Property_Bidding_wars
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and in this episode, I want to recap a couple
00:00:14.180 | of posts that I wrote regarding the housing market.
00:00:17.520 | The first post was called "Understanding Why People Get Into Property Bidding Wars."
00:00:22.480 | Personally, I'm against getting into a bidding war because I know my emotions could make
00:00:28.040 | me go a little bit nuts and make me lose my financial discipline when buying a home.
00:00:34.040 | And the second article is called "Analyzing Home Price Dynamics, A Guide to Smarter Purchases."
00:00:39.660 | Well, it's the first half of 2024 and the housing market is picking up steam.
00:00:47.680 | Here in San Francisco, I have seen multiple bidding wars on over a dozen houses on the
00:00:53.720 | west side of San Francisco and this has been remarkably different from the second half
00:00:58.480 | of 2023 when it was relatively dead as people waited and hemmed and hawed about buying property
00:01:05.840 | because mortgage rates were much higher and there's a lot of uncertainty.
00:01:09.720 | However, with mortgage rates above 6.5-7% for at least 18 months now, it seems like
00:01:17.340 | the buyer is more comfortable with the way things are.
00:01:21.380 | And so, with pent-up demand, with every single month trending at below pre-Covid volume,
00:01:28.680 | that creates pent-up demand as given life goes on, well, that pent-up demand has got
00:01:33.780 | to be unleashed somehow and it seems like it's being unleashed right now.
00:01:38.960 | But here are some takeaways that I have come away with after analyzing these type of price
00:01:44.600 | moves.
00:01:46.220 | First of all, beginning of the year, it's a new year, people are excited, pumped, they
00:01:50.780 | get their year-end bonuses hitting their bank account usually by February.
00:01:55.560 | There's a resolution to try to do something new or to improve your finances or maybe to
00:02:00.060 | buy a home.
00:02:01.420 | And so, if you look historically, prices of homes at the beginning of the year generally
00:02:06.220 | go up and then they fade for the rest of the year with the slowest time during the winter
00:02:13.220 | fourth quarter, holiday, Thanksgiving, Christmas, any other type of holiday.
00:02:19.340 | People are just more chill and also people have spent down their excess savings and then
00:02:23.860 | it's the new year with new income, new bonuses and let's go.
00:02:27.980 | So, if you're a buyer in a hot housing market or a strong housing market and you're seeing
00:02:35.180 | these bidding wars, I don't think you should get into these bidding wars, especially if
00:02:40.460 | the offer you're putting is above the 30/30/3 home buying guideline that I have given and
00:02:48.180 | represented for you all to follow.
00:02:50.740 | Because if you surpass that guideline and if you win, you'll experience what is called
00:02:56.200 | the winner's curse where nobody else was willing to pay that price you were paying, therefore
00:03:01.300 | you were the top dollar, you won.
00:03:03.540 | But that also means that unless the housing market continues to go up, you have basically
00:03:09.820 | top ticked the housing market.
00:03:11.180 | Now, thankfully, in a rising market, you're generally not going to top tick the market.
00:03:15.860 | Just like in a downward market, you're generally not going to bottom tick it and then suddenly
00:03:20.140 | a month after you bought, housing prices are going to rebound, right?
00:03:24.700 | It's generally not like that.
00:03:26.580 | But what I have seen is, this is since buying property since 2003 on my own, is that you
00:03:34.540 | don't really want to get into these bidding wars in the spring because it just pushes
00:03:39.260 | prices way up and it makes you emotional and it makes you undisciplined.
00:03:43.640 | What you want to do is wait until the fourth quarter when that heat has faded.
00:03:48.180 | Generally that fade doesn't go below where the previous year's fade bottom was, right?
00:03:55.500 | So generally higher highs and lower lows.
00:03:58.460 | But it's much better to look for properties, I think, in the second half of the year.
00:04:02.660 | Maybe inventory is down.
00:04:03.980 | Maybe you don't find that perfect, perfect house.
00:04:07.540 | But you don't overpay.
00:04:10.020 | You don't have the risk of overpaying.
00:04:12.300 | And so that's feedback number one.
00:04:14.500 | Wait until the fourth quarter instead of the first quarter.
00:04:17.340 | The second very important takeaway from my post on analyzing home price dynamics is that
00:04:23.220 | prices move quickly on the upside with real estate and very slowly on the downside.
00:04:29.220 | If you look at the charts, I offer five charts of various homes that sold in the first half
00:04:35.020 | of 2024, you can see a price fade over a two year period from the highs of early 2022.
00:04:43.060 | And it just up, up, up, down, down, down.
00:04:45.420 | It goes a little bit until first quarter of 2024.
00:04:50.340 | And then what you see happening are bidding wars for all these homes and the price chart
00:04:56.180 | literally spikes up and surpasses the 2022 high.
00:05:02.020 | So what does this tell you?
00:05:03.300 | This tells you, in my opinion, that it's better to be one year, two years too early when buying
00:05:11.220 | a home rather than one month too late.
00:05:15.100 | Literally maybe one day too late because once you see those bidding wars go on, people just
00:05:20.900 | get a little bit nuts and then they just bid over asking, way over asking, and they just
00:05:26.500 | immediately reset the price.
00:05:28.740 | And this is very different from stocks where let's say you have a bad quarter, bad guidance,
00:05:34.780 | management did something shady, I don't know, competition was really fierce, bad government
00:05:40.900 | regulations, the stock could easily drop 5, 10, 15, 20 plus percent right after that announcement.
00:05:48.300 | And on the flip side, the stock can rise 5 to 20% quite easily after positive guidance,
00:05:54.540 | blowout numbers, a new technology, new invention, and so forth for stocks.
00:05:59.620 | So stocks are more volatile on the upside and downside, whereas real estate is less
00:06:05.300 | volatile on the downside, but it seems to be quite volatile on the upside.
00:06:10.900 | And why is it less volatile on the downside?
00:06:13.340 | Well, transaction costs.
00:06:15.260 | People might be locked into a low mortgage rate.
00:06:18.180 | People might not want to move because their kids enjoy the school.
00:06:22.260 | Owners might think, well, I don't believe my home price has gone down because they don't
00:06:27.900 | see liquid prices every single day transacting.
00:06:31.420 | And then maybe home sellers are stubborn, like I won't accept 10% down or 20% down.
00:06:36.460 | I'm just going to stick to it, keep enjoying my life and ride it out until the good times
00:06:41.060 | return.
00:06:42.060 | So this is the typical mentality of a homeowner.
00:06:45.960 | But for a stock owner, that means just clicking the buttons left and right with no commission
00:06:50.260 | costs, so you can easily see how stocks are much more volatile than real estate.
00:06:57.260 | The final final takeaway from my post on analyzing home price dynamics is that the downturns
00:07:03.940 | generally last between one, one and a half to four years, and the upturns generally last
00:07:09.740 | twice that.
00:07:10.900 | Hence, if you are a buyer, you're in the market and you notice that prices are softening,
00:07:17.420 | it probably is best to wait at least one year, wait until a year for prices to soften a little
00:07:23.340 | further and for home sellers to lose a little bit of hope and accept the reality that their
00:07:28.220 | homes have declined in value.
00:07:30.300 | Again, home sellers are stubborn.
00:07:32.540 | They believe theirs is more special or they've got a lower mortgage rate and it's affordable.
00:07:38.820 | So why not just wait it out?
00:07:40.700 | The risk, however, of waiting too long, as I just mentioned, is that a nice home might
00:07:45.740 | pop up and everybody wants it, and then the prices just reset to all-time highs.
00:07:50.140 | That is the risk of waiting a little bit too long.
00:07:52.540 | Ideally, you would wait perfectly, let's say, two and a half, three years, and then the
00:07:57.480 | very next month, home prices start rebounding.
00:08:00.020 | But it's really unrealistic to expect that type of perfect timing.
00:08:05.020 | Homes are slow moving.
00:08:06.620 | Real estate is much slower moving than the stock market.
00:08:09.860 | So I would wait at least one year, but not too long, because I think it's better to be
00:08:15.260 | again one to two years early.
00:08:17.300 | So that maybe sweet spot of waiting once you see home prices turn down is probably one
00:08:23.580 | and a half to two years.
00:08:25.340 | Maybe you are one to two years too early before the home market rebounds, but that's okay
00:08:31.660 | because you didn't buy the home to only live there for a couple of years.
00:08:35.940 | You bought the home knowing you're going to live there for five, seven, ten plus years,
00:08:40.220 | right?
00:08:41.220 | I hope so.
00:08:42.220 | Now, moving on to the second post regarding understanding why people get into property
00:08:47.500 | bidding wars.
00:08:48.500 | I really wanted to dig into the psychology why because I am against getting into a bidding
00:08:53.980 | war.
00:08:54.980 | It's very emotional.
00:08:55.980 | Generally, you lose a bidding war because it's a war, right?
00:08:59.380 | Five, ten, twenty other offers, it's like, "Ah, probably not going to win."
00:09:04.340 | And then if you win, you have the winner's curse where nobody else is willing to pay
00:09:07.220 | that price.
00:09:08.220 | And then you got to sit with it and you got to hope that the economy doesn't crumble and
00:09:12.140 | crash and fall as soon after you sign that dotted line and send in that money.
00:09:17.540 | So I surveyed my Twitter followers, my newsletter readers, definitely don't forget to subscribe
00:09:23.620 | at financialseminary.com/news to understand why you would get into a bidding war when
00:09:30.540 | you could have not get into a bidding war in the fourth quarter of last year, right?
00:09:35.500 | Why compete when you don't have to compete?
00:09:37.860 | And so here was some of the feedback, anonymous feedback for one.
00:09:42.100 | Here, in 2022, "Two years ago, we bought a small condo in a college town for my daughter
00:09:47.660 | to live in while she attends school.
00:09:50.100 | I grew up near that town, so I'm familiar with and I love the area.
00:09:53.700 | Yes, I perceived it as a bit risky to compete in a bidding war for the condo.
00:09:58.460 | However, we heard horror stories about so many college students in that area who struggled
00:10:03.460 | to locate suitable housing.
00:10:05.460 | We did not want to search and compete for a place every school year.
00:10:09.540 | Also, my daughter is very private and picky and hasn't done well with roommates, and I
00:10:14.300 | intend to keep the property for the long term, so I wasn't as worried about the exact purchase
00:10:20.300 | price.
00:10:21.300 | We needed the property since I would have had to pay rent at another place if I didn't
00:10:26.900 | buy."
00:10:27.900 | Another feedback, Jaime Mraz, a realtor based in Phoenix, Arizona, said, "I am a realtor
00:10:34.260 | and my experience as a buyer's agent with overbidding has been circumstance."
00:10:38.300 | In other words, expiring lease landlord is selling or finding that perfect long term
00:10:43.940 | home coupled with sufficient wealth so they can afford it.
00:10:47.780 | And then I asked, "Well, what about the fear of top ticking the market?"
00:10:50.460 | And he said, "Ah, that fear only exists on Twitter.
00:10:54.060 | I always counsel my clients on where we are in the market, but their circumstance and
00:10:58.940 | desire for the right home overrides market data, especially if they can comfortably afford
00:11:03.100 | it."
00:11:04.100 | Hmm, I don't know about that.
00:11:06.780 | Another person, Marcus, 40 years old buyer in San Francisco, "Before buying our house,
00:11:12.140 | my wife and I resided in a one bedroom, one bathroom apartment, but with a baby on the
00:11:17.300 | way, we needed more space.
00:11:19.540 | Having worked as a software engineer at Tesla for five years, I was fortunate to walk away
00:11:24.160 | with approximately $2 million in equity after taxes.
00:11:28.820 | Considering my current salary of $200,000 along with stock options and my wife's salary
00:11:33.500 | of $150,000, we can comfortably afford to put down $500,000 for a $2.5 million home.
00:11:39.460 | And this means we'd be looking at a monthly mortgage payment of about $13,700 and a 7.3%
00:11:46.340 | mortgage rate with over $1.5 million in cash and liquid investments left over.
00:11:51.580 | And we anticipate a window of refinance to a lower mortgage rate within the next five
00:11:55.940 | years."
00:11:56.940 | So, that sounds rational to me.
00:11:59.200 | $1.5 million is a lot of cash and liquid investments left over.
00:12:03.580 | And then Janet, 38, a buyer in a northern Virginia suburb, she said, "During the winter,
00:12:08.860 | the housing inventory wasn't particularly appealing and we were determined to only make
00:12:13.260 | a purchase when we stumbled upon something truly exceptional.
00:12:18.020 | Then in March, our dream home appeared, a spacious property with a stunning view.
00:12:22.700 | What made it even more appealing was that the sellers had recently renovated the house.
00:12:27.180 | Faring us from potential renovation headaches we'd heard about.
00:12:30.660 | With our children aged 8 and 10 and plans to reside in the area for at least a decade,
00:12:37.060 | we felt confident in our decision.
00:12:39.580 | Schools are exodus and so are the public universities nearby.
00:12:42.700 | We've got a combined income of $280,000 and we purchased the home for $1.2 million that
00:12:48.780 | was listed for $1.1 million in Fairfax County."
00:12:52.420 | So listeners, what are your thoughts about the feedback on why they got into a bidding
00:12:56.980 | war?
00:12:57.980 | Rational?
00:12:58.980 | Irrational?
00:12:59.980 | Well, here are three takeaways that I got from the feedback.
00:13:04.500 | 1.
00:13:05.500 | They can all comfortably afford the prices they pay.
00:13:09.500 | There seems to be a misconception from me and others that only desperate or financially
00:13:14.940 | inexperienced buyers participate in bidding wars, stretching themselves thin.
00:13:19.580 | However, it appears that well-educated buyers with strong financial profiles are the ones
00:13:24.460 | willing to overbid on homes.
00:13:27.180 | This makes sense because you really need to have confidence if you're going to pay way
00:13:31.140 | above asking and beat out the competition.
00:13:33.700 | You need to know your finances inside and out, you need to be bullish on your income
00:13:38.260 | growth and the stability of your household and finances.
00:13:42.260 | 2.
00:13:43.260 | The second commonality of all the overbidders is that they all have children.
00:13:47.900 | Every buyer mentioned have children ranging from yet-to-be-born to college students.
00:13:52.860 | And this is very important to know because once you become a parent, the desire to provide
00:13:58.220 | anything and everything for your children is astronomical.
00:14:02.820 | It's astronomical to the point of being detrimental sometimes when we over-provide.
00:14:07.820 | We pay for everything, over-coddle our children into adulthood.
00:14:11.540 | And I discussed this phenomenon in a previous episode regarding the provider's clock.
00:14:16.380 | Here our provider's clock is ticking so loudly that we just have to provide everything for
00:14:20.900 | our children and never let them go.
00:14:23.900 | And then what happens is that they never leave the house and they never lunch and it becomes
00:14:27.980 | much tougher for them to be a provider going forward.
00:14:31.780 | I believe the best time to own the nicest home you can afford is when your children
00:14:36.660 | are at home, when you have the most number of heartbeats at home.
00:14:39.660 | Because after they leave at age 18 or maybe by the age of 25, hopefully, you're not going
00:14:45.460 | to want to buy a bigger home.
00:14:46.980 | You're probably going to keep your home for nostalgia reasons so you can have that room
00:14:51.180 | available for your little ones to come back and spend time with you before they go off
00:14:56.380 | on their own adventure again.
00:14:58.420 | Or you might want to downsize and simplify your life.
00:15:01.420 | Personally, I am very concerned about the future of housing affordability for my children.
00:15:07.580 | They're only four and seven so in 20 years, I mean a simple 5% compound annual growth
00:15:12.540 | rate means home prices are 150 plus percent more expensive than they are now and there's
00:15:17.780 | already gripes about home prices being expensive now.
00:15:21.700 | So chances are after a 15 to 20 year period, home prices will be much higher.
00:15:28.260 | And so as a parent and as someone who listens to personal finance podcasts and reads Financial
00:15:33.260 | Samurai, you know about compound growth.
00:15:36.500 | You know about historical home price growth, stock market growth, all that stuff, right?
00:15:40.900 | And so it might be responsible as a parent to try to invest in real estate today for
00:15:47.280 | your children because think about all the home prices that were available when your
00:15:53.460 | grandparents, our grandparents, were able to buy.
00:15:56.680 | And we all marvel, "Wow, that was so cheap so long ago."
00:15:59.700 | Well, to stop that from our children saying that 20 years from now and our grandchildren
00:16:04.940 | from saying that 40 years from now, we just simply do the best to buy property today.
00:16:09.380 | Because there's another interesting phenomenon going on and that is the acceptance, the growing
00:16:14.660 | acceptance that real estate can be an asset class to provide income for retirement.
00:16:20.060 | In the past, it might have been just, okay, you buy your primary residence, you buy stocks,
00:16:24.620 | you buy bonds and you have a pension.
00:16:27.220 | But now real estate as an asset class has grown.
00:16:30.260 | There is tremendous amount of capital going to funds, going to investing in built to rent
00:16:36.820 | properties or communities all across the country.
00:16:40.080 | And as a result, I think this trend for returns in real estate is only going to continue.
00:16:44.640 | So in the past, let's say a household would only think about buying just one property,
00:16:49.780 | they might think about now buying two properties, one for themselves and a one rental property.
00:16:54.620 | Or maybe three properties, one for themselves, one for each of their two children and so
00:16:59.900 | forth.
00:17:00.900 | And finally, the common theme from all these people willing to get into bidding wars is
00:17:06.060 | that they all plan to live in their new homes for a long time.
00:17:10.420 | The longer a property bidding war winner lives in their home, the greater their chances of
00:17:15.280 | building equity, not losing money.
00:17:18.620 | It's the same idea with owning stocks.
00:17:20.740 | If you own stocks after a 10-year period, let's say the S&P 500, 94% chance you're going
00:17:27.340 | to have a positive investment return.
00:17:29.820 | And that percentage goes to 100% after holding for 20 years.
00:17:34.060 | Now currently the median home ownership duration is about 12 years.
00:17:37.940 | So if you can live in the home and it's truly a forever home, 12 years should be no problem.
00:17:44.220 | And that winner's curse or top-ticking the market should fade, that concern should fade
00:17:49.740 | over time.
00:17:50.920 | So that's it, folks.
00:17:52.020 | I still recommend people be careful when bidding on a home.
00:17:55.980 | I know it's super emotional.
00:17:57.340 | I know you envision yourself in the home for the long term, all the dreams and experiences
00:18:03.780 | of raising your children or running your dog around the backyard or throwing luau's, whatever
00:18:09.140 | it may be.
00:18:10.140 | I know those dreams are powerful motivators to bid, but you have to have discipline because
00:18:16.740 | this is through my experience over 22 years.
00:18:20.420 | That is, if you miss out on a home, there will always be another home around the corner
00:18:26.340 | to buy.
00:18:27.340 | All right, folks.
00:18:28.340 | That's it for this episode of the Financial Samurai Podcast.
00:18:31.920 | If you enjoyed it, please leave a review, share, subscribe, it helps keep me going.
00:18:37.620 | And also, don't forget to subscribe to the Financial Samurai newsletter at financialsamurai.com/news.
00:18:44.020 | And if you want to invest in private real estate more strategically because, well, there's
00:18:48.700 | a lot of opportunities around the country with higher yields and lower valuations, you
00:18:53.580 | can check out Fundrise, a long-term sponsor of Financial Samurai at financialsamurai.com/fundrise.
00:18:58.880 | I encourage you to listen to the podcast episode I had with Ben Miller, CEO of Fundrise, because
00:19:08.340 | we both think we've passed the bottom of the real estate market downturn and Fundrise has
00:19:13.580 | invested over $800 million over the past 15 months due to all the opportunities it sees
00:19:19.900 | right now.
00:19:20.900 | Thanks so much, everyone, and until next time.
00:19:22.860 | Be well.
00:19:27.860 | (explosion)