The “Great Stall” Has Begun

0:00What's going to happen in the housing market? I wish I could tell you for certain, but I don't have a crystal ball. But I have been analyzing the real estate market professionally for a decade, and I've looked at all the recent data. Home prices, mortgage rates, inflation, unemployment, and more. And what I can tell you are the potential paths the housing market could follow. Real estate could crash. It could melt up. We could continue the current Great Stall dynamic. There could be a black swan event. And you can make money investing in any of these potential future housing markets, but you need to take the right steps to prepare yourself today.

0:38So in this episode, I'll project which of these real estate markets I think are the most and least likely to happen, and then I'll give you my best advice for how to adjust your portfolio before they take place.

0:55Today on the show, we're getting into the question that is on everyone's mind. What is going to happen with the housing market? As investors, the answer to this question is pretty critical, right? Not because you can't invest in any of these scenarios, but because the strategies that you use should be based at least partially on what is happening in the larger housing market. This episode is about helping you understand the direction of the market so you can plan accordingly. And I think right up front, we need to get the big important elephant in the room out of the way as we start this episode.

1:33I do not know what is going to happen. I have spent a decade studying the housing market. I look at data every single day and I am still not sure what comes next. We are at a fork in the road and it's not clear which path we're going to take. But what I can help you all do is understand the different paths and where they lead. I can help you understand which path is most likely, and I can help you build a strategy that is designed to withstand the uncertain period we're in and that will thrive regardless of which path we actually ultimately wind up going down. So in today's episode, what I'm going to go through is first my overarching take on the housing market and the sort of most important variables.

2:17Everyone's talking about all these different things, but what are the most important variables that will determine the direction of the housing market? Next, I'll talk about the three, or actually maybe even four, there's kind of a bonus scenarios that could happen in the housing market. Then I'll share what I think the most likely path is, and lastly, how at least personally I'm planning to invest, and some advice for everyone going forward. Now, I know that things are unclear right now, and this episode is designed to help you make sense of it all. And if you like this type of episode, please let us know.

2:50Comment on YouTube or Spotify if you want more information on how to navigate the current market and questions that you have that we can answer for you in further episodes. With that, let's jump into it. I'm going to start today by just talking about my big picture hypothesis, my thesis about what is going on in the housing market. And honestly, it hasn't changed much over the last couple of years. When interest rates started going up in 2022, I started saying that I think housing affordability is the number one variable that we need to be looking at when we're trying to understand where housing prices are going, where housing volume is going, where certain types of investing returns, certain strategy success are really going to depend on this one critical variable, which is affordability.

3:38Because affordability is one of these magic variables in the housing market in that it drives both supply and demand. It drives demand in that, you know, there are a lot of people who want to buy houses, but affordability dictates who is actually able to buy those houses. And it also actually dictates supply because people who can't afford to buy a new home are more hesitant to sell their existing home. And so in this episode, when I talk about the different paths for the housing market, a lot of what I'm talking about is going to be based on affordability, that is sort of the crux of my hypothesis about the housing market.

4:12And just to extrapolate on that a little bit more, I think that affordability needs to improve. And affordability is just a measure of how easily the average American can afford the average price home in the United States. And if you look at that question, it hasn't been worse than it is right now for about 40 years. The last time we saw affordability this poor was in the early 1980s. And so I believe we've sort of just hit this wall in terms of affordability and we need it to come back down. Now, I know there are a lot of people out there, analysts, social media types who are saying that housing has to crash 50 % to get affordability back to the long-term average or where it was in the 90s or something like that.

4:58I personally don't believe that. I believe we're in a new paradigm where housing is going to be less affordable than it was in the past because we have a housing shortage. but I do think affordability needs to improve. Now, there are a couple of ways that can happen. Some people point to a crash, but affordability is actually made up of three sort of sub variables here. It's wages, how much people are earning. It's prices, the price of homes. And it's mortgage rates because the majority of people who buy properties in the United States, still about 80 % of home purchases are made with a mortgage.

5:30So mortgage rates really matter. And so I've been saying this for years. I still believe this to be true, keep this in mind as we go through this episode, that affordability needs to come down either by wages going up, prices coming down, mortgage rates coming down, or some combination or two or three of those variables. That's been my hypothesis for the last three years. And so far it has proven correct. But given the state of the economy, I need to add sort of a new element to my theory of the housing market. We need a new variable. And to me, that's going to be the unemployment rate or some metric of the labor market, if you prefer one, another one.

6:10But I'm going to use the unemployment rate as a proxy for the whole labor market right now, because no matter how you look at the labor market, it's getting worse, right? We're seeing job growth slowing. That's because of a lot of different things, but we're at just a late point in the tightening cycle. So that's likely to happen. Recessions are a normal part of the economic cycle. So, you know, these kinds of increases in unemployment just happen periodically in our economy. We also have the huge variable X factor here, which is AI. We don't really know how that's going to ripple through the economy.

6:43And I think this is something that's going to be important for the housing market. Because as I said before, affordability really matters. But if you have great affordability in the housing market because no one is employed and no one can realistically act on this affordability, that's not good for the market. So we need these two things to go together, right? We need affordability to improve and we need the labor market to stay relatively good. That doesn't mean it can't get a little bit worse, but it can't be a disaster where we see unemployment at eight, nine, 10 percent like that would not be good for the housing market.

7:18Those are the two variables we're going to focus on. Are there other variables that will impact the housing market? Of course, right? You know, demographic factors, the fact that boomers are aging and own a lot of real estate. We're looking at inventory trends. We look at building trends, migration patterns. All of this stuff does matter, but they're relatively small variables compared to affordability and the labor market. And so that's what I'm going to focus on for today's episode. So let's extrapolate that. Let's go one step further here and talk about if we're looking at affordability and we're looking at the labor market, what could happen?

7:55Like, what are the different scenarios this could play out? I have three and a half for you. The first one is the one that seems to be on everyone's mind, which is a crash. Could the housing market actually crash again? Yes, it could. It definitely could. Is it the most likely scenario? We'll look at that in just a minute. But is there a scenario when we look at affordability in the labor market that could play out in the next few years where the housing market crashes? Yes. And it would happen in a scenario where affordability stays low, right? We don't get an improvement in rates. Prices stay stubborn.

8:31Wages stagnate, right? Affordability stays low and unemployment goes up. Those are the two things that we would need to happen. This is actually what we would call stagflation, right? We would keep mortgage rates high, likely because inflation starts going up. We are not out of the woods in terms of inflation. It's been going up the last four months in a row. And so we have to keep a close eye on that. So inflation going up, reasonable scenario, right? At the same time, unemployment could go down and create distress in the market. People going delinquent on their mortgages, foreclosure starting to go up.

9:07Those are the sort of like the two things that would need to happen at the same time to get a full on crash. So this is a scenario that I could see happening in the next couple of years. Like if inflation's going up and the labor market's getting worse, it's pretty hard to say that this is impossible, but is it likely? We'll get to that and our other possible scenarios right after this quick break. Vacation is expensive. Your empty place doesn't have to be. If you're heading out of town and your home is sitting empty, you could list your space on Airbnb while you're away and turn those unused nights into extra income.

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11:41Welcome back to the BiggerPockets podcast. I'm Dave Meyer talking about the possible directions we should be going in the housing market, which one I think is the most likely and how to navigate it as an investor. We just talked about scenario one, which is a crash. Scenario two is sort of the opposite of a crash. It's what I would call a melt up where we see rapid price acceleration in the housing market, similar to what we saw during COVID. Could this happen? Yeah, there's definitely a scenario when we talk about our key variables here that could happen. And it comes with rapidly improving affordability.

12:17Basically, a recession without inflation, that could definitely bring down mortgage rates. This is what normally happens during a recession. Mortgage rates are dictated by the bond market. And when there's a recession, bond markets, for all sorts of reasons, they get a lot of demand that pushes down bond yields and it takes mortgage rates down with them. And that could happen, right? If we see AI really disrupt the labor market or something else just breaks in the economy, we could see a real recession. But for prices in the housing market to really reaccelerate, we need affordability to get not a little better.

12:51It has to get significantly better. And so we need to see rates really fall. I think at least five and a half, probably maybe down to five to really get things growing faster than the normal rate. And that is probably not the most likely scenario. The other way we could get a melt up is money printing. If we start seeing quantitative easing in 2026 with a new Fed chair, if we see the Fed starting to buy mortgage-backed securities again, that is a scenario where we could see housing prices really start to accelerate again. So is a melt-up possible? Absolutely. But let's talk about our third scenario, which is what I call the great stall.

13:33The two scenarios we've discussed so far are sort of both extremes, right? We have a crash, an extreme decline in pricing, or we have a melt-up, which is an extreme acceleration of pricing. So is there a middle road? Yes, it is what I call the great stall. And the core premise of the great stall is that nothing that dramatic happens to affordability, right? Maybe we see affordability get better, but it's going to be slowly. Remember, my thesis is that affordability has to get better, but I didn't say anything about it having to get better overnight. Because right now in the housing market, there's not a lot of distress, so there's not a lot of urgency, which means that these problems that we have in the housing market, and they are real, could just take their time to resolve themselves.

14:22So what does that look like? It could mean wages keep growing. Right now, wages are above inflation, which is great. It's slowing down, but it's still up right now. Mortgage rates maybe come down a little bit. They've been eking down actually as of this recording. They are near the lowest they've been in a year. And prices go down a little bit or maybe they just stagnate. And if that happens over the course of two or three or four years, affordability could get restored without much crazy happening. So those are the three scenarios I see happening. But what about a fourth one that I can't see happening?

14:56We call these black swan events. They're inherently unknowable. These are things like 9-11 or COVID that you just can't see coming and have huge monumental impacts on the economy, society, all of that stuff. and usually I factor that in as, you know, pretty minor risk. But, you know, the world feels pretty Black Swan-y right now. This is kind of powder keg vibes going on. And so I think we need to take into account that Black Swan events could happen. It's not the most likely scenario, but it still could happen. So I'm sure you're imagining right now, Dave, you just described three different scenarios for us that could happen.

15:35And note that none of them, I don't think any of them right now are a situation where we actually see prices just go up in a healthy way, three to 4 % per year. That is not a scenario I actually see happening in the next year or two. So I'm not saying, you know, these are not all of the possible scenarios, but these are the three avenues based on government policy and larger macroeconomic conditions that I can see coming. But I'm sure you're just wondering, which one is it actually going to be? Because that really matters for my investing decisions. Well, like I said at the beginning, I can't say for sure.

16:07But as a analyst, I have been trained to think in probabilities, how likely different things are coming. So what I'm going to do is tell you which ones I think are the most likely and which ones I think are less probable. To me, a crash, maybe we got like a 15 % chance of that right now. Again, I can imagine a scenario where it happens, but right now there's no data that suggests that that is unfolding. And so that would take a big change in current conditions for that to become more likely, which is why I give it only a 15 % chance right now. A melt-up, I think, is a little bit more likely because we really just don't know what's going to happen with the Fed.

16:44And we might see them really focus on lowering mortgage rates and doing quantitative easing. Now, Jerome Powell just said the other day that he's not going to buy mortgage-backed securities. But in May of 2026, President Trump gets to pick a new Federal Reserve chair, which he's almost certainly going to do, who may choose to push an agenda of mortgage-backed securities buying. And so I don't think you can write off this scenario. I give this one a 25 % chance. To me, the great stall, that's the most likely scenario. I assign a probability of this of about 50 % chance. So this is my view, and it's not just my view.

17:21In my job, I have the great privilege of talking to some of the best housing market analysts in the country, the best economists in the country. And this, to me, of the people I really respect and whose work I've followed for many years is the consensus view of what's going to happen. Most people believe that home prices are going to flatten and stall out for at least the next couple of years. Hopefully mortgage rates will come down a little bit and that will improve affordability. But that also means we're not going to see a lot of appreciation. To me, the great stall, highest probability chance that we have for the next couple of years.

17:55and then a black swan, you know, usually I think it's two or 3 % chance. I'm putting it at a 10 % chance right now because we just don't know what's going to happen on a geopolitical international scale right now. And we got to factor those in because it does matter. We live in a very interconnected global economy and what happens across the world can impact us here in the U.S. and we need to factor that in. Now, of course, having a 50 % probability of the Great Stalt, not a lot of confidence, right? Like over the last couple of years, when I've made my predictions about the housing market, and fortunately I've been correct about those, I've had a much higher degree of confidence.

18:31Like the things I've said, I thought, oh, 70, 80 % chance. So I do want to admit to you that I feel just like all of you less certain about what's going to happen. Now, I know that the great stall may not sound like the most exciting time to invest, but I actually think this is the best case scenario for the housing market right now. As I said before, we're at an affordability wall. It needs to get better. Right now, the housing market is unhealthy. And to get from a market like the one we're in that is unhealthy to a healthier market, there's going to be a little bit of pain. It's not going to be something that just goes smoothly.

19:13We can't just resume that 4 % appreciation that we all got used to during normal times of the housing market, I don't really think that's a likely scenario in the next couple of years. So what we need is sort of a reset of affordability. And that's why a lot of people are calling for crashes. I just don't think they understand that the reset of affordability can happen a little bit more slowly. It doesn't have to be this big, dramatic event. And to me, this is relatively good news, right? This great stall, a gradual, predictable restoration of affordability is about the best thing that we could ask for right now.

19:52And it is absolutely something as investors that we can work with. We have seen scenarios like this many times in the housing market. There are absolutely proven strategies and tactics that you can use in the great stall. And we're going to talk about how you do that right after this break. You've upgraded how to buy properties, but did your insurance get the memo? When investors start scaling, insurance can't be an afterthought. Most policies were designed for a single property, not multiple rentals, LLC ownership, short-term stays, or properties mid-rehab. That's where blind spots can creep in.

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23:20First up, I still think the fundamental strategy is base your short-term planning around the great stall. And we'll talk about what that means in just a minute. But also be conservative. Make sure that you protect yourself in case a crash happens. Now, again, I don't think that's super likely, but you can do both. So why not do both? You can absolutely still position yourself to win and grow during the next few era while taking a few extra steps to protect yourself against any downside risk. So why not do that? And I'm going to share the tactics that you can use to do that in the next couple of minutes.