Hello everybody, it's Sam from Financial Samurai and happy holidays. I love this time of the year Not only because the kids are running around and so happy to open presents feel very grateful to have them and to see their joy But it's also a great time to reflect You know I just sent an email response to someone who had emailed me five times asking me to do something right?

It's business development stuff And when I responded I got his out of office email that said he'll be out of the office until January 10th 2022 and I'll say to myself Wow You can do biz dev now by setting auto blast emails to random people while you go on vacation How cool is that sign me up?

And then the second thing I realized is man If you can do a little bit of work or just a normal amount of work during the holidays You will get far ahead far further than your peers once they come back so in this episode I want to share my 2022 housing market Forecasts and this is really important to me because I have tremendous skin in the game about 65% or roughly $200,000 of our passive income comes from real estate without real estate I'm not so sure I would have left work in 2012 and I'm not so sure my wife would have left work in 2015 real estate has been so important on our financial journey that I really can't afford to get my 2022 housing market forecast to wrong I wish I was just paid to pontificate on where the housing market will be going without any kind of Repercussions right whether it goes up or down and I'm right or wrong It doesn't really matter but getting my forecast right really does matter for our livelihood Because it helps us stay at home to take care of our kids and do what we want So if you are a real estate investor or you're thinking about getting long real estate This podcast is for you and I try to be as honest as possible And if you have bearish views if you have very bearish views I'd love to hear because it's so important to try to elucidate my blind spots because I believe 2022 is going to be another great year for housing specifically for the median home price I think it's gonna go up another eight to ten percent now that is down from 2021's increase of about 17 to 19 percent, but that was an unprecedented gain in 2021 And I don't think it's gonna happen again But eight to ten percent is still huge because historically real estate or the housing market has gone up closer to around Four four and a half percent a year.

So we're still talking about roughly twice the Historical price appreciation growth rate and from a cash on cash return basis Let's say you put down 20% and the housing market goes up another 10% And we're talking about a 50% increase in returns on your cash And then of course you've got to deduct all the relative expenses and so forth But the gains are pretty huge and it's another reason why I like real estate so much So let me share 11 reasons.

I've come up with as to why 2022 will be another strong year for the housing market first reason low and negative real mortgage rates I predict mortgage rates won't go up by more than 0.375 percent in 2022 in other words your typical three point one two five percent thirty or fixed mortgage Might go up to three point five percent, which is still very low further It's still a negative real mortgage rate I think we're gonna come down from six point eight percent inflation in 2021 to roughly four percent or so in 2022 but four percent Inflation and a three point five percent mortgage still means you're getting kind of paid a half a percent to borrow money Therefore there will still be a large amount of incentive to borrow as much money as possible Responsibly possible to buy real assets such as real estate - we're facing a permanently higher demand curve We know that as prices go down demand goes up, but when you see a demand curve shift up Shift up you are seeing demand is higher at all price points And why is that it's because the world has changed the world has permanently changed where there's no going back To going to the office five days a week.

It's gonna be work from home or it's gonna be hybrid work from home I've spoken to many employees Several CEOs who are mulling their work and office process for 2022 and they're all saying we're gonna be doing the hybrid Or work from home for a lot longer Further the adoption of real estate as an investment is growing No longer are people just happy to own their primary residence right in the past You just buy your home and you live in it and then you invest in stocks now more and more people are looking at homes real estate as a viable way to make passive income and Gains profits, right?

So one person one home or one family one home. That's no longer the multiplier It's one family maybe 1.5 homes or 1.2 homes, right? Because people are deciding to buy more and more homes to build their passive income portfolio And then finally the millennial generation is some 72 plus million people strong So this generation will be buying homes in droves over the next 10 20 years It's just the same as it ever was we get older.

We start families. We have children We want shelter and in this day and age, we want more shelter for exercise rooms and offices 3. Increased demand from domestic institutional investors technology innovation demand These three things are making it easier for retail investors to invest with domestic Institutional investors, right?

We are seeing a huge growth in the real estate private syndication platform market real estate crowdfunding market and they are Attracting more and more assets one of the easiest examples I can point you to is fund rise One of the leading real estate institutional investors in early 2021 around April It had about a hundred fifty thousand investors on its platform by the end of the year the platform grew to over two hundred fifty thousand investors, therefore the assets under management have grown and Anybody can invest on that platform if they have ten dollars So this is gonna only continue on fund rise and many of the other platforms They're gonna garner more and more assets that will be unleashed into the property market Investors now account for roughly a quarter of all resale and new transactions That's nationwide and I expect this percentage to grow even if Zillow did blow themselves up due to bad pricing estimates in 2021 for increased demand from foreign investors.

This folks is the biggest X factor Nobody's talking about I haven't seen any Economist or research analyst nobody talking about what happens if foreign real estate demand comes back with inventions One of the best things that has happened from the pandemic is that it has throttled foreign institutional demand since early 2020 By my calculations, there's roughly two hundred billion dollars of pent-up foreign demand for US property And I believe that demand will first hit the coasts and then work its way inward pre pandemic around 2017 2018 I Witnessed many foreigners beat out many competitive home bidding situations here in San Francisco Many wealthy foreigners would simply buy up homes and leave them empty for years to park cash one of my neighborhood homes I think it was sold for two point one million or something back in 2017 It's still empty four years later folks So their disinterest in renting out their home for income, which is what most domestic real estate investors Do is a testament to how attractive?

foreigners view US assets, okay, let's move on to point number five a Revaluation of US property on the world stage anybody who has ever researched overseas real estate markets knows how cheap US real estate is for a developed country and The sad and funny thing is foreign investors know this they know this they watch US TV They are fascinated with our culture, but Americans we don't know this Most Americans don't appreciate how good we've got it because most Americans have not lived overseas Once you live overseas folks, you really will oh my gosh, so appreciate American living You'll probably eat healthier.

You'll probably appreciate your health overall more You probably won't rail as much against people in power. I think it's just a perspective thing But I'm telling you folks as someone who grew up in six different countries Worked in international equities for 13 years and traveled to over 60 countries so far US real estate is cheap and our country is the greatest country in the world and let's never Forget that and take our ability to live in the United States for granted eight strong stock market gains Just look at your 401k IRA Roth IRA Whatever tax advantage retirement account you have from three years ago to now it is up probably way more than 50% Then look at your taxable portfolios also way up and over the past three years.

It's been a huge Anomaly right the S&P 500 generally averages around 10% but in 20 what 19 we saw 27 28 percent in 2020 we saw about 16 17 percent and in 2021 we're at around 27 28 percent I mean those are massive gains where some of the profits will simply flow to buying real assets or they'll get spent on experiences and things because anybody who has been investing since the 1997 Asian financial crisis 2000 dot-com bubble and the 2008 2009 global financial crisis knows to always convert some of your gains some of your paper Profits into real assets so you can keep those gains for longer and you can actually appreciate them because at the end of the day What is the point of making money in the stock market if you actually don't use the money for a better life?

Then going back to the world stage the S&P 500 has been a dominant performer for the past three years way outperforming international stock markets in Asia Europe and so forth so foreigners again see this and say wow the S&P 500 doing so well the US economy The US government has to be doing something relatively better than us We want to buy more US assets as a result All right, nine strong job and wage growth over the past couple years I think all of us have reflected on what we really want to do for a living what is really going to provide us purpose happiness and meaning and Thanks to government benefits a lot of us had this ability to take time off decompress and think what should we do?

And the common consensus is that we all want better pay better flexibility and more perks and to meet these demands Companies have been forced to pay up. For example, the largest investment banks Goldman Sachs Morgan Stanley They raised first year analyst starting base salaries from 85,000 to 100 to 110 thousand dollars in the second half of 2021 and then of course they have bonuses So this causes a cascade effect for the tech management consulting and other industries who also V for this similar talent pool the latest data I think from 2020 shows that the median household income is about sixty eight thousand dollars But I bet when the numbers come out for 2022 since we're forecasting 2022 numbers the median household income should be 73 maybe seventy five thousand dollars and then so when you compare that income to the median home price, let's say three hundred fifty five thousand to four hundred thousand dollars depending on the source you look at it's funny how it's not consistent That's still relatively affordable.

It's actually really affordable based on where interest rates are. All right ten Rising building costs unless you're absolutely desperate and you have no other choice Nobody will sell you a home at a price that is less than its cost to build and building costs are going up folks Think about supply chain issues lumber prices They shot up and then they crashed by like 60 70 80 percent and now they're shooting up another 60 70 80 percent There's a lot of disruption still with input costs and then of course Labor costs are going up as I just said so it costs more to build a home Now than it did a year ago and it'll cost more 12 months from now than today and Not only our costs going up the time it takes to remodel and expand is also going up and I think frankly as a person Who is remodeling a home and it's been two years already that could be the greatest cost And so if I turn around and flip my house or try to resell it I'm gonna demand a higher price to make up for my higher costs and higher time spent then you multiply this feeling by thousands and thousands of other homeowners and remodelers and you can easily see why housing prices will continue to go up and then finally 11th declining supply and inventory Right, the combination of rising demand and declining supply will cause home prices to increase further.

It's economics 101 It's worth clicking over to my post to see a chart that shows how much existing inventory for sale has declined I'm gonna looking at this chart from January 1991 to now and the green line is Way below it's like 50% below the lowest of lows since 1991 Meanwhile existing home sales like transactions are going up and up and up.

So this is a very combustible combination that should boost home prices further now in terms of where I think there's the greatest opportunity to make the most amount of Money, I actually think the coasts the coastal cities such as New York City Seattle San Francisco, San Diego, Los Angeles, Boston I think these cities have a lot of upside these cities these markets underperformed the Midwestern and southern markets for a couple of years as Those markets really took off however I think there's gonna be a mean reversion a narrowing or even a flip in certain markets Housing markets that have gone up the most but also have the most upcoming supply are most at risk of a slowdown or downturn Housing markets that have gone up the least and also have the least upcoming supply I think are the most attractive and again if foreign real estate demand does come back Which I think it will The capital is gonna flood the coastal city markets first because they already see them as cheap and they know Where San Francisco New York Los Angeles, San Diego and so forth are and then it'll slowly move inward I still think there will be a continued migration to lower cost areas of the country This is a multi-decade trend that I started talking about in 2016 investing in the heartland of America But just like two years of the pandemic has throttled the demand from foreigners two years of the pandemic has also Throttled the demand relative demand for big cities if you want to make money if you want to build your network You should probably go where the opportunities are the greatest and the opportunities are the greatest in the biggest cities This is where you can make an outsized amount of money and then you can relocate if you want to but from my experience Being in San Francisco for the past 20 years is that people make so much money that affordability is not the issue and they build Even more networks and more wealth so I think the under 40 crowd is gonna flock back to the big cities in 2022 and Beyond now, let me conclude by saying that no forecast is guaranteed, right?

But I'll share with you my confidence interval at various levels of appreciation and depreciation So I only believe with a 10% confidence. There will be a negative appreciation of housing prices in 2022 Therefore I believe with a 90% confidence housing prices will go up in 2022 5% appreciation or greater 80% confidence 8% appreciation or greater.

This is like my base case 70% confidence 10% appreciation or greater 60% confidence and another 15 plus percent appreciation or greater I say about 30% we could certainly see high teens price appreciation again in housing this could happen if mortgage rates plummet by 30% foreign demand comes in much higher than expected and favorable real estate tax laws are passed, you know such as abolishing the salt cap deduction and then if the market falters Maybe money flows into real estate as safety or if the stock market explodes higher Maybe more money goes into real estate.

So it's like almost the heads. I win tails. I win such an arrow So if you are long real estate Then you should probably hold on to your properties to capture another great year of upside You literally just have to hold on to it rent it out or just enjoy your life in it as a renter You should consider getting neutral real estate by owning your primary residence Just make sure you see yourself living in it for at least five years or longer the longer the better folks And if you don't want to do that, you can invest more strategically in real estate funds REITs and just online real estate so you just gain exposure so you can ride that wave Thanks to just inflation the house you find expensive today Will probably seem reasonable two to three years from now and in ten years You will probably kick yourself for not buying at such a great bargain today You just have to zoom out with your lens zoom in look at it But then zoom out and think what could it be in the future?

Personally, I am already leveraged up in the real estate market, right? I already bought my forever home in 2020 So I can't afford to buy another home without selling assets and I don't want to sell assets because I'm still bullish in 2022 and I don't want to incur tax liability.

So my next home purchase will likely be Three to five years from now, hopefully in Honolulu if all goes according to plan, but things generally don't go according to plan But strategically I'm gonna continue to invest in single-family real estate funds and continue to build my position in VNQ the Vanguard real estate index ETF and then I'll invest in single stock real estate names and also Individual real estate syndication deals just to be a little bit more surgical It is really largely due to expected gains in real estate in 2022 Where I feel comfortable taking things down a notch and you've got to think about your assets your positions as well If your investments go up another eight to ten percent, is it really necessary to work so hard?

Well, it depends on how much you want but for us, you know back in 2012 I thought I had enough obviously I needed more because I had a family but if real estate goes up another eight to ten percent I just don't feel the need to really grind as hard in 2022 and I think we're all tired, right?

I'm tired from 2020 2021 and it'd be nice to just relax a little bit more and take it easy you know and let me conclude by saying the downside scenario for real estate is probably that prices fall five to ten percent in 2022 and this could happen if mortgage rates shoot up by over 1% There's a damaging new law that passes like a self-inflicted wound that a government passes and we enter into a recession because suddenly everybody believes all this craziness in the stock market and NFTs and all that is Just one big bubble and when one bubbles burst they burst really quickly So in such a scenario, you know real estate could go down five ten percent But if it does I plan to be aggressively buying the dip and I expect other investors to aggressively buy the dip as well So I'd love to hear your thoughts about the housing market for 2022 I spent hours thinking about this great time during the holidays and it's really important, right?

Because I have skin in the game and I don't want to mess this up So if you're really bearish on the housing market I'd love to hear your point of view. It's so important to see all sides so we can make better decisions going forward Thanks so much everyone if you appreciated this episode and the post love a positive review I read them all and it keeps me going Take care