Hello, everybody. It's Sam from Financial Samurai. Long time no speak to y'all. I've been busy writing, but sorry I haven't been busy podcasting because priorities, priorities, priorities, priorities. Got a couple of kids, got to manage, got a website to update and to write about. And in this episode, I just want to talk about the housing market because the housing market is on fire nationwide and probably globally too.

And it's one of my favorite topics. I love real estate. Real estate accounts for about 40% of my net worth. I try to limit anything to under 50% just to be diversified. But clearly real estate is one risk asset that I like that I think is going to benefit from an inflationary environment because inflation acts as a tailwind for real assets and inflation helps whittle down the real cost of debt.

So the real cost of your mortgage. So first, let's talk about where we've come from. If you've been listening to Financial Samurai since early 2020 or before, you will know that I've been talking about real estate for a while now. And in 2020, I got all over real estate.

I talked about how real estate prices get impacted when stocks decline. A March 16 publication on April 19, 2020, I published a post called Real Estate Buying Strategies During COVID-19, where it talks about trying to take advantage of the fear that any seller has to try to get a good deal.

I also talked about the best near term real estate buying opportunity, which is right in your own city because there's intra city migration happening back in 2020 and still in 2021 and I think beyond, where people are going to relocate from more expensive, closer to downtown areas of the city to less expensive, farther away portions of the city.

So if you can find opportunities, go explore neighborhoods you seldom ever visit, you thought were just too far away and find it because I think strategically, it's a smart move because you don't have to disrupt your entire ecosystem, your friends and so forth. You can still get paid the same because you're in the same area as where you used to be working.

So I think that's a really smart move. And then finally, I published a post on September 8, 2020, called It's Time to Focus on Big City Living Again. Big City Living. We're talking the classics, New York City, San Francisco, Los Angeles, Seattle, DC, Boston, and so forth. Because I think, at least back then, and I still think right now, the opportunity to buy big city real estate is right here, right now.

And I'm personally looking to buy a pied-de-terre in Manhattan. It's one of my goals and one of my regrets of not buying real estate in Manhattan when I was there back in 2000 and 2001. But we'll discuss that in some other episode. And in this episode, I want to talk about all the reasons why I think the housing market won't crash anytime soon.

I think there is a feeling that the real estate market is a little too frothy. I've actually noticed searchers online land on a couple of my posts warning people about the housing market from older publications and also warning signs on what to look for before you buy a house.

So I think this is really healthy. It's good to be skeptical in a hot market because you don't want to be that one person, the one guy or gal who is the winning bidder out of 20 bidders, right? That's called winner's curse. That means out of the 20 people, you are the only one willing to pay that price.

You don't really want to do that in any market, especially in a hot, hot housing market because let's say you do bid 10%, 15%, 20% above asking and it's 10%, 15% above the actual market value. So we're talking about re-rating in terms of pricing. That could pose a problematic for future gains, right?

Because the market might have to catch up two or three years to get to your new high watermark and the market might never catch up. And also if you're trying to buy a property with debt, with a mortgage, you're going to have to have appraiser come out and appraise the property for your winning bid.

And if you bid too high, you might not be able to borrow that amount of money you were expecting. So you might have to cancel that transaction or you might have to come up with a higher down payment. So just be careful in a bidding war. San Francisco, I've been in San Francisco since 2001.

We are famous for bidding wars and generally it's worked out well, but sometimes, right, it doesn't, right? In 2006, 2007, 2008, 2009, not so good. So be careful. So where are we now in the housing market? Well, as of April 11th, 2021, the median sales price of homes sold is $341,000.

So depending on who you talk to, it's like 320 to 341,000. So this is looking at MLS data, the multiple listing service data, and $341,000 is up 17% year over year. That is crazy. That is unsustainable. So folks, first half of the year, it's generally strong and then it kind of fades into the summer and then it picks up in the fall and then fades again.

But up 17% year over year is unsustainable. The pace of price growth has to slow down because it's the law of large numbers. So in the second half of 2020, things started really heating up or started to heat up. And so you're going to have higher comps. And so the pace is probably going to slow down to 10%.

I'm forecasting with pretty high conviction that the housing market will continue to make new highs for the next three years. I've wrote that in my post and I think that average price growth is going to be in the high single digits. So we're talking 7, 8, 9%. And if I'm wrong, well, I'm just going to suffer the consequences as anybody with skin in the game does.

There is always risk when it comes to buying risk assets. So we've all got to be big boys and girls and understand that we could lose money or we definitely might not be able to make as much money as we thought. And we have to be okay with the consequences.

So let me rattle off 15. Man, I thought it was only going to be 10, but 15 reasons why I don't think the housing market will crash anytime soon. So reason number one, rates will stay low for longer. If you've read Financial Samurai since 2009 when it started, I've been talking about rates being low for the rest of our lives and it's going to continue to go down or continue to stay suppressed.

Rates have been coming down since 1980s, folks. And the reason why is due to better information efficiency, technology, global coordination, being able to manage inflation better, and learning from previous cycles. Oh, and of course, productivity gains as well. We are much more productive now than we were 10, 20, 30 years ago.

You and I can do a lot more things than people from back in the day. And that's thanks to technology productivity gains. So given interest rates are going to stay lower for longer, and probably for the rest of our careers, I truly believe this, rates are going to be a tailwind.

They're going to be a continued tailwind. They're not going to be a headwind that a lot of people fear. All right, the second reason why the housing market won't crash, inventory. Inventory will remain depressed for longer. COVID has permanently increased the intrinsic value of real estate. We're all spending more time at home.

We're working at home, we're playing at home, we're teaching our children more at home. Therefore, if we're spending more time on a product, or any kind of good, or service, we appreciate it more. And I think we're probably all going to permanently spend a little bit more time at home at the margin.

During perilous times, we hold on to what we treasure most. This is why real assets like homes held their value while stocks crashed 32% in March 2020. Unlike a home, you don't need stocks to survive, right? We need shelters to survive. So if you can have shelter, and it can ride inflation, and generate income, perhaps, and appreciate in value, I mean, that's a win, win, win, win, win.

And imagine you're a homeowner right now, do you really want to sell your home? Well, yeah, maybe, why not? Because the demand is so high. But do you really want to sell your home if you actually need to buy another home? I think the answer is no, unless you have a lot more capital, and you're willing to duke it out with the hordes of other people looking to buy homes right now, because inventory is lower.

Therefore, it is only logical to hold on to your home for longer. Further, what if there's another black swan event? You know, let's say it's another pandemic, because there's another strain or whatever. Your home is almost like an insurance policy to live at least a comfortable life. Reason number three, potential homebuyers are much richer post pandemic.

Let's be frank here. Let's look at our investment portfolios since January 1, 2020. Let's look at our net worth gains since January 1, 2020. I'm hoping the majority of listeners and readers of Financial Samurai are much wealthier now than pre pandemic. I am most people I know are. And so in this scenario, if you're wealthier, more money is going to flow towards real estate, more money can flow towards real estate, and more people can buy more real estate, they can afford more because they're just wealthier.

Four, domestic and foreign institutional demand is increasing. It's very clear that institutional real estate investors are looking for single family homes and rental properties because they're searching for yield. You're seeing it in the news and every single major publication. I talked about it before, where the New York Times highlighted actually Fundrise buying this community property in Houston for like 32 or 34 million 124 homes.

And it was cheaper on a single family home basis than the median home price in America. And so I was thinking to myself, that's actually quite attractive for the expense of capital on the coast looking for higher yields. So it's not just domestic institutional real estate investors looking to buy more real estate, sooner or later, and I think it's probably going to be sooner, foreign institutional investors are going to be buying up cheap American property.

American property is so cheap compared to international property. And then if you talk about how much we can make to afford this property, there's just no comparison. For example, in Vancouver, Vancouver is as expensive as Manhattan and San Francisco. But can any of you guys name two companies in Vancouver who are paying their 22 year old college graduates over $100,000 a year?

I can't and I'm not being facetious, I just really can't. So the income side of the equation doesn't really support the property prices in Vancouver. And I don't think Toronto, Paris, Hong Kong, Singapore, all these international cities are much more expensive on an income adjusted basis than the most expensive cities in America.

And then of course you look at 18 hour cities and so forth, there's a lot of great value in America. The median household income is $68,000 and then the median home price is somewhere around $320,000 to $340,000. So that ratio is pretty solid. If you go to other big cities across the globe, the ratio is much, much higher.

And given money is very fungible, I just see foreign money coming to the United States and buying up our property. So we better buy up our own property first before the foreigners buy our property. All right, next reason, number five, the Federal Reserve and the federal government are pro-ownership.

Just look at what they are doing, pumping out massive amounts of stimulus. They have forbearance packages to help renters and homeowners. You got mortgage interest deduction, $250,000 and $500,000 tax-free profits based on single or married status. Programs for first-time homebuyers where you only put down 3%. 1031 exchange, so you don't have to pay capital gains tax.

You just continuously defer any capital gains on your real estate. And then historically, there's been bailouts of homeowners and big lenders. So looking at history and looking at what the government is doing right now, you would be a fool to go against the federal government and the Fed. You never fight the Fed, folks.

You will end up losing money. And if you fight the federal government, you're going to get fined or go to jail. All right, reason number six, demographic tailwind. Fannie Mae estimates there are 88 million people in the millennial generation. That's the highest number I ever heard. It seems like the millennial generation continues to expand, but they're talking about people born between 1980 and 1999 now.

In the past, it was like 1995 or something. Whatever the true number of millennials is, the point is there is a huge population of 22 to 41-year-olds who are soon to be in their prime home buying years or who are currently in their prime home buying years. So all the previous talk of the millennial generation renting for life and shunning home ownership is BS.

It's the same as it ever was. Everybody who hopes to one day find the love of their lives and own a nice home and start a family-- not everybody, but a lot of people, right? Work hard to provide for your kids and then retire with a paid off home and et cetera.

These ideals, the middle class lifestyle ideals that we've talked about so much, they don't go away. They're the same as it ever was. Millennials have been late to the home buying trend due to more education, more student debt, delayed unions, and more competition. And it's interesting. If you look at the median age for home buyers right now, it's shockingly high.

It's like around 47 years old. 47 years old, folks. But the good thing is that hopefully all of us are living several years longer. But if you're buying a home at 47 years old, the bright side is you hopefully have your finances much more put together than someone who's 25 or 30 years old.

You've had more time to save, invest, and so forth. And hopefully, you're more mature where you want to buy property with someone and settle down and stay that way. Of course, life always throws curve balls, and we just never know. All right, the seventh reason, multi-generational wealth transfer. The boomer generation, those born between 1944 and 1964, is one of the wealthiest generations in history.

Probably the wealthiest because they've been able to invest and save in the longest bull market in history. The boomers have about $30 trillion in wealth they will be transferring to their children when they die. And so they're either going to start transferring it now or over the next 10, 20 years.

Hopefully maybe longer because I would love my parents to live as long as possible. But what's also happening is that they are transferring money right now while they're living because they want to see the benefits, the joy of their giving to their kids and to institutions. So revocable living trust business, that's booming.

Inventing of $15,000 a year, that's the gift tax exemption, is booming. Grats, people are sending up grats to avoid estate taxes as well. All these things are helping younger generations buy homes. Again, in San Francisco, it often takes bank of mom and dad to come up with at least the down payment to buy a home.

It's very ubiquitous. It's like 50 to 60% of first-time homebuyers in San Francisco have help from their parents. And so that's just going to happen throughout the entire country. All right, reason number eight, homeowner equity cushion is massive. If you look at the homeowner equity and mortgage debt outstanding chart by the Federal Reserve Board, you'll notice that homeowner equity is around $21 trillion versus $11 trillion in mortgage debt outstanding.

So that's kind of like having 65% equity in your home and a loan to value ratio of only 35%. Most first-time homebuyers put down 10% to 20% for a loan to value ratio of 80% to 90%. So if you have 65% equity in your home on average, you've got a massive equity buffer.

It's going to take a lot for you to foreclose or short sale your home. There's no way that the average homeowner is going to fire or sale their home if they have that much equity. Okay, you never say no way, but it's going to take a lot, a lot, a lot.

In fact, with so much home equity, what's more than likely going to happen is the typical homeowner will take out a home equity line of credit. All right, reason number nine, household debt as a percentage of disposable income is very, very low. I've got a great chart on my site that shows that US household debt service as a percentage of disposable income is about 9%.

That's like a 50 plus year low. In 2007, it was 13.2%. So the absolute percentage numbers aren't huge, but the decline, the drop once you see the graph is quite significant. And it makes sense. People have made more money, they have more equity, rates have gone down, mortgage levels have gone down.

Therefore, debt service as a percentage of disposable income has gone down. All right, 10, inflation is picking up steam. We talked about this earlier in the podcast. The Federal Reserve said they're going to keep the Fed funds rate at 0% to 0.25% for longer in the face of a recovering economy.

They want to make sure that employment gets down to 3%, 4%, basically full employment. And they're willing to let inflation ride higher than the 2% target they have. And the funny thing is the 10-year bond yield has already gone up from 0.51% in August 2020 to about 1.55% today, whereas the Fed funds rate again is at 0% to 0.25%.

So the Federal Reserve can easily raise the Fed funds rate by half a percent or three quarters of a percent and the market will be probably like, okay, that's fine because the yield curve will still be upward sloping, right? Short duration to longer duration. And so if inflation is coming, which it certainly seems like it is, you want to be long things like a hospital or services, private colleges and universities, medical care services, and housing.

That's what you want to be long. But you really can't buy a hospital, a college, university. You can buy UnitedHealthcare stock and so forth, which I have, because they'll just gouge you forever and keep on raising your healthcare premiums. But what you can really do is buy housing and get long inflation because at the end of the day, that is the end good.

Real estate is the end good. You use money, you make money to buy housing, food, tuition, education, services, and so forth. So if you can buy the end good, which is real estate, which everybody needs a home to live in, and it can cost cheaper over time, thanks to inflation, and it can rise in value partially thanks to inflation, it's just such a win for the average person, which is why real estate is my favorite asset class for the average American, average person to build wealth.

Inflation really, really sneaks up on all of us, folks. It's pretty amazing. You hold an asset for 10 years, and it's just pretty nice to ride inflation instead of get beat up by inflation. 11. The amount of funny money is exploding. How many people are bragging to you about how much money they made in cryptocurrency, maybe NFTs, maybe GameStop, AMC Theater, whatever growth stock.

And the reality is more people are making these gains. It's not like they're making and losing it all. People are making these multi-bagger home runs. And so people have learned from the past, the 2000.com era, where they're not just going to round trip it to zero, like what they did with Webvan or Pets.com.

They're going to turn it into a real asset. And so that real asset is going to be real estate, art, maybe nice watches, jewelry, whatever it is. That money is going to flow through to real assets. All right. Asset number 12. Credit is still very tight, which is why the housing market is probably not going to crash.

It was like pulling teeth refinancing my mortgage in 2019. I think it took three months, at least two months, but I think it was like three months. It was so painful. They just asked for more and more dockets, more and more proof. And I had a good amount of assets with the bank that I was refinancing with, and they didn't care.

And it felt like, I don't know, an intruder. And then in 2020, when I got pre-approved for my mortgage, that took about three weeks versus two weeks on average. And going through that process is also very, very arduous. But because I was pre-approved, I already went through a lot of the pain.

So it was just like updating the documents. But getting a mortgage or refinancing a mortgage is not, it hasn't been easy since the global financial crisis. The average credit score to get a mortgage is over 720. And if you look at mortgage originations by credit score, the dominant credit score level for getting mortgages is 760 plus.

760 plus is excellent, folks. I was trying to get my refinance on my new mortgage. They said I could only get the best rate if I had 800 plus. And I was just at the tip there. I was like 808 or 810. I mean, I don't know how to control my credit score.

I don't purposely try to make it better. I just live my life and pay my bills. But it was not easy. And so if you look at this chart on my website, you'll notice that basically something like 80% plus of mortgage originations are for people with credit scores above 720.

So if you have a credit score above 720, it should mean that you have reasonably good finances. You haven't foreclosed before or gone bankrupt and stuff like that. And if you add to the fact that incomes have been rising and home equity has been rising, it's just hard to see people with good credit and good jobs and good financials let go of their properties for fire sale prices.

All right, reason number 13, rents are rebounding in big cities. Rents have been doing well in 18 hour cities, but in 24 hour cities like Manhattan, New York, rents are coming back, baby. I did write a post back in October 2020, highlighting how the demand for a single family home I was renting out was very, very strong.

In the past, I would only get roommates. You know, it was four bedrooms. I would only get like four dudes. It's always four dudes in San Francisco. But this time it was families looking again, because it's that migration west in my city, where it's less expensive, less dense, less crowded and more affordable.

So bubble concerns, you know, that is legitimate. If prices keep on going up and rents go down, that means valuations are going up, right. But now you are clearly seeing rents rebound in San Francisco, Boston, Chicago, Seattle, New York, Washington, DC, they're rebounding and they're going to get tighter and tighter.

Everybody is rushing back. The herd is coming back, just like the herd left. I know a lot of people who decided to go and live with their parents to save on rent and also to spend more time with their parents. That's a win win. And they're like, you know what, I'm going to come back and do independent living again.

And it's really tightening the rental market. So that's good for rental property owners. All right, let's talk about reason number 14. The cost to build housing is rising. You may have heard that lumber prices are up 3x in one year as demand outstrips supply. Therefore, framing costs to build a house are up at least 2x as lumber accounts for 70% of framing costs.

And then there's labor costs. My guy who, you know, has been working with me for five years is charging me 50% more now. And it's because demand is so high. So if it costs more to build a home, it's really hard to imagine scenario where prices start declining because people have to cover their costs.

Otherwise, they won't build and they won't sell their home. And also, it's harder than ever to get a building permit now. It's kind of nuts. I've been waiting for three months, more than three months to get my building permit because San Francisco building and planning department is all backed up thanks to COVID.

And thanks to, I would say, inefficiencies by that department. And it's just really maddening. So if that's backed up, it's hard to get a permit. You know, it's harder to get supply on the market. And so that's another reason why I think price is going to continue to do well.

And then finally, reason number 15, why housing market won't crash. Selling costs are still too high, right? It still costs 5% on average now to sell a home. Whereas it now costs $0 to sell a stock. Whether the stock is worth $100 or $3,000 plus like Amazon. You know, if the cost to sell a home dropped to zero, or let's say not zero, right?

Because that's not realistic. Let's say it becomes a flat cost or the commission goes down to, let's say, 3% or 2%. The amount of supply that will come on the market would be much greater. I think there'd be tons more supply. Therefore, the real estate industry is actually self-throttling, which is beneficial for homeowners who never sell.

In addition to high real estate selling commissions, there's also the cost to prepare the home for sale. These costs include painting, refinishing the floors, staging, so forth. There's also transfer taxes, recording taxes. It is a pain in the butt to sell a home. You've got to be pretty motivated to sell a home during the pandemic, one.

And two, you've got to be, I don't know, there has to be some kind of life event. Divorce, you're changing your life, you're moving across country, you're going to go to Hawaii, you're going to go to Thailand. Something that really has to motivate you to sell a home. So thank goodness the real estate industry has kept commissions so high.

Otherwise, volume would probably explode. All right, now that you have my 15 reasons why I don't think the housing market is going to crash anytime soon, the question is, should you buy now or when should you buy now? I believe ideally the best time to buy property is when you can afford it and when you can stay somewhere for 10 years.

That's ideal. Whether you can afford it is based off, I think, my 30/33 rule for home buying. Check it out. The easy rule is to spend no more than three times your household income on a house. You can probably stretch it to 5x, 5x your household income given rates are so low, but don't go beyond that.

Another good time to buy is during the winter months because anybody listing during December, the bad weather, holidays, is generally more motivated than someone who can just wait for the great weather in the spring and when people are more motivated to buy. And then the other time could be when the moratoriums end.

That could be in September or sometime in the second half of 2021. It could be kicking the can down the road. And the idea is if the moratoriums end, more people lose their homes. It's that simple because they cannot afford to pay the mortgage or the renters can't afford to pay their rent.

And then the landlord has to basically eat all the costs of them foreclose. And banks are probably licking their chops to see a lot of foreclosures. Why? Because the housing market is on fire. The housing market has done well over the past many years now, but especially during the pandemic.

So if you're a bank, you're thinking to yourself, "Hmm, if you foreclose or you can't pay your mortgage, I'm going to be able to take over the home for cheap and then resell it at a higher premium." As a capitalist, you know the senior bankers at these lending companies are thinking about this.

They don't want to get into the home ownership, buying and selling business. But there's a huge arbitrage here where they could just assume a lot of homes and then just resell it because there's a huge amount of institutional demand. So as a retail buyer, what you can do is try to stack cash, save your money for that down payment so that potentially there might be an uptick in supply in fourth quarter of 2021 or first quarter of 2022, where you can take advantage.

You're probably going to be competing against the institutional investors and everybody else who has a similar idea, but it's as good of a time as any if you're not going to be buying now. And the final time to buy might be the summer. Summer is usually the slow period because vacation, right?

Summer vacation and kids are not in school. So if people are all on the beach somewhere, maybe there's just less demand. Every single market, doesn't matter if it's a bull or bear market, there's always an opportunity. You just have to go find it, whether it's a stale fish listing, it's a mispriced listing, it's a bad time listing where it's out of town real estate agent who has no Rolodex, no connections.

There's always an opportunity. And again, try not to be the winning bidder out of a mega bidding frenzy. It's generally not the right way to go. All right, everybody, I hope you enjoyed this episode about my favorite asset class to build wealth. I'm going to be monitoring the housing market like a hawk.

Again, given 40% of my net worth is geared towards housing. And I think it's going to do well, it's going to have its ups and downs. But you know what, you don't really care as much as a real estate investor because you don't see the daily price movements. Thank goodness you can just wake up years from now and be like, okay, it's done good.

Good. All right, I'm going to try to do more episodes going forward. But at the same time, I'm also trying to get myself out of doing more online. I just want to really do less. And I'm really focused on just taking it down as things get better in the economy.

And I hope you guys do too. You know, don't try to grind so hard anymore. Really try to find more balance. If the pandemic has taught us anything, it's that life is precious and that we need to focus on more important things like our relationships and our friendships and our health.

So I really wish you guys the best of luck in your real estate search. And if you enjoyed this podcast, gosh, it took a while to record. But I'd appreciate a positive comment and a review. And I'll see you guys around. Thanks so much. Thanks so much.