Buying_A_House_At_The_Top_Of_The_Market
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and in this episode I want to talk about
00:00:04.600 | Buying a home at the top of the market. What if you do that?
00:00:09.120 | What if you buy a home in 2021 or 2022?
00:00:12.120 | When home prices are at all-time highs and then the economy rolls over you just never know
00:00:18.180 | I mean how many of us could have anticipated a black swan event like the pandemic?
00:00:22.580 | Locking us up for a year or a year and a half, right? You just never know when it comes to
00:00:28.520 | Investing in any risk asset with no guaranteed returns
00:00:31.520 | So if you're thinking about buying a home today
00:00:34.160 | Then you also need to envision a scenario where you buy a home at the top of the market and you make no money
00:00:40.200 | Or you actually lose money. It's not a good feeling and it's something that I went through back in 2007
00:00:46.740 | I bought a vacation condo in Lake Tahoe
00:00:49.480 | Because I thought hey my income was gonna keep on going up. I had recently been promoted to vice president
00:00:55.920 | I got a nice salary bump and a nice bonus. So I was thinking to myself why not live it up?
00:01:02.120 | Why not live it up and buy a place where I first took my wife on her first date in California back in?
00:01:08.300 | 2000 the other thing was that I got a good deal or so I thought
00:01:12.880 | previously the condo sold for
00:01:16.000 | 800 I think about
00:01:18.520 | $820,000 and I was able to buy it for
00:01:22.560 | $2,000 I believe but as we all know
00:01:24.960 | 2008 and 2009 came and everything went to hell
00:01:29.160 | so my bonuses got slashed tons of people got laid off in the finance industry and
00:01:34.880 | The property ultimately lost about 50% of its value went from seven hundred
00:01:39.520 | You know fifteen thousand dollars when I bought it to probably three hundred fifty thousand dollars at one point during the worst part of the cycle
00:01:46.800 | Condo mortgages were shut off the market was done. So you couldn't refinance you couldn't get a condo till mortgage people
00:01:53.640 | you know were preserving cash and
00:01:55.920 | Foreclosures were happening in the building left and right and therefore I got negatively affected and everybody who kept on paying their mortgage
00:02:03.520 | Got negatively affected. It's clear that the housing market is very strong right now
00:02:08.760 | I have written my thesis that I believe the housing market will continue to go up over the next three years
00:02:15.240 | It's not gonna go at the same pace as it has been I think the price
00:02:19.760 | Appreciation will decelerate to the high single digits over the next three years all the same
00:02:24.880 | Prices are still gonna go up. However, it's not a guarantee
00:02:28.600 | Even if there's an 80% chance the property market could continue to go up. There's still a 20% chance. It could get knocked down
00:02:36.520 | Even if you start with pocket aces and poker
00:02:40.360 | Pocket aces get cracked all the time
00:02:42.720 | So let's go through the unlucky scenario and the unlikely scenario that you buy home at the top of the market
00:02:49.200 | At the time of this podcast publication. So what happens first you go into denial
00:02:55.100 | You'll stand behind your decision to buy at the very beginning
00:02:58.520 | Even if you see a neighboring home on the market sit for longer or drop its asking price or just sell a little bit less
00:03:06.480 | You'll justify your purchase by saying your home has a better layout
00:03:10.160 | a nicer Feng Shui
00:03:12.040 | Better, you know curtains or fixtures or whatnot
00:03:16.080 | You'll tell yourself that you bought your home mainly for a better lifestyle first
00:03:20.280 | And then after about a year the elation of owning your home fades a little bit
00:03:24.700 | It's similar to the fading elation of buying a new car with a loan. You're thrilled for the first six months
00:03:30.520 | however
00:03:31.480 | That thrill fades because the car payments stay the same and so eventually there's gonna be this crossover point where your joy
00:03:38.860 | Fades and then that straight line payment stays the same and these start getting a little bit bummed out
00:03:44.300 | - you begin to accept your mistake
00:03:48.140 | Between 12 to 24 months post purchase you start realizing that maybe you didn't make the best purchase after all you start telling yourself
00:03:55.860 | Well in the long run things will be fine
00:03:58.640 | This is what stock traders always tell their themselves when they make a bad trade. Ah, I'm investing for the long run, right?
00:04:05.440 | It's how you make yourself feel better
00:04:07.920 | But the more you look at homes that sell for less the more you beat yourself up internally about your purchase
00:04:13.840 | You start doing calculations and how much you could have saved on the down payment or on the month of cash flow if you had
00:04:19.680 | Just waited a little bit longer or you had been a little bit pickier or you had negotiated a little bit harder
00:04:27.080 | You look at the nicer homes you could have bought with what you paid and you start kicking yourself a little bit
00:04:32.920 | Finally you tell yourself. Well, it's just money at the end of the day. You can always make more money
00:04:38.840 | And again, you are living in your home. You bought it for a better lifestyle
00:04:43.480 | the third thing you start thinking about is
00:04:45.920 | worst-case scenarios due to leverage a
00:04:48.920 | 10% decline in the value of your home is a 50% decline in your 20% down payment and of course a 20% decline in the
00:04:56.400 | Value of your home is a hundred percent decline in your down payment
00:05:00.240 | Once the momentum to sell begins in real estate, it's very hard to change. It's kind of like a super tanker
00:05:06.600 | very wide and slow turns
00:05:09.640 | Momentum kind of continues to build until after about two or three years
00:05:14.440 | It kind of settles at the bottom for another one or two years and then generally based on history
00:05:21.200 | It goes back up during a worst-case scenario
00:05:23.960 | You start calculating how long you can keep the house before you run out of savings or if you lose your job
00:05:29.920 | You also calculate how low the house can go before it no longer makes sense to keep paying the mortgage
00:05:35.240 | Many people made that calculation in 2008 9 10 11 12 probably as well
00:05:42.200 | and they just let it go they gave the keys back to the bank and they said this is your problem and
00:05:48.120 | They just walked away from their equity hurt their credit score and so forth
00:05:52.480 | it's hard not to freak out at this stage, especially if you have children because
00:05:57.720 | You know the house could ruin you you could be so underwater. Your credit is crushed. You lose all your equity
00:06:03.240 | How are you gonna get into job again?
00:06:05.200 | It just depends on how bad the economy can get for those of you who are under I would say
00:06:11.000 | 3540 it's hard to really experience how bad the economy was back in 2008 2009 2010
00:06:19.320 | If it gets like that, it's really bad. It's a systemic crisis, but I don't think it's gonna get that bad
00:06:25.000 | I don't think it's gonna get that bad because
00:06:27.360 | credit scores
00:06:29.120 | Credit reports the financial health of borrowers today is so much better than back then
00:06:35.040 | All right, but let's keep on focusing on the negatives, you know a bad downturn. What are you gonna do?
00:06:40.000 | The fourth thing you're gonna do is you're gonna start to cut out all excess fat from your budget
00:06:44.520 | You know, you are a rational human being you are not a zombie you can adapt you can learn you can hustle
00:06:51.040 | There's no clear evidence that Americans can save more if they want to if we want to
00:06:57.360 | Then during the pandemic in April 2020 the US saving rate went from 6%
00:07:04.640 | Which is okay to 32%
00:07:07.320 | We can save more if we want to and today mid
00:07:11.840 | 2021 the saving rate is still hovering around 10 12 percent
00:07:17.520 | That's pretty good. And of course, not only can we all slash our budgets we could all do some side hustles
00:07:24.560 | We could all make some extra money cutting grass driving cars
00:07:28.460 | Assembling furniture teaching tennis teaching ballet music violin, whatever it is
00:07:35.060 | We can all do something to make a little bit more money. So if you get through these stages
00:07:40.040 | Well, I think you'll be okay
00:07:42.800 | The downturn usually lasts two to five years and if you keep on paying your mortgage
00:07:48.560 | Nothing really bad happens
00:07:50.920 | It's just a psychological knock where you could have saved money or made more money had you waited. That's it and
00:07:58.360 | Given that nothing really happens or bad happens except for a mental knock
00:08:02.840 | It's so important to follow a good home buying rule. I've presented the 30 33 home buying rule
00:08:11.120 | 30% of cash flow
00:08:13.120 | 30% cash
00:08:15.040 | By no more than 3x your household income, you know, it's a pretty conservative rule
00:08:19.720 | But if you follow this rule and a downturn happens, you're probably gonna be fine if you stop paying your mortgage
00:08:26.120 | Let's say the worst case
00:08:28.040 | Your credit score is gonna get knocked 30 days late
00:08:31.320 | You're gonna get a 40 to 110 point hit 90 days late on paying your mortgage 70 to 135 point hit
00:08:38.240 | If you do a foreclosure a short sale
00:08:40.760 | 85 to 160 point hit and then bankruptcy is 130 to 240 point hit the higher your credit score
00:08:49.280 | Actually the more it's gonna get hit
00:08:51.760 | Therefore if you've got a great credit score and you can afford the payments, I would just keep on paying keep on enjoying your life
00:08:59.800 | Build that cash reserve work on building your income and cutting expenses
00:09:05.320 | Over time things are gonna self-correct as we are seeing right now
00:09:09.420 | I mean the people who held on to their homes during the last financial crisis
00:09:13.280 | I would say most of them are in the green now now, obviously the opportunity cost is another thing
00:09:19.240 | they could have invested in something else and maybe have made more or
00:09:22.760 | You know again if they didn't buy at the top of the market and just waited several years
00:09:27.720 | They could have made a lot more but let's be realistic. We just can't time it properly. I
00:09:34.080 | Personally never like to buy into a frenzy whether it's a housing market frenzy equity frenzy or anything
00:09:40.280 | That's why we were talking so much in 2020
00:09:43.600 | During the bottom in first quarter or second quarter 2020 why we should be strategically looking at buying real estate and buying equities
00:09:52.040 | And if you've been listening to this podcast for a while or reading financial samurai for a while
00:09:55.880 | That is when we were really going on in we're finding strategies on how to convince people to sell to us
00:10:03.360 | Because doom was here. You know, we talked about real estate love letters
00:10:07.280 | We're talking about analyzing earnings estimates and seeing what expectations are versus reality all these things
00:10:14.440 | They're great to talk about and we can never get it a hundred percent, right?
00:10:17.800 | But I think if we do our due diligence learn from others
00:10:22.800 | Pay attention to what's going on learn from past cycles. I think we can build ourselves an edge
00:10:29.800 | So the edge right now is a little bit difficult because everybody is buying everything
00:10:35.640 | There's just massive amounts of liquidity everywhere and interest rates are probably gonna stay low for a long long time
00:10:42.120 | I'm gonna make the call that interest rates are gonna stay low for the rest of our lives because we've got this inflation
00:10:47.600 | interest rate cycle down pat
00:10:49.880 | Technology and productivity are our friends when it comes to managing inflation
00:10:54.560 | So our emerging markets exporting their deflation to us right now. It's China. Maybe it's India next
00:11:01.240 | Maybe it's a country in Africa
00:11:03.400 | the world is getting smaller and it's going to continue to get smaller with better technology better connectivity and
00:11:10.320 | Therefore interest rates are gonna stay lower because inflation is gonna be contained
00:11:15.200 | finally, I just want to say that you don't have to go all in on real estate now and all in means buying a physical property
00:11:23.200 | With debt you don't have to leverage up to buy property. You can buy a real estate ETF
00:11:28.520 | You can buy stocks like Home Depot a public REIT or a private eREIT from Fundrise
00:11:33.940 | There are many opportunities to invest in real estate without having to go all in you can invest in real estate more surgically if you
00:11:41.580 | Are worried personally, I'm not that worried about a housing market correction
00:11:46.480 | Because of all the fundamentals that are in place today
00:11:49.240 | I believe there's gonna be a huge rush back to big city living as people realize that the
00:11:55.120 | Opportunities the jobs the connections are all much better
00:11:59.040 | When you're closer to the people in power who have the money
00:12:02.700 | I was just out and about last
00:12:05.100 | Couple nights ago after a softball league game and I went out on a popular Street called Chestnut Street in the marina
00:12:11.160 | Which is the northern side of San Francisco and it was popping
00:12:15.360 | Every single restaurant was packed. All the stalls outdoors were packed
00:12:20.540 | It is absolutely clear to me that big city living is back at the same time
00:12:27.560 | There is going to be a long-term
00:12:29.680 | demographic shift towards lower cost areas of the country because of technology because we can and because we all are more
00:12:37.600 | Accepting of working from home in conclusion. I don't think we're at the top of the market
00:12:42.960 | Maybe a 20% chance over the next one or two years that we buy at the top of the market
00:12:47.280 | But that means there's an 80% chance the housing market continues to do well
00:12:51.340 | I'd love to hear from all of you on whether you've bought at the top of the market in the past or whether you think
00:12:57.360 | The market is toppy right now, and if you like this podcast, I'd appreciate a positive review
00:13:02.480 | Thanks folks, and I'll see you guys around