Why Housing Prices May Fall by 38% in Some Markets

Advisors: How to help your clients play the coming correction

 Ric Edelman: It's January 18th. Yesterday I told you that real estate prices are going to fall this year by a lot - 10% or 20% or more in some markets. I've gotten a lot of questions asking me why I said that. Well, here's why. It's all about home affordability. You can't buy a house unless you can afford to buy a house. I mean, you might not be able to afford a candy bar, but no one stops you from buying it. If you don't have cash in your pocket, you just use a credit card. But if you want to buy a house, you need tens of thousands of dollars in cash just for the down payment. And then you've got to qualify for the mortgage.  

So here are the numbers. If you want to buy the average US home today based on today's mortgage rates, the average household in America would spend 30% of their income on their mortgage. Can the average household afford that? Zillow calls the situation bleak.

Now, just to put this in perspective, from 2005 through 2021, the typical household only had to spend 23% of their income on mortgage payments. Now it's 30%. That's 30% more than before. Oh, by the way, are all these percentages confusing you? If you had to spend 23% before and you've got to spend 30% now, that's seven percentage points more, but 30% is 30% more than 23%. You following this? I know Americans are terrible at percentages, but anyway. For the average house to be as affordable for the average family as it was in 2005, the price of the house today would have to fall by 25%.  

The typical house today is worth about $360,000. So we're talking about a drop in price of $90,000. Now, it's not like this everywhere. In some cities, housing prices have already collapsed. In Baltimore, home prices would only have to fall 4% to get back to being affordable. But in Dallas, they'd have to fall 38%. All of this is because the Fed raised rates five times last year and houses kept rising in price anyway. The result is that the typical mortgage payment today is 55% higher than it was one year ago.  

How Much House Can I Afford? 

When houses are not affordable, people don't buy. And that means sellers have to lower their prices. According to the National Association of Realtors, 20% of the houses that are for sale right now, sellers have lowered their prices in the last month. That's a record decline.  

So like I said yesterday, prices are going to fall further, maybe a lot further as the recession kicks in. So if you're a seller, sell now, lower your asking price and take the offer you get. If you're a buyer and you can wait, then wait. Offer less than what the seller is asking. But don't be silly about it. Be reasonable. Prices need to come down 5% or 10% or 15% or 20%, not 50%.  

Also, I talked about crypto yesterday and here's how real estate and crypto are merging. Somebody just sold a house for $175,000 using NFTs (Non-fungible tokens). The house was titled as an LLC, a limited liability company - with the ownership linked to Home onChain. That's an NFT company on the Ethereum blockchain. The buyer took their cash, they converted it to the USDC Stablecoin and financing was provided by the Teller protocol. The transaction occurred instantly for a total fee of 3%. There are houses from Florida to Utah being bought and sold via crypto. 

Within 10 years, blockchain technology will completely disrupt the traditional real estate brokerage industry. You need to learn about crypto because it's revolutionizing commerce on a global scale and to learn about it, read my number one national best seller, The Truth About Crypto. In fact, the next Big Idea Club just named The Truth About Crypto, the number two top finance book of 2022. They wrote, "Featuring the prophetic insights you'd expect from such an acclaimed financial advisor, The Truth About Crypto is fun to read and easy to understand, and most importantly, gives readers the sound, practical advice we all need to succeed with this new asset class". So I encourage you to get a copy of my book, The Truth About Crypto.