, satisfy all the, uh, demand right now. So what happens is because the interest rates are so low and there's no supply, and there's a lot of demand.
(01:51): Price is skyrocketed, uh, and everything else skyrocketed too, right? There's supply issues. There's, um, you know, there's financials issues. There's job issues. There's work from home. It's kind of a perfect storm right now. So the only way that the government or the fed can see that red light and slow everything down is they have to slam the brakes. Now, the challenge that we're facing right now is that they saw the red light too late, right? We went through an election cycle. We had COVID it would've been really hard for them to go through an aggressive interest rate raise during COVID, because I think that would've sent the economy into a total tailspin. So I don't fault the fed for waiting to do the, this. However, what I think is gonna happen right now is the Fed's gonna continue to raise the rate until they can basically say, Hey, we are gonna stop inflation.
(02:30): Even if it means we have to cause a severe recession, what does that mean in real estate? Well, uh, what's happening right now is that you went from as little as six months ago, being able to get an interest rate like 2 8, 7, 5, 3 0 5, you know, depending on, on what type of product you were buying to. Now, I'm seeing interest rates quoted in the low six S high fives. It's a total stark difference from where we were six months ago. Uh, I made a couple videos on TikTok. If you guys aren't following us there, you should look that up. But on a $750,000 home, the difference in that interest rate on a 30 year mortgage, like it's upwards of like two grand a month, that people are paying more and I'm going through memory right now. I don't have the stats on my phone in front of me, but it's a noticeable difference, right?
(03:07): So in like, you know, October, if you bought a home for seven 50, you were paying, you know, X amount of money per month. And now that we're fast, forward, six months later, whatever that timeframe is, you're paying, you know, thousands more of a month words of $20,000 a year, more for interest. So what happens is most people buy real estate based on a payment. They don't actually buy the home. They buy the payment and we do that because everybody's used to renting before we own. And when we rent before we own, we say, gosh, well, my rent's like five grand a month right now. And I can afford it. I know I need to pay a little bit more when I own a home. So let's say I can afford $6,500 a month. How much home can I afford for $6,500 a month? And that's what dictates what they look for in real estate, right?
(03:44): When they go to get prequalified, it's the same exact thing. They look at your income and they say, based on your income, you can afford X amount of dollars a month. And based on that X amount of dollars a month, people go out there and they look for real estate that they can afford within that X amount of dollars a month. Very few cash buyers do this, but very, you buyers go out there and say, my budget is $750,000. They're gonna say my budget is $6,500 a month. And if that equals a $750,000 home, then that's what they're gonna go to buy. What we're walking through right now is that what sex? $6,500 per month got you last October has not getting you the same home that it gets right now. So over time, and this is an instant, it doesn't happen. The instant rates are go up.
(04:20): It's a very lagging effect. People start to realize that, gosh, I can't afford the home. I was able to afford six months ago. So the criteria starts to change. And then you have the homeowners that are trying to sell their homes. And they're saying, well, gosh, we're not getting the offers that we thought we were gonna get six months ago. Maybe it's a pricing issue. So now pricing will start to adjust to where interest rates are. That's how they're gonna slow down inflation. So if you are on the other side of this camera, if you're watching this on YouTube or Facebook or wherever you're at, and you're thinking like, oh my gosh, I just bought a home. I paid a record price. Pricing's gonna go down. I'm gonna freak out. Listen, this isn't like 2007, 2008 and 2009. We're not in that type of a market.
(04:54): That market was totally different. All of these mortgages mortgage backed securities, we're being sold on wall street and everything was tied. So when one thing fell, the entire thing fell with it. The us government's done a pretty good job over the past 10, 15 years, give or take however long it's been and making sure that there was some more regulation there that detaching all those mortgage backed securities and might not making sure that like, you know, one straw can't break everything. Even if the economy goes into a significant recession right now, real, in my opinion, time will tell, will still be the very vehicle that will pull us out of the recession. Assuming the fed does the right thing over the next amount, I would say nine months and they continue to raise rates. Now you might be thinking, Steve, are they gonna raise rates over 8%?
(05:35): I think we're gonna see an 8% rate. Could we see nine maybe? Well, we say 10. I, I don't know. Right? I could be totally wrong. Maybe six and a half is, is where it goes. And, and I'm, we're already seeing we're in Carlsbad, California, and we're seeing, um, although the inventory has not caught up, uh, the inventory is not even increased, but we are starting to see a little bit of a days on market increase. So it's not, you know, list the home on day one and day two, you have 51 offers and it sells for $500,000 over list price. We're not in that market anymore, but it still is a ferociously competitive market. If you're watching this video on the blog, I will link to this story. And two others that I would reference about this. But if you own the home right now and you bought recently, this is not a time to freak out and say, oh my gosh, I overpaid for the home.
(06:12): We are not in 2007. Now I got my real estate license in February of 2007. I sold my first home. I believe in the end of March of 2007. I remember that first client, it was a great transaction. Uh, they're still in that home today, right? That home took a severe dive. Now again, that client didn't really feel it because they lived in that home all the way through that, that great recession right now, they're way up, they're even up be, you know, since when they bought that, if you're looking to hold your home, there's nothing and you need to be worried about right now, if you're thinking about buying a home and you're like the fact of signing a 6.135 interest rate right now grosses me out. My first home, we signed a first mortgage at, I think it was 7.375 was our first and I, we had a second mortgage and put 10% down if I remember correct.
(06:51): And I, I think our second was somewhere in the low nine S you know, it's, we didn't have like a crazy low rate. Now. We only lived in that home a couple years before we bought another one. So we didn't get a chance to refi to a lower interest rate, but had I still be in that home today, this was back in 2006. Um, had I still been in that home today? And I had refied when the rates dropped at 2 8 75 cost of living would be dirt cheap because we would had, you know, 12, 13, 14 years of mortgage pay down with that higher interest rate, plus the refi amount, it would be extremely cheap to live there. And that's just because we play the interest rate game. You can't manipulate pricing. Pricing is what pricing is right now. Meaning if there's 30 people that want the home that you want, it just is what it is.
(07:29): You're gonna have to pay the price to win. However, we can always manipulate or adjust the interest rates going forward. There are a lot of different things that we can do to manipulate that interest rate in the future. They're going to go down. Will they stay at 9% forever? No, it's not going to happen. Right? We tend to have an amnesia when these things happen, right? When the market's going great, it's like, nothing bad can happen when the market's going bad. I've seen this. Everybody's like, I, I can't tell you how many people back in 2000 9, 10 11 said this market's never coming back. That was the greatest it's ever. And here we are 10 years later, uh, 11 years later, 12 years later, a real estate market that has significantly triumphed and trumped that market back then it happened. And here's, here's the exciting thing.
(08:09): The Fed's gonna push this. It's gonna cause a little bit of an adjustment. Pricing's gonna go like this. Hopefully it causes more inventory. Maybe pricing will adjust. We're not gonna go through like a 15% drop or anything like that. I just think everything's gonna slow down a little bit, but we need it because it's what keeps the economy honest. It's so super important. Don't freak out where we are right now. I've told everybody since the test of time, do not buy real estate because you're trying to time the market buy real estate because you know that buying real estate is what you should be doing. Any home held for eight years or longer. You're always gonna be okay. What? I buy a home with the understanding it, I had to sell it within two years and I had to make money. You could, I would flip into that home, meaning I would buy the ugliest, how home on the neighborhood that pops up, I'd add value to it.
(08:48): I'd redo the kitchen, floors, paint, all that good stuff. So that way I have built in equity and you're pretty much insulated or isolated from what the market does. All right. I'll share these stories below in the blog post. I'll give you the entire transcripts before. If you don't already know this, we go live with all of our private clients, or I talk about the four simple strategies on what you need to know to win in this market. I'll put a link, uh, in the video and YouTube below as well. In addition to over the blog, if you're not getting our daily email, there's a way to do that as well. Uh, listen, the real estate market, I still think we are in the, in infancy is of what is possible to build wealth in real estate. Whether you're an investor, whether you buy and rent, whether you flip or whether you're just buying to live in yourself, there's still gonna be a ton of opportunity going forward. So don't let this moment in time freak you out. It shouldn't, uh, until next time keep buying and selling. And, uh, I'll talk to you on the next one. All right.