Safe_Havens_And_Housing_Price_Prediction
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai, and in this episode I want to talk about safe havens
00:00:05.680 | after the August CPI data came out. So unfortunately, the August CPI data came out
00:00:12.160 | disappointing. It did not decline as much as expected. As a result, treasury bond yields
00:00:17.840 | increased and stocks collapsed. The overall CPI rose 0.1% in the month versus an expectation of
00:00:26.240 | a drop of 0.1%, and the year-over-year CPI was up 8.3%, which was higher than the 8% expectation.
00:00:35.280 | Gasoline prices were down 10.6% month-over-month, and that's to be expected. Anybody who drives
00:00:41.360 | has seen the price of gas decline, and I think we all felt pretty good about that. However,
00:00:47.040 | excluding food and energy, prices were actually up 0.6% in August, and over the last three months,
00:00:53.760 | all items except energy rose at a 7.4% annual rate, and that was faster than during the spring.
00:01:00.400 | And to me, the biggest surprise was shelter cost, which rose 0.7% and 0.8%,
00:01:07.040 | the highest increase in a single month since 1991. So in 31 years, medical care costs were up also
00:01:15.040 | 0.7%, but that's not a surprise since our system is so poorly managed. It's a good reminder to eat
00:01:21.520 | better, work out more, exercise more, take care of your mental health, because you don't want to be
00:01:27.280 | trapped in this very cumbersome and expensive medical system. So the bottom line from this
00:01:32.880 | report is that the Fed will likely not relent on its rate hike mission until the Fed funds rate
00:01:38.480 | is at about 4%. 4%, and that means the yield curve is going to be inverted. It is inverted right now,
00:01:46.800 | actually, the one year and two year bond yields are higher than the 10 year bond yields. And if
00:01:52.720 | the Fed funds rate goes to 4%, so that's the shortest end of the yield curve, 4% is way higher
00:01:58.560 | than the current 10 year Treasury bond yield of about 3.43%. So in terms of stocks, unfortunately,
00:02:06.480 | stocks are probably not going anywhere for the rest of 2022. I wouldn't be surprised to see the
00:02:12.880 | S&P 500 back down to $36, $3700. And it's pretty sad, because monetary policy is a determinant,
00:02:23.680 | 80 to 90% determinant of where stocks are moving, the fundamentals of a company, margin expansion,
00:02:29.920 | market share increase, all that stuff doesn't seem to matter when the Fed is hiking rates.
00:02:35.600 | So it's a good reminder also to focus on your personal cash flow, your job income,
00:02:40.800 | your investment income, and your side hustles. It's the cash flow that's real, not so much your
00:02:47.040 | net worth, not so much the value of a company, as indicated by the stock market market and the stock
00:02:52.560 | price. These valuations are subjective, but what's not is the cash flow that's coming in every single
00:02:58.800 | week, every single month, every single quarter, given the stock market is probably not going to
00:03:03.680 | go anywhere for the remainder of 2022. We don't have to rush to invest in the stock market,
00:03:08.320 | but you should continue to dollar cost average into the stock market according to the appropriate
00:03:14.400 | net worth asset allocation model that I've discussed in my posts and that I've discussed
00:03:19.680 | in Buy This, Not That. You don't know when the stock market will turn exactly, but so long as
00:03:24.800 | you follow a proper model according to your goals and risk tolerance, you're going to be okay over
00:03:29.920 | the long term. Now in the short term, things are more uncertain now. So focusing on safe havens
00:03:37.600 | is a good idea for your capital, capital preservation. One of the things you can do
00:03:42.560 | is obviously look for higher savings rates online. Thanks to the Fed hiking rates,
00:03:48.080 | online savings rates are going up. And one of the highest APYs I've seen is actually by Personal
00:03:54.480 | Capital Cash. They're offering a 2.02% APY for non-customers and a 2.15% APY for customers.
00:04:03.040 | There's no minimum and there's unlimited withdrawals. And you can check it out at
00:04:06.640 | financialsamurai.com/pcc. Now, you're not going to get rich, obviously making 2%,
00:04:14.320 | but you're sure going to outperform if a risk asset is going down. So all the money that we
00:04:20.560 | invested in IBONZ at the end of last year and the beginning of this year, right, 10,000 each,
00:04:25.920 | is outperforming the S&P 500 by over 20%. It's probably going to outperform by 25%
00:04:32.880 | when the year is done. And that is fantastic. And I realized while driving my son to kindergarten
00:04:39.200 | this morning that there's another great safe haven to preserve your capital. And that's
00:04:44.640 | the three-month Treasury bill. Given the yield curve is inverted, that means rates on the short
00:04:52.160 | end are higher than rates on the longer end. And the three-month bill, Treasury bill, is the short
00:04:57.520 | end of the curve. So you get over 3% right now for a three-month Treasury bill and you get all
00:05:03.520 | your capital back every three months. So you can leg into three-month Treasury bills if you have
00:05:09.440 | liquidity concerns. There are obviously no liquidity concerns for online savings accounts or
00:05:15.360 | high-yield cash accounts. But hopefully, three months is not that long of a period to wait.
00:05:22.000 | So three-month Treasury bills, pretty attractive. And you can buy them through Treasury Direct.
00:05:27.840 | If you've opened up an account last year or this year because you bought IBONZ, that's where you
00:05:33.280 | go. Or you should be able to buy it from your online brokerage account such as Fidelity, Vanguard,
00:05:39.840 | Charles Schwab. Just call them if you have difficulty. Each platform is a little bit
00:05:44.080 | different. But there should be pretty direct access as well. Now the other safe haven is
00:05:50.000 | really not a safe haven since risk is involved. However, based on the August CPI data, it has
00:05:56.400 | proven to be a safe haven so far. A couple of months ago, I touched base with Ben Miller,
00:06:02.080 | CEO of Fundrise. He mentioned rents for single-family and multifamily homes in the heartland
00:06:07.120 | were up in the teens percentages. So 11%, 12%, 13%, 14%, 15%. And one of the reasons why is that
00:06:14.080 | higher mortgage rates pushed more people to rent instead of buy because it became too expensive to
00:06:20.080 | buy. Now that reasoning made a ton of sense. But to me, I was a little bit incredulous to hear 10%
00:06:26.160 | to 15% rent price year-over-year increases given we are not experiencing this here in San Francisco.
00:06:32.240 | Instead, we're like, you know, flat to up 5%. So just kind of in the range of normalcy.
00:06:40.080 | The only reason why I was able to increase one of my rental properties' rent was because I remodeled
00:06:46.480 | and added more space. So that's fair. And then this other rental property, actually one tenant
00:06:51.520 | is leaving. So I had two tenants in the two-bedroom condo. One is leaving and she asked if she could
00:06:57.360 | keep the rent flat. It's already been flat for years now. And I said, okay, because she's going
00:07:04.160 | to be the only one living in it. So she's going to use the other bedroom as a work-from-home office.
00:07:08.960 | And so I said, well, okay, no rent increase. That's fine. You guys have been pretty good,
00:07:13.360 | but I still have to fix some things. So the costs are going up. HOA fees have gone up over the years.
00:07:18.960 | Property taxes have gone up over the years. But less wear and tear. That's fine. You know,
00:07:24.080 | let's just keep it simple. So when I heard about 10% to 15% rent price increases, I was like, wow,
00:07:30.000 | really? Is that really happening right now? But like always, let's review the data. And as
00:07:36.160 | mentioned in the beginning, shelter costs accelerated to 0.7% month over month. And
00:07:42.880 | that's the highest single month, month over month rent increase in 31 years. And so what Ben Miller
00:07:50.800 | told me a couple of months ago rings true, and it's coming through to the data. So I continue
00:07:57.280 | to believe in the long-term trend of investing in Heartland real estate. You can also call it the
00:08:02.080 | Sunbelt or the Smile States. I just wish I had invested even more of my real estate exposure
00:08:07.520 | to the Heartland Sunbelt to better ride the inflation wave. Heck, if I could snap my fingers,
00:08:12.400 | I wish I had, you know, 90% of my net worth exposed to this asset class. But obviously,
00:08:18.960 | making large wholesale changes to one's net worth composition would incur a lot of taxes. I'd have
00:08:25.760 | to sell, repurpose, and then there'd obviously be concentration risk. Finally, I'm looking in the
00:08:31.280 | rear view mirror, which is easy to say, "Oh, I should have done this," but we don't know the
00:08:37.600 | future. However, long-term, I think the trend of investing in Heartland real estate is the right
00:08:43.680 | one. Some of my private real estate funds are outperforming the S&P 500 by over 25% year to date,
00:08:49.200 | and it's only September. So let's see whatever happens over the next three months. It's going
00:08:53.600 | to be pretty interesting. It's also good to point out that just like headline inflation,
00:08:59.040 | Heartland rent growth will eventually moderate. It's already moderating if you look at the
00:09:05.360 | comparisons between 2021, which was the biggest. Like the national median rent, according to
00:09:10.160 | Apartment List, was up 17.6% in 2021. In 2022, 7.2% national. 2020, negative 1.5%. 2019, up 2.3%.
00:09:22.960 | And 2018, up 3.4%. So I think there's going to be a moderation to the 2% to 3% to 4% range.
00:09:31.200 | That's just the way things are. Things tend to revert to the mean, but outperformance is probably
00:09:36.960 | going to continue. Just watch out for those boom cities like Austin, where prices went up 50% in
00:09:44.880 | a couple years. That also means they're going to revert to the mean. And for more expensive coastal
00:09:50.080 | city real estate, well, prices didn't get as crazy. So they're probably not going to decline as crazy.
00:09:55.600 | It's just going to be less volatile. So this leads me to my concluding point, which I did write a
00:10:01.840 | detailed post about it. And it's regarding the best time to upgrade to your move up home.
00:10:08.160 | Historically, the real estate cycle moves up in the seven to 10 year cycles. And then it moves down
00:10:15.680 | over a one to three year period. That's kind of like the average. We've had good times since about
00:10:21.760 | 2012. So that's a 10 year bull run. And now that it's ended, so we're in a down cycle now.
00:10:27.680 | And we can really only predict when the previous peaks and troughs were until about six months
00:10:35.680 | after. So if you look at the data, it sure looks like the most recent peak for home prices
00:10:42.240 | occurred in around March 2020. And so I think the perfect time to upgrade your home may be about
00:10:50.320 | 18 months after the peak. So basically, you recognize when the peak was. So that takes
00:10:55.440 | six months to really know. And then you wait another 12 months. So that means for us right now,
00:11:02.080 | if you were to ask me to predict when is the best time to upgrade your home, that period is probably
00:11:07.920 | going to be sometime between June 2023 through February 2024. summers and winters are the slowest
00:11:16.320 | months of the year, which also make them the best times of the year to buy a home if you can find
00:11:21.360 | one that you really really like. So during a real estate down cycle, higher priced homes will
00:11:26.400 | usually decline more in absolute dollar terms, and often in percentage terms as well. The same
00:11:33.280 | thing goes with vacation properties. During a recession, nobody needs to own a vacation property,
00:11:38.640 | or a house with two or three more bedrooms than you need. Hence, they tend to be the properties
00:11:44.000 | that decline the most since they are the first to flood the market. So if you are looking to
00:11:49.360 | upgrade your property, you've got a large cash balance, you got strong cash flow, and you're
00:11:55.360 | bullish about your job prospects and your company's prospects, then you're pretty happy to see more
00:12:01.760 | higher end homes with price cuts. Even if your own home is losing value, which it is, you're still
00:12:08.320 | gaining on a relative basis. So for example, let's say you own a home that's worth $500,000,
00:12:14.240 | and it declines by 10%. So you lose 50,000. But you want to upgrade to a million dollar home that
00:12:19.120 | loses 10%. So that loses 100,000 to 900,000. You're still net up 50,000. So you can go buy that home
00:12:27.040 | for 10% off. And you're probably going to go through less bidding wars because the bidding wars
00:12:32.640 | will disappear. And you're also going to be able to pay less in property taxes compared to the
00:12:37.760 | original price of the move up home. So what's interesting now is prices are fading because
00:12:44.960 | mortgage rates have gone up. But rent growth is strong, but that's also fading a little bit.
00:12:50.640 | So if we can wait 12 months from now, so around this time next year, I think we'll be able to get
00:12:56.960 | better deals. Maybe we can get move up homes that are going to be priced about 10% below what they
00:13:02.480 | are or what they were in the first quarter of 2022, March 2022, to be exact. The only quote,
00:13:09.280 | risk to my thesis of declining home prices for move up homes is that the Fed might relent and
00:13:16.560 | stop their aggressive price hikes, or at least their moral suasion hawkish tone by the end of
00:13:22.720 | 2022. And so if that occurs, we'll probably have like a three month window where we can buy our
00:13:28.560 | upgrade homes at a discounted price before demand comes into the market and buoys prices once more.
00:13:35.680 | So just pay attention to the Fed's tone. And I will be updating newsletter subscribers at
00:13:41.120 | financialsamurai.com/news. So even though things are not the way we want them to be right now,
00:13:48.960 | if you're a long only investor, you can look on the bright side of lower prices for things that
00:13:55.040 | you would like. And that's what I'm going to do. I am focused on building my cash hoard over the
00:14:00.080 | next 12 months. I love saving money. You know, I talk about accumulation and spending more
00:14:05.760 | now that I'm 45. But I love saving for a purpose. Really, it's for the purpose.
00:14:10.640 | And if that purpose is to buy a move up home in one year or two years time, that feels pretty
00:14:17.600 | good. It feels like ah, something to live for something to work for. It just gets me more
00:14:22.320 | motivated. I've lived in our quote forever home for the past two years and two months.
00:14:28.000 | And leaving now would have been such it would just feel stupid after two years. So if I can enjoy our
00:14:34.560 | current home for another one or two years, and then buy a nicer home, I think that would be great.
00:14:39.600 | Because at the end of the day, I think the best time to own the nicest home you can afford is
00:14:44.240 | when you have the most number of heartbeats at home. So everyone, hang in there. I'd love to hear
00:14:50.560 | your thoughts on what you think about what the Fed is doing where the housing market is going.
00:14:55.360 | Other safe havens. Leave a comment. And if you want to invest in single family homes in the
00:15:00.480 | heartland of America, you can go to financial samurai.com forward slash fund rise f u n d r i
00:15:07.120 | s e. It's my favorite platform. They're vertically integrated, and they've got their mission and
00:15:12.880 | their strategy down pat. Finally, if you enjoy this episode and this podcast, I'd love a positive
00:15:18.800 | review, because it helps keep me going. Hearing your feedback, thoughts and perspectives is how
00:15:24.320 | we can all learn and how I can learn and help share more insightful information in the future.
00:15:30.000 | Thanks so much, everyone.