The_state_of_the_housing_market_and_mortgage_industry
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai, and in this episode I want to talk about the
00:00:04.720 | real estate market and the mortgage industry.
00:00:08.320 | The bottom line is that the real estate market is hot, and the mortgage industry is doing
00:00:13.640 | very well.
00:00:15.040 | Refinancing is through the roof.
00:00:17.400 | Purchases, purchases look very strong.
00:00:19.720 | If you look at the May mortgage purchase applications index, it closed at close to 11-year high.
00:00:26.400 | 11-year high, because there's a lot of pent up demand after sheltering in place for so
00:00:30.400 | long.
00:00:31.800 | And I think this is interesting data, because this is what we've been talking about somewhere
00:00:36.120 | around the end of March and in April, looking for deals, trying to look for real estate
00:00:41.720 | deals because the stock market bottomed out at the end of March and started to recover.
00:00:47.720 | So I was thinking to myself, well, let's go look for real estate deals from sellers who
00:00:52.280 | are thinking the end is near.
00:00:54.280 | And frankly right now, even in June, end of June, things are looking still very, very
00:00:59.040 | dicey.
00:01:00.520 | But real estate tends to outperform when the stock market is down about 10-15%, because
00:01:05.760 | money flows into a more stable asset class such as real estate, and mortgage rates start
00:01:11.440 | declining.
00:01:12.440 | And right now we're basically at all time lows, with a 10-year bond yield at about .7%.
00:01:18.200 | The 15-year fixed rate is very low.
00:01:20.520 | The average rate is around 2.5%.
00:01:23.440 | If you want to refinance to a mortgage or get a new mortgage, a 15-year is not a bad
00:01:28.720 | idea.
00:01:29.720 | It's probably a great idea.
00:01:30.720 | Personally, I'm biased towards the 7-1 and the 10-1 arm, because the average ownership
00:01:36.840 | duration is about nine years in America.
00:01:39.680 | So it makes no sense to get a 30-year fixed and pay a higher rate if you're going to pay
00:01:44.520 | it off or sell it or own the home for nine years.
00:01:48.320 | So this demand, this surge in demand for real estate is very interesting.
00:01:53.400 | It's because mortgage rates have hit all time lows.
00:01:56.360 | There's pent up demand, three to four months of demand for real estate, because not a lot
00:02:01.240 | of transactions happened at the end of March, April, May, and in June so far.
00:02:07.760 | Transactions are way down.
00:02:08.760 | So that's not great for the real estate brokerage industry, because they make their money on
00:02:12.520 | commissions.
00:02:13.520 | However, from a buyer's point of view, I think there's an opportunity.
00:02:17.200 | There's always an opportunity if you look hard enough.
00:02:20.320 | And when there is a lot of fear and panic, there's opportunity if you have the cash and
00:02:26.040 | you can get pre-qualified.
00:02:27.880 | So the demand for real estate goes up also because there's a realization that having
00:02:32.080 | a home is more valuable, because more time is spent at home.
00:02:35.720 | I realized this in 2012 when I left my day job.
00:02:39.480 | So instead of being away from the home for 12 to 14 hours a day, I was suddenly stuck
00:02:44.760 | at home, well not stuck at home, just spending more time at home reading, writing, relaxing.
00:02:51.320 | So I was much more willing to spend money on remodeling, building out a deck, getting
00:02:56.800 | a hot tub.
00:02:58.240 | I knew I would enjoy these things much more because I was simply home much longer.
00:03:02.720 | And I think the world is recognizing this truth that the more you spend time at home,
00:03:08.480 | the more valuable it gets.
00:03:10.100 | And there's also this desire to have a nicer home, because we are spending more time at
00:03:14.520 | home.
00:03:15.520 | So in the past, maybe you were okay with renting a one bedroom apartment in a not so nice area,
00:03:21.880 | a noisy area, because it was temporary.
00:03:25.000 | And you were out for 14 hours a day, so all that noise and the smells and the crime didn't
00:03:30.440 | really bother you.
00:03:31.440 | But now that you're at home, hey, let's make it nicer.
00:03:34.640 | Let's paint the walls.
00:03:35.960 | Let's get that hot tub.
00:03:37.360 | Let's get that $1,000 Toto washlet bidet, which heats the seat and shoots warm water
00:03:44.260 | at you.
00:03:45.260 | I mean, that's wonderful if you're going to be going to the bathroom five more times,
00:03:48.600 | 10 more times a day, right?
00:03:50.080 | So it's just really logical that the demand for real estate has increased.
00:03:55.520 | But before you buy a home, I think it's very, very important to understand what's going
00:03:59.780 | on in the mortgage industry, because the mortgage industry is very tight in terms of its lending
00:04:05.320 | standards right now.
00:04:06.960 | And the reason why it's very tight is because it has liquidity and profitability concerns.
00:04:14.460 | There's forbearance programs right now where people don't have to pay their mortgages,
00:04:18.360 | people aren't paying their rents, so landlords have a difficult time paying their mortgage
00:04:21.780 | as well.
00:04:22.780 | And so banks are being very cautious.
00:04:24.980 | They went through 2008 and 2009.
00:04:27.100 | A lot was learned.
00:04:28.660 | And the lending standard dramatically increased post 2009, which is why I'm quite sanguine
00:04:34.260 | this time around that the housing market isn't going to implode, because a lot of people
00:04:37.800 | have a lot more equity piled up in their home, especially after a strong run since about
00:04:43.020 | 2012.
00:04:45.100 | But the mortgage industry is the key to keeping the housing market strong and upwards if you
00:04:52.260 | are bullish.
00:04:53.660 | Because without that capital, the housing market is going to be really suspect, because
00:04:58.860 | there are so many people unemployed.
00:05:00.780 | So the mortgage industry, the lending industry is really important.
00:05:05.020 | And I talked to my lending officer for about an hour the other day, and I wanted to just
00:05:08.220 | share some key points with all of you.
00:05:10.720 | So the first thing, like I said, was that there are liquidity or profitability concerns
00:05:15.380 | amongst all the banks.
00:05:17.780 | They're wondering, OK, what can we do to protect profitability, improve shareholder value,
00:05:25.700 | and make sure everybody keeps their jobs in this uncertain time?
00:05:29.000 | Because they don't know when the economy is going to come back.
00:05:31.660 | They don't know when forbearance rules are going to be fixed or changed.
00:05:36.700 | There's just a lot of uncertainty.
00:05:38.180 | So the banks are doing the best they can for themselves and for their shareholders.
00:05:42.240 | And at the same time, they're trying to be competitive, because inevitably, there will
00:05:45.680 | be a recovery.
00:05:47.940 | And consumers don't want to hear news headlines saying, this bank denied me of this mortgage
00:05:52.940 | because X, Y, and Z, especially in this environment.
00:05:56.720 | Because when there's a recovery, you could see banks who are uncompetitive during bad
00:06:00.360 | times or unfeeling or uncaring will probably lose out on many, many customers to competing
00:06:06.640 | banks.
00:06:07.640 | So profitability, liquidity concerns, and social concerns, top of mind.
00:06:12.000 | And so if you are a borrower, you're just going to have to find that lender who's going
00:06:17.900 | to be a little bit more aggressive during this uncertain time for that best loan.
00:06:23.720 | The second point is obviously stricter lending standards.
00:06:27.420 | Due to liquidity and profitability concerns, banks have significantly tightened lending
00:06:31.280 | standards.
00:06:32.280 | And here are some interesting points that you should know.
00:06:35.320 | One, cash out refinances, that's going away.
00:06:38.640 | At least this bank is not allowing cash out refinances anymore.
00:06:42.760 | Two, banks are no longer fully counting RSUs.
00:06:46.760 | Those are restricted stock unit values when calculating how much a person can borrow.
00:06:50.840 | So if those RSUs are not counted, then the person cannot borrow as much.
00:06:55.920 | If you work at a tech company, for example, and you have $500,000 in RSUs that suddenly
00:07:00.880 | are not counted, well, you're definitely not going to be able to borrow as much.
00:07:03.960 | Three, this is the most interesting thing that I got out of talking to my mortgage lender.
00:07:09.120 | He said that his bank is no longer including Schedule E income.
00:07:13.280 | That's all the rental income you earn if you're a landlord.
00:07:17.640 | So they're not including Schedule E income when calculating how much a person can borrow.
00:07:22.620 | That is a big shocker, and I don't think I've ever heard of that before.
00:07:26.280 | Because hey, look, if you're gaining $40,000 a year from your rental property, that's $40,000
00:07:32.040 | a year.
00:07:33.040 | Why would you discount that completely?
00:07:36.200 | Underwriters have traditionally discounted rental income by about 30%.
00:07:39.960 | I know through all my previous refinances, they would only assign a 70% value to any
00:07:46.100 | rental income I had.
00:07:47.480 | So $70,000 instead of, let's say, $100,000, because they wanted it to be conservative.
00:07:52.540 | They wanted to account for vacancies and maintenance expenses and so forth.
00:07:57.400 | And I understand that 70%, that's about right.
00:08:00.200 | I guess I would probably do the same if I was a lender.
00:08:02.960 | But to discount 100% of all rental income, that is pretty extreme.
00:08:10.000 | So you can take this both ways, in a positive or negative way.
00:08:13.940 | The positive is that there's so much demand for property right now with mortgage rates
00:08:19.080 | so low that despite not including Schedule E income, rental income, mortgages are still
00:08:27.100 | going through.
00:08:28.300 | So when banks finally do allow for Schedule E income, which my mortgage loan officer said
00:08:33.500 | is coming over the next one or two months, it's kind of like rolling lockdowns, phase
00:08:37.940 | one, phase two, phase three.
00:08:39.560 | Slowly getting released, it's getting a little bit better and looser.
00:08:42.860 | That could very well unleash a lot more capital into the system.
00:08:47.500 | On the negative side, I would just say that lenders are perhaps exacerbating the situation.
00:08:54.300 | Unemployment, tough to get credit and all that.
00:08:57.200 | And so there's going to be a bifurcation of who will get mortgages and who will not.
00:09:01.580 | And then over the coming years, I think if things recover right, there's going to be
00:09:06.760 | a widening of the wealth gap spread once again.
00:09:09.700 | All right, let's continue on other tightening lending standards.
00:09:14.380 | This bank, it's a top five bank in the country.
00:09:17.220 | Everybody's heard of it.
00:09:18.220 | It's no longer approving home equity lines of credit.
00:09:21.580 | They have raised the minimum down payment to 20% and they've raised the minimum credit
00:09:25.960 | score to qualify for a mortgage to 680.
00:09:29.060 | And for the jumbo loans, I think they raised it to 740 and above.
00:09:33.260 | So anything above 720, 740 is considered excellent credit.
00:09:37.820 | So the bank is only lending to people with large down payments and excellent credit.
00:09:42.420 | So again, this, if it continues, it could be good in terms of the people getting the
00:09:48.620 | loans, the capital are going to have a lower chance of defaulting.
00:09:52.600 | Right now, the default rate, well, as of October 2019, the research that I saw was about 1.9%.
00:09:59.020 | I think the default rate might be higher now, but I'm not so sure because the government
00:10:04.540 | has implemented, you know, you can't default because there's forbearance rules and you
00:10:09.140 | can't go bankrupt because of COVID-19 and all that stuff.
00:10:11.780 | So everything is kind of suspended in air with a lot of uncertainty.
00:10:15.820 | So the bottom line is lending standards are strict and everybody is feeling the crunch,
00:10:21.060 | including the banks, and they don't know exactly what the future holds.
00:10:25.800 | In terms of jumbo loans, jumbo loans are loans that are above the conforming loan limit.
00:10:32.220 | So nationwide, the conforming loan limit, according to the Federal Housing Finance Agency,
00:10:37.660 | is $510,400.
00:10:39.900 | However, in different states and cities, the conforming loan limit is different because
00:10:46.280 | housing prices cost more.
00:10:47.680 | So in San Francisco, for example, the conforming loan limit is $765,600 for single family home
00:10:55.100 | or condo.
00:10:56.100 | And it's different all throughout, but that is one of the top conforming loan limits in
00:11:01.180 | the country.
00:11:02.180 | So it is much easier to get a conforming loan than a jumbo loan.
00:11:07.660 | Conforming loans can be sold off to government-backed Fannie Mae and Freddie Mac.
00:11:12.620 | So what happens is the bank gets the loan, they underwrite it, it's good to go, they
00:11:17.420 | sell it to Freddie Mac and Fannie Mae and offload that risk off their books so they
00:11:22.940 | can do more loans.
00:11:24.660 | However, there's something really interesting that I heard from my mortgage loan officer
00:11:28.180 | and he said that there's new regulation that states if you sell a mortgage to Fannie Mae
00:11:33.260 | and if the borrower of that mortgage was late on even a single payment or is in forbearance,
00:11:39.860 | his bank would be required to not only buy back the entire mortgage but also pay an 11
00:11:44.780 | point penalty.
00:11:45.780 | An 11 point penalty is 11%, folks.
00:11:48.540 | So an 11 point penalty is equivalent to $77,000 penalty on a $700,000 loan.
00:11:55.260 | And I have never heard of that before.
00:11:57.060 | And whoa, no wonder if this is true, which it has to be true because he told me it's
00:12:01.340 | true that banks are being much, much more stringent.
00:12:04.820 | And to clarify, these are for new loans.
00:12:07.220 | These aren't the past loans.
00:12:08.360 | These are new originated loans that they sell to Fannie or Freddie.
00:12:12.660 | This rule isn't enforced.
00:12:13.820 | So you can see from a lender's perspective how they are much, much more stringent because
00:12:19.060 | paying that 11% penalty is massive compared to the spread that they earn on these loans
00:12:24.100 | because the interest rates are so low.
00:12:25.700 | 11%, wow.
00:12:26.700 | Jumbo loans cannot be sold to Fannie Mae or Freddie Mac.
00:12:31.140 | They can be sold and bundled to the private mortgage market, secondary market.
00:12:36.300 | However, my lender was saying due to more regulations, his bank is keeping most of the
00:12:41.980 | jumbo loans on its book.
00:12:43.900 | Therefore, they've got to be very, very stringent on their lending standards.
00:12:48.940 | Another interesting thing I learned from my lender is that small business owners are getting
00:12:53.020 | more scrutinized and they seem to be getting more penalized than normal W-2 earners.
00:12:59.580 | In other words, the PPP loan, the Paycheck Protection Program loan, could be a red flag.
00:13:06.020 | He was saying that when the bank takes a look at a small business owner's books and does
00:13:13.360 | the thorough P&L calculation and whatnot, if the bank sees a PPP loan, that could be
00:13:19.360 | a red flag regarding the viability of the business.
00:13:22.380 | I think this is an interesting stance because you can also make the argument that a small
00:13:26.100 | business has a greater chance of surviving because it has received a PPP loan.
00:13:31.300 | If the loan is forgivable, which the government says it is, why wouldn't more money be more
00:13:36.020 | beneficial to the business?
00:13:38.340 | But banks, again, really conservative right now, are just looking at everything and wondering,
00:13:44.300 | "Hmm, maybe we shouldn't lend to a small business owner because it may never recover.
00:13:48.700 | He may never recover."
00:13:49.700 | Whereas, in contrast, there continues to be only a routine concern about the W-2 employee
00:13:55.740 | loan applicant potentially losing his or her job.
00:13:59.940 | But that is probably elevated too because there are tens of millions of people unemployed
00:14:03.740 | right now.
00:14:04.740 | And if you are a small business owner or if you're thinking about creating a small business,
00:14:09.420 | it is important.
00:14:10.500 | It's important for you to make your business unshutdownable.
00:14:16.340 | The government has forced shutdowns for three to four months of millions of small businesses
00:14:22.060 | because of the lockdowns.
00:14:23.620 | So in other words, you should really think about a business that's online, that will
00:14:28.060 | go and operate regardless of whether there's a pandemic or whether there's a government
00:14:32.740 | directive.
00:14:33.740 | So long as you're not doing anything shady and wrong online, it can continue to operate
00:14:37.740 | and grow.
00:14:39.180 | Not only should you have higher operating profit margins, the value of your online business
00:14:43.840 | should grow as well because the sustainability and the security of those future earnings
00:14:50.020 | and cash flow are stronger and higher.
00:14:53.560 | So there's something interesting to note and something that I'm very appreciative about
00:14:57.100 | with Financial Samurai as I try to run it more like a small business now to take care
00:15:01.260 | of my family.
00:15:02.620 | And that is, gosh, yeah, traffic could be down, revenues down or whatever.
00:15:08.220 | But so long as Financial Samurai stays up, it's fine.
00:15:12.080 | And I am, interestingly enough, fielding a lot more inquiries about buying Financial
00:15:16.620 | Samurai and I myself am looking for online businesses to buy because valuations are relatively
00:15:22.900 | low, especially compared to the S&P 500.
00:15:25.660 | And these businesses are very, very defensible.
00:15:28.620 | And I'm seeing a lot of online businesses do very well in this time because more dollars
00:15:34.020 | are directed for certain types of products like hot tubs, like home gardening and landscaping
00:15:39.380 | and so forth.
00:15:40.460 | It's just a really, really interesting time right now.
00:15:42.780 | So if you have some capital and you think the stock market is overvalued and maybe you
00:15:47.940 | don't want to invest in real estate property, I would look at online real estate.
00:15:52.700 | Frankly, I've talked about this in the past.
00:15:54.260 | You can check out my archives.
00:15:56.020 | But online real estate to me is, I think it's number one asset class right now.
00:16:02.060 | So let's put all this together regarding how a tighter mortgage industry will affect housing.
00:16:07.860 | Well, it's logical to conclude that a tighter mortgage industry will negatively affect the
00:16:14.780 | housing market.
00:16:16.020 | However, as I spoke earlier, there's an overwhelming amount of demand to purchase property due
00:16:22.340 | to confluence of all the reasons I stated in my introduction, right, lower mortgage
00:16:27.060 | rates, the desire for better property, because you're spending more time, the desire for
00:16:33.340 | investing in a more stable asset that you can actually enjoy, and so forth.
00:16:38.220 | I say that the real estate segment that's doing the best is the price point where you
00:16:42.900 | can buy with a conforming loan.
00:16:46.340 | So what is the conforming loan limit again?
00:16:49.060 | $510,400 nationwide up to $765,600 for expensive cities like San Francisco.
00:16:57.020 | So assuming an 80% loan to value ratio, which is putting 20% down, there is a strength in
00:17:04.140 | the 638,000 to about 960,000 price point.
00:17:09.460 | Obviously, if you put more down, you can still borrow a conforming loan limit.
00:17:15.880 | So for example, a person can afford a $2.765 million home using a conforming loan if he
00:17:23.260 | or she puts down $2,010,000, right, so a 72.5% down payment with a loan to value ratio of
00:17:32.100 | about 28%.
00:17:35.340 | Conforming loans are easier to get than jumbo loans.
00:17:38.020 | Therefore, the housing price point that is going to do relatively well is where conforming
00:17:44.460 | loans are able to be used to buy this price point.
00:17:48.760 | So the higher you go, the harder it is to get a loan, and once you get into the jumbo
00:17:53.120 | loan, this is where borrowing gets more difficult.
00:17:56.220 | In other words, if you want to find a real estate deal, and if you can afford it, obviously
00:18:00.940 | if you can afford it, then you want to look at that price point where jumbo loans start
00:18:06.720 | getting into the equation.
00:18:08.180 | And the higher the price point, the more deals will be had.
00:18:13.060 | Because in this environment, extraneous stuff, vacation properties, mansions, whatever it
00:18:19.360 | is that you don't really need are probably going to be the weakest, because those are
00:18:23.840 | the types of property that will be sold off first, and those are the properties that are
00:18:29.220 | not going to be desired by people the most, because you don't need all that extra space,
00:18:35.080 | nor do you want to spend as much money during this time of uncertainty.
00:18:39.320 | It's really up to you to find that higher price point in your city where there are more
00:18:43.480 | deals to be had.
00:18:44.960 | If you're looking for property deals near your city's median home price, let's say plus
00:18:48.680 | or minus 25%, maybe plus or minus 30 to 40%, it's tough right now, because a lot of people
00:18:56.080 | can afford that price point, which is why it's the median price point of your city.
00:19:00.600 | To find value, you've got to go up the price point, which is going to entail obviously
00:19:06.320 | more risk and more expenses and more costs, but if you've got the cash and the income
00:19:11.600 | and so forth, you're going to find much better deals.
00:19:15.040 | There's one last thing I want to leave you with, and that is this.
00:19:18.800 | If you get pre-approved for a jumbo mortgage in this tight lending environment, you can
00:19:23.640 | pat yourself on the back.
00:19:24.880 | Congratulations to you, it's not easy.
00:19:27.920 | However, you need to immediately turn that feeling of triumph into caution.
00:19:33.160 | Caution, caution, caution when it comes to buying anything with debt.
00:19:37.800 | Remember, leverage always enhances returns on the way up, but destroys returns on the
00:19:45.000 | way down.
00:19:46.800 | Leverage is very dangerous, and right now is a time of uncertainty, so you probably
00:19:50.960 | don't want to take too much leverage.
00:19:54.440 | Turn your feeling of triumph into caution.
00:19:56.800 | Getting pre-approved for a mortgage today is like being a part of a small team of soldiers
00:20:02.000 | landing on the beaches of your enemy.
00:20:04.040 | Just think about that a little bit.
00:20:06.000 | The beaches are there, you can't see your enemy, but they're there in the hills behind
00:20:12.120 | the trees ready for you.
00:20:13.920 | Your combat skills and artillery may be top-notch, but your enemy will still wipe you out simply
00:20:19.340 | because it outnumbers you 10 to 1.
00:20:22.360 | In order to win the war, which is to have the property market go up, you would rather
00:20:26.880 | have 100 times more people on your side with fighter jets and warships as well.
00:20:33.080 | Maybe this analogy is getting a little out of hand, but the point is you'd rather have
00:20:37.720 | everybody qualified for a mortgage instead of only a small few.
00:20:42.480 | You don't want the small few to represent the whole.
00:20:47.440 | Remember during the last downturn, let's say you owned a condo and you were diligent in
00:20:51.560 | paying your mortgage and everything was good, but a couple people in your building decided
00:20:56.640 | to foreclose or short sale or whatever because of whatever reason they want.
00:21:02.080 | That negatively impacts everybody's valuations and that's really, really tough.
00:21:07.480 | You can talk about the guy in your block, single family home, foreclosing and that hurting
00:21:12.300 | neighborhood property values as well.
00:21:14.440 | It's the small few during a downturn that can really hurt the overall property market.
00:21:21.800 | At the same time, it's the small few.
00:21:23.720 | If you can get a win, it's just not strong enough.
00:21:26.720 | You need the masses, the majority, the vast majority to do well for the property market
00:21:32.200 | to do well.
00:21:33.880 | Just because you've locked down an ultra low mortgage rate that's burning a desire in your
00:21:40.240 | heart to buy property, you shouldn't do it.
00:21:42.340 | That's like the tail wagging the dog.
00:21:44.720 | Instead, you should buy property if you've identified the ideal home, can afford the
00:21:49.400 | payments, have run various scenario analysis and plan to live or own the home for years
00:21:55.240 | and years to come.
00:21:56.960 | The unemployment market is scary and I think the longer that it lasts, there's going to
00:22:01.560 | be a bigger and bigger fallout.
00:22:03.620 | Right now, we're hoping for the good graces of the federal government and the federal
00:22:08.680 | reserve to save us, to save us from falling into the abyss.
00:22:12.920 | There needs to be hopefully another round of PPP loans, for example.
00:22:17.740 | There probably needs to be another round of stimulus checks and there needs to be an extension
00:22:21.460 | of enhanced unemployment benefits because fighting this virus is taking a long time
00:22:27.400 | and I don't know if we're going to be able to completely fight it off by July 31st when
00:22:32.640 | the enhanced unemployment benefits of $600 more a week are set to expire.
00:22:38.340 | I'm always trying to throw caution in the wind, especially when it comes to buying property
00:22:42.920 | and getting into debt.
00:22:45.080 | So just take it for what it is and run the numbers and be cautious.
00:22:49.120 | My lender said the demand he is seeing for purchase applications is the strongest he's
00:22:53.640 | seen all year.
00:22:55.940 | His business is booming because refinancing continues to be super strong as well.
00:23:00.380 | I was able to lock in a 7-1 arm jumbo at 2.125%.
00:23:04.280 | 2.125% is ridiculous.
00:23:07.460 | It is so cheap.
00:23:09.200 | I just want to buy up everything that I can, but you know, I'm trying to be reserved and
00:23:14.280 | be measured because buying a home is a very big decision.
00:23:17.840 | So please talk to your lender.
00:23:20.680 | Ask him or her what he or she is seeing in the market, what they are doing, when do they
00:23:26.080 | expect to return to its pre-pandemic lending standards.
00:23:30.160 | I mean, pre-pandemic lending standards were already pretty strict, but now it's super
00:23:34.520 | strict, right?
00:23:35.520 | No Schedule E, no RSUs, credit scores high, down payments and so forth.
00:23:41.180 | What you have to think about as a home investor and a home buyer is when the standards will
00:23:47.480 | be loosened.
00:23:48.480 | If it's by the end of the year and we expect the Federal Reserve and the Federal Government
00:23:54.340 | to have more stimulus, I think real estate is probably going to continue to do fine.
00:23:59.880 | The desire for real estate, because we're spending more time in our homes, is overwhelming.
00:24:05.800 | At this moment, the fear of losing your job and your income, and I think a lot of people
00:24:11.060 | are thinking, "Well, I can afford it right now because interest rates are so low, and
00:24:15.520 | worst case, if I lose my job or whatever, I can hang out and hold out for one or two
00:24:19.520 | years while enjoying a nicer piece of property, and I want to live my life now."
00:24:24.480 | And this is something that I've been thinking about a lot that I'll talk about in the next
00:24:27.880 | episode or write about in a new post, and that is whether to stack cash and not utilize
00:24:34.480 | my hard-earned savings and earnings, or actually spend the money to try to make a better life.
00:24:41.040 | And this is something that I think a lot of people are thinking about, and buying real
00:24:46.360 | estate is something where a lot of people think could help improve the quality of their
00:24:50.200 | life.
00:24:51.200 | And if the real estate market starts going down, and there's going to be more price cuts,
00:24:55.920 | which there are at higher price points, and if the lending standards continue to be tight
00:25:00.400 | well into 2021 and so forth, then we should expect property prices to fade.
00:25:06.480 | And that's not going to feel good if you buy the property, but at least you'll be able
00:25:10.720 | to enjoy your home, which is again what I think most people are thinking about right
00:25:15.280 | now.
00:25:16.280 | Let's buy a home to live a better life today because tomorrow is not guaranteed.
00:25:21.480 | I would say this if you want to buy a property.
00:25:23.840 | One, you should try to get a discount of between 5 to 10% from pre-pandemic levels.
00:25:30.560 | So February 2020, for example.
00:25:33.120 | This 5 to 10% buffer is necessary, I think, just in case everything drags on for longer.
00:25:40.000 | Second, I think you've got to promise yourself that you're going to own the property for
00:25:44.000 | at least 5 years, if not 10 years, because of transaction costs and so forth.
00:25:50.200 | Those transaction costs really eat things up.
00:25:52.080 | It's probably going to cost 5 or 6% to sell a property.
00:25:55.200 | Hopefully not in 10 years as the internet reduces friction in selling costs.
00:26:00.240 | But still, let's say it still costs 2 to 3%, you've got to hold on to that property for
00:26:04.200 | a while.
00:26:05.200 | Another criteria I urge you guys to follow if you want to buy a property is to not borrow
00:26:11.000 | more than 3 times your annual household gross income.
00:26:15.400 | So if your annual household gross income is $200,000, try not to borrow more than $600,000,
00:26:21.320 | despite rates being so low.
00:26:23.200 | Okay, fine.
00:26:24.280 | If you really, really want to push that multiple as 5x, definitely don't borrow more than 5x
00:26:30.760 | your annual household income.
00:26:33.120 | And it's gone to 5x because mortgage rates are so low right now.
00:26:36.160 | In the past when it cost 5%, 6% to get a mortgage, yeah, the 3x multiple is probably more appropriate.
00:26:44.160 | But now I guess you can go to 5x, but I personally am not going more than 3x.
00:26:49.960 | It is really interesting time to buy right now because there are no open houses.
00:26:55.280 | Open houses, I think that's one of the biggest contributor to bidding war because people
00:26:59.840 | see other people like it.
00:27:01.600 | And as soon as you see someone else like it, you start feeling this FOMO, this frenzy.
00:27:06.600 | And that's what happens at least here in San Francisco.
00:27:09.080 | I remember buying my property in 2000, I put an offer in end of 2004, early 2005, because
00:27:16.120 | I saw another couple sitting in the living room during the open house and I was thinking
00:27:20.200 | to myself, "No, you can't buy this house.
00:27:21.720 | This is my house.
00:27:22.720 | I got to buy it."
00:27:23.720 | So I ended up offering about $25,000 more than I wanted to, which in retrospect, fine.
00:27:28.740 | It turned out okay because I sold it in 2017 for a good profit.
00:27:33.660 | But not having to deal with the emotional buying aspect of it by seeing other people
00:27:38.280 | competing for a property you want is actually really powerful.
00:27:42.400 | It's very powerful if you're a buyer right now because you can really get better deals.
00:27:48.540 | You can offer more rational pricing.
00:27:51.840 | I promise you this, folks, because I have seen private open houses, I've done like four
00:27:56.760 | or five over the past two months on properties I really, really like.
00:28:01.120 | And it's just a different feeling.
00:28:02.480 | I'm just thinking to myself, "Much more rational.
00:28:04.400 | I'm much more calm when I'm thinking about the numbers."
00:28:08.120 | And as a result, I'm going to be able to get a better deal.
00:28:11.600 | So I think once open houses start becoming commonplace again, let's say everybody has
00:28:16.240 | to wear a mask and let's say it's only 10 at a time or five at a time, whatever, that
00:28:21.920 | emotional frenzy, folks, I promise you is going to come back.
00:28:25.620 | And I think that could really ignite the housing market again, besides all the pent-up demand,
00:28:30.960 | lower interest rates, and so forth.
00:28:32.440 | All right.
00:28:33.440 | I'm rambling on a long time, but I'm very passionate about this.
00:28:36.980 | And I really want you guys to get this right because a lot of us didn't get this right.
00:28:40.960 | And I didn't get this right in 2007 when I bought my vacation property.
00:28:43.880 | That was a terrible, terrible investment and idea.
00:28:48.200 | You got to get this right.
00:28:49.600 | Understand the mortgage market.
00:28:51.340 | Do your best to understand the housing market.
00:28:53.440 | Be rational.
00:28:54.720 | If you have not found the ideal property, move on.
00:28:58.040 | It's okay.
00:28:59.200 | You deserve to buy the ideal property.
00:29:02.320 | There's always going to be another one coming along.
00:29:05.420 | So you just got to be patient.
00:29:07.280 | Be wise.
00:29:08.280 | All right, everyone.
00:29:09.520 | If you enjoyed this episode, I'd love a positive review.
00:29:12.120 | I'd love a share.
00:29:13.360 | Stay safe.
00:29:14.360 | Let me know how your property hunting is going.
00:29:16.920 | And let's all hope for the best.