Hello everybody, it's Sam from Financial Samurai and in this episode I want to talk about Buying a home at the top of the market. What if you do that? What if you buy a home in 2021 or 2022? When home prices are at all-time highs and then the economy rolls over you just never know I mean how many of us could have anticipated a black swan event like the pandemic?

Locking us up for a year or a year and a half, right? You just never know when it comes to Investing in any risk asset with no guaranteed returns So if you're thinking about buying a home today Then you also need to envision a scenario where you buy a home at the top of the market and you make no money Or you actually lose money.

It's not a good feeling and it's something that I went through back in 2007 I bought a vacation condo in Lake Tahoe Because I thought hey my income was gonna keep on going up. I had recently been promoted to vice president I got a nice salary bump and a nice bonus.

So I was thinking to myself why not live it up? Why not live it up and buy a place where I first took my wife on her first date in California back in? 2000 the other thing was that I got a good deal or so I thought previously the condo sold for 800 I think about $820,000 and I was able to buy it for $2,000 I believe but as we all know 2008 and 2009 came and everything went to hell so my bonuses got slashed tons of people got laid off in the finance industry and The property ultimately lost about 50% of its value went from seven hundred You know fifteen thousand dollars when I bought it to probably three hundred fifty thousand dollars at one point during the worst part of the cycle Condo mortgages were shut off the market was done.

So you couldn't refinance you couldn't get a condo till mortgage people you know were preserving cash and Foreclosures were happening in the building left and right and therefore I got negatively affected and everybody who kept on paying their mortgage Got negatively affected. It's clear that the housing market is very strong right now I have written my thesis that I believe the housing market will continue to go up over the next three years It's not gonna go at the same pace as it has been I think the price Appreciation will decelerate to the high single digits over the next three years all the same Prices are still gonna go up.

However, it's not a guarantee Even if there's an 80% chance the property market could continue to go up. There's still a 20% chance. It could get knocked down Even if you start with pocket aces and poker Pocket aces get cracked all the time So let's go through the unlucky scenario and the unlikely scenario that you buy home at the top of the market At the time of this podcast publication.

So what happens first you go into denial You'll stand behind your decision to buy at the very beginning Even if you see a neighboring home on the market sit for longer or drop its asking price or just sell a little bit less You'll justify your purchase by saying your home has a better layout a nicer Feng Shui Better, you know curtains or fixtures or whatnot You'll tell yourself that you bought your home mainly for a better lifestyle first And then after about a year the elation of owning your home fades a little bit It's similar to the fading elation of buying a new car with a loan.

You're thrilled for the first six months however That thrill fades because the car payments stay the same and so eventually there's gonna be this crossover point where your joy Fades and then that straight line payment stays the same and these start getting a little bit bummed out - you begin to accept your mistake Between 12 to 24 months post purchase you start realizing that maybe you didn't make the best purchase after all you start telling yourself Well in the long run things will be fine This is what stock traders always tell their themselves when they make a bad trade.

Ah, I'm investing for the long run, right? It's how you make yourself feel better But the more you look at homes that sell for less the more you beat yourself up internally about your purchase You start doing calculations and how much you could have saved on the down payment or on the month of cash flow if you had Just waited a little bit longer or you had been a little bit pickier or you had negotiated a little bit harder You look at the nicer homes you could have bought with what you paid and you start kicking yourself a little bit Finally you tell yourself.

Well, it's just money at the end of the day. You can always make more money And again, you are living in your home. You bought it for a better lifestyle the third thing you start thinking about is worst-case scenarios due to leverage a 10% decline in the value of your home is a 50% decline in your 20% down payment and of course a 20% decline in the Value of your home is a hundred percent decline in your down payment Once the momentum to sell begins in real estate, it's very hard to change.

It's kind of like a super tanker very wide and slow turns Momentum kind of continues to build until after about two or three years It kind of settles at the bottom for another one or two years and then generally based on history It goes back up during a worst-case scenario You start calculating how long you can keep the house before you run out of savings or if you lose your job You also calculate how low the house can go before it no longer makes sense to keep paying the mortgage Many people made that calculation in 2008 9 10 11 12 probably as well and they just let it go they gave the keys back to the bank and they said this is your problem and They just walked away from their equity hurt their credit score and so forth it's hard not to freak out at this stage, especially if you have children because You know the house could ruin you you could be so underwater.

Your credit is crushed. You lose all your equity How are you gonna get into job again? It just depends on how bad the economy can get for those of you who are under I would say 3540 it's hard to really experience how bad the economy was back in 2008 2009 2010 If it gets like that, it's really bad.

It's a systemic crisis, but I don't think it's gonna get that bad I don't think it's gonna get that bad because credit scores Credit reports the financial health of borrowers today is so much better than back then All right, but let's keep on focusing on the negatives, you know a bad downturn.

What are you gonna do? The fourth thing you're gonna do is you're gonna start to cut out all excess fat from your budget You know, you are a rational human being you are not a zombie you can adapt you can learn you can hustle There's no clear evidence that Americans can save more if they want to if we want to Then during the pandemic in April 2020 the US saving rate went from 6% Which is okay to 32% We can save more if we want to and today mid 2021 the saving rate is still hovering around 10 12 percent That's pretty good.

And of course, not only can we all slash our budgets we could all do some side hustles We could all make some extra money cutting grass driving cars Assembling furniture teaching tennis teaching ballet music violin, whatever it is We can all do something to make a little bit more money.

So if you get through these stages Well, I think you'll be okay The downturn usually lasts two to five years and if you keep on paying your mortgage Nothing really bad happens It's just a psychological knock where you could have saved money or made more money had you waited.

That's it and Given that nothing really happens or bad happens except for a mental knock It's so important to follow a good home buying rule. I've presented the 30 33 home buying rule 30% of cash flow 30% cash By no more than 3x your household income, you know, it's a pretty conservative rule But if you follow this rule and a downturn happens, you're probably gonna be fine if you stop paying your mortgage Let's say the worst case Your credit score is gonna get knocked 30 days late You're gonna get a 40 to 110 point hit 90 days late on paying your mortgage 70 to 135 point hit If you do a foreclosure a short sale 85 to 160 point hit and then bankruptcy is 130 to 240 point hit the higher your credit score Actually the more it's gonna get hit Therefore if you've got a great credit score and you can afford the payments, I would just keep on paying keep on enjoying your life Build that cash reserve work on building your income and cutting expenses Over time things are gonna self-correct as we are seeing right now I mean the people who held on to their homes during the last financial crisis I would say most of them are in the green now now, obviously the opportunity cost is another thing they could have invested in something else and maybe have made more or You know again if they didn't buy at the top of the market and just waited several years They could have made a lot more but let's be realistic.

We just can't time it properly. I Personally never like to buy into a frenzy whether it's a housing market frenzy equity frenzy or anything That's why we were talking so much in 2020 During the bottom in first quarter or second quarter 2020 why we should be strategically looking at buying real estate and buying equities And if you've been listening to this podcast for a while or reading financial samurai for a while That is when we were really going on in we're finding strategies on how to convince people to sell to us Because doom was here.

You know, we talked about real estate love letters We're talking about analyzing earnings estimates and seeing what expectations are versus reality all these things They're great to talk about and we can never get it a hundred percent, right? But I think if we do our due diligence learn from others Pay attention to what's going on learn from past cycles.

I think we can build ourselves an edge So the edge right now is a little bit difficult because everybody is buying everything There's just massive amounts of liquidity everywhere and interest rates are probably gonna stay low for a long long time I'm gonna make the call that interest rates are gonna stay low for the rest of our lives because we've got this inflation interest rate cycle down pat Technology and productivity are our friends when it comes to managing inflation So our emerging markets exporting their deflation to us right now.

It's China. Maybe it's India next Maybe it's a country in Africa the world is getting smaller and it's going to continue to get smaller with better technology better connectivity and Therefore interest rates are gonna stay lower because inflation is gonna be contained finally, I just want to say that you don't have to go all in on real estate now and all in means buying a physical property With debt you don't have to leverage up to buy property.

You can buy a real estate ETF You can buy stocks like Home Depot a public REIT or a private eREIT from Fundrise There are many opportunities to invest in real estate without having to go all in you can invest in real estate more surgically if you Are worried personally, I'm not that worried about a housing market correction Because of all the fundamentals that are in place today I believe there's gonna be a huge rush back to big city living as people realize that the Opportunities the jobs the connections are all much better When you're closer to the people in power who have the money I was just out and about last Couple nights ago after a softball league game and I went out on a popular Street called Chestnut Street in the marina Which is the northern side of San Francisco and it was popping Every single restaurant was packed.

All the stalls outdoors were packed It is absolutely clear to me that big city living is back at the same time There is going to be a long-term demographic shift towards lower cost areas of the country because of technology because we can and because we all are more Accepting of working from home in conclusion.

I don't think we're at the top of the market Maybe a 20% chance over the next one or two years that we buy at the top of the market But that means there's an 80% chance the housing market continues to do well I'd love to hear from all of you on whether you've bought at the top of the market in the past or whether you think The market is toppy right now, and if you like this podcast, I'd appreciate a positive review Thanks folks, and I'll see you guys around