Why the HOUSING MARKET is Going to EXPLODE | HOUSING CRASH | New Regulations
So everyone knows that the housing situation in the US is getting more and more unaffordable but now it appears that we are headed to artificially inflated housing prices that will cause a colossal housing crash in the housing market.
One of the factors that will cause the housing crash is the actions that are potentially in the works by Fannie Mae and Freddie Mac. Their role in the housing market is to buy loans made by banks, package them, and sell them back to investors. It's important because if a lender knows that these GSEs will buy their loans, it helps them to keep the cost of borrowing low while also helping give out loans to more people.
Now Freddie and Fannie have standards. And they will buy these loans only if a loan meets the standards. If a loan meets the standards it's called a conforming loan, else the loan is non-conforming.
These criteria usually play into the underwriting standards of a lender. Its things such as credit score, loan to value, etc. e
Now one of the characteristics of a conforming loan is there's a limit to which the loan is backed by Fannie and Freddie. That limit in 2021 is $548,250. Now it's true that in some markets such as NY and California that limit is higher and the rate does reset annually.
However, with housing prices soaring, and average prices increasing 18.5% year over year, these numbers are bound to increase, and there is a discussion that Fannie and Freddie will back loans valued at close to $1 million.
Now, remember the role of Fannie and Freddie is to support lenders to lend more. If they bump up their limits, lenders will be more willing to take on risks and give more loans out and presumably low-interest rates.
But there are lots of factors that drive interest rates. Further, even though housing prices have gone up 18.5% on average, it does not mean that wages have gone up that much. And eventually, it's you and I, i.e. the mortgagee, who still have to pay the loan.
So basically, if you are looking to buy a home, lenders will take more risk. You will still have to pay the loan, but the good news is that the lenders will be safe. It's an asinine concept and the building block of creating a housing bubble since it rewards risk over common sense, which will eventually lead to a massive housing crash.
The biggest problem with a lot of these programs is they are not addressing the root cause of the issue that could mitigate a housing crash. To determine the root cause we need to understand what's causing high home values. Generally speaking all boils down to supply. There aren't enough homes being built.
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DISCLAIMER: The opinions expressed in these videos are not meant to be financial advice. Always consult with your financial advisor and do your own due diligence as individual facts and circumstances may vary.
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