Why_The_U.S._Housing_Market_Could_Go_Up_Another_30
00:00:00.000 | Hello, everybody. It's Sam from Financial Samurai. And in this episode, I want to talk about the US
00:00:04.480 | housing market and what could ignite the US housing market further. So for those of you who
00:00:11.280 | have been reading my stuff, I'm very bullish on the housing market. I love real estate. It's my
00:00:16.800 | favorite asset class to build wealth. The combination of rising rents and rising real
00:00:21.600 | estate prices is a powerful, powerful combination for the average person to build a lot of wealth
00:00:26.880 | over time. History has shown real estate is one of the best wealth creators. So I've been thinking a
00:00:33.440 | lot about what could make house prices in the United States go up even further. The market
00:00:39.760 | has already been on a tear since the beginning of 2020. And frankly, since 2009, 2010. And it seems
00:00:48.560 | like prices should slow down. And I think prices will slow down, it can go up by 15 to 20% year
00:00:54.880 | over year for years because housing prices must follow income growth. Otherwise, nobody can afford
00:01:01.760 | a home. It's very basic fundamentals. One of the things I wonder about is whether the typical
00:01:07.360 | American knows how good he or she has it. You know, you how you hear about immigrant stories
00:01:12.640 | who come to America, and they just do very, very well. I think one of the reasons why is because
00:01:18.000 | there's a lot of perspective, they know how great the United States is compared to where they came
00:01:23.040 | from. And also, they don't want to screw things up once they come to America. This is their one
00:01:26.960 | chance. Their relatives back home are counting on them. And the relatives are watching them to see
00:01:32.880 | if they can succeed in the land of hope and dreams. The reality is, the US housing market is cheap.
00:01:39.840 | It is one of the cheapest housing markets in the world. Look at all the data from The Economist
00:01:46.480 | to Numbia, which is the largest cost of living database site, supposedly in the world. And the
00:01:51.680 | United States ranks as the second most affordable country in the world. Whereas Canada, our friends
00:01:58.720 | up north, ranks as the 17th most expensive country for real estate. So I got to thinking,
00:02:05.920 | what would happen if the United States housing market got as hot and as expensive as the Canadian
00:02:13.120 | housing market? It could happen. Why not? We're both, we're part of the North American continent.
00:02:19.040 | We both speak English. We have similar cultures, not the same, but similar cultures. We have really
00:02:24.640 | open borders, relatively open borders. We have similar philosophies. So why couldn't the US
00:02:30.640 | housing market get one day as hot as the Canadian housing market? If you haven't been paying
00:02:36.080 | attention, well, the Canadian housing market is truly on fire. It makes the US housing market
00:02:42.000 | look like a little anthill. It is unbelievable how much home prices have risen in Canada. And
00:02:49.760 | the funny thing about this is that, look, incomes are on average lower in Canada, yet home prices
00:02:56.480 | are higher in Canada. I mean, why is this? Is it because Canadian weather is so much better?
00:03:02.960 | There's a lot more big companies that pay big bucks. The answer is no and no. I don't know
00:03:09.040 | of many big companies in Canada that are paying 22 year old college graduates $150,000 to $200,000.
00:03:14.880 | Like almost all these big tech companies in the Bay Area. If you look at the banking industry in
00:03:21.440 | the United States, Goldman Sachs raised their base salary from $80,000 to $110,000 plus,
00:03:27.200 | you know, a $30,000 to $50,000 to $60,000 bonus. Income is very strong in America, which is why
00:03:34.800 | real estate is relatively more affordable than almost any other country in the world.
00:03:39.920 | And so if you click over to my post, you'll see an amazing chart that graphs disposable income
00:03:46.480 | to home prices. So for the United States, the correlation is very tight. In fact, it looks like
00:03:52.720 | or one can argue that home prices are still about 10% undervalued in the United States compared to
00:03:58.720 | disposable income. Now then take a look at Canada. The Canadian home price chart is through the roof.
00:04:07.040 | It totally decoupled from the Canadian disposable income line starting at around 2001. Therefore,
00:04:14.880 | we can make several conclusions. One, the US housing market is not in a bubble because disposable
00:04:21.040 | income growth is strong. Two, the Canadian housing market looks like it's totally decoupled from
00:04:27.200 | fundamentals and it looks like it's in a bubble. And then three, if there's a choice between buying
00:04:32.880 | a comparable United States property or Canadian property, you probably want to buy the United
00:04:37.600 | States property. After all, income growth is higher and the average income is higher. Let's
00:04:44.000 | now do a back of the envelope calculation to determine how much higher United States home
00:04:50.640 | prices would have to go to equal the Canadian housing market. Right now, the median home price
00:04:56.800 | in America is anywhere from $350,000 to $400,000 depending on whose data you use. It's kind of
00:05:03.680 | interesting that we don't have the exact figure, but that's kind of economics. That's finances.
00:05:08.320 | You don't know for sure, but you have rough estimates. So let's average the range out and
00:05:13.120 | say the median US home price is $375,000. That's up about 15 to 20% year over year.
00:05:20.160 | Now, if the US housing market got as expensive as Canada's housing market,
00:05:25.440 | the median home price would be closer to $656,000 with a range of between $612,000 and $700,000.
00:05:33.680 | And if the US median home price was to rocket higher by 75% because that's what the calculation
00:05:40.560 | is, Canadian home prices are about 75% higher, income adjusted. The prices in the most expensive
00:05:46.640 | coastal city markets, San Francisco, LA, DC, New York City, and so forth, would likely increase
00:05:54.480 | by double digit percentages as well. Probably not 75% because it's coming from a higher base,
00:05:59.920 | but we could easily see these more expensive real estate, coastal real estate markets,
00:06:04.480 | increase by 30%, 35%. So half the overall rate of return. And that's what you're seeing right now
00:06:11.520 | in the markets since the pandemic began. You're seeing 18 hour cities, secondary cities,
00:06:16.960 | Austin, Charleston, all that. They're growing at 20 plus percent, whereas the bigger cities,
00:06:23.360 | the more expensive cities are growing at 8 to 12%. Think about that folks, a 30 to 75% increase
00:06:31.840 | in the median US home price, depending on where you are, if the US housing market gets as hot as
00:06:38.720 | the Canadian housing market. And some would say that America has much more opportunity than Canada
00:06:46.000 | when it comes to making money, starting a business, and so forth. So the next logical thought process
00:06:53.280 | is what are the chances? What are the chances that the US housing market could turn into the
00:06:58.400 | Canadian housing market? Well, I don't have some exact data to blab off to you, but I think there's
00:07:05.920 | a 60% chance that it could happen within the next 10 years. And I think there's a 75% chance the
00:07:12.800 | United States housing market could turn into the Canadian housing market over the next 20 years.
00:07:17.600 | And I think this likelihood is much greater than the Canadian housing market reverting to the
00:07:24.160 | United States housing market. Once the genie is out of the bottle, it's hard to put back.
00:07:28.880 | And the reason why I think the US housing market could turn into the Canadian housing market
00:07:33.600 | is because of technology and information and capital flows. As technology advances,
00:07:40.960 | and as governments develop stronger international relations, it's only logical to conclude that
00:07:47.520 | capital will continue to seek the highest returns in the world. Just think about the evolution of
00:07:53.920 | the stock market. Decades ago, we can only invest in single stocks, right? And then there was the
00:08:00.640 | creation of the S&P 500 index and the Dow Jones Industrial Index. And then there was the creation
00:08:06.720 | of ETFs and index funds. And then those ETFs and index funds were going into different asset classes
00:08:13.920 | and also international equities and country specific ETFs. And it kept on evolving and
00:08:20.400 | developing. So in a way, the stock market evolution is much quicker than the real estate market
00:08:26.560 | evolution, especially when it comes to commissions, gosh, is now free to trade securities,
00:08:31.520 | stock securities bonds. But yet we still have to pay four and a half to 6% in real estate
00:08:36.800 | commissions to sell a home. So it is clear to me that the real estate market has a lot more
00:08:43.200 | disrupting to do a lot more, which is one of the reasons why I'm so bullish. It's why I'm paying
00:08:48.480 | attention to the real estate crowdfunding industry. It's why I'm looking at the mortgage market to see
00:08:53.120 | where that can get disrupted. It's why I'm trying to invest in some private companies in the real
00:08:59.280 | estate space, there's a lot of opportunity. And the more the market evolves, I think the more
00:09:05.760 | liquidity is going to go into the real estate market. And that's going to be very beneficial
00:09:09.920 | for investors. I think there are two main things that could revalue the United States housing
00:09:15.520 | market higher. The first is a massive realization by international investors that the United States
00:09:21.680 | market is attractive. It's affordable and as a stable government and as an international reserve
00:09:26.880 | currency. If you're a wealthy person coming out of any emerging market country who needs to park
00:09:32.480 | money somewhere, why wouldn't you want to buy United States real estate, send your kids to some
00:09:37.520 | of the best schools in America and give them the biggest opportunity possible. The second catalyst,
00:09:44.560 | I think, is the collective realization by Americans that we've got it so good. We have got it good,
00:09:51.600 | folks. Prices are low. We've got internet. We've got a stable government. The air is pretty good.
00:09:58.560 | We've got our freedoms. Life is good in America. And the more you live abroad and travel abroad,
00:10:04.960 | unfortunately, that's been truncated a lot due to covid. But the more you will realize
00:10:09.920 | United States is good and you don't want to let other people buy up your assets. You want to buy
00:10:16.480 | up your assets first. Otherwise, you're going to get pissed off and your children are probably
00:10:21.600 | going to get screwed because prices are going to keep on going up. And they're going to ask you
00:10:26.640 | one day when they're adults, why didn't you buy real estate when you could have or before?
00:10:32.240 | You know, the foreign invaders bought up all our property, just like the Japanese bought up
00:10:36.720 | all of Hawaii property in the 1980s. So I say one of the greatest X factors in determining
00:10:43.040 | the price direction of the US housing market are foreign investors. So just to give you an idea,
00:10:48.720 | the top five foreign buyers of US real estate from April 2020 to May 2021 are Canada, Mexico,
00:10:57.600 | China, India and the United Kingdom. In that order, traditionally, it's always been Canada
00:11:03.200 | at number one because they're the closest to us. And then Mexico is traditionally a top three
00:11:09.600 | because it's also one of the closest countries to us. So for us to compare ourselves to Canada
00:11:15.360 | is the right logical thinking. And then to compare our housing market to the Canadian housing market
00:11:20.560 | is also a logical extension. And I think it's really important for us to also discuss why
00:11:25.680 | why is the Canadian housing market so strong? It didn't really correct at all during the global
00:11:31.600 | financial crisis in 2008 and 2009. And it is just continue to go up. So if we can understand why the
00:11:39.280 | Canadian housing market is doing so well, and why it's done so well, I think it can better help us
00:11:45.680 | understand where the United States housing market could go. So there are five main reasons. One,
00:11:52.960 | supply and demand high demand for single family homes, but not enough being built. Canadians were
00:11:58.640 | building mostly apartments from 2011 to 2020. Whereas Canadians wanted single family homes,
00:12:04.800 | so simple supply and demand fundamentals to running out of land. Did you know Canada is larger in land
00:12:12.240 | mass than the United States? 3.9 million square miles. Pretty interesting, huh? That's about
00:12:18.880 | point 2 million square miles larger than the United States. However, most Canadians are
00:12:23.920 | clustered in a handful of major cities not far from the US border. So most jobs, you know, Toronto,
00:12:30.320 | Vancouver, Victoria, that's how the structure is. So in terms of land, Canada is boxed in by the
00:12:37.680 | United States below Pacific Ocean to the west, the Atlantic Ocean to the east, and mountains and
00:12:43.680 | really, really cold weather to the north. So Canada doesn't have as much livable land as one
00:12:48.320 | might imagine. 3. Relaxed foreign buying rules. Canada is relatively well known for having an
00:12:55.040 | open door policy for immigration. Therefore, if you have more immigration, you have more foreign
00:13:00.800 | money coming into Canada. Unfortunately, this open door policy has really squeezed locals.
00:13:07.280 | And if you listen to the news, watch the news regarding Canada, so much of it talks about
00:13:14.640 | real estate, about the runaway prices for real estate and how it's really hurting renters who
00:13:19.680 | want to buy in future generations. It really makes me wonder whether local Canadian politicians are
00:13:25.600 | sleep at the wheel. Are they not listening to their constituents, the local people who are
00:13:31.520 | getting priced out of the market as foreigners buy up their housing and their land? It just seems so
00:13:37.760 | odd to me that Canadian politicians would allow housing prices to go up so far beyond what
00:13:44.240 | disposable income can warrant. It just doesn't make any sense. I would be pissed off if I was
00:13:50.000 | a local Canadian myself. But something must be going on under the table. That has got to be the
00:13:55.680 | only way. So 4. Easier to launder money in Canada. I think this is something that we need to discuss
00:14:03.200 | a little bit more. According to Global Financial Integrity, a Washington DC-based anti-corruption
00:14:08.240 | organization, they believe a significant amount of illicit funds is laundered in Canadian real estate.
00:14:14.560 | From 2015 to 2020, the news media ran stories about $626 million of real estate being bought
00:14:22.720 | with laundered cash. Over 88% of it was on residential real estate. And what's really
00:14:28.880 | interesting is that this $626 million was only from 35 cases. So that's like $17 million per case.
00:14:37.360 | Think about all the undiscovered illicit real estate transactions and money laundered. If you've
00:14:44.080 | watched Ozarks, man, money laundering is big business. And the study revealed that 48.6%
00:14:50.800 | of cases involved Canadian-sourced funds. So Canada is the main culprit of its own money laundering.
00:14:58.560 | However, the largest international source was China, representing about 23% of cases. And then
00:15:04.960 | the US was the third with 11.4% of money laundered cases. Let's think about mainland Chinese people.
00:15:14.320 | So the government only allows mainland Chinese people to withdraw $50,000 a year or buy up to
00:15:20.960 | $50,000 of US assets a year. So how on earth is the typical Chinese buyer buying a $2 million,
00:15:28.800 | $3 million property? There are only so many friends and relatives you can pull your money,
00:15:33.840 | your assets to, to buy such a property. There's clearly something going on. And I think the
00:15:38.640 | government, the Canadian government knows what's up. But for some reason, it chooses to look the
00:15:45.760 | other way. Now, maybe if you get paid off like 100 grand, 200 grand under the table, or I don't know,
00:15:52.560 | something's going on, you'll look the other way. But I don't understand why the Canadian government
00:15:57.760 | doesn't crack down harder on money laundering. Maybe it's just too difficult. Who knows?
00:16:03.040 | All right, the final reason why the Canadian housing market is so strong.
00:16:06.720 | Perhaps it's a stronger culture of the bank of mom and dad helping their adult children.
00:16:12.880 | As Americans, we strongly value independence. You know, go get a job right after you turn 18
00:16:18.400 | or see you later. Right? Go for it. Be on your own. Do the right thing. Whereas Canadians seem
00:16:24.320 | to emphasize interdependence, subsidized health care and subsidized college tuition are great
00:16:29.520 | examples of a more communal Canadian culture. Nobody is getting left behind in Canada or much
00:16:35.920 | fewer people than they are here in the United States. You're not going to go bankrupt because
00:16:40.800 | of some massive medical expense. Unlike here in the United States. We're all in this together,
00:16:46.640 | right? That sounds like the Canadian mantra. Whereas in America, it's every man or woman for
00:16:52.800 | himself or herself. So with this type of culture, I think it's very common or more common in Canada
00:16:59.040 | for the bank of mom and dad to help come up with a down payment, buy a car, pay for tuition,
00:17:04.400 | you know, tuition is cheap, so who cares, but really, for housing sake, come up with a down
00:17:09.040 | payment or buy the home outright to help their adult children. I live in San Francisco, and
00:17:14.240 | parents helping their children buy their first home is ubiquitous. Several realtors I spoke to
00:17:19.760 | said it's about 60% 60% of first time homebuyers, at least the clients they see have parents helping
00:17:27.440 | them with their down payment. And I believe in the median home price here is 1.7 to 1.9 million
00:17:33.280 | depends on who you ask. But it's a lot. And it's going to be pretty hard for the typical person to
00:17:38.720 | come up with a 300 to $350,000 down payment. And what I think we're seeing is that the United
00:17:46.800 | States culture is moving more towards the Canadian culture of trying to help more people,
00:17:53.280 | bigger government programs, higher taxes on the horizon, we're going to get closer to Canada. And
00:17:58.960 | I think we're eventually going to get closer to Europe, you know, where the happiest people in
00:18:03.520 | the world are consistently, but those guys have huge tax rates. But they also have universal
00:18:08.960 | health care, and good unemployment benefits, good maternity and paternity benefits, and so forth.
00:18:15.600 | So isn't it a little bit ironic, folks, think about it, isn't it a little bit ironic that the
00:18:20.240 | countries with the highest tax rates, and the biggest governments have some of the world's most
00:18:26.000 | expensive housing, look at the housing costs in Sweden or Norway, or Canada, very expensive,
00:18:35.280 | very expensive, same thing with in France. So as investors, I think we've got to always think about
00:18:41.600 | the yin yang of finance, yin yang. So if you do something, what are the unintended consequences?
00:18:48.800 | Or what are the consequences? You can study other countries, housing markets, capital systems,
00:18:54.480 | and so forth to try to get an idea, but you don't really know for sure. But what I do know is that
00:19:00.640 | our children in 20 to 30 years will ask us, why didn't you take advantage of cheap real estate
00:19:06.640 | prices today? I am pretty certain that they're going to ask us this if we start diddle dallying
00:19:11.920 | and not taking advantage, or if we decide to rent for the next 30 years. I think that's a mistake,
00:19:17.200 | folks. Just like it's not a good idea to short the S&P 500 for the next 20 years, it's probably not
00:19:23.680 | a good idea to rent for the next 20 years. Because when you rent, you're short the real estate market,
00:19:29.520 | you're a price taker, you're at the mercy of inflation, and so forth. Now I want to conclude
00:19:34.320 | by saying that the house price appreciation in America cannot sustain itself. 15 to 20%
00:19:40.960 | year over year growth, that's not happening. Next year, we're going to talk about single digit,
00:19:47.280 | high single digit price appreciation, which I think is great, especially if you have leverage.
00:19:51.760 | And I want to remind everyone to buy responsibly. Follow my 3033 rule for home buying. You don't
00:19:59.200 | want to get into too much leverage, especially with prices on the up, up and up, because you
00:20:04.720 | just never know. I think things are going to continue to do well. It's kind of like a car
00:20:08.720 | that was going 80 miles an hour that's now going 50 miles an hour. It's still going pretty fast.
00:20:14.400 | And if it hits something, it's going to get into a big fender bender accident. You want to be very
00:20:19.840 | disciplined when it comes to real estate investing. You don't want to be over leveraged. Please go
00:20:25.120 | through my archives, whether it's the 10 warning signs to look for before buying a property or how
00:20:30.240 | to write a real estate love letter, or how to analyze an investment property to make the right
00:20:36.320 | choice. There is so much wealth of information on financial samurai. I've spent so much time
00:20:41.440 | writing and thinking about these topics. Please take a look. There are no guarantees,
00:20:46.640 | but I think we're going to look back and 10 to 20 years and realize how good value real estate
00:20:53.120 | was in the United States. And if the foreigners pile on, man, watch out. Thanks so much, everyone.
00:20:59.520 | And if you enjoyed this podcast, please share it. Please leave a positive review. It keeps me going.
00:21:04.640 | I'm really pumped about this connection I've made with the Canadian housing market in the US housing
00:21:08.720 | market. I hope more people discuss and share their thoughts. Trying to connect the investment dots
00:21:15.360 | makes investing so much fun. And I love hearing everyone's perspective. Thanks so much, everyone.