Buying_a_house_in_2023
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and in this episode I want to
00:00:04.680 | talk about buying a house in 2023 because if you have been waiting since
00:00:10.960 | October 2022 to buy a house I think a window, a big window has emerged. Now it's
00:00:18.520 | not a table-pounding buy like I thought in mid-2020 when my conviction level is
00:00:24.240 | like a 8.8 out of 10. It's more like a 6.5 to 6.8 out of 10
00:00:31.800 | conviction level but that's high enough where I think if you buy now you're not
00:00:36.900 | gonna regret it especially if you negotiate hard and well because I think
00:00:42.000 | in one or two years home prices will be higher than they are in mid-2023. So to
00:00:48.360 | recap what was my 2023 housing price prediction? You know obviously we're only
00:00:53.440 | four months in so anything can happen but I expected about an 8% decline in
00:00:57.520 | the median home price because of higher mortgage rates namely an overly
00:01:02.080 | aggressive Fed, a potential recession in the economy, earnings recession in the
00:01:07.360 | S&P 500, and high prices that were simply unaffordable to a lot of the
00:01:14.000 | median home buyer. But if you look at the data you'll see that on the East Coast
00:01:19.440 | home prices seem to be more stable or even up a little bit. On the West Coast
00:01:24.200 | home prices are down 5 to 10 percent so given I'm on the West Coast I'm seeing
00:01:29.800 | more opportunity and because I'm seeing more opportunity I'm more bullish. So
00:01:34.480 | keep that in context as you listen to this podcast and as you read my post on
00:01:39.720 | buying a house in 2023 in the show notes. So first of all where are we in terms of
00:01:45.720 | the national median home price? Well according to Redfin March 2023 saw a
00:01:51.080 | 3.3% decline in home prices. So if you take a look at the show notes and take a
00:01:56.600 | look at the chart you'll see this big decline in home price appreciation
00:02:01.080 | because it's now depreciating. February 2023 showed the first year-over-year
00:02:06.800 | decrease since 2012 and this is the largest year-over-year decrease since
00:02:13.000 | 2012. So if you're a buyer this is great if you're an owner well not so much but
00:02:19.480 | look at 2022 the S&P 500 went down 19.6% and the housing market well it was kind
00:02:27.960 | of flat maybe it was down several percent right. So if you can buy a home
00:02:32.360 | between 5% to 10% below last year's levels I think you're gonna do pretty
00:02:38.640 | well. So here are three reasons why I think buying a home in 2023 mid-2023 and
00:02:44.760 | maybe fourth quarter 2023 is a safer bet now. Nothing is a guarantee but I think
00:02:50.400 | it's safer to wade in the waters and I don't think you're gonna regret it a
00:02:54.960 | year or two years from now. Alright first of all there is a lot of pent-up demand
00:03:01.120 | especially since the fourth quarter of 2022. Pent-up demand for homes yet
00:03:07.040 | inventory is still below 2022, 2021, 2020 and pre-pandemic levels. Since October
00:03:16.000 | 2022 specifically there's been a stalemate in the housing market. Sellers
00:03:21.880 | don't want to sell because they have great mortgages many under 3% so why
00:03:26.660 | sell and then lock in a higher rate mortgage and buyers didn't want to buy
00:03:31.840 | because well mortgage rates were going up the bear market was happening the Fed
00:03:37.680 | was aggressive and it's like well why don't we take a wait-and-see approach. So
00:03:42.760 | it's been seven months since October 2022 and every month that goes on with
00:03:48.600 | one person not buying a house creates more pent-up demand and what have we all
00:03:52.600 | been doing since the second half of 2022? Well we've been saving more cash and
00:03:59.040 | we've put in putting that cash to work in higher yielding Treasury bonds,
00:04:02.920 | Treasury bills and money market funds which now offer four to five percent and
00:04:07.840 | that's a really attractive return based on the past ten years when we were
00:04:12.560 | getting less than you know 0.2% on our money. So this combination of more cash
00:04:20.160 | and more higher yielding cash has built up over seven plus months. But the thing
00:04:27.120 | is life continues to go on while you wait for the opportune time. You know
00:04:32.120 | babies still get born, people still get married, people still relocate for better
00:04:37.560 | job opportunities and so forth. So as this pent-up demand builds I think the
00:04:43.120 | wave of potential capital back into the housing market is going to get stronger
00:04:47.880 | and stronger and I think that wave is coming by the end of this year.
00:04:51.880 | Personally I have been saving aggressively if you saw my post on how
00:04:56.200 | I'd invest $250,000 today, 60 to 70 percent of that cash has been used to
00:05:03.160 | buy Treasury bonds and then the remaining has been nibbling in the stock
00:05:06.880 | market, private real estate market as well as the public real estate market.
00:05:11.680 | Look at the home building stocks. The home building stocks are on fire in 2023
00:05:16.680 | up 20 to 30 percent. DR Horton, Toll Brothers, KBH, it shows there's a lot of
00:05:22.240 | demand for at least new homes and well these home builders are deploying a
00:05:27.880 | strategy of buying down the mortgage rate to make it more affordable for
00:05:30.920 | buyers but this is a good piece of evidence that there is demand out there
00:05:36.280 | for homes. Now then if you look at let's say VNQ, the Vanguard Real Estate Index
00:05:41.720 | ETF, it's lagging and I think this lag, the six-month lag, is important to
00:05:47.360 | understand if you want to be a good real estate investor. Which brings me to
00:05:51.960 | point number two, the stock market has rebounded a lot in 2023 by about 8% this
00:05:58.280 | year and even more since October 2022 when the rate hikes really started
00:06:03.960 | getting more aggressive. In general, real estate lags the stock market by about
00:06:09.360 | six months. So the bottom of the S&P 500 was in October 2022, six months ago and
00:06:18.680 | since then we're up double digits right? Therefore if you can buy real estate
00:06:23.480 | with prices down five to ten percent and the stock market stays flat over the
00:06:30.520 | next six months, I think you're gonna see a catch-up in real estate prices over
00:06:35.640 | the next six to twelve months by five to ten percent. And this is why I say this
00:06:41.800 | window of opportunity is emerging. The window might only be, I don't know, three
00:06:48.520 | four five months at most before the capital, which is always looking for the
00:06:54.520 | highest rate of return, fills up this gap. And once that gap is filled, the spread,
00:07:00.960 | you know, the catch-up just narrows to the point where, well, you don't have as
00:07:05.960 | great of an opportunity to make money. Psychologically, I think all stock
00:07:11.200 | investors, especially long investors, feel better right now. We feel richer. Man, just
00:07:16.560 | a month ago we had bank runs, deja vu of 2008 with Lehman Brothers, Bear Stearns,
00:07:22.480 | Washington Mutual all going under. And I definitely thought, hmm, could this be the
00:07:27.120 | start of a cascade of bank runs? So far it hasn't. You know, obviously there's
00:07:31.400 | probably more banks out there, plenty of banks that are losing money if they mark
00:07:35.120 | to market. However, it looks like the Fed is not gonna make the same mistake as it
00:07:39.920 | did in 2008 and it's going to step in and be the lender of last resort, which
00:07:44.880 | is good for the overall economy. Also, if you look at what Wall Street strategists
00:07:50.520 | were forecasting for the S&P 500 at the beginning of this year, the median price
00:07:55.760 | target was about $4,033. It ranged from around $3,400 to $4,600. And sure, there are
00:08:04.360 | definitely bears still out there, like Mike Wilson from Morgan Stanley, who's
00:08:08.280 | predicting $3,000 on the S&P 500. But then there are bulls out there, like Tom
00:08:13.120 | from Fundstrat, who's always perma bullish, who's focusing on $4,600 and above. So at
00:08:20.040 | current levels, around $4,140, $4,150, we are a couple percentage points above the
00:08:27.840 | median S&P 500 target price for 2023. And I think that makes people feel good. We
00:08:33.800 | feel better, we're richer, we spend more money on things we don't need and on
00:08:37.760 | experiences that we enjoy. And that's good for corporate profits. And we
00:08:42.760 | definitely are gonna spend money on housing because we still spend so much
00:08:46.960 | time at home. And we all know that real assets hold their value much better than
00:08:52.680 | funny money paper assets. I think we've gone through this multiple times before
00:08:56.680 | to the point where owning real assets like real estate, jewelry, fine art, wine,
00:09:03.360 | fine wine that can be consumable, you know, at least there's some value in
00:09:07.360 | these things that we buy and it just doesn't go up and down on our computer
00:09:10.920 | screen that offers really no value. So I expect more stock market capital to flow
00:09:17.320 | into the real estate market. Personally, I'm reducing my exposure to public
00:09:23.600 | stocks from about 30% of my net worth to 25% of my net worth. At current levels,
00:09:29.080 | $4,150, it feels like I got a second chance. Yeah, we're still down from the
00:09:33.160 | highs, but we're not down to $3,577, the recent low. It feels like, ah, second chance
00:09:40.120 | to take some profits and to buy real assets and to stabilize my net worth
00:09:45.600 | volatility. And I think many people feel this way. Alright, the final reason why I
00:09:51.480 | think buying a house in 2023 is gonna be okay is because mortgage rates have
00:09:56.920 | peaked. If you look at the data, June/July 2022 was the peak in CPI inflation. We
00:10:03.880 | were at about 9.1% in June 2022 and the latest data in March 2023 showed 5% for
00:10:10.960 | the CPI. So clearly, inflation has peaked. As a result, mortgage rates have peaked. As a
00:10:17.200 | result, the Federal Reserve is thinking, well, maybe one more rate hike in May and
00:10:22.560 | that's it, we're gonna hold. And if you look at expectations for future Fed funds
00:10:26.520 | rates, the expectation is there's gonna be Fed funds cuts over the next 12 months
00:10:31.640 | after May. So rationally, many buyers, many home buyers, just have been waiting
00:10:38.440 | to see how high the Federal Reserve would take the Fed funds rate and waiting
00:10:44.800 | when will inflation finally break. You know, a couple months does not a trend
00:10:50.440 | make, but now it's seven, eight, nine months of declining inflation. So as a
00:10:57.760 | result, we see the light at the end of the tunnel and when you see light at the
00:11:01.920 | end of the tunnel, you can better model your future housing expenses and you
00:11:06.000 | have more conviction to buy. Now, savvy real estate investors actually don't
00:11:11.560 | mind getting a mortgage at a high rate if they can get a purchase price at a
00:11:17.240 | much lower price. Because at the end of the day, you can always refinance your
00:11:22.040 | mortgage, but you can never change the purchase price or the sale price of a
00:11:26.840 | home. Therefore, if you were to buy a house, let's say in mid-2023, let's say
00:11:33.000 | with a 6.25% mortgage rate, yeah, that's not the best, but if you got a great deal,
00:11:38.120 | let's say 8 to 10% off, and then mortgage rates fall by another 1 or 2% in a year,
00:11:43.960 | you can always refinance and save money. And as mortgage rates decline, demand for
00:11:49.000 | housing increases, thereby helping push up home prices. Alright, now that we
00:11:55.200 | talked about the three positives to potentially buying a house in 2023, let's
00:11:59.800 | talk about three or four negatives. The first negative is that we go into
00:12:04.280 | another recession. Recession is technically two consecutive quarters of
00:12:08.120 | downward GDP growth. We had that last year and we have an earnings recession in
00:12:13.480 | the fourth quarter of 2022 and first quarter of 2023 so far. So maybe we're
00:12:19.120 | already in a recession and if this is as bad as it's going to get, well, things
00:12:23.280 | aren't too bad because the stock market and investors are forward-looking.
00:12:26.920 | However, if we fall back down into a deeper recession or a recession that's
00:12:34.000 | worse than expected, thanks to, you know, the Fed funds rate going to 5 to 5 and a
00:12:39.760 | quarter percent, and there's also a lag, right? Once you start tightening, there's
00:12:43.080 | a 6 to 12 month lag where consumers stop spending so much and start saving more.
00:12:48.360 | Then that could weaken housing demand. That probably will weaken housing demand.
00:12:54.040 | What I'm looking for is the unemployment rate, which is currently at 3.5%, going to
00:12:59.480 | 5%. If we get to 5% on the unemployment rate, it's very feasible because back in
00:13:04.640 | March 2020, the unemployment rate went to like 14%. Then I expect housing market
00:13:09.600 | demand to slow. And then if we go to like 6.5, 7%, I definitely think the
00:13:14.680 | housing housing prices will probably go down 10 to 15% if we get to that bad of
00:13:20.880 | an unemployment level because that's millions of jobs lost. But I assign, you
00:13:25.360 | know, maybe like a 30% chance we get to 6% unemployment. I think things are going
00:13:31.280 | to be kind of, you know, will fade a little bit. Unemployment rate might go to
00:13:35.320 | 4%, 4.5%, but it's kind of generally in line with the natural rate of
00:13:40.240 | unemployment level. So I think it's going to be fine, but that is a risk. The other
00:13:44.800 | risk is that the stock market goes back down another 10 to 20%. Another bear
00:13:50.360 | market, right? We do have highly paid Wall Street forecasters who are thinking the
00:13:55.240 | S&P 500 could go to 3,000 to 3,600. And if that's the case, I think people are
00:14:01.520 | going to step back and say, "Wait a minute. We're probably in a recession again and
00:14:05.840 | let's hold on to our cash that's earning hopefully over 4% while we wait things
00:14:12.360 | out some more." I only sign about a 20% probability we go back to the recent low
00:14:18.080 | of 3,577 on the S&P 500, but it could happen. So recession and a bear market and
00:14:25.120 | stock market. The counterbalancing mechanism is a decline in Treasury bond
00:14:31.320 | yields, right? Because if things are going bad, people are going to go flight to
00:14:34.640 | safety, which is Treasury bonds. And then Treasury bond yields go down and
00:14:38.480 | mortgage rates go down because mortgage rates tend to track the 10-year Treasury
00:14:44.040 | bond yield. Another risk to the buy housing in 2023 call is if inflation
00:14:50.680 | stays sticky at 5%, right? It peaked at around 9.1% in mid-2022. It's now about
00:14:57.880 | 5%. If it stays at 4.5% to 5.5%, well, that's not
00:15:03.000 | gonna be good because the Fed will raise the Fed funds rate or at least keep it
00:15:07.640 | at 5% to 5.25% for longer than expected. Right now, the market is
00:15:11.280 | expecting the Fed to cut within the next 6 to 12 months after it raises in May. I
00:15:16.960 | mean, I don't know why they need to raise and then cut again. Just keep it the way
00:15:20.720 | it is. But that's what the market is saying. Sticky inflation is a risk. I mean, I
00:15:25.360 | just went to fill up my tank and it was a hundred bucks because $5 per gallon
00:15:30.960 | here in San Francisco again. So if energy prices go up, well, there's a risk to
00:15:36.000 | inflation. But the good thing is that shelter inflation, i.e. rents, have been
00:15:40.840 | coming down over the past 6 to 8 months and that's a leading indicator.
00:15:44.760 | Whereas the CPI index that we see, you know, is always a lagging indicator. So
00:15:49.920 | over the next 3 to 6 months, because shelter inflation has been coming down,
00:15:53.560 | which accounts for about 30% of CPI, we should see downward pressure, further
00:15:59.640 | downward pressure in the inflation number. The final risk to the housing
00:16:05.200 | buy/call in 2023 is commercial office real estate. So, so far, the return to work
00:16:13.800 | trend has been happening, but it might be slower than expected for building owners
00:16:18.920 | and lenders. A lot of these commercial office buildings are on floating rates,
00:16:23.720 | not long-term 30-year fixed rates. So as rates go up, you know, you're gonna see an
00:16:29.400 | increase in defaults of commercial office building owners. And that could
00:16:34.480 | cause a cascade effect, a negative effect, for the lenders who lend to these owners.
00:16:39.240 | We saw the bank runs with SVB and Signature Bank and Credit Suisse, and it
00:16:44.400 | just takes a little bit of spooked-out investors where, you know, one bank says
00:16:48.960 | they had too much exposure to office buildings, and then that could create a
00:16:53.000 | domino effect. So please be aware of the commercial office building space. More
00:16:58.960 | companies are asking their employees to come back to work because I think
00:17:03.080 | they're finding that productivity might not be as high as working at home, even
00:17:07.720 | though I think most people who are on it are way more productive at home. But I
00:17:12.760 | think it's human nature, right? The human nature to just, you know, go walk the dog,
00:17:16.520 | take a nap, go play pickleball. Here, I'm at the pickleball court right now
00:17:20.280 | recording this podcast because, hey, it's a really nice day. It's just human nature
00:17:25.320 | to not work as hard if nobody is governing you as much. So I do expect
00:17:31.200 | more employees to go back to the office, which will help the commercial office
00:17:36.080 | building space, but it's just something to watch, folks. Alright, I hope you
00:17:40.320 | enjoyed this episode. Send me an email or leave a comment in the post letting me
00:17:44.280 | know what you think about buying housing real estate in 2023. If you're interested
00:17:49.920 | in investing in real estate, private real estate that is, check out Fundrise at
00:17:54.000 | FinancialSamurai.com/Fundrise. It invests mostly in the Sunbelt
00:18:00.480 | region where valuations are lower and net rental yields are higher. They focus on
00:18:04.840 | single-family and multifamily homes, which are much more sticky than
00:18:08.800 | commercial office real estate. If you enjoyed this podcast episode or this
00:18:12.880 | entire series, I'd love a positive 5-star review. And don't forget to sign up for
00:18:17.520 | my weekly newsletter at FinancialSamurai.com/News so you never miss a
00:18:22.840 | Thanks so much.