Sept. 27, 2022
Publisher’s Note: Are mortgage rates about to shoot to 20%? They are if you ask the Economic Ninja, an investment Youtuber that’s stormed on the scene in the last few years. He’s racked up more views on YouTube in the past year than CNN because he’s not afraid to go out on a limb or discuss taboo topics. I caught up with him recently to get his thoughts on the real estate market.
Nick Hodge: Nick Hodge here with Digest Publishing, sitting down with the Economic Ninja.
Economic Ninja: Hey, everybody.
Nick Hodge: Last time he was interviewing me, we were talking about precious metals. This time, he said he wanted to talk about real estate. So I don't do a lot of real estate. I own a house. I own a second house that I'm making into an office. And I own some REITs. But I know you've been putting out some warning videos about real estate, so what's up?
Economic Ninja: REITs are sort of a four letter word with me, quite frankly. Well, I guess they literally are. But no, are you ready to own another hundred homes? That's the big question because what's coming in the real estate market is going to be so much worse than what happened in 2008. I can't even begin to describe it. But I guess we could start by beginning to describe it with the massive mortgage rate hike, in that we're going to see that much, much higher, anywhere between 8% and 10%, sometime between November and this next spring.
Nick Hodge: And so you think rates are going to continue to go up based on the Fed raising rates, based on the treasury yields, or what?
Economic Ninja: Absolutely. So it's very easy to figure out that the Federal Reserve, when banks want to loan money, they either loan it to people or they can put it on loan to the Fed. And the Federal Reserve is very safe. It's very secure. It's solid income right now. And the Federal Reserve says that they want to see the Fed Funds Rate up around 4% near the first of the year.
Well, think about it… if a bank wants to make a decision, if they want to take risk and loan to somebody where they think the housing market's actually starting to tilt, go backwards, we're going to start declining in prices, you would want much more interest — some more bang for your buck. And actually, what we're seeing too is mortgage companies are asking for points now. They want stellar, stellar credit for any good rate. What's good in this environment? We literally saw mortgage rates double.
Nick Hodge: Six percent.
Economic Ninja: Yeah, six, six and a quarter right now. And right now, to sit there and pay that plus a point or two, buyers just aren't there for that.
Nick Hodge: So what does it mean for me as an investor? What does it mean for Joe the plumber who wants to either sell his house or buy a house? What's the Ninja telling people to do?
Economic Ninja: Ironically, I think Joe the plumber is in a better position than a lot of people of wealth. And the reason why is because people with wealth usually want other people to manage their money. It's too much money. It's too much work. I want to go on vacation. So I'm going to go put it with a fund manager. I'm going to go buy REITs. I'm going to do things like that, where you only see just a fraction of the profit, because everybody's got their hands in it.
Where Joe the plumber could go out and buy himself, during this next downfall, when the prices are rock bottom and the mortgage rates are super high, that's when you want to buy. And I'm calling for 20 plus percent mortgage rates, because when it turns and the rates start coming down, that's when you refi. Well, Joe the plumber can actually buy a duplex, a fourplex rent out two, three units, and then enjoy the tax benefits that come along with that. Not only the appreciation when it comes back or turns, but also the tax benefits.
Nick Hodge: You think this is a nationwide thing? You think certain markets are insulated-
Economic Ninja: 100%.
Nick Hodge: Spokane with me and my partners in Austin, where the markets have been sort of booming? You think it's across the board?
Economic Ninja: So let's bring back the famous words of Ben Bernanke in 2006, when the mortgage back security fiasco actually started, it actually started in mid 2005. And he was addressing the nation, he said on CNBC to Maria Bartiromo, when she says, "Is there a problem with the mortgage backed securities? Do you think the housing market is going to start to fall?" And he said, if I can get it right, "Well, I don't think that I understand your reasoning or your premise here, because we have already taken care of it. And by the way, real estate can't fall all throughout the nation at the same time."
Well, we already found out he was a hundred percent dead wrong. And the reason why people don't realize that real estate fell was because in 2003 to 2005, the Federal Reserve started the dot plot plan and started raising rates 25 basis points almost every other month until they hit around an ironic number, two and a quarter percent. And that is when the Federal Funds Rate hit two and a quarter percent, we started seeing all of this stuff start to unwind. It's because of the sheer amount of debt in the nation right now, when it comes to mortgages, that's where most people hold all of their wealth. That is the greatest wealth effect there is. And actually, it's been proven that when stocks are up and they have that wealth effect, it's not as strong. It doesn't initiate so much buying from the public as when there's a wealth effect from real estate. So when that turns, it takes everything down with it. It's just a big snowball.
Nick Hodge: You got these people that have taken out equity in their houses. They can see that technically disappear or go down. I see the Zestimate I get on my house has gone down the past couple of months. So should we sell if we're trying to sell our house? And should we be waiting to buy if we're looking to deploy capital?
Economic Ninja: If you only have one house, you should never sell. Why? Because you have to live somewhere. You're going to spend your money somewhere. And that's what's really interesting about real estate. Most people don't understand that real estate is only worth what the average person can pay in a payment. And it usually sits between one-third and two-thirds of the average income, take home income. So the thing is, real estate value will go down as mortgage rates go up. And then when mortgage rates go down, real estate value goes up.
And so the point is the payment is always the same. It always sits between one and two-thirds of the average income of any given locality. So my thing is, if you have a house, why would you sell it? You need to live somewhere. Why not enjoy the tax benefits and the security of knowing that you're putting something away for you for your future. Hopefully, you pay it off, but look to go and find investment deals when this thing turns.
Nick Hodge: So no pivot from the Fed?
Economic Ninja: Oh gosh, no. What's interesting, so I think the Fed will pivot when we see another 20% correction in the markets, but I think we've got a little bit of a ways to go. I think we honestly got about eight to 12 weeks until we see that. And I do believe it's going to come before the first of the year, because a Fed Funds Rate of 4%... I mean, real estate sales have completely collapsed since June, since mortgage rates hit over five. To think that they're going to be touching seven and then next, 8%, we will have no sales.
Nick Hodge: Brace for some pain, he says. Right?
Economic Ninja: And that's a really good thing. He's telling you the truth. And the thing is, is we want to turn pain, like what I'm doing on my channel, I want to turn pain into gain. But the only way you could do that is with patience. And that's what most people don't have in this world is patience.
Nick Hodge: Well, we'll try to teach them. Thanks for stopping by. It was good bumping into you here at Beaver Creek.
Economic Ninja: Thanks, man. Appreciate it.
Nick Hodge: You want to snap?
Economic Ninja: Yeah.
Publisher, Daily Profit Cycle