2023_Housing_Price_Forecasts
00:00:00.000 | Hello, everybody.
00:00:01.560 | It's Sam from Financial Samurai.
00:00:03.520 | And in this episode, I want to talk about the 2023 housing price forecast.
00:00:09.600 | There are definitely more bears than bulls, and I am one of them.
00:00:13.640 | But don't worry, I don't think it's gonna be that bad.
00:00:16.960 | But I don't think prices are going to go up.
00:00:18.960 | So the 2023 housing price forecast range from down 22% to up 5.4%.
00:00:27.600 | So there's no consensus, but the bias is towards the downside.
00:00:32.080 | There's also the issue of forecasting the national median home price and the price of
00:00:36.200 | your local housing market.
00:00:38.520 | While we care about the national median home price forecast, we care way more about our
00:00:44.240 | local housing market forecast.
00:00:46.880 | Personally, if I'm looking at buying houses in 2023, I'm looking for house prices that
00:00:52.560 | are trading at least 10% off its high.
00:00:56.600 | And I'm also looking for deals where, you know, maybe the sellers have to relocate to
00:01:02.160 | another part of the country or another part of the world.
00:01:04.660 | So they're more motivated to sell.
00:01:06.720 | This is especially true if you're listing during the winter.
00:01:09.240 | Or maybe the sellers are trying to sell because they went through a divorce and they just
00:01:12.960 | really couldn't care less about maximizing prices.
00:01:17.320 | And they just want to get rid of another asset, simplify life and split the proceeds.
00:01:23.220 | There are always opportunities out there, folks.
00:01:25.920 | You just have to make the effort to go search for them.
00:01:29.240 | For background, I expected the median sales price in the United States to rise by 8 to
00:01:34.040 | 10% in 2022.
00:01:36.360 | My estimate was less bullish than the majority of firms expecting closer to 12 to 18% price
00:01:41.840 | increases.
00:01:43.400 | So in the fourth quarter of 2021, according to the St. Louis Fred, the median home price
00:01:48.400 | was $423,600.
00:01:51.320 | The latest pricing data available third quarter 2022 shows the median home price of $454,900
00:02:00.020 | or a 7.4% increase.
00:02:02.240 | So that's pretty close.
00:02:03.880 | What I obviously underestimated was the rise in mortgage rates.
00:02:08.200 | I did not expect mortgage rates to break five, five and a half percent.
00:02:12.980 | They went all the way up to 7% for the average 30 year fixed rate mortgage.
00:02:17.440 | And that was a surprise.
00:02:18.440 | Obviously, that's going to put the brakes on the housing market.
00:02:21.720 | However, the median home price still went up about 7.4%.
00:02:26.360 | We'll see what the fourth quarter 2022 housing price data will be.
00:02:30.060 | And that'll come out in the first quarter of 2023.
00:02:32.920 | I would think the price would decline a little bit in the fourth quarter of 2022.
00:02:38.220 | But let's just wait and see.
00:02:40.280 | Now on to the house price forecast.
00:02:43.920 | On the most bearish end, we've got John Burns Real Estate Consulting down 20 to 22%.
00:02:49.640 | Zonda down 10%.
00:02:52.080 | Goldman Sachs down 5 to 10%.
00:02:54.640 | Redfin down 4%.
00:02:56.680 | The most bullish housing price forecast for 2023, Realtor.com plus 5.4%.
00:03:02.760 | CoreLogic up 4.1%.
00:03:05.360 | And the National Association of Realtors up 1.2%.
00:03:08.360 | And then there's a bunch of other forecasts like from Fannie Mae and Freddie Mac, basically
00:03:13.800 | plus or minus 1%.
00:03:16.480 | And it's just not very exciting.
00:03:18.100 | So I wanted to focus on the most bearish call and the most bullish call.
00:03:23.160 | When you're doing forecasts, you want to look at the tail ends to see who's delusional and
00:03:28.240 | what you're missing.
00:03:29.440 | Because every one of us who has money at stake in the real estate market, stock market, any
00:03:34.360 | risk asset needs to have a thesis.
00:03:38.120 | We need to understand where things are going so we can better prepare and make more optimal
00:03:42.760 | decisions.
00:03:43.760 | That's the whole theme of buy this, not that, how to spend your way to wealth and freedom.
00:03:49.520 | The more optimal decisions we can make over time, the wealthier we will get and the happier
00:03:54.800 | we will be.
00:03:56.040 | So the most bearish call is by John Burns Real Estate Consulting.
00:04:00.520 | I like their work.
00:04:01.520 | I've sourced their data in many posts before.
00:04:04.520 | Good data, good stuff.
00:04:06.320 | However, seeing a 20 to 22% decline in house prices in 2023 is way too pessimistic.
00:04:13.460 | That would bring the national median home price to about $364,000.
00:04:18.120 | A 20 to 22% price decline would mean a greater decline than the one during the global financial
00:04:23.880 | crisis.
00:04:25.560 | Back in the first quarter of 2007, the median home price was $257,000.
00:04:31.200 | And it declined to $208,400 in the first quarter of 2009.
00:04:38.280 | So that's an 18.9% decline.
00:04:41.160 | And that took two years for national median home prices to decline by 18.9%.
00:04:47.140 | So for John Burns Real Estate Consulting to say that home prices will decline by a greater
00:04:52.960 | amount in half the time is completely off.
00:04:56.400 | I don't understand where they're getting this forecast from.
00:05:01.160 | The data is not that bad.
00:05:02.920 | Credit standards are much higher than they were before the 2008 crisis.
00:05:07.440 | We all know anybody who's bought a home since 2008 and since 2012 know how difficult it's
00:05:14.400 | been to get a mortgage.
00:05:16.520 | The average credit score for a successful mortgage applicant is over 720.
00:05:23.900 | Before that global financial crisis in 2008, the average credit score was in the 600s,
00:05:30.080 | by 600s.
00:05:31.340 | So the credit quality of mortgage borrowers is much higher.
00:05:34.880 | Meanwhile, the vast majority of homeowners locked in mortgage rates below 5%.
00:05:40.240 | It's like 95% of mortgage, people who have mortgages are at 5% or lower.
00:05:46.840 | And further, a great percentage of homeowners just simply don't have a mortgage at all.
00:05:52.140 | If you want to forecast house price declines, one way is to think how bad is the current
00:05:58.240 | environment versus the environment in 2007, 2008, 2009.
00:06:04.280 | And if we say the current environment is let's say half as bad, well, the price decline would
00:06:09.760 | be half of 18.9%.
00:06:12.160 | So we'd say something like 9.9%.
00:06:14.760 | We could say that, but I don't think this current environment is half as bad.
00:06:18.480 | Maybe a third as bad, 30% as bad.
00:06:21.180 | So we could see a 5.7% house price decline.
00:06:24.600 | This is just one way of thinking about potential declines in 2023.
00:06:29.600 | But the thing is, as I just summarized, there is a 5.4% housing price forecast by realtor.com.
00:06:37.400 | That's the most bullish call.
00:06:39.640 | And I think it's absolutely wrong.
00:06:42.200 | Realtor.com is a website that helps you find a realtor to buy or sell a home.
00:06:45.880 | I remember looking on realtor.com to look for homes in Hawaii, when I've been searching
00:06:51.720 | for the past three to four years.
00:06:53.440 | And they put me together with a realtor, and then the realtor pays a referral fee.
00:06:58.340 | So the stronger the housing market, the more business realtor.com will generate.
00:07:02.880 | And I don't think it's a coincidence that CoreLogic, expecting 4.1% increase, the National
00:07:08.900 | Association of Realtors expecting a positive 1.2% increase, the Mortgage Bankers Association
00:07:14.700 | expecting a 0.7% increase, and Zillow expecting a 0.8% increase are all bullish and are all
00:07:22.920 | part of the real estate industry.
00:07:25.800 | Now the outlier to the bullish calls is Redfin.
00:07:29.480 | Redfin is obviously a real estate company, and they're expecting down 4%.
00:07:34.840 | But Redfin, my gosh, have you seen the stock price of Redfin?
00:07:38.520 | It's similar to Zillow.
00:07:40.120 | The stock is down a whopping 85% year to date, because it too went into the institutional
00:07:47.800 | eye buying business, lost a lot of money, and volume is way down because everybody's
00:07:53.640 | taking a wait and see approach.
00:07:56.260 | If you're a seller, you've got a low mortgage rate, you're just waiting and seeing how things
00:08:00.600 | are going to turn out, whether mortgage rates are going to come down and demand is going
00:08:03.600 | to come back.
00:08:04.700 | And if you're a buyer, well, you're waiting to see if mortgage rates are coming down.
00:08:08.440 | And you're waiting to see if there are better deals ahead.
00:08:10.800 | All right, so here's my forecast with a 75% conviction level, pretty high.
00:08:16.040 | I expect the median housing price for 2023 to decline by 8% to $419,000 if we assume
00:08:24.520 | home prices and 2022 at about $455,000.
00:08:29.320 | And the reasons include one a global recession by the end of 2023, thanks to the Fed, the
00:08:35.520 | Fed insisting on hiking to a 5 to 5.125% terminal rate, even though inflation is clearly declining
00:08:42.840 | and annualizing under 2% now, three, the inescapable correlation between risk assets as the S&P
00:08:50.280 | 500 goes nowhere in 2023.
00:08:52.560 | Again, real estate has outperformed the S&P 500 by over 25% in 2022.
00:08:58.720 | Finally, a higher risk free rate makes investing in risk assets less appealing.
00:09:04.240 | I talked about how I'm actively investing over 60% of my cash flow and cash into short
00:09:10.640 | term Treasury bonds, three months, six months, nine months, one year, I like one year especially,
00:09:15.880 | because you could have got 4.7%.
00:09:17.960 | Now it's like 4.55%.
00:09:20.380 | And that looks amazing, compared to the 10 year bond yield now at only 3.45%.
00:09:27.260 | So that yield curve inversion is completely out of whack.
00:09:30.440 | And it's telling the Fed to stop.
00:09:32.200 | And if the Fed doesn't stop, you know, it just doesn't seem like that based on its recent
00:09:37.240 | December 14 discussion saying, oh, the terminal rate, we think should be at 5.125%.
00:09:43.560 | I mean, where did that come from?
00:09:46.200 | We're all expecting 5%.
00:09:48.480 | And many of us were hoping lower given October and November inflation data that came out
00:09:53.400 | in November and December were below expectations.
00:09:57.060 | Now I know down 8% isn't great.
00:10:00.600 | It's disappointing.
00:10:01.600 | We always want to make money.
00:10:03.440 | But look, real estate has outperformed the S&P 500 by a lot in 2022.
00:10:08.760 | And real estate prices have gone up a lot since 2020.
00:10:12.520 | So giving back 8% is not that bad.
00:10:15.000 | I think it's actually pretty healthy.
00:10:17.040 | You want that froth to get out of the system.
00:10:19.960 | You want more people with great credit scores and great down payments to be able to afford
00:10:24.720 | comfortably afford to buy property, hopefully using my 30/30, three to five home buying
00:10:31.120 | rule.
00:10:32.240 | You want a greater and greater percentage of the population to be able to comfortably
00:10:36.880 | afford homes and have home buying security.
00:10:40.400 | That's great for society.
00:10:42.680 | And it's great for a stable economy.
00:10:45.600 | Crazy home price increases of 20/30% a year, completely unhealthy.
00:10:52.140 | So I'm kind of glad that the froth is out of the system.
00:10:56.280 | Now here are reasons why I don't expect home prices to decline by much more than 8% in
00:11:02.520 | 2023.
00:11:03.520 | One, 30 year fixed rate mortgages should decline by two to 3% from their peak of 7% by mid
00:11:10.200 | 2023.
00:11:12.280 | I'm looking at this chart, which is in the post if you click through that shows how mortgage
00:11:17.400 | purchase applications rose by 13.8% in December, after mortgage rates fell from 7.08% to 6.3%.
00:11:29.920 | The 6.3% sound great.
00:11:32.320 | I mean, it sounds okay, but it's pretty high compared to a year ago.
00:11:37.240 | However, there was a huge uptick.
00:11:39.620 | So the elasticity of demand for homes when mortgage rates fall is very, very high.
00:11:47.220 | And if that's the case, if mortgage rates do indeed decline to let's say an average
00:11:51.720 | of four to 5%, that pickup in demand could be greater than 25%, maybe 30%.
00:11:59.000 | And the longer there's this inactivity in the real estate market, the more pent up demand
00:12:05.260 | there will be.
00:12:06.260 | So if you have pent up demand plus lower mortgage rates, I don't know, maybe my 8% downside
00:12:12.920 | scenario is too bearish.
00:12:16.800 | Another reason why I don't expect home prices to decline by much more than 8% the Treasury
00:12:21.760 | bond market has stopped listening to the Fed.
00:12:24.600 | The 10 year bond yield did not move at all after the Fed raised by another 50 basis points
00:12:29.640 | on December 14, 2022.
00:12:32.560 | So we're now at 4.25 to 4.5% on the Fed funds rate.
00:12:37.320 | And the yield curve is hugely inverted.
00:12:40.120 | And thankfully, the 10 year Treasury bond is what dictates mortgage rates.
00:12:46.720 | More so than the Fed funds rate.
00:12:49.080 | All right.
00:12:50.600 | Consumers still have excess savings, thanks to tremendous stimulus spending in 2020 and
00:12:55.360 | 2021.
00:12:56.580 | That excess savings is getting spent for sure, but we still got it.
00:13:02.240 | Another positive data point, there will still be a continued under supply of homes.
00:13:07.460 | The vast majority of homeowners have a 30 year fixed rate under 5%.
00:13:11.360 | Therefore, there's really no need for most to sell.
00:13:14.960 | And if you look at the post and you look at the inventory chart, we're still like 30,
00:13:20.560 | 40% below 2015 to 2020 averages, 2019 averages.
00:13:27.960 | So we still got a ways to go to get back to that normalized demand supply scenario.
00:13:33.860 | More reasons why home prices won't decline by more than 8% there will be a continued
00:13:39.080 | capital shift towards real assets and away from funny money assets like stocks, cryptocurrencies
00:13:45.480 | and anything else that provides zero utility.
00:13:48.300 | This is a theme that I've been discussing since I started Financial Samurai in 2009,
00:13:52.920 | because I saw funny money blow up in people's faces back in 2000.
00:13:58.160 | One minute you are worth 2 million and you were going to quit your job and the next minute
00:14:02.700 | you lost it all and had a huge tax bill and you got to go back to work with your tail
00:14:07.640 | between your legs.
00:14:09.320 | I think this is another really big long term trend where more and more capital will be
00:14:14.240 | converted into real assets that hold its value better, that provides utility and that provides
00:14:21.960 | joy.
00:14:22.960 | Finally, there's this great chart in the post that highlights how much home equity has been
00:14:29.160 | built over the years, especially since 2012.
00:14:34.600 | Once home prices started going up again, that amount of equity compared to the amount of
00:14:39.960 | debt is huge.
00:14:42.680 | It's much larger than the amount of equity compared to the amount of debt back in 2006
00:14:47.880 | and 2007.
00:14:49.360 | Back in 2006-2007, the spread was it looks like around $5 trillion.
00:14:57.040 | There's $5 trillion more in home equity than in home debt.
00:15:02.000 | Now, the spread is let's say, let's see $32 trillion in home equity minus about $12 trillion
00:15:10.320 | in home debt.
00:15:11.840 | So the simple math states that there is a $20 trillion difference between equity and
00:15:16.680 | debt in 2022 versus only a $5 trillion difference buffer in about 2006-2007.
00:15:26.320 | In other words, the average or median homeowner can withstand economic shock much greater
00:15:33.280 | than the ones 15, 16, 17 years ago.
00:15:37.880 | So there you have it, my thoughts and everybody else's thoughts about house price forecasts
00:15:43.840 | in 2023.
00:15:44.840 | I do want to conclude by saying that I had a really great hour long conversation with
00:15:50.280 | Ben Miller, CEO of Fundrise on Friday.
00:15:54.200 | We more or less agree with most of my points in my 2023 housing price forecast post.
00:16:00.200 | What I did learn, however, was their Sunbelt properties are continuing to see 5% plus rent
00:16:06.680 | price growth, which will help negate price declines.
00:16:10.400 | Therefore, if you're a fund investor, I would expect continued outperformance actually,
00:16:15.960 | if you have a fund that is investing in the heartland of America real estate.
00:16:20.480 | The main question I wanted to ask Ben was with availability of 4% plus risk free returns
00:16:26.360 | through treasury bonds, what should investors be doing in real estate?
00:16:31.680 | And he said, look at credit opportunities, credit funds.
00:16:35.480 | So Fundrise's fixed income fund, for example, is yielding 8% after fees.
00:16:40.880 | He also mentioned there are some deals because they've declined in price where they're trying
00:16:45.640 | to take advantage and whose yields are at 12 to 14% as they find more opportunity.
00:16:52.640 | In terms of timing, we both agreed summer could provide some of the best buying opportunities.
00:16:58.440 | But it was interesting because he was kind of surprised that I agreed with him on the
00:17:03.920 | summer.
00:17:04.920 | So then he started thinking, well, maybe he should start being more aggressive and looking
00:17:08.880 | earlier in the year because we're both thinking summer's the time.
00:17:12.680 | And if we're both thinking summer's the time, other people are thinking summer's the time.
00:17:17.440 | And then if everybody's thinking summer's the time to really pounce, then will it really
00:17:21.720 | happen?
00:17:22.720 | It probably won't.
00:17:23.760 | And my thesis on why summer could be a great time is because I think mortgage rates will
00:17:27.960 | decline by 2 to 3% by say June 2023.
00:17:33.120 | And with pent up demand, and hopefully a Fed that pivots a little, I think after, you know,
00:17:39.640 | any desperation selling there is during the winter, demand could rebound relatively quickly.
00:17:45.560 | And it's interesting with all risk assets, whether it's stocks, real estate, and especially
00:17:50.280 | cryptocurrencies, is that there's tremendous amount of FOMO where we don't want to miss
00:17:55.200 | out on that rebound.
00:17:57.060 | So many of us, many investors just nibble, nibble, nibble on the way down and try to
00:18:01.680 | time it so we go all in once there's that inflection point.
00:18:06.280 | But as we all know, it's very hard to time.
00:18:10.200 | I really appreciate my call with Ben Miller, founder of Fundrise, because we had a call
00:18:14.760 | at the beginning of 2022.
00:18:16.520 | And he said he believed inflation was going to go beyond 8% and the Fed was going to hike
00:18:21.240 | aggressively.
00:18:22.640 | I didn't think that.
00:18:24.380 | And so he has been spot on.
00:18:26.360 | And it's always great to see other points of view.
00:18:29.320 | Because again, when we are thinking about the future, we need to look at every single
00:18:34.240 | angle to try to make better investment decisions.
00:18:38.160 | So if you want to invest in Fundrise, you can go to financialsamurai.com/fundrise.
00:18:43.840 | About 20% of their assets under management is in cash, and they are looking for deals
00:18:49.020 | right now.
00:18:50.420 | And if you have a moment, please spare a positive review on this podcast and for my book on
00:18:55.760 | Amazon or wherever you purchased it.
00:18:58.320 | I haven't worked this hard in a long time over the past couple of weeks.
00:19:02.680 | And I think partially the reason why is I was sick off and on for two and a half, three
00:19:07.480 | months, and I finally got the energy back to do more podcasts and to write more.
00:19:12.660 | And I wanted to utilize my time left to do my best to work my hardest.
00:19:19.000 | Because who knows when that energy will fade.
00:19:22.320 | And I do wonder as we approach the end of life, is this what happens?
00:19:26.600 | Do we end up doing as much as possible to minimize regret?
00:19:31.320 | I think so.
00:19:32.640 | I hope so.
00:19:34.240 | Because we are all rational actors in the end.
00:19:37.080 | And I really hate regret.
00:19:38.840 | So thank you everyone for your great reviews on this podcast and for my book.
00:19:43.720 | It helps keep me going no matter how sick and tired I feel.
00:19:48.760 | For the remainder of the year, I'm going to do a lot of reflecting and thinking about
00:19:52.960 | how, how to make life better, simpler, more joyful in 2023.
00:19:59.720 | So thanks for sticking with me all year,
00:20:01.480 | and I'll speak to you folks soon.