Hello everybody, it's Sam from Financial Samurai and in this episode, I want to recap a couple of posts that I wrote regarding the housing market. The first post was called "Understanding Why People Get Into Property Bidding Wars." Personally, I'm against getting into a bidding war because I know my emotions could make me go a little bit nuts and make me lose my financial discipline when buying a home.

And the second article is called "Analyzing Home Price Dynamics, A Guide to Smarter Purchases." Well, it's the first half of 2024 and the housing market is picking up steam. Here in San Francisco, I have seen multiple bidding wars on over a dozen houses on the west side of San Francisco and this has been remarkably different from the second half of 2023 when it was relatively dead as people waited and hemmed and hawed about buying property because mortgage rates were much higher and there's a lot of uncertainty.

However, with mortgage rates above 6.5-7% for at least 18 months now, it seems like the buyer is more comfortable with the way things are. And so, with pent-up demand, with every single month trending at below pre-Covid volume, that creates pent-up demand as given life goes on, well, that pent-up demand has got to be unleashed somehow and it seems like it's being unleashed right now.

But here are some takeaways that I have come away with after analyzing these type of price moves. First of all, beginning of the year, it's a new year, people are excited, pumped, they get their year-end bonuses hitting their bank account usually by February. There's a resolution to try to do something new or to improve your finances or maybe to buy a home.

And so, if you look historically, prices of homes at the beginning of the year generally go up and then they fade for the rest of the year with the slowest time during the winter fourth quarter, holiday, Thanksgiving, Christmas, any other type of holiday. People are just more chill and also people have spent down their excess savings and then it's the new year with new income, new bonuses and let's go.

So, if you're a buyer in a hot housing market or a strong housing market and you're seeing these bidding wars, I don't think you should get into these bidding wars, especially if the offer you're putting is above the 30/30/3 home buying guideline that I have given and represented for you all to follow.

Because if you surpass that guideline and if you win, you'll experience what is called the winner's curse where nobody else was willing to pay that price you were paying, therefore you were the top dollar, you won. But that also means that unless the housing market continues to go up, you have basically top ticked the housing market.

Now, thankfully, in a rising market, you're generally not going to top tick the market. Just like in a downward market, you're generally not going to bottom tick it and then suddenly a month after you bought, housing prices are going to rebound, right? It's generally not like that. But what I have seen is, this is since buying property since 2003 on my own, is that you don't really want to get into these bidding wars in the spring because it just pushes prices way up and it makes you emotional and it makes you undisciplined.

What you want to do is wait until the fourth quarter when that heat has faded. Generally that fade doesn't go below where the previous year's fade bottom was, right? So generally higher highs and lower lows. But it's much better to look for properties, I think, in the second half of the year.

Maybe inventory is down. Maybe you don't find that perfect, perfect house. But you don't overpay. You don't have the risk of overpaying. And so that's feedback number one. Wait until the fourth quarter instead of the first quarter. The second very important takeaway from my post on analyzing home price dynamics is that prices move quickly on the upside with real estate and very slowly on the downside.

If you look at the charts, I offer five charts of various homes that sold in the first half of 2024, you can see a price fade over a two year period from the highs of early 2022. And it just up, up, up, down, down, down. It goes a little bit until first quarter of 2024.

And then what you see happening are bidding wars for all these homes and the price chart literally spikes up and surpasses the 2022 high. So what does this tell you? This tells you, in my opinion, that it's better to be one year, two years too early when buying a home rather than one month too late.

Literally maybe one day too late because once you see those bidding wars go on, people just get a little bit nuts and then they just bid over asking, way over asking, and they just immediately reset the price. And this is very different from stocks where let's say you have a bad quarter, bad guidance, management did something shady, I don't know, competition was really fierce, bad government regulations, the stock could easily drop 5, 10, 15, 20 plus percent right after that announcement.

And on the flip side, the stock can rise 5 to 20% quite easily after positive guidance, blowout numbers, a new technology, new invention, and so forth for stocks. So stocks are more volatile on the upside and downside, whereas real estate is less volatile on the downside, but it seems to be quite volatile on the upside.

And why is it less volatile on the downside? Well, transaction costs. People might be locked into a low mortgage rate. People might not want to move because their kids enjoy the school. Owners might think, well, I don't believe my home price has gone down because they don't see liquid prices every single day transacting.

And then maybe home sellers are stubborn, like I won't accept 10% down or 20% down. I'm just going to stick to it, keep enjoying my life and ride it out until the good times return. So this is the typical mentality of a homeowner. But for a stock owner, that means just clicking the buttons left and right with no commission costs, so you can easily see how stocks are much more volatile than real estate.

The final final takeaway from my post on analyzing home price dynamics is that the downturns generally last between one, one and a half to four years, and the upturns generally last twice that. Hence, if you are a buyer, you're in the market and you notice that prices are softening, it probably is best to wait at least one year, wait until a year for prices to soften a little further and for home sellers to lose a little bit of hope and accept the reality that their homes have declined in value.

Again, home sellers are stubborn. They believe theirs is more special or they've got a lower mortgage rate and it's affordable. So why not just wait it out? The risk, however, of waiting too long, as I just mentioned, is that a nice home might pop up and everybody wants it, and then the prices just reset to all-time highs.

That is the risk of waiting a little bit too long. Ideally, you would wait perfectly, let's say, two and a half, three years, and then the very next month, home prices start rebounding. But it's really unrealistic to expect that type of perfect timing. Homes are slow moving. Real estate is much slower moving than the stock market.

So I would wait at least one year, but not too long, because I think it's better to be again one to two years early. So that maybe sweet spot of waiting once you see home prices turn down is probably one and a half to two years. Maybe you are one to two years too early before the home market rebounds, but that's okay because you didn't buy the home to only live there for a couple of years.

You bought the home knowing you're going to live there for five, seven, ten plus years, right? I hope so. Now, moving on to the second post regarding understanding why people get into property bidding wars. I really wanted to dig into the psychology why because I am against getting into a bidding war.

It's very emotional. Generally, you lose a bidding war because it's a war, right? Five, ten, twenty other offers, it's like, "Ah, probably not going to win." And then if you win, you have the winner's curse where nobody else is willing to pay that price. And then you got to sit with it and you got to hope that the economy doesn't crumble and crash and fall as soon after you sign that dotted line and send in that money.

So I surveyed my Twitter followers, my newsletter readers, definitely don't forget to subscribe at financialseminary.com/news to understand why you would get into a bidding war when you could have not get into a bidding war in the fourth quarter of last year, right? Why compete when you don't have to compete?

And so here was some of the feedback, anonymous feedback for one. Here, in 2022, "Two years ago, we bought a small condo in a college town for my daughter to live in while she attends school. I grew up near that town, so I'm familiar with and I love the area.

Yes, I perceived it as a bit risky to compete in a bidding war for the condo. However, we heard horror stories about so many college students in that area who struggled to locate suitable housing. We did not want to search and compete for a place every school year. Also, my daughter is very private and picky and hasn't done well with roommates, and I intend to keep the property for the long term, so I wasn't as worried about the exact purchase price.

We needed the property since I would have had to pay rent at another place if I didn't buy." Another feedback, Jaime Mraz, a realtor based in Phoenix, Arizona, said, "I am a realtor and my experience as a buyer's agent with overbidding has been circumstance." In other words, expiring lease landlord is selling or finding that perfect long term home coupled with sufficient wealth so they can afford it.

And then I asked, "Well, what about the fear of top ticking the market?" And he said, "Ah, that fear only exists on Twitter. I always counsel my clients on where we are in the market, but their circumstance and desire for the right home overrides market data, especially if they can comfortably afford it." Hmm, I don't know about that.

Another person, Marcus, 40 years old buyer in San Francisco, "Before buying our house, my wife and I resided in a one bedroom, one bathroom apartment, but with a baby on the way, we needed more space. Having worked as a software engineer at Tesla for five years, I was fortunate to walk away with approximately $2 million in equity after taxes.

Considering my current salary of $200,000 along with stock options and my wife's salary of $150,000, we can comfortably afford to put down $500,000 for a $2.5 million home. And this means we'd be looking at a monthly mortgage payment of about $13,700 and a 7.3% mortgage rate with over $1.5 million in cash and liquid investments left over.

And we anticipate a window of refinance to a lower mortgage rate within the next five years." So, that sounds rational to me. $1.5 million is a lot of cash and liquid investments left over. And then Janet, 38, a buyer in a northern Virginia suburb, she said, "During the winter, the housing inventory wasn't particularly appealing and we were determined to only make a purchase when we stumbled upon something truly exceptional.

Then in March, our dream home appeared, a spacious property with a stunning view. What made it even more appealing was that the sellers had recently renovated the house. Faring us from potential renovation headaches we'd heard about. With our children aged 8 and 10 and plans to reside in the area for at least a decade, we felt confident in our decision.

Schools are exodus and so are the public universities nearby. We've got a combined income of $280,000 and we purchased the home for $1.2 million that was listed for $1.1 million in Fairfax County." So listeners, what are your thoughts about the feedback on why they got into a bidding war?

Rational? Irrational? Well, here are three takeaways that I got from the feedback. 1. They can all comfortably afford the prices they pay. There seems to be a misconception from me and others that only desperate or financially inexperienced buyers participate in bidding wars, stretching themselves thin. However, it appears that well-educated buyers with strong financial profiles are the ones willing to overbid on homes.

This makes sense because you really need to have confidence if you're going to pay way above asking and beat out the competition. You need to know your finances inside and out, you need to be bullish on your income growth and the stability of your household and finances. 2. The second commonality of all the overbidders is that they all have children.

Every buyer mentioned have children ranging from yet-to-be-born to college students. And this is very important to know because once you become a parent, the desire to provide anything and everything for your children is astronomical. It's astronomical to the point of being detrimental sometimes when we over-provide. We pay for everything, over-coddle our children into adulthood.

And I discussed this phenomenon in a previous episode regarding the provider's clock. Here our provider's clock is ticking so loudly that we just have to provide everything for our children and never let them go. And then what happens is that they never leave the house and they never lunch and it becomes much tougher for them to be a provider going forward.

I believe the best time to own the nicest home you can afford is when your children are at home, when you have the most number of heartbeats at home. Because after they leave at age 18 or maybe by the age of 25, hopefully, you're not going to want to buy a bigger home.

You're probably going to keep your home for nostalgia reasons so you can have that room available for your little ones to come back and spend time with you before they go off on their own adventure again. Or you might want to downsize and simplify your life. Personally, I am very concerned about the future of housing affordability for my children.

They're only four and seven so in 20 years, I mean a simple 5% compound annual growth rate means home prices are 150 plus percent more expensive than they are now and there's already gripes about home prices being expensive now. So chances are after a 15 to 20 year period, home prices will be much higher.

And so as a parent and as someone who listens to personal finance podcasts and reads Financial Samurai, you know about compound growth. You know about historical home price growth, stock market growth, all that stuff, right? And so it might be responsible as a parent to try to invest in real estate today for your children because think about all the home prices that were available when your grandparents, our grandparents, were able to buy.

And we all marvel, "Wow, that was so cheap so long ago." Well, to stop that from our children saying that 20 years from now and our grandchildren from saying that 40 years from now, we just simply do the best to buy property today. Because there's another interesting phenomenon going on and that is the acceptance, the growing acceptance that real estate can be an asset class to provide income for retirement.

In the past, it might have been just, okay, you buy your primary residence, you buy stocks, you buy bonds and you have a pension. But now real estate as an asset class has grown. There is tremendous amount of capital going to funds, going to investing in built to rent properties or communities all across the country.

And as a result, I think this trend for returns in real estate is only going to continue. So in the past, let's say a household would only think about buying just one property, they might think about now buying two properties, one for themselves and a one rental property. Or maybe three properties, one for themselves, one for each of their two children and so forth.

And finally, the common theme from all these people willing to get into bidding wars is that they all plan to live in their new homes for a long time. The longer a property bidding war winner lives in their home, the greater their chances of building equity, not losing money.

It's the same idea with owning stocks. If you own stocks after a 10-year period, let's say the S&P 500, 94% chance you're going to have a positive investment return. And that percentage goes to 100% after holding for 20 years. Now currently the median home ownership duration is about 12 years.

So if you can live in the home and it's truly a forever home, 12 years should be no problem. And that winner's curse or top-ticking the market should fade, that concern should fade over time. So that's it, folks. I still recommend people be careful when bidding on a home.

I know it's super emotional. I know you envision yourself in the home for the long term, all the dreams and experiences of raising your children or running your dog around the backyard or throwing luau's, whatever it may be. I know those dreams are powerful motivators to bid, but you have to have discipline because this is through my experience over 22 years.

That is, if you miss out on a home, there will always be another home around the corner to buy. All right, folks. That's it for this episode of the Financial Samurai Podcast. If you enjoyed it, please leave a review, share, subscribe, it helps keep me going. And also, don't forget to subscribe to the Financial Samurai newsletter at financialsamurai.com/news.

And if you want to invest in private real estate more strategically because, well, there's a lot of opportunities around the country with higher yields and lower valuations, you can check out Fundrise, a long-term sponsor of Financial Samurai at financialsamurai.com/fundrise. I encourage you to listen to the podcast episode I had with Ben Miller, CEO of Fundrise, because we both think we've passed the bottom of the real estate market downturn and Fundrise has invested over $800 million over the past 15 months due to all the opportunities it sees right now.

Thanks so much, everyone, and until next time. Be well. (explosion)