Why_The_Housing_Market_Wont_Crash
00:00:00.000 | Hello, everybody.
00:00:01.400 | It's Sam from Financial Samurai.
00:00:03.280 | Long time no speak to y'all.
00:00:05.340 | I've been busy writing, but sorry I haven't been busy podcasting because priorities, priorities,
00:00:09.920 | priorities, priorities.
00:00:10.920 | Got a couple of kids, got to manage, got a website to update and to write about.
00:00:17.760 | And in this episode, I just want to talk about the housing market because the housing market
00:00:21.520 | is on fire nationwide and probably globally too.
00:00:26.600 | And it's one of my favorite topics.
00:00:28.320 | I love real estate.
00:00:29.440 | Real estate accounts for about 40% of my net worth.
00:00:33.000 | I try to limit anything to under 50% just to be diversified.
00:00:38.720 | But clearly real estate is one risk asset that I like that I think is going to benefit
00:00:44.240 | from an inflationary environment because inflation acts as a tailwind for real assets and inflation
00:00:51.560 | helps whittle down the real cost of debt.
00:00:55.220 | So the real cost of your mortgage.
00:00:57.400 | So first, let's talk about where we've come from.
00:01:01.160 | If you've been listening to Financial Samurai since early 2020 or before, you will know
00:01:08.000 | that I've been talking about real estate for a while now.
00:01:11.640 | And in 2020, I got all over real estate.
00:01:14.600 | I talked about how real estate prices get impacted when stocks decline.
00:01:19.080 | A March 16 publication on April 19, 2020, I published a post called Real Estate Buying
00:01:25.880 | Strategies During COVID-19, where it talks about trying to take advantage of the fear
00:01:32.000 | that any seller has to try to get a good deal.
00:01:34.720 | I also talked about the best near term real estate buying opportunity, which is right
00:01:39.580 | in your own city because there's intra city migration happening back in 2020 and still
00:01:44.920 | in 2021 and I think beyond, where people are going to relocate from more expensive, closer
00:01:50.960 | to downtown areas of the city to less expensive, farther away portions of the city.
00:01:57.200 | So if you can find opportunities, go explore neighborhoods you seldom ever visit, you thought
00:02:02.960 | were just too far away and find it because I think strategically, it's a smart move because
00:02:08.760 | you don't have to disrupt your entire ecosystem, your friends and so forth.
00:02:12.600 | You can still get paid the same because you're in the same area as where you used to be working.
00:02:18.320 | So I think that's a really smart move.
00:02:19.960 | And then finally, I published a post on September 8, 2020, called It's Time to Focus on Big
00:02:26.040 | City Living Again.
00:02:28.120 | Big City Living.
00:02:29.120 | We're talking the classics, New York City, San Francisco, Los Angeles, Seattle, DC, Boston,
00:02:35.800 | and so forth.
00:02:36.800 | Because I think, at least back then, and I still think right now, the opportunity to
00:02:41.160 | buy big city real estate is right here, right now.
00:02:45.200 | And I'm personally looking to buy a pied-de-terre in Manhattan.
00:02:48.420 | It's one of my goals and one of my regrets of not buying real estate in Manhattan when
00:02:53.520 | I was there back in 2000 and 2001.
00:02:58.180 | But we'll discuss that in some other episode.
00:03:01.120 | And in this episode, I want to talk about all the reasons why I think the housing market
00:03:06.000 | won't crash anytime soon.
00:03:08.700 | I think there is a feeling that the real estate market is a little too frothy.
00:03:13.960 | I've actually noticed searchers online land on a couple of my posts warning people about
00:03:20.720 | the housing market from older publications and also warning signs on what to look for
00:03:26.920 | before you buy a house.
00:03:28.180 | So I think this is really healthy.
00:03:29.880 | It's good to be skeptical in a hot market because you don't want to be that one person,
00:03:36.240 | the one guy or gal who is the winning bidder out of 20 bidders, right?
00:03:41.120 | That's called winner's curse.
00:03:43.440 | That means out of the 20 people, you are the only one willing to pay that price.
00:03:48.300 | You don't really want to do that in any market, especially in a hot, hot housing market because
00:03:54.280 | let's say you do bid 10%, 15%, 20% above asking and it's 10%, 15% above the actual market
00:04:02.320 | value.
00:04:03.420 | So we're talking about re-rating in terms of pricing.
00:04:06.840 | That could pose a problematic for future gains, right?
00:04:11.040 | Because the market might have to catch up two or three years to get to your new high
00:04:15.600 | watermark and the market might never catch up.
00:04:18.600 | And also if you're trying to buy a property with debt, with a mortgage, you're going to
00:04:22.840 | have to have appraiser come out and appraise the property for your winning bid.
00:04:27.520 | And if you bid too high, you might not be able to borrow that amount of money you were
00:04:33.120 | expecting.
00:04:34.120 | So you might have to cancel that transaction or you might have to come up with a higher
00:04:37.800 | down payment.
00:04:38.800 | So just be careful in a bidding war.
00:04:41.480 | San Francisco, I've been in San Francisco since 2001.
00:04:44.480 | We are famous for bidding wars and generally it's worked out well, but sometimes, right,
00:04:49.440 | it doesn't, right?
00:04:50.440 | In 2006, 2007, 2008, 2009, not so good.
00:04:55.760 | So be careful.
00:04:57.080 | So where are we now in the housing market?
00:05:00.280 | Well, as of April 11th, 2021, the median sales price of homes sold is $341,000.
00:05:10.840 | So depending on who you talk to, it's like 320 to 341,000.
00:05:15.240 | So this is looking at MLS data, the multiple listing service data, and $341,000 is up 17%
00:05:23.680 | year over year.
00:05:25.200 | That is crazy.
00:05:27.280 | That is unsustainable.
00:05:29.240 | So folks, first half of the year, it's generally strong and then it kind of fades into the
00:05:34.080 | summer and then it picks up in the fall and then fades again.
00:05:38.040 | But up 17% year over year is unsustainable.
00:05:41.680 | The pace of price growth has to slow down because it's the law of large numbers.
00:05:47.760 | So in the second half of 2020, things started really heating up or started to heat up.
00:05:53.460 | And so you're going to have higher comps.
00:05:56.760 | And so the pace is probably going to slow down to 10%.
00:06:00.360 | I'm forecasting with pretty high conviction that the housing market will continue to make
00:06:05.520 | new highs for the next three years.
00:06:08.520 | I've wrote that in my post and I think that average price growth is going to be in the
00:06:13.040 | high single digits.
00:06:14.380 | So we're talking 7, 8, 9%.
00:06:18.920 | And if I'm wrong, well, I'm just going to suffer the consequences as anybody with skin
00:06:23.580 | in the game does.
00:06:25.280 | There is always risk when it comes to buying risk assets.
00:06:28.880 | So we've all got to be big boys and girls and understand that we could lose money or
00:06:33.680 | we definitely might not be able to make as much money as we thought.
00:06:37.000 | And we have to be okay with the consequences.
00:06:40.500 | So let me rattle off 15.
00:06:42.320 | Man, I thought it was only going to be 10, but 15 reasons why I don't think the housing
00:06:48.080 | market will crash anytime soon.
00:06:50.720 | So reason number one, rates will stay low for longer.
00:06:54.560 | If you've read Financial Samurai since 2009 when it started, I've been talking about rates
00:07:00.400 | being low for the rest of our lives and it's going to continue to go down or continue to
00:07:05.080 | stay suppressed.
00:07:06.080 | Rates have been coming down since 1980s, folks.
00:07:09.800 | And the reason why is due to better information efficiency, technology, global coordination,
00:07:16.520 | being able to manage inflation better, and learning from previous cycles.
00:07:21.200 | Oh, and of course, productivity gains as well.
00:07:24.120 | We are much more productive now than we were 10, 20, 30 years ago.
00:07:29.920 | You and I can do a lot more things than people from back in the day.
00:07:34.160 | And that's thanks to technology productivity gains.
00:07:37.940 | So given interest rates are going to stay lower for longer, and probably for the rest
00:07:41.840 | of our careers, I truly believe this, rates are going to be a tailwind.
00:07:45.940 | They're going to be a continued tailwind.
00:07:48.740 | They're not going to be a headwind that a lot of people fear.
00:07:51.680 | All right, the second reason why the housing market won't crash, inventory.
00:07:57.000 | Inventory will remain depressed for longer.
00:08:00.400 | COVID has permanently increased the intrinsic value of real estate.
00:08:05.160 | We're all spending more time at home.
00:08:07.680 | We're working at home, we're playing at home, we're teaching our children more at home.
00:08:11.920 | Therefore, if we're spending more time on a product, or any kind of good, or service,
00:08:18.680 | we appreciate it more.
00:08:20.080 | And I think we're probably all going to permanently spend a little bit more time at home at the
00:08:25.040 | margin.
00:08:26.040 | During perilous times, we hold on to what we treasure most.
00:08:30.200 | This is why real assets like homes held their value while stocks crashed 32% in March 2020.
00:08:37.080 | Unlike a home, you don't need stocks to survive, right?
00:08:40.040 | We need shelters to survive.
00:08:42.200 | So if you can have shelter, and it can ride inflation, and generate income, perhaps, and
00:08:47.920 | appreciate in value, I mean, that's a win, win, win, win, win.
00:08:52.600 | And imagine you're a homeowner right now, do you really want to sell your home?
00:08:57.080 | Well, yeah, maybe, why not?
00:08:59.240 | Because the demand is so high.
00:09:00.720 | But do you really want to sell your home if you actually need to buy another home?
00:09:04.880 | I think the answer is no, unless you have a lot more capital, and you're willing to
00:09:09.040 | duke it out with the hordes of other people looking to buy homes right now, because inventory
00:09:14.200 | is lower.
00:09:15.200 | Therefore, it is only logical to hold on to your home for longer.
00:09:19.840 | Further, what if there's another black swan event?
00:09:23.000 | You know, let's say it's another pandemic, because there's another strain or whatever.
00:09:27.240 | Your home is almost like an insurance policy to live at least a comfortable life.
00:09:34.520 | Reason number three, potential homebuyers are much richer post pandemic.
00:09:39.340 | Let's be frank here.
00:09:40.440 | Let's look at our investment portfolios since January 1, 2020.
00:09:46.720 | Let's look at our net worth gains since January 1, 2020.
00:09:51.300 | I'm hoping the majority of listeners and readers of Financial Samurai are much wealthier now
00:09:57.680 | than pre pandemic.
00:10:00.120 | I am most people I know are.
00:10:03.600 | And so in this scenario, if you're wealthier, more money is going to flow towards real estate,
00:10:09.840 | more money can flow towards real estate, and more people can buy more real estate, they
00:10:14.480 | can afford more because they're just wealthier.
00:10:17.000 | Four, domestic and foreign institutional demand is increasing.
00:10:22.040 | It's very clear that institutional real estate investors are looking for single family homes
00:10:27.040 | and rental properties because they're searching for yield.
00:10:30.440 | You're seeing it in the news and every single major publication.
00:10:33.760 | I talked about it before, where the New York Times highlighted actually Fundrise buying
00:10:38.400 | this community property in Houston for like 32 or 34 million 124 homes.
00:10:45.440 | And it was cheaper on a single family home basis than the median home price in America.
00:10:52.200 | And so I was thinking to myself, that's actually quite attractive for the expense of capital
00:10:56.420 | on the coast looking for higher yields.
00:10:59.080 | So it's not just domestic institutional real estate investors looking to buy more real
00:11:03.920 | estate, sooner or later, and I think it's probably going to be sooner, foreign institutional
00:11:09.920 | investors are going to be buying up cheap American property.
00:11:14.120 | American property is so cheap compared to international property.
00:11:19.280 | And then if you talk about how much we can make to afford this property, there's just
00:11:24.960 | no comparison.
00:11:25.960 | For example, in Vancouver, Vancouver is as expensive as Manhattan and San Francisco.
00:11:32.280 | But can any of you guys name two companies in Vancouver who are paying their 22 year
00:11:37.720 | old college graduates over $100,000 a year?
00:11:41.640 | I can't and I'm not being facetious, I just really can't.
00:11:46.680 | So the income side of the equation doesn't really support the property prices in Vancouver.
00:11:52.520 | And I don't think Toronto, Paris, Hong Kong, Singapore, all these international cities
00:11:59.100 | are much more expensive on an income adjusted basis than the most expensive cities in America.
00:12:06.400 | And then of course you look at 18 hour cities and so forth, there's a lot of great value
00:12:12.160 | in America.
00:12:13.160 | The median household income is $68,000 and then the median home price is somewhere around
00:12:18.920 | $320,000 to $340,000.
00:12:21.320 | So that ratio is pretty solid.
00:12:24.180 | If you go to other big cities across the globe, the ratio is much, much higher.
00:12:30.740 | And given money is very fungible, I just see foreign money coming to the United States
00:12:37.520 | and buying up our property.
00:12:39.240 | So we better buy up our own property first before the foreigners buy our property.
00:12:44.800 | All right, next reason, number five, the Federal Reserve and the federal government are pro-ownership.
00:12:50.520 | Just look at what they are doing, pumping out massive amounts of stimulus.
00:12:56.080 | They have forbearance packages to help renters and homeowners.
00:13:01.320 | You got mortgage interest deduction, $250,000 and $500,000 tax-free profits based on single
00:13:07.520 | or married status.
00:13:09.640 | Programs for first-time homebuyers where you only put down 3%.
00:13:12.840 | 1031 exchange, so you don't have to pay capital gains tax.
00:13:17.320 | You just continuously defer any capital gains on your real estate.
00:13:22.200 | And then historically, there's been bailouts of homeowners and big lenders.
00:13:26.500 | So looking at history and looking at what the government is doing right now, you would
00:13:32.080 | be a fool to go against the federal government and the Fed.
00:13:36.440 | You never fight the Fed, folks.
00:13:38.220 | You will end up losing money.
00:13:39.760 | And if you fight the federal government, you're going to get fined or go to jail.
00:13:42.760 | All right, reason number six, demographic tailwind.
00:13:47.520 | Fannie Mae estimates there are 88 million people in the millennial generation.
00:13:52.360 | That's the highest number I ever heard.
00:13:54.200 | It seems like the millennial generation continues to expand, but they're talking about people
00:13:58.040 | born between 1980 and 1999 now.
00:14:00.640 | In the past, it was like 1995 or something.
00:14:05.160 | Whatever the true number of millennials is, the point is there is a huge population of
00:14:11.000 | 22 to 41-year-olds who are soon to be in their prime home buying years or who are currently
00:14:17.360 | in their prime home buying years.
00:14:19.520 | So all the previous talk of the millennial generation renting for life and shunning home
00:14:23.320 | ownership is BS.
00:14:24.920 | It's the same as it ever was.
00:14:26.760 | Everybody who hopes to one day find the love of their lives and own a nice home and start
00:14:32.480 | a family-- not everybody, but a lot of people, right?
00:14:35.920 | Work hard to provide for your kids and then retire with a paid off home and et cetera.
00:14:40.600 | These ideals, the middle class lifestyle ideals that we've talked about so much, they don't
00:14:45.400 | go away.
00:14:46.400 | They're the same as it ever was.
00:14:49.160 | Millennials have been late to the home buying trend due to more education, more student
00:14:53.880 | debt, delayed unions, and more competition.
00:14:56.640 | And it's interesting.
00:14:57.720 | If you look at the median age for home buyers right now, it's shockingly high.
00:15:03.760 | It's like around 47 years old.
00:15:06.040 | 47 years old, folks.
00:15:08.480 | But the good thing is that hopefully all of us are living several years longer.
00:15:13.400 | But if you're buying a home at 47 years old, the bright side is you hopefully have your
00:15:18.140 | finances much more put together than someone who's 25 or 30 years old.
00:15:23.080 | You've had more time to save, invest, and so forth.
00:15:25.980 | And hopefully, you're more mature where you want to buy property with someone and settle
00:15:31.880 | down and stay that way.
00:15:34.280 | Of course, life always throws curve balls, and we just never know.
00:15:38.600 | All right, the seventh reason, multi-generational wealth transfer.
00:15:43.740 | The boomer generation, those born between 1944 and 1964, is one of the wealthiest generations
00:15:50.300 | in history.
00:15:51.300 | Probably the wealthiest because they've been able to invest and save in the longest bull
00:15:55.200 | market in history.
00:15:56.960 | The boomers have about $30 trillion in wealth they will be transferring to their children
00:16:01.840 | when they die.
00:16:03.240 | And so they're either going to start transferring it now or over the next 10, 20 years.
00:16:09.680 | Hopefully maybe longer because I would love my parents to live as long as possible.
00:16:13.840 | But what's also happening is that they are transferring money right now while they're
00:16:17.200 | living because they want to see the benefits, the joy of their giving to their kids and
00:16:23.100 | to institutions.
00:16:24.600 | So revocable living trust business, that's booming.
00:16:28.520 | Inventing of $15,000 a year, that's the gift tax exemption, is booming.
00:16:34.000 | Grats, people are sending up grats to avoid estate taxes as well.
00:16:38.400 | All these things are helping younger generations buy homes.
00:16:43.240 | Again, in San Francisco, it often takes bank of mom and dad to come up with at least the
00:16:48.920 | down payment to buy a home.
00:16:50.320 | It's very ubiquitous.
00:16:51.320 | It's like 50 to 60% of first-time homebuyers in San Francisco have help from their parents.
00:16:56.440 | And so that's just going to happen throughout the entire country.
00:16:59.800 | All right, reason number eight, homeowner equity cushion is massive.
00:17:06.280 | If you look at the homeowner equity and mortgage debt outstanding chart by the Federal Reserve
00:17:11.520 | Board, you'll notice that homeowner equity is around $21 trillion versus $11 trillion
00:17:18.480 | in mortgage debt outstanding.
00:17:20.920 | So that's kind of like having 65% equity in your home and a loan to value ratio of only
00:17:27.600 | 35%.
00:17:28.600 | Most first-time homebuyers put down 10% to 20% for a loan to value ratio of 80% to 90%.
00:17:34.080 | So if you have 65% equity in your home on average, you've got a massive equity buffer.
00:17:40.480 | It's going to take a lot for you to foreclose or short sale your home.
00:17:46.200 | There's no way that the average homeowner is going to fire or sale their home if they
00:17:50.240 | have that much equity.
00:17:51.240 | Okay, you never say no way, but it's going to take a lot, a lot, a lot.
00:17:55.040 | In fact, with so much home equity, what's more than likely going to happen is the typical
00:17:59.600 | homeowner will take out a home equity line of credit.
00:18:02.280 | All right, reason number nine, household debt as a percentage of disposable income is very,
00:18:08.000 | very low.
00:18:09.000 | I've got a great chart on my site that shows that US household debt service as a percentage
00:18:15.120 | of disposable income is about 9%.
00:18:18.080 | That's like a 50 plus year low.
00:18:20.240 | In 2007, it was 13.2%.
00:18:24.320 | So the absolute percentage numbers aren't huge, but the decline, the drop once you see
00:18:29.080 | the graph is quite significant.
00:18:32.000 | And it makes sense.
00:18:33.800 | People have made more money, they have more equity, rates have gone down, mortgage levels
00:18:38.820 | have gone down.
00:18:40.520 | Therefore, debt service as a percentage of disposable income has gone down.
00:18:44.720 | All right, 10, inflation is picking up steam.
00:18:48.880 | We talked about this earlier in the podcast.
00:18:51.480 | The Federal Reserve said they're going to keep the Fed funds rate at 0% to 0.25% for
00:18:56.000 | longer in the face of a recovering economy.
00:18:59.140 | They want to make sure that employment gets down to 3%, 4%, basically full employment.
00:19:06.240 | And they're willing to let inflation ride higher than the 2% target they have.
00:19:11.680 | And the funny thing is the 10-year bond yield has already gone up from 0.51% in August 2020
00:19:17.520 | to about 1.55% today, whereas the Fed funds rate again is at 0% to 0.25%.
00:19:23.720 | So the Federal Reserve can easily raise the Fed funds rate by half a percent or three
00:19:29.560 | quarters of a percent and the market will be probably like, okay, that's fine because
00:19:34.760 | the yield curve will still be upward sloping, right?
00:19:38.980 | Short duration to longer duration.
00:19:41.560 | And so if inflation is coming, which it certainly seems like it is, you want to be long things
00:19:46.840 | like a hospital or services, private colleges and universities, medical care services, and
00:19:55.240 | housing.
00:19:57.080 | That's what you want to be long.
00:19:58.280 | But you really can't buy a hospital, a college, university.
00:20:03.860 | You can buy UnitedHealthcare stock and so forth, which I have, because they'll just
00:20:09.320 | gouge you forever and keep on raising your healthcare premiums.
00:20:13.280 | But what you can really do is buy housing and get long inflation because at the end
00:20:17.600 | of the day, that is the end good.
00:20:20.480 | Real estate is the end good.
00:20:21.480 | You use money, you make money to buy housing, food, tuition, education, services, and so
00:20:29.220 | forth.
00:20:30.220 | So if you can buy the end good, which is real estate, which everybody needs a home to live
00:20:35.800 | in, and it can cost cheaper over time, thanks to inflation, and it can rise in value partially
00:20:44.880 | thanks to inflation, it's just such a win for the average person, which is why real
00:20:51.320 | estate is my favorite asset class for the average American, average person to build
00:20:57.040 | wealth.
00:20:58.040 | Inflation really, really sneaks up on all of us, folks.
00:21:01.520 | It's pretty amazing.
00:21:02.680 | You hold an asset for 10 years, and it's just pretty nice to ride inflation instead of get
00:21:07.200 | beat up by inflation.
00:21:09.360 | 11.
00:21:10.640 | The amount of funny money is exploding.
00:21:12.960 | How many people are bragging to you about how much money they made in cryptocurrency,
00:21:19.800 | maybe NFTs, maybe GameStop, AMC Theater, whatever growth stock.
00:21:26.480 | And the reality is more people are making these gains.
00:21:31.040 | It's not like they're making and losing it all.
00:21:33.520 | People are making these multi-bagger home runs.
00:21:37.040 | And so people have learned from the past, the 2000.com era, where they're not just going
00:21:41.360 | to round trip it to zero, like what they did with Webvan or Pets.com.
00:21:45.920 | They're going to turn it into a real asset.
00:21:47.480 | And so that real asset is going to be real estate, art, maybe nice watches, jewelry,
00:21:54.040 | whatever it is.
00:21:55.180 | That money is going to flow through to real assets.
00:21:57.880 | All right.
00:21:58.880 | Asset number 12.
00:22:00.800 | Credit is still very tight, which is why the housing market is probably not going to crash.
00:22:06.120 | It was like pulling teeth refinancing my mortgage in 2019.
00:22:11.800 | I think it took three months, at least two months, but I think it was like three months.
00:22:17.440 | It was so painful.
00:22:18.440 | They just asked for more and more dockets, more and more proof.
00:22:22.780 | And I had a good amount of assets with the bank that I was refinancing with, and they
00:22:27.200 | didn't care.
00:22:28.200 | And it felt like, I don't know, an intruder.
00:22:31.200 | And then in 2020, when I got pre-approved for my mortgage, that took about three weeks
00:22:34.680 | versus two weeks on average.
00:22:37.760 | And going through that process is also very, very arduous.
00:22:42.680 | But because I was pre-approved, I already went through a lot of the pain.
00:22:46.360 | So it was just like updating the documents.
00:22:49.080 | But getting a mortgage or refinancing a mortgage is not, it hasn't been easy since the global
00:22:55.400 | financial crisis.
00:22:57.300 | The average credit score to get a mortgage is over 720.
00:23:02.840 | And if you look at mortgage originations by credit score, the dominant credit score level
00:23:09.600 | for getting mortgages is 760 plus.
00:23:12.360 | 760 plus is excellent, folks.
00:23:14.840 | I was trying to get my refinance on my new mortgage.
00:23:17.660 | They said I could only get the best rate if I had 800 plus.
00:23:21.000 | And I was just at the tip there.
00:23:22.920 | I was like 808 or 810.
00:23:23.920 | I mean, I don't know how to control my credit score.
00:23:27.160 | I don't purposely try to make it better.
00:23:29.360 | I just live my life and pay my bills.
00:23:31.680 | But it was not easy.
00:23:33.900 | And so if you look at this chart on my website, you'll notice that basically something like
00:23:39.160 | 80% plus of mortgage originations are for people with credit scores above 720.
00:23:47.440 | So if you have a credit score above 720, it should mean that you have reasonably good
00:23:52.320 | finances.
00:23:53.320 | You haven't foreclosed before or gone bankrupt and stuff like that.
00:23:58.720 | And if you add to the fact that incomes have been rising and home equity has been rising,
00:24:05.680 | it's just hard to see people with good credit and good jobs and good financials let go of
00:24:10.920 | their properties for fire sale prices.
00:24:13.600 | All right, reason number 13, rents are rebounding in big cities.
00:24:19.040 | Rents have been doing well in 18 hour cities, but in 24 hour cities like Manhattan, New
00:24:23.640 | York, rents are coming back, baby.
00:24:26.680 | I did write a post back in October 2020, highlighting how the demand for a single family home I
00:24:32.960 | was renting out was very, very strong.
00:24:35.560 | In the past, I would only get roommates.
00:24:37.560 | You know, it was four bedrooms.
00:24:38.840 | I would only get like four dudes.
00:24:40.240 | It's always four dudes in San Francisco.
00:24:42.360 | But this time it was families looking again, because it's that migration west in my city,
00:24:47.680 | where it's less expensive, less dense, less crowded and more affordable.
00:24:52.360 | So bubble concerns, you know, that is legitimate.
00:24:57.000 | If prices keep on going up and rents go down, that means valuations are going up, right.
00:25:02.600 | But now you are clearly seeing rents rebound in San Francisco, Boston, Chicago, Seattle,
00:25:08.120 | New York, Washington, DC, they're rebounding and they're going to get tighter and tighter.
00:25:13.600 | Everybody is rushing back.
00:25:15.180 | The herd is coming back, just like the herd left.
00:25:18.680 | I know a lot of people who decided to go and live with their parents to save on rent and
00:25:23.680 | also to spend more time with their parents.
00:25:25.880 | That's a win win.
00:25:27.160 | And they're like, you know what, I'm going to come back and do independent living again.
00:25:31.440 | And it's really tightening the rental market.
00:25:34.660 | So that's good for rental property owners.
00:25:37.160 | All right, let's talk about reason number 14.
00:25:39.600 | The cost to build housing is rising.
00:25:42.860 | You may have heard that lumber prices are up 3x in one year as demand outstrips supply.
00:25:48.240 | Therefore, framing costs to build a house are up at least 2x as lumber accounts for
00:25:52.960 | 70% of framing costs.
00:25:54.800 | And then there's labor costs.
00:25:56.820 | My guy who, you know, has been working with me for five years is charging me 50% more
00:26:02.280 | now.
00:26:03.420 | And it's because demand is so high.
00:26:06.060 | So if it costs more to build a home, it's really hard to imagine scenario where prices
00:26:11.320 | start declining because people have to cover their costs.
00:26:15.560 | Otherwise, they won't build and they won't sell their home.
00:26:18.720 | And also, it's harder than ever to get a building permit now.
00:26:22.560 | It's kind of nuts.
00:26:23.560 | I've been waiting for three months, more than three months to get my building permit because
00:26:30.000 | San Francisco building and planning department is all backed up thanks to COVID.
00:26:35.320 | And thanks to, I would say, inefficiencies by that department.
00:26:40.480 | And it's just really maddening.
00:26:41.960 | So if that's backed up, it's hard to get a permit.
00:26:45.360 | You know, it's harder to get supply on the market.
00:26:48.600 | And so that's another reason why I think price is going to continue to do well.
00:26:53.080 | And then finally, reason number 15, why housing market won't crash.
00:26:57.280 | Selling costs are still too high, right?
00:26:59.680 | It still costs 5% on average now to sell a home.
00:27:04.400 | Whereas it now costs $0 to sell a stock.
00:27:08.920 | Whether the stock is worth $100 or $3,000 plus like Amazon.
00:27:13.940 | You know, if the cost to sell a home dropped to zero, or let's say not zero, right?
00:27:18.640 | Because that's not realistic.
00:27:19.640 | Let's say it becomes a flat cost or the commission goes down to, let's say, 3% or 2%.
00:27:27.040 | The amount of supply that will come on the market would be much greater.
00:27:32.240 | I think there'd be tons more supply.
00:27:34.520 | Therefore, the real estate industry is actually self-throttling, which is beneficial for homeowners
00:27:40.380 | who never sell.
00:27:42.040 | In addition to high real estate selling commissions, there's also the cost to prepare the home
00:27:45.560 | for sale.
00:27:47.260 | These costs include painting, refinishing the floors, staging, so forth.
00:27:51.600 | There's also transfer taxes, recording taxes.
00:27:54.840 | It is a pain in the butt to sell a home.
00:27:57.160 | You've got to be pretty motivated to sell a home during the pandemic, one.
00:28:01.840 | And two, you've got to be, I don't know, there has to be some kind of life event.
00:28:05.920 | Divorce, you're changing your life, you're moving across country, you're going to go
00:28:09.600 | to Hawaii, you're going to go to Thailand.
00:28:12.160 | Something that really has to motivate you to sell a home.
00:28:15.900 | So thank goodness the real estate industry has kept commissions so high.
00:28:21.480 | Otherwise, volume would probably explode.
00:28:24.760 | All right, now that you have my 15 reasons why I don't think the housing market is going
00:28:30.080 | to crash anytime soon, the question is, should you buy now or when should you buy now?
00:28:36.680 | I believe ideally the best time to buy property is when you can afford it and when you can
00:28:41.600 | stay somewhere for 10 years.
00:28:44.340 | That's ideal.
00:28:45.340 | Whether you can afford it is based off, I think, my 30/33 rule for home buying.
00:28:50.200 | Check it out.
00:28:51.200 | The easy rule is to spend no more than three times your household income on a house.
00:28:55.520 | You can probably stretch it to 5x, 5x your household income given rates are so low, but
00:29:01.600 | don't go beyond that.
00:29:03.720 | Another good time to buy is during the winter months because anybody listing during December,
00:29:09.400 | the bad weather, holidays, is generally more motivated than someone who can just wait for
00:29:13.400 | the great weather in the spring and when people are more motivated to buy.
00:29:18.760 | And then the other time could be when the moratoriums end.
00:29:22.920 | That could be in September or sometime in the second half of 2021.
00:29:27.240 | It could be kicking the can down the road.
00:29:29.360 | And the idea is if the moratoriums end, more people lose their homes.
00:29:35.680 | It's that simple because they cannot afford to pay the mortgage or the renters can't afford
00:29:41.280 | to pay their rent.
00:29:42.640 | And then the landlord has to basically eat all the costs of them foreclose.
00:29:47.680 | And banks are probably licking their chops to see a lot of foreclosures.
00:29:53.200 | Why?
00:29:54.200 | Because the housing market is on fire.
00:29:55.640 | The housing market has done well over the past many years now, but especially during
00:30:01.280 | the pandemic.
00:30:02.280 | So if you're a bank, you're thinking to yourself, "Hmm, if you foreclose or you can't pay your
00:30:08.880 | mortgage, I'm going to be able to take over the home for cheap and then resell it at a
00:30:14.320 | higher premium."
00:30:15.960 | As a capitalist, you know the senior bankers at these lending companies are thinking about
00:30:22.400 | this.
00:30:23.400 | They don't want to get into the home ownership, buying and selling business.
00:30:26.720 | But there's a huge arbitrage here where they could just assume a lot of homes and then
00:30:33.120 | just resell it because there's a huge amount of institutional demand.
00:30:36.920 | So as a retail buyer, what you can do is try to stack cash, save your money for that down
00:30:43.600 | payment so that potentially there might be an uptick in supply in fourth quarter of 2021
00:30:51.840 | or first quarter of 2022, where you can take advantage.
00:30:55.800 | You're probably going to be competing against the institutional investors and everybody
00:30:59.080 | else who has a similar idea, but it's as good of a time as any if you're not going to be
00:31:05.240 | buying now.
00:31:06.840 | And the final time to buy might be the summer.
00:31:09.200 | Summer is usually the slow period because vacation, right?
00:31:13.280 | Summer vacation and kids are not in school.
00:31:16.480 | So if people are all on the beach somewhere, maybe there's just less demand.
00:31:22.320 | Every single market, doesn't matter if it's a bull or bear market, there's always an opportunity.
00:31:27.240 | You just have to go find it, whether it's a stale fish listing, it's a mispriced listing,
00:31:32.720 | it's a bad time listing where it's out of town real estate agent who has no Rolodex,
00:31:38.760 | no connections.
00:31:40.000 | There's always an opportunity.
00:31:42.400 | And again, try not to be the winning bidder out of a mega bidding frenzy.
00:31:48.320 | It's generally not the right way to go.
00:31:50.360 | All right, everybody, I hope you enjoyed this episode about my favorite asset class to build
00:31:56.560 | wealth.
00:31:57.560 | I'm going to be monitoring the housing market like a hawk.
00:32:00.680 | Again, given 40% of my net worth is geared towards housing.
00:32:05.520 | And I think it's going to do well, it's going to have its ups and downs.
00:32:08.040 | But you know what, you don't really care as much as a real estate investor because you
00:32:11.880 | don't see the daily price movements.
00:32:15.160 | Thank goodness you can just wake up years from now and be like, okay, it's done good.
00:32:20.560 | Good.
00:32:21.560 | All right, I'm going to try to do more episodes going forward.
00:32:24.760 | But at the same time, I'm also trying to get myself out of doing more online.
00:32:31.400 | I just want to really do less.
00:32:33.520 | And I'm really focused on just taking it down as things get better in the economy.
00:32:38.720 | And I hope you guys do too.
00:32:39.960 | You know, don't try to grind so hard anymore.
00:32:44.720 | Really try to find more balance.
00:32:46.860 | If the pandemic has taught us anything, it's that life is precious and that we need to
00:32:50.160 | focus on more important things like our relationships and our friendships and our health.
00:32:55.680 | So I really wish you guys the best of luck in your real estate search.
00:32:58.440 | And if you enjoyed this podcast, gosh, it took a while to record.
00:33:03.440 | But I'd appreciate a positive comment and a review.
00:33:06.540 | And I'll see you guys around.
00:33:07.540 | Thanks so much.
00:33:07.560 | Thanks so much.