Are you thinking about buying a home today? Then you need to also envision a scenario where you buy a home at the top or near the top of the market and a deeper recession hits.
If there is a downturn, will you be able to afford the monthly payments? If a bear market comes, can you continue to pay the ongoing insurance and maintenance expenses as well?
The housing market was strong until the Fed started aggressively jacking up interest rates in 2022. With higher mortgage rates, demand has waned and sellers want to hold onto their sub-3% mortgage rates. In other words, there is a housing market standoff, where prices are slowly declining.
Inventory is still low, but unless mortgage rates decline again, we could easily see a 5% – 20% decline in home prices by the end of 2023. In hot pandemic markets like Phoenix, Austin, Miami, and Memphis, they could easily correct by 20%.
Good To Assume The Worst In The Housing Market
If you lose your primary source of income, usually your job, will you also be able to afford your home? Buying a home with mortgage debt is a big decision. Therefore, please treat a home purchase with the utmost respect and buy with discipline.
Everything was feeling pretty incredible in 2006 and 2007. Then the housing market crashed and burned for the next three years as people borrowed too much and banks lent too much.
Plenty of homeowners didn’t know what hit them. As a result, thousands of homeowners lost their homes to foreclosure and short sale.
It is exactly when times are great when we all need to think about downside risk. Despite a pandemic in its third year, real estate continues to be a highly coveted asset class.
What If You Buy A Home At The Top Of The Market?
One way to tell whether buying a home right now is a good time or not is seeing what the stock market is doing. The stock market reflects earnings expectations 6 – 12 months in advance.
Right now, earnings expectations are getting declining again. The S&P 500 closed up an incredible 27% in 2021 after a strong 2020. But 2022 has been rough for stocks, cryptocurrency, and bonds so far. So is real estate the next sector to fall? Probably.
You can investigate further and look at sectors in which your location has large exposure. For example, check out tech sector performance as it relates to the San Francisco Bay Area. Or take a look at bank sector performance as it relates to NYC. Tech performed incredibly well in 2020. Meanwhile, banks and other old economy stocks are performing well this year.
Stocks correct swiftly, while real estate corrects slowly until everybody knows real estate is weakening. Then liquidity dries up and the floor drops out. If the stock market is correcting, it’s time to pay closer attention to any investment you make, especially with leverage. So far, the stock market is holding strong.
Real Estate Moves In Cycles
What we do know about the real estate market is that it moves in cycles due to the desire for economic profits, i.e. new construction to meet new demand.
Peak new construction tends to occur past peak demand, which ultimately leads to temporary oversupply and lower prices. This is what we call: boom and bust. This bust phase usually lasts between 1-3 years before a price floor is found.
In 2022, we are in a peculiar situation because input costs to build new homes have risen. Further, there is a shortage of home construction labor. Home builders want to build, but they can’t build fast enough. Inflation is also a big tailwind for property prices. As a result, I still expect further housing price upside in 2022. But the pace of appreciation is slowing and prices are actually falling in more cities now.
The utility of a home is way up since we’re spending more time at home. Add on local government regulations to build new units, and supply is severely lagging demand at the moment. But the supply of new housing is coming to some heartland cities where land is plentiful. Therefore, stay observant of the supply and demand dynamics.
Below is a chart that shows Market Cycle Quadrants. Back in 2006-2007, we were in Phase III – Hypersupply. In 2022+, it feels like we are at the end of Phase II – Expansion. This expansion phase should last for a year or two. But again, nobody knows for sure.
What I do know is that the supply of homes continues to be very limited, which is one of the key reasons why housing prices will likely continue to go up, albeit at a slower pace.
Reinvest In An Earlier Part Of The Housing Cycle
Real estate investors can look at the chart above and rationally make an argument it would be wise to shift exposure from late phase markets to early phase markets to earn more money and protect against downside risk.
If you believe in such logic, then you should believe in my thesis of investing in heartland real estate. Heartland real estate is considered in the earlier phase of the real estate market cycle than coastal city real estate. There will likely be a long-term demographic shift towards lower-cost areas of the country thanks to technology and the greater acceptance of working from home.
Personally, I reinvested $550,000 of my San Francisco home sale proceeds into a real estate crowdfunding fund across the Midwest and South. The goal was to diversify and earn income 100% passively.
At the same time, there will likely be a revival in big city real estate as people rush back to places like New York. At the end of the day, you want to be where the jobs and the people in power are. Going remote is fine, but at the margin, you will lose out on more career advancement opportunities compared to the people who are regularly seeing their bosses in person.
Buying At The Top Of The Market – How You’ll Feel
Let’s say you go ahead and buy property with leverage at the top of the cycle. Even though things look good now, some random black swan event crushes the housing market. Or maybe the Fed raises the Fed Funds rate too much, too quickly.
What happens to your mind and to your money if you buy property at the top of the market?
I’ve got first hand experience since I bought my Lake Tahoe vacation property in 2007, only one year after the peak. I bought the property for 12% less than the previous owner, but then the property’s value continued to decline by up to 50% two years later! Condotel mortgages dried up, and I was left sulking. But I still own the vacation property today and it is only a small portion of my net worth now.
Here’s what happens if you buy property at the top of the latest real estate cycle.
1) You go into denial at first.
You will 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, you will justify your purchase by saying your home has a better layout or nicer amenities. You will tell yourself that you bought your home mainly for a better lifestyle first.
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 are thrilled for the first six months, but that thrill dies down while the car payments stay the same. You’ll go online to see the valuation of imperfect comparable home sales to justify your purchase.
2) You begin to accept your mistake.
Between 12 – 24 months post purchase, you start realizing that maybe you didn’t make the best purchase after all. You may start telling yourself, “In the long run, things will be fine,” in order to feel better. But the more you look at homes that sell for less, the more you beat yourself up about your purchase.
You start doing calculations on how much you could have saved on the downpayment or on the monthly cash flow if you had just been a little bit pickier or a little more patient. You look at the nicer homes you could have bought with what you paid and kick yourself a little bit. Finally, you tell yourself, “It’s just money at the end of the day.“
3) You start to think worst-case scenarios.
Due to leverage, a 10% decline in the value of your home is a 50% decline in your 20% downpayment. Once the momentum to sell begins in real estate, it starts getting scary, especially if you own a condo in a large building. Think about real estate as a super tanker that’s hard to stop in either direction.
During a worst case scenario, you start calculating how long you can keep the house before you run out of savings 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.
During the worst stage of a correction, you may really begin to freak out because you will know friends who have been laid off. You start wondering whether you’ll be next. You cannot help but worry about the housing market ruining your life, especially if you’re over 40.
During the Global Financial Crisis my company went through seven rounds of layoffs. My best friend at the time lost his job and just had his first son. I did my best to get my firm to hire him, but it didn’t work out. Although I didn’t have kids at the time, I did have a $1.1+ million mortgage on my primary residence.
4) You start to cut out all excess fat from your budget.
The great thing about being rational is that during difficult times, all extraneous expenses get slashed and savings rates go up. Before the pandemic began, the average U.S. saving rate was around 6%. Then it exploded to 32% in April 2020. We Americans can save more if we want to!
As your property loses value, you might try and get a second job or work a side hustle. Fear of financial ruin in 2009 is what got me to start Financial Samurai. I needed a cathartic outlet to release my fear. I needed something to do just in case I was one of the thousands of people who got fired from the finance industry that year.
During the financial crisis, I didn’t buy anything. I also hustled harder to build relationships with clients who were my only leverage to keeping my job. Instead of buying groceries, I took as many clients out for lunch and dinner to not only build better relationships, but to save on food!
Yes, I took leftovers home to feed my wife as well. My clients were also worried about losing their jobs and also wanted to save money. When you go through a crisis with someone and survive, your relationship thrives in good times.
5) You either stick with the game plan, or stick it to the bank.
If things get really bad where you’re underwater on your home, you will need to make a crucial decision. You will decide to either stay current on your mortgage or stop making payments.
If you decide to break your contract with the bank, you must realize which states are non-recourse states so they don’t come after your other assets. By short-selling or foreclosing on your home, not only do you ruin your credit and dignity, you also hurt your neighbors who decided to keep paying.
But in America, it’s often every man and woman for himself. You can foreclose on your home like one financial pro did in 2011. He subsequently got hired by The New York Times to write about money advice and even wrote a book about how to improve your finances!
This is one of many examples as to why I’m so bullish on America. It doesn’t matter what mistakes you’ve made or who you are, you can always come back.
Nothing Happens If You Decide To Keep Paying Your Mortgage
If you decide to keep paying your mortgage, then usually life goes on as planned. After all, real estate markets tend to recover over time. Few people go into buying the most expensive thing in their lifetimes without a long-term plan. The average homeownership duration is also about 10 years today.
If you buy a home at the top of the market, you’re just annoyed you paid full price for something when it went on sale just a couple months later past the return policy.
The key is to try and refinance your mortgage before your equity gets wiped out. Most banks won’t let you refinance to the best rate, even if you have stellar credit, if your loan-to-value ratio is greater than 80%. In other words, you need to have at least 20% equity to refinance.
Therefore, if you start seeing the housing market turn south, one of your first moves should be to call your bank or check online to refinance. Personally, I like Credible. They’ve got a great group of lenders competing for your business so you can get the lowest rate. You can get a free, no-obligation quote in minutes.
Further, if you ever lose your job, you will become dead to banks. The vast majority of banks will not let unemployed people refinance or take out a new mortgage.
If You Stop Paying Your Mortgage
If you decide to foreclose or do a short-sale, then you simply lose 100% of your downpayment. You also hurt your credit score by the following amount according to FICO.
- 30 days late: 40 to 110 points
- 90 days late: 70 to 135 points
- Foreclosure, short sale or deed-in-lieu: 85 to 160
- Bankruptcy: 130 to 240
A foreclosure will be on your record for 7 years on average plus 180 days from the last time the account was paid as agreed. Your credit score will gradually improve over these seven years, but may not fully recover until the foreclosure is off your record.
Those who’ve been through foreclosure and want to do conventional financing in the future will have to pay a higher interest rate (approximately 1 and a half to 2%) unless they put a sizable downpayment on their new property (more than 20% down).
If the real estate market seems frothy, please follow my 30/30/3 rule for home buying. If you do, you significantly increase your chances of being able to afford your home in a recession.
Just Have To Hold Onto Your Real Estate
Buying real estate at the top of the market stinks. But it’s not the end of the world if you hold on. Over time, the property should account for a smaller and smaller portion of your net worth. The property should also recover its value as well.
If you responsibly bought your property to enjoy, then enjoy it! Today, the Lake Tahoe property I bought near the top of the market is a place where my family will spend the summers and winters. This is what I have always dreamed of doing when I first bought it as an unmarried man with no children. Surprisingly, I also discovered that owning a vacation condo at a resort is preferable to owning a mansion vacation property
When my wife and I pass, I hope our children will have their own families to take up to the mountains one day. Maybe they’ll even have a picture of us on the mantle smiling over them.
You Don’t Have To Go All-In On Real Estate
Investing is difficult. When things are bad, it’s hard to invest because you think things could always get worse. When things are good, as they are now, you don’t want to look foolish buying just in case the cycle turns.
If you want to invest in real estate, you don’t have to take out a mortgage and buy property. That’s like going all-in. Instead, you can buy a publicly-traded REIT, a real estate ETF, or a private eREIT for real estate exposure. None of these real estate investments require leverage.
After buying a “forever home” in 2020, I’m no longer looking to buy another primary residence for a while. However, given I think the housing market will continue doing well for several years, I’m investing in real estate more surgically through private real estate funds and real estate ETFs.
Top Real Estate Investing Platforms
Fundrise is my favorite private real estate investing platforms with over $3.5 billion managed from over 400,000 clients. Investors can surgically invest in one of their real estate funds with as little as $10. Fundrise primarily focuses on single-family rentals.
My second favorite real estate investing platform is CrowdStreet. CrowdStreet focuses primarily on individual real estate opportunities in 18-hour cities. 18-hour cities tend to have higher growth, lower valuations, and potentially more upside. CrowdStreet sometimes offers specialized funds as well.
As I get older, I want to spend less time managing rental properties and more time doing what I want. As a result, I’ve invested $810,000 in real estate crowdfunding across 18 deals and funds to earn more passive income.
It’s important for me to diversify away from my expensive San Francisco real estate holdings into the heartland of America. I don’t think we’re at the top of the market yet. But having a well-diversified real estate portfolio is always smart.
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Readers, have you ever bought a home at the top of the market or near the top? How did that work out for you? With less buying competition thanks to the arrival of summer, are you actively looking for deals now?
For more free personal finance content to help you get smarter and richer, join 60,000+ others and sign up for my free weekly newsletter. This way, you’ll never miss a thing. What If You Buy A Home At The Top Of The Market is a FS original post.
We bought our place in the east bay and we definitely overpaid. We bought in Feb and saw the market appreciate through May, but the last couple of months have been hard.
The “steps” of grief here really resonate. I go back/forth between the: I wish I was more patient, and it’s just money and we will hold on.
We have stable jobs and the mortgage is well within our comfort zone. My only worry here is that we will lose the flexibility to move/upgrade if we’re underwater.
The thing we’re focused on now is just enjoying this home that we live in, and not worrying about what the market will do over the next 3-5 years.
My eventual goal is to turn this into a rental and save up enough money/sell investments to afford our 2nd home.
Any advice for us?
This makes me laugh because it hits too close to home ( literally ) I found this page searching for some perspective into this crazy market .
I have been living in South Lake Tahoe since 2005. I was at the right place at the right time in 2010. I convinced my now ex husband to buy a foreclosure in Tahoe. He was scared it was going to crash more. I said now is the time. I remember seeing what the prices were when I first moved here in 2005 and I watched them go up then fall. I knew now was the time.
We raised our 13 year old daughter here. I worked my ass off in this messed up little town that is SLT. Yes it is a Mess of a town if you live here long enough you will see. Beautiful disaster I call it.
I came out here from the East coast with nothing more than a dream and $10,000 when I was 24. I have been able to call Tahoe Home all these years. My dad warned me it’s a trap, this is not the real world. He was so right.
I am almost 40 now. I say F this place. You bay area people can have it. I bought at the bottom and I sold my home at the top. I got a divorce too. I made the mistake and married a Tahoe bum who lived in a fantasy land. It has been the perfect storm. In the end this is the land for the 2nd home owners, and it makes me sad. The community I loved is falling apart more and more due to people buying second homes. Some bay area person bought a home in my area for $835,000 and said “ I hope we get to come up and use it.” In 2007 that house sold for $415,000. After that crash in 2008 the home was worth $240,000. So how long are you in this haul?
To see an article about this topic of an inflated market and the person that writes about it refer to Lake Tahoe. It just hit me hard. It put a bad taste in my mouth. Us locals say “ GO BACK TO THE BAY!” we say that after we take your money.
It might be a bubble that we are in? Are you ready for it? Sell high, buy high, but if you do buy high. Go big or go home. Enjoy the F-ing ride. Because it will be a wild one. How bad do you want it? Is a vacation home you use 2 times a year worth it?
Vacation homes take away from the working people. No one realizes that until they are complaining about an understaffed restaurant. Yes! Your second home is why this restaurant is not staffed.
Financial Samurai says
Glad you mad money! Where are you planning on going and what do you plan to do with the proceeds?
I wonder if Lake Tahoe has a way of making people turn more lazy, like you mention your ex?
What is your advice on buying a home in Austin right now? Homes are about 40% up since early 2021 and all news about housing market bubble/recession.
Financial Samurai says
Risky due to upcoming supply.
Balbina Nasiff says
I have been wanting to buy a home, but the market is so overpriced! I had to start over again in 2015 due to divorce. I have worked on rebuilding everything I lost. Now, I have a stable job in the healthcare field. I came across fundrise, robin hood, etc. trying to find some sort of investment that could help create a substantial return, but there are so many scams and I don’t know where to begin or even how to begin.
Is it too late to invest in Fundrise? You mentioned Heartland fund, but the only Heartland fund in Fundrise is closed it seems. Any other suggestions on Fundrise or crowdfunding if I do not really want own and operate physical property?
The Heartland Fund is available. You have to be at Core level or higher. I am planning on planning on dumping some cash in there shortly.
Bitter to Richer says
I bought a home last year that I plan on turning into a rental property in 5-7 years (it is currently my primary residence). As scary as the real estate market (and its potential to crash) may be, you’re right, as long as you’re able to hold onto the property you’ll probably be fine.
Love how you broke up the phases into a graphic by the way!
I bought a home in ’93 for $120k in Irvine, Calif. Four years later I had it appraised and it was worth $90k. By 2007 it was worth $450k. In 2010, about $190k. Today I figure conservatively it’s about $500k.
So I guess you never know what the market is going to do. I’m glad I kept it, though, because it generates $20k a year in positive cash flow.
I remember when I bought the place, people said I was crazy for paying so much for a 2 bedroom home when I could rent for hundreds less. Nowadays it brings $2400 a month in gross rental income and the only monthly expenses are property tax (~$200/mo — indexed to 1993 when I bought it) and the HOA dues. Comparable rentals run the gamut from $2400 to $5500 a month.
Financial Samurai says
Dang, what a roller coaster ride! But I’m glad you held on too. Cash flow is KING right now in this low interest rate environment.
Owning cash flowing properties and other assets and holding them forever is a top strategy for financial freedom. Do not sell your cash cow folks!
Ranking The Best Passive Income Investments
Rental Properties: The Case For Buying More Now
Been there once before!
We bought a single family home ~ 1600 sqft (3bed, 2.5 bath) for $139k in June 2007. Then the recession hit and at the bottom the value of the house was about $90k, with some houses in the neighborhood closing for as low as $80k (or also being foreclosed).
We were fortunate enough to hold onto our jobs through the recession and into the recovery. In 2014, we converted the house from primary residence to rental property and have managed nearly 95% occupancy with decent rental yield.
Come 2020, the pandemic really changed things down there in the city and the value of the property has hit an all time high of $170k today. Many nearby homes in the neighborhood (similar specs) have recently sold for $150-165k range.
14 years on, the rental property is now fully paid off (as of yesterday!). We anticipate some repair and maintenance work to come through since the property is nearly 20 years old, but the rental yield phenomenal and if the rental demand continues (along with inflation push into rental prices), then we should be okay!
Financial Samurai says
Great job holding on! I like that for almost all homeowners, if we just keep on paying our mortgage, it eventually gets paid off and we’re left with a cash flowing property.
Thanks for sharing. You’ve reminded me of the property I bought in 2003. It’s been a nice rental since 2005 and was paid off in 2017. It’ll need some updating, but it’s been a core piece of our retirement income.
Great post. Been following you the last like 5 years. I bought my first property (1 bedroom loft) for 309k back in 2015, now a similar unit sold for 555k. Although not cash flowing since I refinanced to a 20 year loan, I want to make it into a cash flowing cow when I leave my job on 20 years.
Also, similar to you, I love real estate so much, I bought 2 investment properties in TX and FL, both are cash flowing, bought back in 2020. Bought a primary SFH 2 months ago as well.
After reading your article, I’m a bit worried so hope you’re right that we have 2-5 years more of a ride to ride this real estate growth! That way, the down side isn’t too bad for me :)
Ms. Conviviality says
I bought a condo in 2006 for $132K and saw the value drop to $49K at one point. It was my primary residence at the time of purchase. After getting married and moving in with my husband, it hit me how expensive it was to hold onto the place since even with rent, I was still paying $7,200 out of pocket. Multiply that $7,200 by the 15 years I have owned the place and it comes out to $108,000. Fortunately or unfortunately, I stopped making payments on the mortgage in 2012 just so I could get the bank to begin working with me to refinance my mortgage since I was paying 6.77% when rates were going for 3.5% at the time. The current value of the condo is $89K so it’s still underwater, even after 15 years! Oh, and that refinance came with a catch. While the lower rate allowed the rent to barely cover the mortgage, the bank also tacked on $40,000 on the back end of the loan which becomes due when the 30 years is up. The bright side is that the condo has been used as an Airbnb since 2019 and annual profit is about $9,000. I have to credit reading the FS for helping me to look at all angles of a bad situation and making the best of it.
Financial Samurai says
Don’t forget to add back the amount you didn’t have to pay renting to your cost of owning too. Should help!
Simple Money Man says
Very nice FS! What if you are selling your existing home and moving. REAL CASE: I’m seriously thinking about selling my 2010 2500 sq ft house and moving into a 1940 1600 sq ft mostly renovated waterfront cottage a BREATHTAKING view. The value of both properties is roughly about the same.
Any advice, tips, other considerations etc. are much appreciated?
In my opinion, as long as you’re living within your means, effects of the market are negligible in this situation (sell and buy of a primary residence) *as long as you plan to stay in the house or can afford to keep it and rent it should the market turn and you need to move*. You already own a home that has appreciated in value, and are trading it in for another. If the market were to crash, both houses would depreciate so the net effect isn’t worth considering. The difference for you is that you are refreshing a mortgage, but likely for a lower interest rate. The waterfront always has more upside however, so even though the properties are currently about the same, in a crash that may not be the case (my guess). Investment properties are another story due to rent variation, and first time home buyers are hit the hardest in a dip.
I’m not a financial expert, so FS chime in if i’m way off, just someone who has bought and sold through one recession already (and has a couple rentals.) I’ll also add that I just bought a place on waterfront for the first time a couple months ago, and man is it nice to see that every morning. If it were me, and didn’t mind downsizing, I’d go for it! Other concerns? Age of house could lead to higher maintenance costs than you currently have, but if recently renovated that may not be accurate. Really depends on the house. But if you’re handy, that helps a lot!
Financial Samurai says
Given the cost is roughly the same for the two properties, then your goal should be to minimize transaction costs. Sell by yourself or ask a listing agent to cut your commission in half if s/he can represent you with the new transaction. Or ask a real estate lawyer to flat fee the transactions.
I have never regretted spending money living in a great house or condo. With so much more time at home, spending money on a nice home has some of the biggest utility.
Further, I am a HUGE fan of water-view properties. They retain value better and go up in value more. Further, seeing the water every day has been great for my mental health. It will probably help you as well.
I’m actually sitting on my bed viewing the ocean right now behind my laptop.
why do we need to invest in real estate (Other than the primary home) We have a lot of choices in the stock market (REITs, stocks, ETFs, Leveraged ETFs). These instruments are highly diversified and allow risk mitigation and there is no maintenance and cost of selling.
Financial Samurai says
True, check out the conclusion of my post. You don’t have to go all-in if you don’t want to.
You’ve got to go find your own risk tolerance and invest in what you enjoy and feel comfortable with.
And also, most people just buy a home to live in first. But I still wonder whether by now is the right choice or not.
Sergio Bustamante says
I have always looked at Real Estate as a long term play. The risk washes out in the long run. As a lower risk tolerance investor, I have adopted the BLERR strategy, buy-live-equity-rent-repeat. I just made that up, probably needs refinement. Basically you buy your forever home at an early age. Once you grow out it, you leverage the equity in it to buy the next place as necessary and then repeat. I am on property #3 and have $1.2M in equity in them (50% LTV). I started with the 1st in 2007 and went from a purchase price of $300k to a foreclosed neighbor for $175k in 2010 and now it is worth $450k and has been rented with 100% occupancy since 2014 (I am lucky I know). Again, long term play. Sam, you might consider doing a post comparing long term returns from real estate vs RE funds & ETFs. Considering the lower risk, I would expect a lower return on the latter, maybe compare across a few different markets?
I moved during the pandemic and don’t have plans to move again any time soon. I still watch the property market for fun though. And I’ve been seeing some crazy overbids in San Francisco.
For example, I just got an email alert that a 4 bed 2.5 bath house near Cole Valley sold for 3.75mil which was 755,000 over asking. WTH That is insane.
He doesn’t have a crystal ball, of course, he can’t give and exact amount, percentage or date. No one can and to do so would be foolish. You must not be very old if you don’t remember prices plummeting in the late ’80s and not everyone can “hold housing long enough” so options/information is key.
Financial Samurai says
Sorry for throwing caution into the wind. You are free to leverage up as much as possible and buy whatever you want. However, I will say there have been many housing busts in history before. If you can’t hold on through the bust, you lose due to leverage.
Property prices did soften by 5-8% from 2017 to the beginning of 2019. Now they are taking off again due to the pandemic. If you have waited and bought in late 2018, you would have been up more.
Then again, don’t count your chickens. You think your house is up $100,000. But you won’t know until you actually sell. BTW, I don’t see your previous comment. Never met someone upset about being up a supposed $100,000 before. Is there anything else that’s bothering you?
What are your thoughts on the NYC suburbs? Specifically Montclair/Glen Ridge area? Overpriced right now? We’re seeing crazy bids WAAAYYYY over ask right now as people flee the city. Do you think prices will continue to go up there for the next few years or do you think they are peaking and will fall as the full impact of COVID further disrupts the economy, potentially causing foreclosures?
Financial Samurai says
It’s nuts that housings in the median price rang and below are so hot. But you can’t blame people for moving to a nicer place that maybe is less dense due to COVID-19. Further, mortgage rates are at all time lows. I locked in a 7/1 jumbo ARM at 2.125%!
I’d wait until winter to find deals. The deals were had in ~April and early May 2020. Not too much anymore, unless you want to look at the high end.
See: Real Estate Buying Strategies During COVID-19
Impressive! How did you get such a low loan rate??
We’ve been looking at NC properties and the market is HOT. Houses are sold within 2-5 weeks of being on the market. More than 5-10 offers on most properties. Does that mean it’s too heated and we shouldn’t buy right now?
Mike Sanders says
I like what you said about not buying a home at the top of the market since prices will likely decline. My sister has been telling me about how she wants to get a new home in the coming weeks. I’ll share this information with her so that she can look into her options for buying the right pieces of real estate.
I am looking at buying a house in Madison WI. I would like to buy in the $150k- $230k range(I am a school teacher, I do not make much) . Everything is very expensive. My rent is not bad but I would rather be paying a mortgage. Is it worth it to wait?
Thank you for the informative article on buying high. What about Santa Barbara, CA? Is it in a bubble all its own or is it rather like, say, NYC?
Shaylee Packer says
As you mentioned, the prices for homes will always come back up after a fall. It may take a little while, but they will come back up. My husband and I have been thinking about selling our house and buying a new one, but the prices are pretty high right now. We are trying to decide if they are just going to continue going up, or if there is going to be some relief soon.
The problem is if it takes 10 years of payments, interest and maintenance expenses, I would argue that when the market does come back, a lot of that profit(most of it) has already been eaten by the downturn, which means most people even today would still be very lucky to break even. For me I see red ink in really “hot” markets and tend to think of them like countries infected with Ebola, keep you money as far away as possible. In turn I love downturns and believe I missed out on the 2007-2009 downturn, which is a once in a lifetime gift. I’m hoping I’m wrong, sincerely as I want to live through another one, as I want to be rich. Its depressing right now watching the idiots race to over pay. Multi family where I live(Oregon) is being ruined by big billionaire capital firms thinking 2% or less cash on cash is great. I think when my business produces income in sufficient quantities for 30% down payments I’m going to go overseas, as cities in the US are overpriced in general. I want rental income not speculative develop or remodel and fight for zoning changes to make property more valuable, no that’s gambling and eaking out the last profits from a dead market that doesn’t know it’s already dead walking. Rental income from day one, helps people survive downturns.
My hope for the future is another recession, I know I might get a lot of hate comments from people invested in top of the market. How do you know if you’re at the top? Easy for me, look at percentage of college grad couples that can’t afford to buy with 20% down(X>50% warning sign), or the normalization of 10% or less down payments. Those to me are a sign the market is at the top taking the Lemmings money. Right now in Portland, except in certain regions of metro you’re better off renting and buying in other parts of the country or overseas.
Financial Samurai says
I’ve been hoping for a large pull back as well, but it looks like I’ll be waiting for a long time. 2020 is going to be a good year for real estate given affordability is way up.
Has Covid changed your assessment?
Financial Samurai says
Check out my thoughts now that we’re in a bear market:
We are in a bear market in the midst of a pandemic. Your wish has been granted.
James Borst says
My neighbor is a real estate investor and he told me that he works with different groups to acquire properties. It is interesting that peak new construction tends to peak past demand and cause an oversupply and lower prices on homes. I imagine that if I were a real estate investor, that I’d want to work with professionals who have experience buying and selling homes to help me know when to buy and sell.
Anil MAni says
I have been betting on the Toronto real estate market to crash for the last seven years. Boy, have I left a lot of opportunity on the table
Appreciate the “inside the mind of someone who bought near the peak” section. Takes some vulnerability to share that.
I’m planning to hold off on any home/luxury car purchases until during the recession that will presumably occur at least within 3-4 years. Hopefully can save 10-15%. I live in a smaller real estate market, but a proportionally large amount of hiring in the area has appreciated values 10-15% for the past few years due to increased (high-earning) population and lagging supply. New supply here is just starting to come online as prices are flat-lining generally, so hopefully that will result in some depreciation.
Great article and gives me a lot to think about! Currently, I am thinking about buying a house with all cash, 100% paid for here in the Phoenix/Queen Creek/Casa Grande area. This would mean I would not have a mortgage payment to worry about…only taxes, HOA and insurance. But I’m not sure if I should just hold onto all of my money and wait a couple years to see if the market drops. What do you think? Is it worth paying for a house in full at this time, especially with the houses as expensive as they are? Thanks for your help and advice.
Brian B says
Here we are now almost halfway through 2019 and we have been seeing certain homes sitting longer than others (Sacramento area). We are shopping the 590 – 690k price point. We purchased in 09 and are now up about 280K in equity.
We want a house with a larger lot, they are becoming far and few now with all the new developments putting up massive 3,400 sqft homes on 5,700 sqft lots. Lets say we are att the peak now or nearing. If we take our 280k to use as a downpayment, that equity basically carries over to the new property. The market can crash and our equity would be gone but if we didn’t sell well then our 280k would still shrink or vanish only wed be in the house we no longer want to be in.
The biggest difference in our payment would be Property Tax from purchasing so much higher than our 2009 purchase.
Are people who are rolling over equity in the same boat as people who are entering the market without equity?
I made some poor financial decisions over the past few years. Mostly uneducated, impulsive decisions. I’ve been through all of the stages of grief that you outline in your article (wonderfully written! thank you!).
We recently sold our home and moved across the state (of WA). We’re now renting. We used the little money we got out of the sale of our home to pay-off nearly all of our debt. We’ve cinched the belt significantly, and are determined to save AT LEAST a 20% down payment for our next home (or bust).
Setting aside the sum of my yearly take-home salary in three years is ambitious for me. The numbers seem to pan out, as long as we stay disciplined.
My question is: Do you suggest just dropping this weekly cash into a money-market account, or investing it alternatively to maximize our returns? It’s a $200 weekly deposit currently. It will increase to $600/week over the course of twelve months. Our tolerance for risk is slightly higher than the average Joe.
Thanks for the advice!
M. Ryan says
I’m not Financial Sam, so take my advice with a grain of salt.
First, build an emergency fund of at least 3 months of living expenses in a money-market account.
Second, pay off any high interest debt.
Third, invest in the markets by dollar cost averaging.
Amazing article! Describes many worries I currently have about buying here in Phoenix. Everything just seems so over priced. I sold my home in November 2018 and earned a big profit from that. My goal is to use those profits to buy a new house, but with prices looking like they are at their peak I am thinking of just holding off for now. Too worried about going underwater on a mortgage and pretty much “losing” my down payment
Thank you soooo much for your analysis, Samurai! And Happy New Year! I really respect your clear writing with graphs to validate the point (I’m a scientist). But what I see, you look at a general (average) trend and also some specifics of Bay Area, NYC and the like. My question is how would you see the situation differs for, say, Austin TX? This is one of the fastest growing city in the USA, good areas are $500-600K houses, surely you can find 350K as well. Now, the devil is that it is now an IT hub and the state gives incentives to CA companies to move here. For example, AAPL just announced it will build a second campus (Austin already has one) with 5000 workers. A lot of cars with CA license plates – surely for them it is so easy to buy a house here after CA! I tried to look up the data from the last crash (2008) but Zillow has it only starting 2009, it shows a plateau and then a steady crazy appreciation. The only negative side – property taxes are crazy too 1.2-3% with the city announcing another hike just recently. I also see a clear plateau in renting cost right now. Hence 2 Qs:
1) do you expect that such places like Austin can be immune from the drop in RE prices? Org I should also just be patient? (to be honest, scientists do not get much money).
2) does the rent cost curve lead the RE cost curve? (I’d expect so, meaning that RE should start plateauing now)
Bonus Q :)
3) Any websites where I can just dig for the useful graphs? Or data (I’m aiming now to learn data science, so it would be a nice practice to plot the data).
Thank you so much!
Financial Samurai says
Nowhere will be immune, but Austin should fair better than most!
Related: Why I’m Investing In The Heartland Of America
I have read the article you linked, pretty interesting stat and ideas confirming my fears :) But if nowhere is immune that means a unique situation: I should not lose by waiting (a year or two) and my peers who own houses in Austin already should not lose by NOT selling. Right?
My only remark would be that actually the fastest growing cities are blue, not red. They are in all states, red states also. TX is a good example. Austin IS a sanctuary city, for example. Funny, before Austin I lived right near West Palm Beach (another blue city in a red state).
What may a plateauing renting curve tell us?
People here told me that prices were just plateau during the last crash (2008). I still hope for at least 10% correction, and for whatever reason my guess is that when everybody is denying this possibility the probability of this black swan goes up… You know, it’s like when I started getting crypto-spam in email, I felt it is the beginning of the end. (Now it may be a good idea to start average down in crypto though. But I’m not into that).
Nicole D says
We bought a house in San Diego CA in May 2017 . We tried multiple times to get in the market years before but were always out bidded. Finally my husband hit over $100,000 at work and we decided to buy. I’m not sure if we should of waited to see how much prices would drop but rates are going up. I’m very stressed over the whole thing and being a first time buyer is just the worst. Do you think will lose a huge amount of value in our home when it crashes and how much. Did we make the right move?
Financial Samurai says
Nicole, it’s too late now to back track. Best is to just ensure y’all both have jobs and continue saving aggressively. Prices have softened since 2017, especially after the rate hikes and the 4Q2018 market crash.
Enjoy the house and all the great memories it’ll bring. Over a 10 year period, you’ll probably be fine.
I’m curious, given how the stock market has been behaving, am I right assume we are the start of the Phase 4?
Found a lovely house that’s a bit overprice for the area (but boasts also lot of space, so not so eat to comp) but it’s a bit of stretch for the payment. That plus upcoming uncertainty makes me weary.
Financial Samurai says
The housing market is rolling over, and the 10% correction in the S&P 500 is signaling a drastic slowdown in profits in 2019. We’re talking 8%-10% growth from 20% growth. But even those estimates may be slashed.
Thanks for the quick reply, Samurai.
We are in the bay area too, btw. :) The house found is in Maxwell for context.
Just to clarify, by patient you mean don’t rush into a house purchase, right? (Perhaps pass on this one, if in doubt)
Or do you mean to carry on with and wait to see what happens before making alterations to plans?