If you want to find better value when buying a house, then avoid the Frenzy Zone. The Frenzy Zone is essentially the housing price point where the majority of people can buy. If you look for homes priced above the Frenzy Zone, demand drops of significantly. As a result, you should be able to get a better deal.
The housing market is finally slowing with a rise in mortgage rates and a slowdown in corporate profits. If you want to buy real estate now, I suggest you go up the housing price curve to find better value.
Homes priced no more than 30% higher than the median home price for the area are in high demand. Homes priced below the median are flying off the shelves as the millennial generation become the biggest home buying generation. Competition is fierce!
If you go up the house pricing curve, your competition declines. Due to all that's going on with the pandemic and the economy, lending standards have really tightened up. Banks require 720+ credit scores and 20% down payments nowadays. Jumbo loans are very hard to get as a result.
Let me share how you can get better value if you move up the price curve. I'll use my own housing hunting as an example.
Avoid The Frenzy Zone: Go Up The Housing Price Curve To Find Better Value
Back in 2004, I was looking to upgrade to a three bedroom, two bathroom condo in San Francisco. I had bought a two bedroom, two bathroom condo in early 2003 for $580,000, but had a twinge of regret that I didn't buy a larger place for more money because prices kept on going up. It was my first place, so I had decided it was better to be conservative.
What I discovered in my search for a new home was that the $900,000 – $1,400,000 price point for three bedroom, two bathroom condos was an absolute buyer's frenzy. Every single condo I observed went for 10% – 20% over asking due to multiple offers. After getting blown out of the water on several places, I decided to temporarily shelve my plans for a larger condo. It was too disheartening.
A Lucky House Find
Then one rainy weekend during the winter of 2004, I stumbled across a single family house priced just above the frenzy zone at $1,550,000. Yes, it was on a busy street next to a busier street, but this was a three bedroom, two bathroom home with an in-law unit with its own bathroom. It also had a backyard and a little deck to boot.
I would never have imagined at that time being able to buy a single family home in a good area in San Francisco, so I never bothered looking. But there it was. I went up the housing price curve to find better value!
Unlike the condos in the $900,000 – $1,400,000 price point, there was no demand for this single family home at $1,550,000 despite having 50% more square footage and valuable land. The property had been sitting there for months.
So instead of trying to buy a $1,300,000 condo for $1,400,000 at $1,100/sqft, I decided to buy a $1,550,000 house for $1,525,000 at $720/sqft. I closed in early 2005. Who doesn't like a 35% discount?
Poorly Marketed House
The house was being marketed by an out-of-town agent with a flimsy one-page flyer. She wasn't doing a great job because she hadn't connected to the San Francisco real estate network. The house wasn't showing well because it hadn't been cleaned or staged due to its existing owners still inhabiting the place and looking for a rent back.
Back in 2004, a 30-year fixed mortgage rate was closer to 6% and the median household income was about 30% less. With $1,400,000 at the top of the frenzy range, $1,500,000 was the absolute cap. Even the Bank of Mom & Dad had their limits.
What's Going On In The New Decade
The typical San Francisco household buyer (not median income earner) now earns between $200,000 – $500,000 a year. As a result, the frenzy price range shifted from $900,000 – $1,400,000 to $1,200,000 – $1,900,000. Even more parents are helping out with the downpayment according to all the real estate agents I've spoken to.
But what I've discovered today is that once you go up the housing price curve and break the $2,500,000 price point in San Francisco, the value you get grows once again. To comfortably buy a $2,500,000 home requires at least a $500,000 down payment plus a $100,000 liquidity cushion. Having $500,000 to earmark into a single asset isn't the easiest thing to do, even if you're making a healthy $300,000 a year middle class income.
Although I'm not interested in buying property in San Francisco anymore, I still look online for fun every week because that's what I've been doing since I first came here in 2001. There are always opportunities to be had or stories to be told.
In fact, the $2.2M house I put a lowball $1,950,000 offer in May, is back on the market because the potential buyer's loan didn't go through. Being on the market for over six months is unheard of in San Francisco.
This fixer is being priced at $530/sqft ($688/sqft after putting $500K of remodeling work), while smaller homes in inferior locations still see good demand at $1,000/sqft in this location because they are priced under $2,000,000. Getting out of the housing frenzy zone worked!
Glad I Was Able To Sell My Home
The large drop-off in demand at $2,500,000 was one of the reasons why I decided to hit the bid when a guy wanted to buy my previous house for $2,740,000 in 2017. It was so far above the $2,500,000 cap that I hoped to one day get because I had tried selling the house for $1,700,000 in 2012 with no takers.
My buyer had to take out a $2,000,000 first mortgage and a bridge loan in order to close the transaction. Without him, there would be no sale because there were no other interested parties after a month of looking.
With new fatherly duties, zero tolerance for wasting time, and a detailed strategy to re-invest my proceeds, I decided it was better to take some money off the table.
The end price was roughly $1,320/sqft vs my $720/sqft purchase. This was a lucky outcome because I held on. But there were about three years there where I might not have even been able to get my original purchase price if I needed to sell.
Your Buying Mission If You Choose To Accept
If you choose to buy property when prices are at or close to all-time highs, implement my communications strategy to try and get up to 5% off fair market value. Going up the housing price curve to avoid the frenzy zone is key.
Further, you should consider my spray n' pray method since it's so easy with electronic contracts nowdays. Finally, you should also spend time looking for stalefish properties. Stalefish properties at a price point one level higher than you are used to will provide great value. It's free to look, so you better.
Do your best to get out of the frenzy price point. The frenzy price point is where any dual income earning couple in your city can afford to buy. This is where you'll get the least value.
Since real estate is local, you'll have to figure out what that price point is for your area. Ask your realtor or put a multiple on the typical homebuyer's household income.
For example, the frenzy zone for a typical $100,000 income earning household might be $300,000 – $500,000, based on a 3X – 5X multiple.
There are artificial price points which mentally, homebuyers have a difficult time crossing. These price points are generally $250,000, $500,000, $750,000, $1,000,000, $1,250,000, $1,500,000, $1,750,000, $2,000,000, $2,500,000, $3,000,000, $5,000,000 and so forth.
Predict Where The Future Price Frenzy Zone Will Be
Your goal is to anticipate what the future frenzy zone is and own that piece of property now. While you wait, you'll have a grand old time getting more bang for your buck than everybody else.
If you don't properly predict the future frenzy zone, you may face difficulties selling in the future.
I've decided to take my anticipation one level further by investing in the heartland of America. I predict over the next several decades, eager beavers from the coasts with overpriced college degrees will realize that grinding it out in congested and expensive cities will no longer be appealing.
With work from home a big trend now due to the pandemic, there should be an acceleration of people moving to lower cost areas of the country.
Yes, because we're all lemmings, it'll take time to see the change. But if you can invest in a long-term trend, I'm confident your wealth will be greater than those who don't.
Please go up the housing price curve to find better value. I'm sure you'll be surprised at the better deals you can find.
Consider Investing In Passive Real Estate
If you're looking invest in property take a look at Fundrise. Fundrise is one of the largest real estate crowdfunding platforms today. They are the pioneers of eREIT funds which give investors broader exposure to real estate with less volatility.
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Fundrise is my favorite real estate investing platform because it focuses on investing in single-family and multi-family properties in the Sunbelt. Sunbelt real estate has lower valuations and higher yields, great for passive income and diversification.
Another great real estate investing platform to check out is CrowdStreet. If you are an accredited investor, you can find individual real estate opportunities mostly in 18-hour cities on the CrowdStreet platform. 18-hour cities are secondary cities with usually greater growth prospects at lower valuations.
I've personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
Below is my latest private real estate investing dashboard. Real estate truly is my favorite asset class to build wealth. It's stable, generates income, and provides utility. Further, real estate is a beneficiary of inflation. Hard to beat these attributes if you're trying to grow your wealth.
My friend suggested me to look for crowdfunding platforms and while exploring the same I came across your article. you have mentioned about Fundrise and I will definitely look forward to explore the same. I am really glad I stumbled upon this significant piece of information.
I like what you said about finding better value at higher prices. My sister and her husband are looking for a home. They’ll have to check out something a little higher priced, with the help of a real estate professional.
Hi Sam, I want to see if you have any clarity on deducting property taxes and state income taxes due to the new 10K cap. If someone uses a property as a rental property and receives rental income, can he deduct the full property taxes as business expense, thereby allowing the 10K cap on deductions to apply to just state income? Trump really took a jab at middle class households in CA and NY and tax year 2018 will be the first year it’s felt.
Our buying frenzy in Northern Colorado is under $350k. Over that price point and there is much more available. Our market is crazy though. Went from a median price of $100,000 in 2010 to $310,000 now. Glad I bought as many rentals as I could. Getting a great deal is key to buying in a hot market. I see 5 percent discount being decent in high priced areas, but you should get a higher discount in lower priced markets.
The frenzy point can change if jumbo lenders in the area increase their DTI – which I think happened a year or two ago in some of the pricier metros. Not sure they have much room to bump it up further – super jumbos seem to be the profit center that subprime was for the large bank lenders in the 2000s.
So this JUST happened to us. I had actually given up completely on purchasing a home because our ideal purchase price of $899K in SoCal was exactly where everyone else was and there was less and less value at that range. Our ideal home was 2600 sq ft with 4 bedrooms and a loft, plus enough backyard for little ones. I was browsing Zillow for fun every week but not willing to pay the $500+ sq ft that everyone was asking for in our desired areas (super nice beach towns). Some places were even $1000+/sq ft. So then something interesting happened. A new build had a grand opening and lo and behold, it was the perfect house. Almost 2700 sq ft, jaw dropping kitchen and open layout, 4 bedrooms (one downstairs) and a loft upstairs. A closet so big that we would both need to have 3X more clothes to fill it. It was crazy! Price? $925K! OMG. And when I called the builder after touring they said yes, we’ve had incredible response, everyone is saying that this is an incredible value compared to existing homes on the market, and their prequalifier is backed up with applications so put your application in now to make sure you are in line. We did and we reserve a lot, get all ready to put our earnest money deposit down and then we got the public report. Well, it turns out this amazing community is 1,000 feet from a wastewater treatment plant. And there are news articles about the smells, etc. I was completely crestfallen. My dream home next to a sewage plant! I couldn’t do it. Of course, we could do it, as that price point was extremely comfortable for us, and I almost wavered, but my partner talked sense into me that such a home would have long term value issues. And did I really want to pay nearly a million dollars to live next door to a wastewater plant? I did not. I thank him for being the voice of reason often. So then I gave up AGAIN, thinking that’s it, I’m just going to wait two years for the $1.25 MM homes to come back to earth (in terms of what’s being offered at that price point) and just save until then. Well less than 2 weeks later, we saw a home for just under $1.09MM that was way, way better. The location is unbelievable. The walkability, amenities, and the style blow the other house out of the water. It had been sitting on the market for 3 months because even though any house under $1.25 MM is somewhat competitive in SoCal, going over that $1MM mark is uncomfortable. I know it certainly messed with my head. But still it was comfortable and doable for us. So we bit the bullet and got the better house. It just doesn’t have 4 bedrooms (it has 3), but in every other aspect it is awesome. And as some pointed out for me, I don’t need 4 bedrooms for a family of 3 (that may someday be 4), and it might just encourage guests to overstay :)!!
Smart strategy of identifying the “frenzy zone” as you call it and looking at the next tier for greater value, should your savings and budget warrant. Typically, as interest rates rise, asset prices fall, all things being equal. As the Fed has raised rates, you can see that home prices have begun to increase at a decreasing rate. In other words, home prices increases have begun to moderate.
It will be interesting to observe trends in home prices as inflation picks up and long-term interest rates resume their rise. While there has been a lull due in large part to geopolitical noise around tariffs, I don’t see an inverted yield curve on the near horizon. I don’t buy this interest rate swoon being anything more than transitory.
Mortgage rates will follow and will increasingly make borrowers on the margin have a more difficult time bidding on homes. This is especially true as we exit the 2018 home-buying season and people recognize the impact of tax reform on higher-priced homes.
What a timely article for me! I have been bidding on 3bd/2ba houses in the greater LA area around $900K-$1mil and the closer the asking price has been to $900K, the more frenzied the interest at open houses as well as multiple bids on the property.
I am the backup offer at $981K on a house that listed for $899K. The seller said that if we released the house inspection contingency, they would accept our offer. I did not give up my inspection contingency!
After submitting another offer on another property in the same price range — offered $930K on a house listed for $960K, I didn’t even get a counter because the listing agent said they had had so much activity and interest.
I started to look at houses listed closer to $1.1mil and even eyed one listed at almost $1.4mil. These properties were sitting on the market and did not have the interest that the under $1mil homes did.
We bid $1025K for a house listed at $1100K and were told that if we came up to $1070K it would be ours. The house had zero curb appeal and an awkward layout for outdoor space, so we weren’t in love with it.
While thinking about our counter offer, the $1.4mil property dropped in price to $1.2mil. We have an accepted offer at $1135K but it is a stretch for us! Fortunately, I am pretty conservative when it comes to making financial debt plans and we can still afford this — it’s just not with the kind of buffer I prefer to have!
But all this to say that yes, there are better deals to be had at the above-frenzy purchase prices…
$1.4mil down to $1135K — I’m buying at about 80% of what they had originally hoped to get. It’s likely they priced it originally too high, but there is definitely a price point above which it is less competitive, for sure.
The house with no curb appeal that was listed for $1.2mil just dropped their list price to $1080K. They might have sold to us had they not wanted us to come up so high…
Very interesting you still have frenzy going on. In my local market (an inner ring Chicago suburb), there are 3x the normal sales volume of houses on the market just sitting and all the talk is about how the market cooled right off this summer.
The frenzy zone is an interesting concept. I’ve never given it too much thought, but now you discuss it, things are clear as day on price points.
What I am curious about is how people who trade up houses move into higher pricing points.
I’m genuinely curious, if you are bullish on the midwest / heartland, why don’t you move there?
Sure. Because I plan to move to Hawaii, and I can afford to live in SF for now. It did help that I sold one of my rentals in 2017 and bought my current house, which is 40% cheaper. Otherwise, I’m not sure if I can comfortably afford to live in SF due to child expenses.
My favorite thing about real estate crowdfunding and technology is that it allows you to profit from areas that are experiencing faster growth while not having to live there.
Where do you live and why do you live there?
Wow Sam, if you can’t afford to live in SF, who can??
Yeah man, it’s tough, but with certain sacrifices and some extra effort late at night or before the sun comes up, we’re getting by. Just gotta be prepared when bad times return.
Praying we win the public school lottery and get into a neighborhood public school to avoid the hefty private school tuition.
I would say in my area the buyer’s frenzy right now is $600k-$900k. Even before the tax reform changes the “entry level” home in our region is right in that range. Supply is limited so anything under $1M sees a lot of interest. We also have a 1% mansion tax on all home purchases above $1M which hurts. But we stretched the budget to step up above that $1M threshold and got an amazing, much newer house for $300/sq. ft. compared to $400-$450/sq. ft. older homes we saw in the $800k-$900k price. I’m less confident that in 5 years the frenzy range will be $1M-$1.5M but I can hope. I’m just happy to get the house at a good price and I’m not viewing it as an investment.
Where is your market? Interesting tax on homes over $1 million.
New York. The seller pays a much smaller transfer tax but the buyer pays the 1% mansion tax. Ultimately the supply and low quality of most homes priced under $1M here keeps that from being too much of a barrier but it is an annoying and unnecessary tax. Especially when property taxes are 2.5%-3.5% of your property value already it’s not like they aren’t going to get plenty of tax dollars from that house.
Fascinating article, I also live in NYC and would I’d love your thoughts on any takeaways you might have for someone for whom going above the buyer’s frenzy range is just not wise. The condo/co-op fees of a $1 mil+ unit would just eat up more of our income than I’m comfortable with.
I’m not sure yet whether I’ll stay in New York long term so it doesn’t make sense to buy anyhow right now, but I should know in the next 5ish years and like to plan ahead
That makes perfect sense that by going into a higher range the typical buyer pool there will be less competition and more likely getting a better deal.
How about approaching it from the other side? Would it make sense if you were the seller to underprice your home to go in the next lower bracket and hope to create a bidding frenzy?
Absolutely. The example of the stalefish house asking $2.2 million is a perfect example. They should’ve listed the house for $1.99 million and let it get bit up. Now it is screwed and stuck in purgatory.
A smart real estate agent will always price the house slightly below market expectations and inside the frenzy zone to create that mega frenzy that causes people to lose their minds.
Determining the “frenzy point” in a given area is easier said than done I think. For example here in GA, any home in excess of 800k is definitely a luxury home.
You’re talking greater than 4K square feet in a golfing or tennis community. The majority of the home being built in my area are listed between. 250 – 400. That seems to be the local sweet spot where houses sell like hot cakes.
I’m not currently in the market for a new home, but this post has given me a fun experiment to work on. Thanks for sharing your research.
Interesting post Sam. I think it shows how many buyers are simply going as deep as possible on houses, going on the higher end of the most mortgage they can get. This was always a big obstacle for me when I lived in Canada, high incomes are harder to come by relative to the US (at least from my perspective) but people are simply house crazy. The bottom of the market is constantly being driven up, destroying value but leaving more expensive houses out of reach since people are not concerned about swinging for the fences when it comes to house debt. I lived in a notoriously boom/bust city (Calgary) where oil prices float or sink the economy, and still saw people getting leveraged to the hilt so they can buy at the top… certainly made me content to continue renting!
One big advantage for US real estate investment over Canada’s is deductible on paid interest and property tax. In general, Canada has a smaller pool so easier to be impacted by overseas’ investors like Toronto and Vancouver.
Ahhh……. The Bellamy Mansion in Wilmington, NC. Right around the corner from my house.
I’m just outside of DC and I thought our numbers were crazy but, wow. Insane. My little 1400 sq ft house would go for about $520,000, but I get the feeling that near you it would be more towards $800k or higher. Maybe I should have it transported.
Try $2 million. I have a 1400 sq ft shack built in the 1950s, it’s worth $2.3 million. It’s also walking distance from Apple’s new spaceship headquarters.
I always have looked at multiple of the average home in your area with 2.5 times being a big cut off. Average for your area indicates what people can afford. If average home in 100,000 then anything over 250,000 is going to take longer to sell. I totally agree some numbers also stop people 500,000, 750,000 and 1,000,000.
I am wondering if the new cap on homes from the IRS at 750,000 will hurt homes over a million long term (25% down with rest financed)?
I am very confident that once $1M+ homeowners do their 2018 taxes in 2019, there’s going to be oh crap moment, which adds to Housing market headwinds.
Hence why I am trying to stay away from coastal city real estate for now.
People never really see the full impact until It happens to them.
Yup. New York and New Jersey are scrambling to workaround the SALT deduction cap. Homeowners are definitely going to feel the squeeze when it kicks in.
The “one-two combo” of high property tax rates and a really expensive housing market just doesn’t seem sustainable. People are naturally going to want to downsize, or even leave the state, to reduce their tax burden, which is going to put even more pressure on local governments.
Thanks Financial Samurai! Funny thing you should write this article as I am finishing up one for my blog looking at Sand Diego real estate! SD is running into many of the same problems that SF is experiencing as well right now as well!
I actually made posted a similar question on the Bigger Pockets forum. I think there is definitely more value in luxury SD real estate right now. I’m trying to do some more market research so looking forward to reading your article!
Thanks!
My blog post is now live.
https://independenceengineered.com/million-dollar-fomo%E2%88%92buying-a-house-in-2018/
Part of the post takes from FS’s post earlier in the year, but I go over what I have noticed here in SD.
Thanks!
So… for us mere mortals (or wannabe HENRYS), wait until the market cools off then? haha
Any idea what you would say the frenzy point is across the Bay in Oakland?
I’ve gone to a lot of open houses in a wide price range for fun bc I like properties and studying staging and interior design. I agree that the condos and properties in SF that are under 1.5 are like a frenzy especially those around 1-1.2mil. The closer a property gets to 2 mil the fewer people come through. When I’ve gone to some over 2.5 there’s usually nobody else there looking. It’s hard and uncommon to be able to afford those higher price points but you’re right there is added value for those who can afford it.