2022_Housing_Market_Forecast
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and happy holidays. I love this time of the year
00:00:05.440 | Not only because the kids are running around and so happy to open presents feel very grateful to have them and to see their joy
00:00:13.280 | But it's also a great time to reflect
00:00:16.280 | You know
00:00:17.120 | I just sent an email response to someone who had emailed me five times asking me to do something right?
00:00:23.340 | It's business development stuff
00:00:24.400 | And when I responded I got his out of office email that said he'll be out of the office until January 10th
00:00:30.800 | 2022 and I'll say to myself Wow
00:00:33.320 | You can do biz dev now by setting auto blast emails to random people while you go on vacation
00:00:39.940 | How cool is that sign me up?
00:00:41.940 | And then the second thing I realized is man
00:00:44.620 | If you can do a little bit of work or just a normal amount of work during the holidays
00:00:50.240 | You will get far ahead far further than your peers once they come back
00:00:56.820 | so in this episode I want to share my
00:00:59.680 | 2022 housing market
00:01:02.100 | Forecasts and this is really important to me because I have tremendous skin in the game about 65% or roughly
00:01:09.940 | $200,000 of our passive income comes from real estate without real estate
00:01:15.680 | I'm not so sure I would have left work in 2012 and I'm not so sure my wife would have left work in
00:01:20.960 | 2015 real estate has been so important on our financial journey that I really can't afford to get my
00:01:27.680 | 2022 housing market forecast to wrong
00:01:30.940 | I wish I was just paid to pontificate on where the housing market will be going without any kind of
00:01:38.440 | Repercussions right whether it goes up or down and I'm right or wrong
00:01:41.360 | It doesn't really matter but getting my forecast right really does matter for our livelihood
00:01:46.600 | Because it helps us stay at home to take care of our kids and do what we want
00:01:51.620 | So if you are a real estate investor or you're thinking about getting long real estate
00:01:56.800 | This podcast is for you and I try to be as honest as possible
00:02:01.600 | And if you have bearish views if you have very bearish views
00:02:05.080 | I'd love to hear because it's so important to try to elucidate my blind spots because I believe
00:02:11.240 | 2022 is going to be another great year for housing specifically for the median home price
00:02:16.360 | I think it's gonna go up another eight to ten percent now that is down from
00:02:21.360 | 2021's increase of about 17 to 19 percent, but that was an unprecedented gain in 2021
00:02:28.640 | And I don't think it's gonna happen again
00:02:30.640 | But eight to ten percent is still huge because historically real estate or the housing market has gone up closer to around
00:02:38.400 | Four four and a half percent a year. So we're still talking about roughly twice the
00:02:43.560 | Historical price appreciation growth rate and from a cash on cash return basis
00:02:49.000 | Let's say you put down 20% and the housing market goes up another 10%
00:02:52.880 | And we're talking about a 50% increase in returns on your cash
00:02:57.120 | And then of course you've got to deduct all the relative expenses and so forth
00:03:00.680 | But the gains are pretty huge and it's another reason why I like real estate so much
00:03:07.200 | So let me share 11 reasons. I've come up with as to why
00:03:10.880 | 2022 will be another strong year for the housing market first reason low and negative real mortgage rates
00:03:19.160 | I predict mortgage rates won't go up by more than
00:03:23.000 | 0.375 percent in 2022 in other words your typical three point one two five percent thirty or fixed mortgage
00:03:30.080 | Might go up to three point five percent, which is still very low further
00:03:35.520 | It's still a negative real mortgage rate
00:03:38.400 | I think we're gonna come down from six point eight percent inflation in 2021 to roughly four percent or so in 2022
00:03:45.800 | but four percent
00:03:48.520 | Inflation and a three point five percent mortgage still means you're getting kind of paid a half a percent to borrow money
00:03:55.160 | Therefore there will still be a large amount of incentive to borrow as much money as possible
00:04:01.120 | Responsibly possible to buy real assets such as real estate - we're facing a permanently higher demand curve
00:04:08.920 | We know that as prices go down demand goes up, but when you see a demand curve shift up
00:04:15.760 | Shift up you are seeing demand is higher at all price points
00:04:21.440 | And why is that it's because the world has changed the world has permanently changed where there's no going back
00:04:27.840 | To going to the office five days a week. It's gonna be work from home or it's gonna be hybrid work from home
00:04:33.600 | I've spoken to many employees
00:04:35.600 | Several CEOs who are mulling their work and office process for 2022 and they're all saying we're gonna be doing the hybrid
00:04:43.640 | Or work from home for a lot longer
00:04:45.960 | Further the adoption of real estate as an investment is growing
00:04:50.760 | No longer are people just happy to own their primary residence right in the past
00:04:55.040 | You just buy your home and you live in it and then you invest in stocks
00:04:58.920 | now more and more people are looking at homes real estate as a viable way to make passive income and
00:05:06.520 | Gains profits, right? So one person one home or one family one home. That's no longer the multiplier
00:05:14.760 | It's one family maybe
00:05:16.760 | 1.5 homes or 1.2 homes, right?
00:05:21.360 | Because people are deciding to buy more and more homes to build their passive income portfolio
00:05:27.400 | And then finally the millennial generation is some 72 plus million people strong
00:05:32.000 | So this generation will be buying homes in droves over the next 10 20 years
00:05:36.400 | It's just the same as it ever was we get older. We start families. We have children
00:05:41.120 | We want shelter and in this day and age, we want more shelter for exercise rooms and offices
00:05:47.800 | 3. Increased demand from domestic institutional investors
00:05:52.000 | technology
00:05:53.720 | innovation demand
00:05:55.520 | These three things are making it easier for retail investors to invest with domestic
00:06:02.640 | Institutional investors, right? We are seeing a huge growth in the real estate
00:06:06.720 | private syndication platform market real estate crowdfunding market and they are
00:06:11.600 | Attracting more and more assets one of the easiest examples I can point you to is fund rise
00:06:17.040 | One of the leading real estate institutional investors in early 2021 around April
00:06:22.760 | It had about a hundred fifty thousand investors on its platform by the end of the year
00:06:27.240 | the platform grew to over two hundred fifty thousand investors, therefore the assets under management have grown and
00:06:34.240 | Anybody can invest on that platform if they have ten dollars
00:06:37.680 | So this is gonna only continue on fund rise and many of the other platforms
00:06:43.000 | They're gonna garner more and more assets that will be unleashed into the property market
00:06:48.200 | Investors now account for roughly a quarter of all resale and new transactions
00:06:52.680 | That's nationwide and I expect this percentage to grow even if Zillow did blow themselves up due to bad pricing estimates in
00:07:00.720 | 2021 for increased demand from foreign investors. This folks is the biggest X factor
00:07:08.600 | Nobody's talking about I haven't seen any
00:07:12.480 | Economist or research analyst nobody talking about what happens if foreign real estate demand comes back with inventions
00:07:19.720 | One of the best things that has happened from the pandemic is that it has throttled foreign institutional demand since early 2020
00:07:27.160 | By my calculations, there's roughly two hundred billion dollars of pent-up foreign demand for US property
00:07:33.760 | And I believe that demand will first hit the coasts and then work its way inward
00:07:39.040 | pre pandemic around
00:07:42.120 | 2017 2018 I
00:07:44.120 | Witnessed many foreigners beat out many competitive home bidding situations here in San Francisco
00:07:50.600 | Many wealthy foreigners would simply buy up homes and leave them empty for years to park cash one of my neighborhood homes
00:07:57.960 | I think it was sold for two point one million or something back in 2017
00:08:02.340 | It's still empty four years later folks
00:08:05.320 | So their disinterest in renting out their home for income, which is what most domestic real estate investors
00:08:12.200 | Do is a testament to how attractive?
00:08:14.200 | foreigners view US assets, okay, let's move on to point number five a
00:08:20.280 | Revaluation of US property on the world stage
00:08:22.960 | anybody who has ever researched overseas real estate markets knows how cheap US real estate is for a developed country and
00:08:31.840 | The sad and funny thing is foreign investors know this they know this they watch US TV
00:08:37.940 | They are fascinated with our culture, but Americans we don't know this
00:08:42.160 | Most Americans don't appreciate how good we've got it because most Americans have not lived overseas
00:08:47.760 | Once you live overseas folks, you really will oh my gosh, so appreciate American living
00:08:53.640 | You'll probably eat healthier. You'll probably appreciate your health overall more
00:08:57.860 | You probably won't rail as much against people in power. I think it's just a perspective thing
00:09:04.000 | But I'm telling you folks as someone who grew up in six different countries
00:09:07.540 | Worked in international equities for 13 years and traveled to over 60 countries so far
00:09:12.420 | US real estate is cheap and our country is the greatest country in the world and let's never
00:09:18.560 | Forget that and take our ability to live in the United States for granted eight strong stock market gains
00:09:26.960 | Just look at your 401k IRA Roth IRA
00:09:29.720 | Whatever tax advantage retirement account you have from three years ago to now it is up probably way more than 50%
00:09:37.120 | Then look at your taxable portfolios also way up and over the past three years. It's been a huge
00:09:43.960 | Anomaly right the S&P 500 generally averages around 10% but in 20 what 19 we saw
00:09:52.320 | 27 28 percent in 2020 we saw about
00:09:55.300 | 16 17 percent and in 2021 we're at around 27 28 percent
00:10:00.520 | I mean those are massive gains where some of the profits will simply flow to buying real assets or they'll get
00:10:08.400 | spent on
00:10:10.040 | experiences and things because anybody who has been investing since the 1997 Asian financial crisis
00:10:16.200 | 2000 dot-com bubble and the 2008 2009 global financial crisis knows to always convert some of your gains some of your paper
00:10:24.280 | Profits into real assets so you can keep those gains for longer and you can actually appreciate them because at the end of the day
00:10:31.000 | What is the point of making money in the stock market if you actually don't use the money for a better life?
00:10:35.920 | Then going back to the world stage the S&P 500 has been a dominant performer
00:10:41.560 | for the past three years
00:10:43.640 | way outperforming
00:10:45.640 | international stock markets in Asia
00:10:47.640 | Europe and so forth so foreigners again see this and say wow the S&P 500 doing so well the US economy
00:10:54.880 | The US government has to be doing something relatively better than us
00:10:59.720 | We want to buy more US assets as a result
00:11:03.720 | All right, nine strong job and wage growth over the past couple years
00:11:08.440 | I think all of us have reflected on what we really want to do for a living
00:11:13.840 | what is really going to provide us purpose happiness and meaning and
00:11:17.320 | Thanks to government benefits a lot of us had this ability to take time off decompress and think what should we do?
00:11:25.440 | And the common consensus is that we all want better pay better flexibility and more perks and to meet these demands
00:11:32.760 | Companies have been forced to pay up. For example, the largest investment banks Goldman Sachs Morgan Stanley
00:11:39.920 | They raised first year analyst starting base salaries from 85,000 to 100 to 110 thousand dollars in the second half of
00:11:47.720 | 2021 and then of course they have bonuses
00:11:50.000 | So this causes a cascade effect for the tech management consulting and other industries who also
00:11:55.560 | V for this similar talent pool the latest data I think from
00:12:00.000 | 2020 shows that the median household income is about sixty eight thousand dollars
00:12:05.640 | But I bet when the numbers come out for 2022 since we're forecasting
00:12:09.760 | 2022 numbers the median household income should be
00:12:13.160 | 73 maybe seventy five thousand dollars and then so when you compare that income to the median home price, let's say
00:12:20.160 | three hundred fifty five thousand to four hundred thousand dollars depending on the source you look at it's funny how it's not consistent
00:12:26.840 | That's still relatively affordable. It's actually really affordable based on where interest rates are. All right ten
00:12:33.360 | Rising building costs unless you're absolutely desperate and you have no other choice
00:12:37.800 | Nobody will sell you a home at a price that is less than its cost to build and building costs are going up folks
00:12:44.200 | Think about supply chain issues lumber prices
00:12:47.840 | They shot up and then they crashed by like 60 70 80 percent and now they're shooting up another 60 70 80 percent
00:12:55.160 | There's a lot of disruption still with input costs and then of course
00:12:59.320 | Labor costs are going up as I just said so it costs more to build a home
00:13:04.320 | Now than it did a year ago and it'll cost more 12 months from now than today
00:13:10.200 | and
00:13:11.160 | Not only our costs going up the time it takes to remodel and expand is also going up and I think frankly as a person
00:13:18.280 | Who is remodeling a home and it's been two years already that could be the greatest cost
00:13:22.920 | And so if I turn around and flip my house or try to resell it
00:13:26.320 | I'm gonna demand a higher price to make up for my higher costs and higher time spent then you multiply this feeling by
00:13:33.360 | thousands and thousands of other homeowners and remodelers and you can easily see why housing prices will continue to go up and
00:13:40.440 | then finally 11th declining supply and inventory
00:13:44.320 | Right, the combination of rising demand and declining supply will cause home prices to increase further. It's economics 101
00:13:51.680 | It's worth clicking over to my post to see a chart that shows how much existing inventory for sale has declined
00:13:59.240 | I'm gonna looking at this chart from January 1991 to now and the green line is
00:14:04.720 | Way below it's like 50% below the lowest of lows since 1991
00:14:11.560 | Meanwhile existing home sales like transactions are going up and up and up. So this is a very
00:14:20.280 | combustible combination that should boost home prices further now in terms of where I think there's the greatest opportunity to make the most amount of
00:14:28.560 | Money, I actually think the coasts the coastal cities such as New York City
00:14:33.880 | Seattle San Francisco, San Diego, Los Angeles, Boston
00:14:38.120 | I think these cities have a lot of upside
00:14:42.680 | these cities these markets underperformed the Midwestern and southern markets for a couple of years as
00:14:49.320 | Those markets really took off
00:14:51.480 | however
00:14:52.240 | I think there's gonna be a mean reversion a narrowing or even a flip in certain markets
00:14:58.040 | Housing markets that have gone up the most but also have the most upcoming supply are most at risk of a slowdown or downturn
00:15:06.840 | Housing markets that have gone up the least and also have the least upcoming supply
00:15:12.380 | I think are the most attractive and again if foreign real estate demand does come back
00:15:17.800 | Which I think it will
00:15:19.280 | The capital is gonna flood the coastal city markets first because they already see them as cheap and they know
00:15:26.080 | Where San Francisco New York Los Angeles, San Diego and so forth are and then it'll slowly move inward
00:15:33.760 | I still think there will be a continued migration to lower cost areas of the country
00:15:37.840 | This is a multi-decade trend that I started talking about in 2016 investing in the heartland of America
00:15:43.240 | But just like two years of the pandemic has throttled the demand from foreigners two years of the pandemic has also
00:15:50.480 | Throttled the demand relative demand for big cities if you want to make money if you want to build your network
00:15:57.600 | You should probably go where the opportunities are the greatest and the opportunities are the greatest in the biggest cities
00:16:04.760 | This is where you can make an outsized amount of money and then you can relocate if you want to but from my experience
00:16:12.320 | Being in San Francisco for the past 20 years is that people make so much money that affordability is not the issue and they build
00:16:18.680 | Even more networks and more wealth
00:16:20.760 | so I think the under 40 crowd is gonna flock back to the big cities in
00:16:25.960 | 2022 and
00:16:28.160 | Beyond now, let me conclude by saying that no forecast is guaranteed, right?
00:16:33.000 | But I'll share with you my confidence interval at various levels of appreciation and depreciation
00:16:39.480 | So I only believe with a 10% confidence. There will be a negative appreciation of housing prices in 2022
00:16:45.440 | Therefore I believe with a 90% confidence housing prices will go up in 2022
00:16:51.280 | 5% appreciation or greater 80% confidence 8% appreciation or greater. This is like my base case 70% confidence
00:16:59.640 | 10% appreciation or greater 60% confidence and another 15 plus percent appreciation or greater
00:17:05.720 | I say about 30% we could certainly see high teens price appreciation again in housing
00:17:11.120 | this could happen if mortgage rates plummet by 30% foreign demand comes in much higher than expected and
00:17:16.880 | favorable real estate tax laws are passed, you know such as
00:17:20.320 | abolishing the salt cap deduction and then if the market falters
00:17:24.920 | Maybe money flows into real estate as safety or if the stock market explodes higher
00:17:30.000 | Maybe more money goes into real estate. So it's like almost the heads. I win tails. I win such an arrow
00:17:35.520 | So if you are long real estate
00:17:37.240 | Then you should probably hold on to your properties to capture another great year of upside
00:17:41.120 | You literally just have to hold on to it rent it out or just enjoy your life in it as a renter
00:17:46.480 | You should consider getting neutral real estate by owning your primary residence
00:17:50.320 | Just make sure you see yourself living in it for at least five years or longer the longer the better folks
00:17:55.840 | And if you don't want to do that, you can invest more strategically in real estate funds
00:18:01.720 | REITs and just online real estate so you just gain exposure so you can ride that wave
00:18:06.560 | Thanks to just inflation the house you find expensive today
00:18:09.840 | Will probably seem reasonable two to three years from now and in ten years
00:18:14.280 | You will probably kick yourself for not buying at such a great bargain today
00:18:19.120 | You just have to zoom out with your lens zoom in look at it
00:18:22.840 | But then zoom out and think what could it be in the future?
00:18:26.640 | Personally, I am already leveraged up in the real estate market, right? I already bought my forever home in 2020
00:18:33.440 | So I can't afford to buy another home without selling assets and I don't want to sell assets because I'm still bullish in
00:18:38.320 | 2022 and I don't want to incur tax liability. So my next home purchase will likely be
00:18:44.120 | Three to five years from now, hopefully in Honolulu if all goes according to plan, but things generally don't go according to plan
00:18:51.360 | But strategically I'm gonna continue to invest in single-family real estate funds and continue to build my position in
00:18:57.760 | VNQ the Vanguard real estate index ETF and then I'll invest in single stock real estate names and also
00:19:05.240 | Individual real estate syndication deals just to be a little bit more surgical
00:19:09.320 | It is really largely due to expected gains in real estate in 2022
00:19:14.120 | Where I feel comfortable taking things down a notch and you've got to think about your assets your positions as well
00:19:21.000 | If your investments go up another eight to ten percent, is it really necessary to work so hard?
00:19:27.360 | Well, it depends on how much you want but for us, you know back in 2012
00:19:32.000 | I thought I had enough obviously I needed more because I had a family but if real estate goes up another eight to ten percent
00:19:37.400 | I just don't feel the need to really grind as hard in 2022 and I think we're all tired, right?
00:19:43.720 | I'm tired from 2020 2021 and it'd be nice to just relax a little bit more and take it easy
00:19:50.920 | you know and let me conclude by saying the downside scenario for real estate is probably that prices fall five to ten percent in
00:19:58.080 | 2022 and this could happen if mortgage rates shoot up by over 1%
00:20:02.640 | There's a damaging new law that passes like a self-inflicted wound that a government passes
00:20:08.920 | and we enter into a recession because suddenly everybody believes all this craziness in the stock market and NFTs and all that is
00:20:15.480 | Just one big bubble and when one bubbles burst they burst really quickly
00:20:20.480 | So in such a scenario, you know real estate could go down five ten percent
00:20:24.760 | But if it does I plan to be aggressively buying the dip and I expect other investors to aggressively buy the dip as well
00:20:33.400 | So I'd love to hear your thoughts about the housing market for 2022
00:20:38.080 | I spent hours thinking about this great time during the holidays and it's really important, right?
00:20:43.240 | Because I have skin in the game and I don't want to mess this up
00:20:46.080 | So if you're really bearish on the housing market
00:20:48.440 | I'd love to hear your point of view. It's so important to see all sides so we can make better decisions going forward
00:20:55.800 | Thanks so much everyone if you appreciated this episode and the post love a positive review
00:21:00.640 | I read them all and it keeps me going
00:21:02.640 | Take care