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Many people are panicking about the upcoming massive reset of variable rate mortgages in 2028 because many homebuyers due to COVID took out variable rate mortgages in 2021 and now you have this potential 7 year reset that could cause people's rates to go up significantly. So here we'll look at some statistics on what's really happening in the housing market.
First, we'll look at the Wall Street Journal, which, you know, gave rise to this idea today. Homebuyers who took advantage of cheap variable rate mortgages are now getting an unpleasant shock. And then they show what, uh, Arizona is and the houses being built in Arizona. Basically, here's a guy named Andrew Hecker who, uh, offered me a rate that was 1.25 % lower than the 4% he was offered on a traditional 30- year fixed-rate mortgage.
So he's like, "Wow, why should I pay 4% when I can pay 2.75?" And then he thought, "Oh, I'll move anyway until, you know, this quarantine starts." Well, now he still lives in this property, he has no intention of moving. His mortgage rate increased from 2.75% to 7.75% in January, and this will cause his payments to skyrocket from $6,800 per month to $9,300.
Folks, if you don't need life insurance after seeing this, I don't know what's going on. But you can get life insurance in just 5 minutes by going to meetkevin.com/life. They are a sponsor of the channel. Anyway, take a look at this. So his payments will essentially skyrocket. And so a lot of people started wondering, "Wait, what if this happens everywhere?" Because now people are wondering, “Damn, I should have gotten a fixed- rate mortgage.
"I'm being cheated." And adjustable- rate mortgages became infamous for fueling the 2008 housing crisis . Is this a giant repeat of what we've seen historically, where people get greedy about real estate and then this giant crash happens? Well , Canada certainly has some of these problems itself. Canada has seen up to 50% of its lending volume on variable rate mortgages.
This, I think, has contributed significantly to the problems in the Canadian real estate market because there are typically no buyers who say, “Hey, why am I going to take a fixed rate if I can only lock it in for 10 years in Canada? I'll just take your hand." So you get 50% exposure to variable rate mortgages, and when rates go up, like they just did today with Canada, they raise rates again, you have affordability issues, people are forced out of their homes, they move, prices go down, and supply skyrockets.
However, what is very interesting about the United States is that the United States does not have a similar problem. In the United States, there is a unique 30- year fixed-rate mortgage. And in the United States, the share of adjustable-rate mortgages increased to about 36 % of all loans issued between 2003 and 2006, and between 2003 and 2006, adjustable-rate mortgages accounted for 36% of all applications.
However, the average is now only 11.3%. So, in other words, Canada has a big problem with adjustable- rate mortgages, 50% of applications are adjustable-rate mortgages . In the United States, there was a big problem with adjustable- rate mortgages in 2007, 2008, where you had ninja loans, no income, no job, no assets, low qualification standards, negative amortization loans, negative amortization loans where your loan balance actually grows every day, right?
These are big problems that have happened in the past, and they led to things like the ability-to-pay rule and the Dodd- Frank lending rules. Um, my real estate startup got pre-approved as a mortgage lender in November, which is really interesting since we don't plan on using it right now. We're really focused on our technology product, but it's very exciting.
We know quite a bit about mortgages. But what's interesting is that we're actually at 1/5th the level of the Canadian crisis when it comes to the percentage of adjustable-rate mortgages that lead to problems in the, uh, housing market, and we're only at 31 % of the level of adjustable-rate mortgages that we had in 2003-2006 , which led to the housing bubble.
In fact, the level of adjustable-rate mortgages may be even lower. You see, some studies show that 10% of new mortgage applications are currently gun-related, or between 10 and 11%, and it fluctuates every week. Uh, adjustable- rate mortgages are on track to a 12- year high, which is truly terrifying.
But it happens that many people who choose fixed- rate mortgages switch to fixed-rate mortgages pretty quickly, and that's where over 90%, some say as much as 92% of U.S. households have fixed- rate mortgages. So, a very small portion of the United States does not have a fixed 30- year fixed-rate mortgage, and that is a unique feature of the United States.
We don't see 30-year fixed-rate mortgages anywhere outside the United States, as they are provided by Fannie Mae and Freddie Mac, and Ginnie Mae to some extent for loans like FHA. And that's why mortgage penetration at the state level, at least according to Polygon Research, is very low , perhaps as low as it is in these individual states, somewhere between 2% and 3%.
California and higher-income regions lead the way, seeing higher mortgage utilization rates, especially for larger loans where interest rate differentials have a greater impact. But what's also interesting is that in the western United States, compared to the South, the mortgage fixation rate is significantly higher, below 4%, and that may actually contribute to some of the price differences that we're seeing.
So, we already know that areas like Texas and South Florida have been overdeveloped and they are still struggling in the real estate market. We were just in Florida, a member of my team was researching some real estate, and you know , it's not that it's a bad thing. Things are not going well in Florida right now.
Maybe it's okay in Miami , but definitely not in Central Florida. There are some problems there. Whereas in California or some western states prices are still rising, which seems impressive. But one reason could be that mortgage borrowers in the West, uh, 64% of them have a rate below 4% in the West.
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And if you go to the South, that fixation rate is below 4%, 12 percentage points lower, only 52%, which is a bit surprising that you have that difference, but it is there. And where there is no fixation effect, you are more prone to liquidity and, therefore, to price volatility. The problem, however, is these variable rate mortgages that are outstanding, 70% of the ARM reset in 2028, it's kind of like a big reset in 2028 , 70% of them, um, come from the 7- year ARM.
Um, and something like this six-month ARM reboot period. So this could definitely create some payment shock and unfortunately further impact affordability for people who are already facing higher energy costs, inflation costs, higher interest rates, credit card rates, auto loan rates, you name it. In terms of, um, ARM share, California leads the nation in ARM burden.
Again , housing is generally more expensive , but this can be offset by potentially higher solvency. Florida is the next largest state with a mortgage pool. Both of them are around 10 to 11%. Then there's Massachusetts, which has literally halved, to just 5%, uh, of the ARM pool. So it's interesting to see the ARM spread.
Overall, nothing like what we saw in 2007, 2008. So, will some people be affected by these reboot periods? Of course, especially in times of, you know, the stakes, I mean, what? 10- year Treasury bonds just soared to about 5.3. We expected a maximum at around 5.27. Uh, and luckily, we're downstairs now.
But, you know, we're probably going to be getting ready for another mortgage rate hike, uh, or, um, Fed rate hike at the end of the year. 10- year Treasury bonds, which are typically followed by mortgage rates, will rise again. I mean, look, today, just after Canada preemptively raised rates, we went up another 4.3 basis points.
So, yeah, you know, real estate is definitely not the most attractive investment right now. In my opinion, this is because I don't see a 2008-style bubble here. I think the job market is likely to explode. You will see interest rates fall because the labor market will have to be rescued because artificial intelligence is taking away too many jobs.
I think that's much more likely than a real estate market crash. Nevertheless, is real estate desirable now? No , no one wants real estate right now. Does this make it a good time to buy? Depends on where. You have to be very careful where you buy. In some markets you still catch a falling knife. In other markets, I mean, some markets have already adjusted by 25%.
So you've already seen some correction in real estate prices. Other markets, like many in California, are still growing. California doesn't have supplies, people still want to live here, they still get jobs here. Prices in San Francisco are rising rapidly again. I mean, there are some dramatic changes happening in the real estate market .
And so, as always, real estate depends on location, and location again. But, if you do buy, my general advice is to always get a fixed- rate mortgage. I have always had a fixed rate mortgage, and always will. I don't do variable rate mortgages because you can predict your financial situation in the future based on where you are today , but you can't take into account what to do if you have health problems?
What if you have more children? What to do if you lose your job? We do n't necessarily know everything that will happen in the future. So when you get scammed like this guy, where his payment goes from $6,800 to potentially $9,300, it's crazy . This is a terrible decision. And you know, I'm not trying to fool this person.
This happens. But I just hope that other people don't make the same mistake in the future. Then, like, I'd rather pay a little more and then, you know, get the L if it was better. They could, they could, they should, right? No problem . There's nothing wrong with not going bankrupt, right? Just don't reset everything to zero.
This is the most important thing. Well, secondly, if you can at all, make a good deal on real estate. Uh, you know, our real estate technology, our real estate software, helps us look at different counties and zip codes. You can learn about it at reinvest1.com. Helps us look at different counties and zip codes and determine what the best deals are in that area?
And our artificial intelligence is improving every day. What we create is truly fascinating. But I can't wait for the launch of our next terminal , as we experience another big step in the development of this technology, which will happen in the fourth quarter. And, you know, we're actually interested in opportunities to buy a house whose value increases after purchase and renovation.
Here's how to insulate yourself. We just bought a property for $875,000 plus some closing costs . It is in the $ 1.2 to $1.3 million range. We estimate that the repairs could cost us $80,000. We are going to close this deal for less than a million dollars, and our equity will increase by two to three hundred thousand dollars.
So even if prices drop by 20-30%, we feel like we're still 100% insulated. This fascinates us very much. This is exactly the property we want to buy. These are the deals we want to continue to make, and these are the things we want to share transparently with you, and I think you should pay attention to that as well.
Of course, I can't give you personalized financial advice because I don't know your situation. But I believe there is a real risk in buying property in markets that are seeing a lot of new construction or an increase in vacation home purchases, such as Texas or Florida. You see excessive construction.
In some areas, there is still a risk of "catching a falling knife." Whereas in other areas, such construction activity is simply not observed, and you can buy and be protected by the policies of the local region. Ironically , like Manhattan. Probably a great place to shop. Because, as I've been saying for the last year, when I'm going to, I've been saying that if Mondani wins, you should buy real estate in Manhattan.
Because they are not going to build more. They are going to make real estate construction more rigorous, not less rigorous. And that will just push prices up, not down. Classic, right? In any case, this is how the market works for you. And so if you liked this video, check this out. I think you will like it.
Why not publicize what you told us here? I don't think anyone else knows about this . Well, let's try to advertise a little and see how it goes. Congratulations, dude. You have done so much. People love you. People look up to you. Kevin Paffrath, financial analyst and YouTuber. Meet Kevin. It's always great to hear your opinion.
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