Hello, everybody. It's Sam from Financial Samurai. And in this episode, I want to talk about the 2023 housing price forecast. There are definitely more bears than bulls, and I am one of them. But don't worry, I don't think it's gonna be that bad. But I don't think prices are going to go up.

So the 2023 housing price forecast range from down 22% to up 5.4%. So there's no consensus, but the bias is towards the downside. There's also the issue of forecasting the national median home price and the price of your local housing market. While we care about the national median home price forecast, we care way more about our local housing market forecast.

Personally, if I'm looking at buying houses in 2023, I'm looking for house prices that are trading at least 10% off its high. And I'm also looking for deals where, you know, maybe the sellers have to relocate to another part of the country or another part of the world. So they're more motivated to sell.

This is especially true if you're listing during the winter. Or maybe the sellers are trying to sell because they went through a divorce and they just really couldn't care less about maximizing prices. And they just want to get rid of another asset, simplify life and split the proceeds. There are always opportunities out there, folks.

You just have to make the effort to go search for them. For background, I expected the median sales price in the United States to rise by 8 to 10% in 2022. My estimate was less bullish than the majority of firms expecting closer to 12 to 18% price increases. So in the fourth quarter of 2021, according to the St.

Louis Fred, the median home price was $423,600. The latest pricing data available third quarter 2022 shows the median home price of $454,900 or a 7.4% increase. So that's pretty close. What I obviously underestimated was the rise in mortgage rates. I did not expect mortgage rates to break five, five and a half percent.

They went all the way up to 7% for the average 30 year fixed rate mortgage. And that was a surprise. Obviously, that's going to put the brakes on the housing market. However, the median home price still went up about 7.4%. We'll see what the fourth quarter 2022 housing price data will be.

And that'll come out in the first quarter of 2023. I would think the price would decline a little bit in the fourth quarter of 2022. But let's just wait and see. Now on to the house price forecast. On the most bearish end, we've got John Burns Real Estate Consulting down 20 to 22%.

Zonda down 10%. Goldman Sachs down 5 to 10%. Redfin down 4%. The most bullish housing price forecast for 2023, Realtor.com plus 5.4%. CoreLogic up 4.1%. And the National Association of Realtors up 1.2%. And then there's a bunch of other forecasts like from Fannie Mae and Freddie Mac, basically plus or minus 1%.

And it's just not very exciting. So I wanted to focus on the most bearish call and the most bullish call. When you're doing forecasts, you want to look at the tail ends to see who's delusional and what you're missing. Because every one of us who has money at stake in the real estate market, stock market, any risk asset needs to have a thesis.

We need to understand where things are going so we can better prepare and make more optimal decisions. That's the whole theme of buy this, not that, how to spend your way to wealth and freedom. The more optimal decisions we can make over time, the wealthier we will get and the happier we will be.

So the most bearish call is by John Burns Real Estate Consulting. I like their work. I've sourced their data in many posts before. Good data, good stuff. However, seeing a 20 to 22% decline in house prices in 2023 is way too pessimistic. That would bring the national median home price to about $364,000.

A 20 to 22% price decline would mean a greater decline than the one during the global financial crisis. Back in the first quarter of 2007, the median home price was $257,000. And it declined to $208,400 in the first quarter of 2009. So that's an 18.9% decline. And that took two years for national median home prices to decline by 18.9%.

So for John Burns Real Estate Consulting to say that home prices will decline by a greater amount in half the time is completely off. I don't understand where they're getting this forecast from. The data is not that bad. Credit standards are much higher than they were before the 2008 crisis.

We all know anybody who's bought a home since 2008 and since 2012 know how difficult it's been to get a mortgage. The average credit score for a successful mortgage applicant is over 720. Before that global financial crisis in 2008, the average credit score was in the 600s, by 600s.

So the credit quality of mortgage borrowers is much higher. Meanwhile, the vast majority of homeowners locked in mortgage rates below 5%. It's like 95% of mortgage, people who have mortgages are at 5% or lower. And further, a great percentage of homeowners just simply don't have a mortgage at all.

If you want to forecast house price declines, one way is to think how bad is the current environment versus the environment in 2007, 2008, 2009. And if we say the current environment is let's say half as bad, well, the price decline would be half of 18.9%. So we'd say something like 9.9%.

We could say that, but I don't think this current environment is half as bad. Maybe a third as bad, 30% as bad. So we could see a 5.7% house price decline. This is just one way of thinking about potential declines in 2023. But the thing is, as I just summarized, there is a 5.4% housing price forecast by realtor.com.

That's the most bullish call. And I think it's absolutely wrong. Realtor.com is a website that helps you find a realtor to buy or sell a home. I remember looking on realtor.com to look for homes in Hawaii, when I've been searching for the past three to four years. And they put me together with a realtor, and then the realtor pays a referral fee.

So the stronger the housing market, the more business realtor.com will generate. And I don't think it's a coincidence that CoreLogic, expecting 4.1% increase, the National Association of Realtors expecting a positive 1.2% increase, the Mortgage Bankers Association expecting a 0.7% increase, and Zillow expecting a 0.8% increase are all bullish and are all part of the real estate industry.

Now the outlier to the bullish calls is Redfin. Redfin is obviously a real estate company, and they're expecting down 4%. But Redfin, my gosh, have you seen the stock price of Redfin? It's similar to Zillow. The stock is down a whopping 85% year to date, because it too went into the institutional eye buying business, lost a lot of money, and volume is way down because everybody's taking a wait and see approach.

If you're a seller, you've got a low mortgage rate, you're just waiting and seeing how things are going to turn out, whether mortgage rates are going to come down and demand is going to come back. And if you're a buyer, well, you're waiting to see if mortgage rates are coming down.

And you're waiting to see if there are better deals ahead. All right, so here's my forecast with a 75% conviction level, pretty high. I expect the median housing price for 2023 to decline by 8% to $419,000 if we assume home prices and 2022 at about $455,000. And the reasons include one a global recession by the end of 2023, thanks to the Fed, the Fed insisting on hiking to a 5 to 5.125% terminal rate, even though inflation is clearly declining and annualizing under 2% now, three, the inescapable correlation between risk assets as the S&P 500 goes nowhere in 2023.

Again, real estate has outperformed the S&P 500 by over 25% in 2022. Finally, a higher risk free rate makes investing in risk assets less appealing. I talked about how I'm actively investing over 60% of my cash flow and cash into short term Treasury bonds, three months, six months, nine months, one year, I like one year especially, because you could have got 4.7%.

Now it's like 4.55%. And that looks amazing, compared to the 10 year bond yield now at only 3.45%. So that yield curve inversion is completely out of whack. And it's telling the Fed to stop. And if the Fed doesn't stop, you know, it just doesn't seem like that based on its recent December 14 discussion saying, oh, the terminal rate, we think should be at 5.125%.

I mean, where did that come from? We're all expecting 5%. And many of us were hoping lower given October and November inflation data that came out in November and December were below expectations. Now I know down 8% isn't great. It's disappointing. We always want to make money. But look, real estate has outperformed the S&P 500 by a lot in 2022.

And real estate prices have gone up a lot since 2020. So giving back 8% is not that bad. I think it's actually pretty healthy. You want that froth to get out of the system. You want more people with great credit scores and great down payments to be able to afford comfortably afford to buy property, hopefully using my 30/30, three to five home buying rule.

You want a greater and greater percentage of the population to be able to comfortably afford homes and have home buying security. That's great for society. And it's great for a stable economy. Crazy home price increases of 20/30% a year, completely unhealthy. So I'm kind of glad that the froth is out of the system.

Now here are reasons why I don't expect home prices to decline by much more than 8% in 2023. One, 30 year fixed rate mortgages should decline by two to 3% from their peak of 7% by mid 2023. I'm looking at this chart, which is in the post if you click through that shows how mortgage purchase applications rose by 13.8% in December, after mortgage rates fell from 7.08% to 6.3%.

The 6.3% sound great. I mean, it sounds okay, but it's pretty high compared to a year ago. However, there was a huge uptick. So the elasticity of demand for homes when mortgage rates fall is very, very high. And if that's the case, if mortgage rates do indeed decline to let's say an average of four to 5%, that pickup in demand could be greater than 25%, maybe 30%.

And the longer there's this inactivity in the real estate market, the more pent up demand there will be. So if you have pent up demand plus lower mortgage rates, I don't know, maybe my 8% downside scenario is too bearish. Another reason why I don't expect home prices to decline by much more than 8% the Treasury bond market has stopped listening to the Fed.

The 10 year bond yield did not move at all after the Fed raised by another 50 basis points on December 14, 2022. So we're now at 4.25 to 4.5% on the Fed funds rate. And the yield curve is hugely inverted. And thankfully, the 10 year Treasury bond is what dictates mortgage rates.

More so than the Fed funds rate. All right. Consumers still have excess savings, thanks to tremendous stimulus spending in 2020 and 2021. That excess savings is getting spent for sure, but we still got it. Another positive data point, there will still be a continued under supply of homes. The vast majority of homeowners have a 30 year fixed rate under 5%.

Therefore, there's really no need for most to sell. And if you look at the post and you look at the inventory chart, we're still like 30, 40% below 2015 to 2020 averages, 2019 averages. So we still got a ways to go to get back to that normalized demand supply scenario.

More reasons why home prices won't decline by more than 8% there will be a continued capital shift towards real assets and away from funny money assets like stocks, cryptocurrencies and anything else that provides zero utility. This is a theme that I've been discussing since I started Financial Samurai in 2009, because I saw funny money blow up in people's faces back in 2000.

One minute you are worth 2 million and you were going to quit your job and the next minute you lost it all and had a huge tax bill and you got to go back to work with your tail between your legs. I think this is another really big long term trend where more and more capital will be converted into real assets that hold its value better, that provides utility and that provides joy.

Finally, there's this great chart in the post that highlights how much home equity has been built over the years, especially since 2012. Once home prices started going up again, that amount of equity compared to the amount of debt is huge. It's much larger than the amount of equity compared to the amount of debt back in 2006 and 2007.

Back in 2006-2007, the spread was it looks like around $5 trillion. There's $5 trillion more in home equity than in home debt. Now, the spread is let's say, let's see $32 trillion in home equity minus about $12 trillion in home debt. So the simple math states that there is a $20 trillion difference between equity and debt in 2022 versus only a $5 trillion difference buffer in about 2006-2007.

In other words, the average or median homeowner can withstand economic shock much greater than the ones 15, 16, 17 years ago. So there you have it, my thoughts and everybody else's thoughts about house price forecasts in 2023. I do want to conclude by saying that I had a really great hour long conversation with Ben Miller, CEO of Fundrise on Friday.

We more or less agree with most of my points in my 2023 housing price forecast post. What I did learn, however, was their Sunbelt properties are continuing to see 5% plus rent price growth, which will help negate price declines. Therefore, if you're a fund investor, I would expect continued outperformance actually, if you have a fund that is investing in the heartland of America real estate.

The main question I wanted to ask Ben was with availability of 4% plus risk free returns through treasury bonds, what should investors be doing in real estate? And he said, look at credit opportunities, credit funds. So Fundrise's fixed income fund, for example, is yielding 8% after fees. He also mentioned there are some deals because they've declined in price where they're trying to take advantage and whose yields are at 12 to 14% as they find more opportunity.

In terms of timing, we both agreed summer could provide some of the best buying opportunities. But it was interesting because he was kind of surprised that I agreed with him on the summer. So then he started thinking, well, maybe he should start being more aggressive and looking earlier in the year because we're both thinking summer's the time.

And if we're both thinking summer's the time, other people are thinking summer's the time. And then if everybody's thinking summer's the time to really pounce, then will it really happen? It probably won't. And my thesis on why summer could be a great time is because I think mortgage rates will decline by 2 to 3% by say June 2023.

And with pent up demand, and hopefully a Fed that pivots a little, I think after, you know, any desperation selling there is during the winter, demand could rebound relatively quickly. And it's interesting with all risk assets, whether it's stocks, real estate, and especially cryptocurrencies, is that there's tremendous amount of FOMO where we don't want to miss out on that rebound.

So many of us, many investors just nibble, nibble, nibble on the way down and try to time it so we go all in once there's that inflection point. But as we all know, it's very hard to time. I really appreciate my call with Ben Miller, founder of Fundrise, because we had a call at the beginning of 2022.

And he said he believed inflation was going to go beyond 8% and the Fed was going to hike aggressively. I didn't think that. And so he has been spot on. And it's always great to see other points of view. Because again, when we are thinking about the future, we need to look at every single angle to try to make better investment decisions.

So if you want to invest in Fundrise, you can go to financialsamurai.com/fundrise. About 20% of their assets under management is in cash, and they are looking for deals right now. And if you have a moment, please spare a positive review on this podcast and for my book on Amazon or wherever you purchased it.

I haven't worked this hard in a long time over the past couple of weeks. And I think partially the reason why is I was sick off and on for two and a half, three months, and I finally got the energy back to do more podcasts and to write more.

And I wanted to utilize my time left to do my best to work my hardest. Because who knows when that energy will fade. And I do wonder as we approach the end of life, is this what happens? Do we end up doing as much as possible to minimize regret?

I think so. I hope so. Because we are all rational actors in the end. And I really hate regret. So thank you everyone for your great reviews on this podcast and for my book. It helps keep me going no matter how sick and tired I feel. For the remainder of the year, I'm going to do a lot of reflecting and thinking about how, how to make life better, simpler, more joyful in 2023.

So thanks for sticking with me all year, and I'll speak to you folks soon.