Hello everybody, it's Sam from Financial Samurai and in this episode I want to talk about buying a house in 2023 because if you have been waiting since October 2022 to buy a house I think a window, a big window has emerged. Now it's not a table-pounding buy like I thought in mid-2020 when my conviction level is like a 8.8 out of 10.

It's more like a 6.5 to 6.8 out of 10 conviction level but that's high enough where I think if you buy now you're not gonna regret it especially if you negotiate hard and well because I think in one or two years home prices will be higher than they are in mid-2023.

So to recap what was my 2023 housing price prediction? You know obviously we're only four months in so anything can happen but I expected about an 8% decline in the median home price because of higher mortgage rates namely an overly aggressive Fed, a potential recession in the economy, earnings recession in the S&P 500, and high prices that were simply unaffordable to a lot of the median home buyer.

But if you look at the data you'll see that on the East Coast home prices seem to be more stable or even up a little bit. On the West Coast home prices are down 5 to 10 percent so given I'm on the West Coast I'm seeing more opportunity and because I'm seeing more opportunity I'm more bullish.

So keep that in context as you listen to this podcast and as you read my post on buying a house in 2023 in the show notes. So first of all where are we in terms of the national median home price? Well according to Redfin March 2023 saw a 3.3% decline in home prices.

So if you take a look at the show notes and take a look at the chart you'll see this big decline in home price appreciation because it's now depreciating. February 2023 showed the first year-over-year decrease since 2012 and this is the largest year-over-year decrease since 2012. So if you're a buyer this is great if you're an owner well not so much but look at 2022 the S&P 500 went down 19.6% and the housing market well it was kind of flat maybe it was down several percent right.

So if you can buy a home between 5% to 10% below last year's levels I think you're gonna do pretty well. So here are three reasons why I think buying a home in 2023 mid-2023 and maybe fourth quarter 2023 is a safer bet now. Nothing is a guarantee but I think it's safer to wade in the waters and I don't think you're gonna regret it a year or two years from now.

Alright first of all there is a lot of pent-up demand especially since the fourth quarter of 2022. Pent-up demand for homes yet inventory is still below 2022, 2021, 2020 and pre-pandemic levels. Since October 2022 specifically there's been a stalemate in the housing market. Sellers don't want to sell because they have great mortgages many under 3% so why sell and then lock in a higher rate mortgage and buyers didn't want to buy because well mortgage rates were going up the bear market was happening the Fed was aggressive and it's like well why don't we take a wait-and-see approach.

So it's been seven months since October 2022 and every month that goes on with one person not buying a house creates more pent-up demand and what have we all been doing since the second half of 2022? Well we've been saving more cash and we've put in putting that cash to work in higher yielding Treasury bonds, Treasury bills and money market funds which now offer four to five percent and that's a really attractive return based on the past ten years when we were getting less than you know 0.2% on our money.

So this combination of more cash and more higher yielding cash has built up over seven plus months. But the thing is life continues to go on while you wait for the opportune time. You know babies still get born, people still get married, people still relocate for better job opportunities and so forth.

So as this pent-up demand builds I think the wave of potential capital back into the housing market is going to get stronger and stronger and I think that wave is coming by the end of this year. Personally I have been saving aggressively if you saw my post on how I'd invest $250,000 today, 60 to 70 percent of that cash has been used to buy Treasury bonds and then the remaining has been nibbling in the stock market, private real estate market as well as the public real estate market.

Look at the home building stocks. The home building stocks are on fire in 2023 up 20 to 30 percent. DR Horton, Toll Brothers, KBH, it shows there's a lot of demand for at least new homes and well these home builders are deploying a strategy of buying down the mortgage rate to make it more affordable for buyers but this is a good piece of evidence that there is demand out there for homes.

Now then if you look at let's say VNQ, the Vanguard Real Estate Index ETF, it's lagging and I think this lag, the six-month lag, is important to understand if you want to be a good real estate investor. Which brings me to point number two, the stock market has rebounded a lot in 2023 by about 8% this year and even more since October 2022 when the rate hikes really started getting more aggressive.

In general, real estate lags the stock market by about six months. So the bottom of the S&P 500 was in October 2022, six months ago and since then we're up double digits right? Therefore if you can buy real estate with prices down five to ten percent and the stock market stays flat over the next six months, I think you're gonna see a catch-up in real estate prices over the next six to twelve months by five to ten percent.

And this is why I say this window of opportunity is emerging. The window might only be, I don't know, three four five months at most before the capital, which is always looking for the highest rate of return, fills up this gap. And once that gap is filled, the spread, you know, the catch-up just narrows to the point where, well, you don't have as great of an opportunity to make money.

Psychologically, I think all stock investors, especially long investors, feel better right now. We feel richer. Man, just a month ago we had bank runs, deja vu of 2008 with Lehman Brothers, Bear Stearns, Washington Mutual all going under. And I definitely thought, hmm, could this be the start of a cascade of bank runs?

So far it hasn't. You know, obviously there's probably more banks out there, plenty of banks that are losing money if they mark to market. However, it looks like the Fed is not gonna make the same mistake as it did in 2008 and it's going to step in and be the lender of last resort, which is good for the overall economy.

Also, if you look at what Wall Street strategists were forecasting for the S&P 500 at the beginning of this year, the median price target was about $4,033. It ranged from around $3,400 to $4,600. And sure, there are definitely bears still out there, like Mike Wilson from Morgan Stanley, who's predicting $3,000 on the S&P 500.

But then there are bulls out there, like Tom from Fundstrat, who's always perma bullish, who's focusing on $4,600 and above. So at current levels, around $4,140, $4,150, we are a couple percentage points above the median S&P 500 target price for 2023. And I think that makes people feel good.

We feel better, we're richer, we spend more money on things we don't need and on experiences that we enjoy. And that's good for corporate profits. And we definitely are gonna spend money on housing because we still spend so much time at home. And we all know that real assets hold their value much better than funny money paper assets.

I think we've gone through this multiple times before to the point where owning real assets like real estate, jewelry, fine art, wine, fine wine that can be consumable, you know, at least there's some value in these things that we buy and it just doesn't go up and down on our computer screen that offers really no value.

So I expect more stock market capital to flow into the real estate market. Personally, I'm reducing my exposure to public stocks from about 30% of my net worth to 25% of my net worth. At current levels, $4,150, it feels like I got a second chance. Yeah, we're still down from the highs, but we're not down to $3,577, the recent low.

It feels like, ah, second chance to take some profits and to buy real assets and to stabilize my net worth volatility. And I think many people feel this way. Alright, the final reason why I think buying a house in 2023 is gonna be okay is because mortgage rates have peaked.

If you look at the data, June/July 2022 was the peak in CPI inflation. We were at about 9.1% in June 2022 and the latest data in March 2023 showed 5% for the CPI. So clearly, inflation has peaked. As a result, mortgage rates have peaked. As a result, the Federal Reserve is thinking, well, maybe one more rate hike in May and that's it, we're gonna hold.

And if you look at expectations for future Fed funds rates, the expectation is there's gonna be Fed funds cuts over the next 12 months after May. So rationally, many buyers, many home buyers, just have been waiting to see how high the Federal Reserve would take the Fed funds rate and waiting when will inflation finally break.

You know, a couple months does not a trend make, but now it's seven, eight, nine months of declining inflation. So as a result, we see the light at the end of the tunnel and when you see light at the end of the tunnel, you can better model your future housing expenses and you have more conviction to buy.

Now, savvy real estate investors actually don't mind getting a mortgage at a high rate if they can get a purchase price at a much lower price. Because at the end of the day, you can always refinance your mortgage, but you can never change the purchase price or the sale price of a home.

Therefore, if you were to buy a house, let's say in mid-2023, let's say with a 6.25% mortgage rate, yeah, that's not the best, but if you got a great deal, let's say 8 to 10% off, and then mortgage rates fall by another 1 or 2% in a year, you can always refinance and save money.

And as mortgage rates decline, demand for housing increases, thereby helping push up home prices. Alright, now that we talked about the three positives to potentially buying a house in 2023, let's talk about three or four negatives. The first negative is that we go into another recession. Recession is technically two consecutive quarters of downward GDP growth.

We had that last year and we have an earnings recession in the fourth quarter of 2022 and first quarter of 2023 so far. So maybe we're already in a recession and if this is as bad as it's going to get, well, things aren't too bad because the stock market and investors are forward-looking.

However, if we fall back down into a deeper recession or a recession that's worse than expected, thanks to, you know, the Fed funds rate going to 5 to 5 and a quarter percent, and there's also a lag, right? Once you start tightening, there's a 6 to 12 month lag where consumers stop spending so much and start saving more.

Then that could weaken housing demand. That probably will weaken housing demand. What I'm looking for is the unemployment rate, which is currently at 3.5%, going to 5%. If we get to 5% on the unemployment rate, it's very feasible because back in March 2020, the unemployment rate went to like 14%.

Then I expect housing market demand to slow. And then if we go to like 6.5, 7%, I definitely think the housing housing prices will probably go down 10 to 15% if we get to that bad of an unemployment level because that's millions of jobs lost. But I assign, you know, maybe like a 30% chance we get to 6% unemployment.

I think things are going to be kind of, you know, will fade a little bit. Unemployment rate might go to 4%, 4.5%, but it's kind of generally in line with the natural rate of unemployment level. So I think it's going to be fine, but that is a risk. The other risk is that the stock market goes back down another 10 to 20%.

Another bear market, right? We do have highly paid Wall Street forecasters who are thinking the S&P 500 could go to 3,000 to 3,600. And if that's the case, I think people are going to step back and say, "Wait a minute. We're probably in a recession again and let's hold on to our cash that's earning hopefully over 4% while we wait things out some more." I only sign about a 20% probability we go back to the recent low of 3,577 on the S&P 500, but it could happen.

So recession and a bear market and stock market. The counterbalancing mechanism is a decline in Treasury bond yields, right? Because if things are going bad, people are going to go flight to safety, which is Treasury bonds. And then Treasury bond yields go down and mortgage rates go down because mortgage rates tend to track the 10-year Treasury bond yield.

Another risk to the buy housing in 2023 call is if inflation stays sticky at 5%, right? It peaked at around 9.1% in mid-2022. It's now about 5%. If it stays at 4.5% to 5.5%, well, that's not gonna be good because the Fed will raise the Fed funds rate or at least keep it at 5% to 5.25% for longer than expected.

Right now, the market is expecting the Fed to cut within the next 6 to 12 months after it raises in May. I mean, I don't know why they need to raise and then cut again. Just keep it the way it is. But that's what the market is saying. Sticky inflation is a risk.

I mean, I just went to fill up my tank and it was a hundred bucks because $5 per gallon here in San Francisco again. So if energy prices go up, well, there's a risk to inflation. But the good thing is that shelter inflation, i.e. rents, have been coming down over the past 6 to 8 months and that's a leading indicator.

Whereas the CPI index that we see, you know, is always a lagging indicator. So over the next 3 to 6 months, because shelter inflation has been coming down, which accounts for about 30% of CPI, we should see downward pressure, further downward pressure in the inflation number. The final risk to the housing buy/call in 2023 is commercial office real estate.

So, so far, the return to work trend has been happening, but it might be slower than expected for building owners and lenders. A lot of these commercial office buildings are on floating rates, not long-term 30-year fixed rates. So as rates go up, you know, you're gonna see an increase in defaults of commercial office building owners.

And that could cause a cascade effect, a negative effect, for the lenders who lend to these owners. We saw the bank runs with SVB and Signature Bank and Credit Suisse, and it just takes a little bit of spooked-out investors where, you know, one bank says they had too much exposure to office buildings, and then that could create a domino effect.

So please be aware of the commercial office building space. More companies are asking their employees to come back to work because I think they're finding that productivity might not be as high as working at home, even though I think most people who are on it are way more productive at home.

But I think it's human nature, right? The human nature to just, you know, go walk the dog, take a nap, go play pickleball. Here, I'm at the pickleball court right now recording this podcast because, hey, it's a really nice day. It's just human nature to not work as hard if nobody is governing you as much.

So I do expect more employees to go back to the office, which will help the commercial office building space, but it's just something to watch, folks. Alright, I hope you enjoyed this episode. Send me an email or leave a comment in the post letting me know what you think about buying housing real estate in 2023.

If you're interested in investing in real estate, private real estate that is, check out Fundrise at FinancialSamurai.com/Fundrise. It invests mostly in the Sunbelt region where valuations are lower and net rental yields are higher. They focus on single-family and multifamily homes, which are much more sticky than commercial office real estate.

If you enjoyed this podcast episode or this entire series, I'd love a positive 5-star review. And don't forget to sign up for my weekly newsletter at FinancialSamurai.com/News so you never miss a Thanks so much.