What If You Buy A Home At The Top Of The Market And A Recession Hits?

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 again, can you continue to pay the ongoing insurance and maintenance expenses as well?

Affording a home isn't just about coming up with the downpayment, it's also about whether you can comfortably keep on paying the ongoing expenses for years.

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 in some parts of the country.

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 15% – 20%.

Downward home price cycles often take two-to-three years to play out.

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.

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.

2022 saw a 19.6% decline in the S&P 500, but 2023 is so far up 16% year-to-date.

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 2023/204, 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. But mortgage rates have surged, so affordability is limiting buyers.

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.

Classic Home Buying Cycle

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 stay buoyant, albeit at a slower pace.

There is a “life goes on” home-buying cycle that is embedded in the market. Millions of people put off their home buying during the pandemic, but marriages, babies, and divorce continued to happen.

Now millions more are waiting for mortgage rates to come down. But life goes on and this pent-up demand will eventually be unleashed as people are getting older and sick of waiting.

Real estate market cycles

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.

My favorite private investment platform is Fundrise. Fundrise has over $3.5 billion in various funds they created to invest in residential and industrial property in the Sunbelt region. I've personally invested $810,000 in private real estate funds to invest in lower-cost areas of the country with higher yields

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.

What If You Buy A Home At The Top Of The Market?

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.

private real estate investment dashboard

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167 thoughts on “What If You Buy A Home At The Top Of The Market And A Recession Hits?”

  1. 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?

  2. 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.

    1. 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?

  3. 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.

      1. Balbina Nasiff

        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.

  4. 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?

    1. 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.

  5. Bitter to Richer

    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!

  6. IrvineOwner

    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.

  7. 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!

    1. 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.

    2. Sam,

      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 :)

  8. Ms. Conviviality

    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.

  9. 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?

    1. 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!

    2. 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.

  10. 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.

    1. 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.

      1. Sergio Bustamante

        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?

  11. 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.

  12. 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.

  13. 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?

  14. 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?

    1. 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

      1. 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?

  15. Mike Sanders

    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.

  16. 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?

    1. 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?

  17. Shaylee Packer

    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.

    1. 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.

      1. 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.

  18. James Borst

    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.

  19. 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

  20. 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.

  21. 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.

  22. 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?

  23. 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!

    1. 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.

  24. 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

  25. 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!

      1. Thanks Samurai!
        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).

  26. 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?

    1. 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.

  27. Good day,

    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.


    1. 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.

      Stay patient.

      1. 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?


  28. We are looking at coastal properties in San Diego. Our real estate agent, lender, everyone has advised us that houses here are in such high demand that even a “correction” just means that houses will APPRECIATE at just a slightly slower level. I am still worried about buying at the top of our budget–900k in Point Loma, Ocean Beach, or Pacific Beach. Thoughts?

      1. Hey samari love the article. I live in Portland Oregon and the prices here are ridiculously as well. My wife wants to buy a house around 300k and I keep telling her prices will come down because I feel like it’s a seller’s market right now and bidders are hopping over each other for a piece of real estate. (I’m a day trader) and realize the overall market is topping and we are due for a correction in the next 5yrs. I’m just wondering if we should wait till the crash or just buy now. I’m not too familiar with real estate market but it’s looking over due for a correction as well. Only real positive I’ve found or buying now is the interest rate here is 3.4- 3.8 which is at all time lows. Is there a reason why they are so low? And if waiting for the crash could cause them to go up? Would it be a better call to get in now or be patient? Thanks for your help!

        1. Check inventory levels. They should be moving higher since 2018. More inventory, more opportunity.

          I don’t think there will be more than a 10-15% correction. SF went through a 11.5% correction from peak levels in 2018 and now it’s a sellers market again.

          If you’re going to be there long term, I think it’s always good to get a neutral real estate by owning your own primary residence.

  29. Sam, We are looking to sell our home because it’s too small right now but we like the neighborhood and want to stay for our children’s schools (5&8). We thought about a remodel but the cost of construction is outrageous. The problem is it’s too pricey wherever you look in Portland Oregon. What if we sold and rented for a bit? Is that better? We have no mortgage and own home outright.

  30. Hello

    I am currently renting near downtown san jose. I work from home and my wife works about 4 miles from away for big name tech firm. We are paying 2.6k in rent (water/garbage included) which is pretty good for the area. Condo is nice about 1300 sqft 2bed 2 bath. Property management company just notified that the owner is planing to sell the condo. Its not listed yet but I am assuming in next few months we may have to leave. Given the scenario and the current market does it makes sense to take the plunge and buy house now. Going from the past sales condo units in my building has gone for as much as 830k for 2 bed with about 400$ in HOA.
    I was looking to buy townhome with reasonable HOA (around 200$) in 800k-950k which unfortunately still seem to be difficult to find but seem to be coming up cos of some recent price cuts in listing. Monthly mortgage payments, property tax,HOA, insurance and utilities will come to be around 5.5k after 20% down which will be about 3 to 3.5k if i rent something similar. I might get about 500-600$ per month back (6-7k per annum in taxes) cos of itemized deductions on mortgage and 10K SALT. I dont see us being able to do itemized if we keep on renting. so essentially the total expense in terms of monthly payments will be about 1.5k per month extra after adjusting for tax deductions if we own instead of renting.

    I got excellent credit history with score of approx 800. Speaking to lender I may be able to get the 7/1 arm at about 3.62% interest rate.

  31. I wish real estate wasn’t such a roll of the dice. We’re talking about sums of money that could easily be 80% of a family’s wealth – who really wants to put that on the line. I would gladly give up any chance of appreciation if the downside risk were similarly eliminated, ie security and stability.

  32. Given the stock market and real estate gains over the past several years, I’m starting to wonder if we are just entering an unprecedented inflationary period.

    Maybe this years of super low interest rates will create a much longer boom…

    Or maybe that’s what people say during a peak/bubble to justify jumping in…would love to get your opinion, Sam. Thanks for all the great articles.

  33. Bought our former house at the peak in Dallas in 2006 with 95% financing. We held on while prices dropped in 2007-10 and were upside-down on the mortgage for at least a couple of years. We stayed put and in 2013 sold the house for 40% more than we paid for it. So, just because you buy at the peak does not spell disaster, although it sure felt like it at the time!

  34. I’m a single lady, early 30’s, debt free & have 20% cash saved for a condo or townhouse in Dallas. However, the ironies of life are that Dallas is at Maturing Exuberance stage… Do I rent for another 2 years and throw away $50k on rent? Looking to only buy a $250k place. View it as a long term investment property?

    1. Do you plan to live / own the place for 10 years? If so, I would. Just run the numbers and have a nice cash buffer before you do.

      The thing is, I suspect coastal city real estate money will continue to be pumped into the Dallas and surrounding areas. So for you guys, prices seem expensive. But from our perspective, it’s good value. Real estate crowdfunding and technology has made investing around the country easy.

      Check out: Invest In Trends: Why I’m Investing In The Heartland Of America

  35. teacherincharlotte


    I am a first time home buyer in Charlotte, NC, and I am terrified to buy in this market. I have been looking at properties for years, but have never had the nerve to purchase. I have rented here for ten years. I am hoping for some advice about a condo that was last purchased for 70,000 and the owner would like to sell for 145,000. All of the condos in the area are selling like this in a matter of days. I am hoping to have a very low mortgage payment, but do not know whether I should purchase now, or wait to buy towards the end of the year, or maybe even next year. Thank you for your wonderful information and for sharing your personal experience. I find it very helpful.

  36. I also want to hear your thoughts on this one. Someone asked above ” one question to you though is even with what you noted above, how do you account for the all the news we are hearing about lack of supply and affordable housing? You always hear the pundits say that credit is strong, lending practices are stronger than pre 08, and supply is short in these coastal CA cities?” Thx Sam

    1. Easiest way to cut through the noise is to do the math. Calculate the cost of renting versus the cost of owning. Now calculate your return as a landlord vs the risk free rate of return (10-year bond yield) and see if the risk premium is high enough to warrant the risk and the hassle of owning.

      Based on my calculations, the answer is no for coastal city real estate, and yes for heartland real estate.

  37. AJ, always ready to help. I am a real estate broker who just happened to grow up in the Inner Sunset and Golden Gate Heights. If you want to connect, we can grab a coffee or beer on 9th avenue between irving/judah.

    We have had some success getting over the overbid hurdle. Not always but with some determination and willingness to put a premium out there, it can be done.

  38. Trying to buy a house in San Francisco for a few months with no luck. Always get overbid. Looking around the Sunnyside/Westwood park / Parkside area. Are there any neighborhoods you can suggest in the city or peninsula that would be good buys given the RE cycles? San Carlos seems to be getting expensive too which is the other option. Brisbane? Belmont? Tried to get the GG heights but it seems to have gotten so popular that its hard to get something around 1.5.

  39. I like the overall arc of the emotions involved and the personal connections you have to the subject in Tahoe and plans in Hawai’i. It gives the subject a lot of depth. Thanks for sharing your thoughtful position.

    I sold in the Austin market last year and felt near the peak. Most of the purchasers of homes in my area were investors looking to rent, but I’m not sure what they saw that I still can’t. The rents didn’t support the purchase prices and prices have since begun to fall. I’m looking forward to opportunities should a coastal slump initiate in the next few years.

    1. What did you end up renting or buying in its place? Is Austin really topping out? Because from a relative standpoint, Austin is still so cheap compared to coastal city real estate. So perhaps all the investors are coming from out of town?

      Can you share some numbers on purchase price and selling price and how long you held it?

      1. I moved north of Seattle to live in mountains. I bought a place with a lot of expansion potential and relatively flat land. I may have bought close to a peak, but the local signs still point upward and I’m in it for the long haul.

        I built a new place in the NW Austin area for around $200,000 and sold at around $280,000 after eight years. The purchasing investor is betting on rising rents and property appreciation to bail out a good stretch of negative cashflow.

        I’m not a real estate pro by any stretch and there are parts of the Austin suburbs that are still rising in value. My parents are selling near $450,000 after holding about 12 years at at 36% gain. They have a unique property in a neighborhood with larger lot sizes (1/2 acre+) of a suburban area known for having the best schools.

        There’s still significant downward pressure on areas that have been built out more recently around the city. There is so much construction that you can often buy a new build 10 minutes farther away for a little less or no more. The sprawl over the last 25 years is staggering.

        The city core is still experiencing upward price pressure and a few newer developing areas like Mueller (old Air Force base in town turned neighborhood) are exploding for similar reasons — namely exclusivity — to my parent’s place.

        A lot of the upward price pressure has been folks moving to the area from coastal locales and many large companies competing for local tech talent by paying higher and higher salaries locally. There’s still far more opportunity to spread out that in any coastal location and the people sticking around generally want affordable space more than they want a view or a specific location. That’s the draw of a place like Austin.

  40. Hey Sam. Loved the end paragraph cause yeah, at the end of it all, what are we really doing this for?

    Anyway, I just wanted to chime in and mention that if you are buying as a long-term rental, serious corrections seem to mean little. If you have budgeted a small monthly cash flow from a unit, or even just break even, the renters will be covering all of your mortgage and other costs. True, your net worth figure will decline on paper, but if the overall value of the property decreases at a faster rate than the rent, your rate of return calculated by a new prospective investor will actually look better. None of that really matters because you still paid what you paid for it, but in the end, you should be able to hold for 5, 10, or 15yrs until the mortgage is paid off by the renters and walk away with a bucket of cash or leverage that up into another deal.

    Could your down payment had done better somewhere else? Probably, but so long as the downturn doesn’t create massive vacancies, it should be fine. And you might even still have a good deal of depreciation to use come tax time.

    So yeah, buy, rent, and hold long term. That’s our simple strategy. But again, your wisdom far outweighs us mere mortals so feel free to slice through this logic as well.


  41. Great article! We have been house hunting here in Seattle for the past 2 years, and the market just seems out of control. In the city, most homes have 20+ offers, and in the in the suburbs, homes that sold in 2015 for 500k are going for 900k. It feels like a bubble and we decided to keep renting and hopefully take advantage of the dip as you describe it. My question is how do you view high influx of foreign cash buyers in places like Seattle, SF and the coastal cities? It was touched upon briefly in the comments above regarding NYC investmen, but are these foreign cash investments as cyclical as the typical real estate cycle, or are we going to continue to see this trend?

  42. Debra Apple

    I am thinking about selling a single family home in SCAL (which is being rented out) this summer to purchase a duplex or triplex.

  43. All about timing

    Hi Sam,

    I am thinking about selling a single family home in SCAL (which is being rented out) this summer to purchase a duplex or triplex. Due to 1031 exchange, I will have to purchase something by Jan or Feb 2019, all depending on the timing of the sell. If I am able to sell this summer, I will be very lucky to sell it at its peak, but it also puts me at buying during the peak as well. Should I continue with the plan? The current home is less than 900 sq ft & is valued at $500-$550K which I think is the max. I currently owe $222k but after 1031 exchange, will acquire $450K in debt.

  44. Samurai- The 2008-2011 pull back was 27% as shown on the graph, that was with poor underwriting guidelines and massive fraud :) We are up nearly 80% since that time, if and when there is another pull back period, do you think we will see a drop of nearly the same 27%? Despite our underwriting guidelines being arguably much better then there were in the past? What wouldn’t surprise you from a pullback perspective in San Francisco when we have a period of correction. Great job on the blog. Anyone else please chime with your opinions.

  45. Hi Sam:
    I know exactly what you described. I read many article but yours really sinks in. It really brought back what we went thru.

    We bough a home in Irvine at peak (of course we did not know that was the peak) in 2005 for $710K only to see the neighbors next door bought theirs (which is much bigger) for 599K in 2007 thru probate. The market was so bad that we were able to file a re-assessment request to the County to have our property lowered. The only comfort we had was that my job with the City of LA was pretty secured. Otherwise I would have had the fear of being laid off too, and I truly understand the fear.

    I am thinking about buying a home to retire (and also for investment) and I am waiting for the market to go down. Hope it will happen around 2021.

  46. I’m particularly interested in buying rental property in Vegas. The Housing Cycle: Market by Market graph show Vegas to be roughly in the middle of Phase 2. Any thoughts on the timeline for when it would reach Maturing Exuberance? <3 years? 3-5 years? 5-7 years?

  47. Sam,

    I’m a local San Francisco resident living with parents. I recently bought a house in North Natomas Sacramento for $400K range. How do you feel about the potential growth of Sacramento real estate (North Natomas, Elk Grove, Roseville)? I think bay area market more or less will push the Sacramento market. Those who couldn’t afford to live in the bay are moving north for a better life style, bigger houses, and cheaper living expense.


  48. Is there a way to show the inflation adjusted or “real” changes in the prices of property?

  49. So based on these projections, when would be a good time to buy in Minneapolis? Am I interpreting it correctly and looking at like three years from now?

  50. Your observations are insightful. I am selling my house in Atlanta and relocating to Dallas and worried I will be in a hotter market. Now I am confused whether I should buy or rent and preserve cash from the sell in Atlanta. Any advice? Much appreciated. Thanks!

  51. Sam, I really appreciate such a clear breakdown of the situation in this article. I wanted to get your opinion on my particular situation as you seem to know California markets pretty well.

    I’m relocating with wife and toddler to LA for a dream job with a company I’ve been trying to break into for a while. We have $260k in savings/equity from our previous home in Denver (we bought for $193k then sold for over $400k several years later, amazing timing to say the least).

    We’re looking at a house in the San Fernando Valley (Woodland Hills specifically) for $730k. We’d be putting $150k down. With both of us working, we’d be putting roughly 40% of our income into the mortgage each month. The house is four bedrooms and would easily accommodate us for all our remaining phases of life (one more kid through retirement). It’s mid-century modern and is beautiful.

    With ample savings in reserve, and having the perspective of holding the house long-term, we *think* we feel that this is a smart decision. But we’ve had the sense of “Jeeze, we’re really buying at a market peak” and feel that a reset is looming on the horizon.

    Are we crazy to buy this house? There’s really not an option to get a home for much less in this area, at least one with decent schools in a safe area.

  52. Sam,

    (Disclaimer: sorry for the rant)

    This is the article I needed to see today. I found FS about a month ago when doing research for buying a home here in San Diego, CA. Homes in the $600k range are selling like hot cakes, but homes in the mid $800k’s+ have been sitting on the market for a long time. I agree with most of your research you have put in previous blog posts for coastal cities, but also was feeling a serious case of FOMO. The FOMO comes from the thinking in my head that I want to set up my family for success and especially my kids by buying a house in a particularly good school district and that I feel like prices in Cali (SD in my case) are just going to continue to go up and up.

    Anyways this brings me to what I am currently going through. After reading all your previous blogs on this subject, I was going to take a risk on buying a new home in the 900K range. I knew I could take the risk of a down turn because this house was my dream home and the one I probably would retire in. I’ve been trying to work with the builder to sell it to me for below what the other builds sold for because this particular unit has sat on the market for 140 days. Last week, they finally decided to sell it to me, I told them I needed a week to get things in order before I could come in and sign the paperwork. This morning I woke up to a phone call from my real estate agent telling me that the house sold to another buyer.

    Anyways perhaps this is a blessing in disguise. Hopefully what you have projected comes true. (I hope in my case sooner rather than later ;p).

    My one question to you though is even with what you noted above, how do you account for the all the news we are hearing about lack of supply and affordable housing? You always hear the pundits say that credit is strong, lending practices are stronger than pre 08, and supply is short in these coastal CA cities?

    1. this article just helped us walk away from buying in Los Angeles. We are going to rent for a few more years and try to yet again “buy low and sell high.”

  53. Sam,

    I think DC is a little more mature on the curve than the graphic gives it credit for. DC had the worst returns last year of any of the top 20 metro regions (about 2% y-o-y) and has seen rental prices drop.

    A great way to value homes is as a business. What is the cashflow you can generate from rent? In DC, rents overall are close to what they were 5 years ago and rental vacancies are up 20% y-o-y. So why the major appreciation on the underlying asset? I blame cheaper financing and greater leverage. I think 2016 with it’s 3.5% mortgage rates and 3.5% downpayment for the average first time home buyer will be seen as the peak here.

      1. Kevin Carter

        Sam –

        Same poster coming back to say we bought our first house in DC and close Friday. Purchased in DC-suburbs of Montgomery County where homes are dropping 10-20% over last year’s high.

        Our home (a flip) was listed in May for $850k. They came down gradually over months until they settled at $760k in July. We made an offer at $730k in September and refused to budge. Investor continued to sit on it, put another $5k into it (fence + washer/dryer/blinds), but finally agreed to our original offer in October.

        Knowing what he paid, his transaction costs ($46k in realtor fees+transfer taxes), and what he put in, and his seven months of carry costs, I can almost guarantee he took a loss.

        One house doesn’t make the market, but it is definitely not a sellers market in this neighborhood. Don’t know if this is a harbinger of things to come.

  54. Not sleeping In Denver

    How do you feel about Denver? I’m about to buy a home there for 500,000 and scared shitless. Even though it’s a nice size home (2700 sq ft), I am having sleepless nights over it. It’s less than 10 percent our gross per your advice and we have a decent nut if the shit hits the fan…

    1. Denver has been on fire! If you don’t feel anxiety behind buying now, then there is probably something wrong with you.

      Less than 10% of your gross income is great.

      Just ask yourself if you’ll be OK losing 20% of its value, or $100,000 within 5 years. If you are, and plan to stay in the house for a while, then it doesn’t really matter.

      1. Fascinating article, I have additional data points for Denver.

        First, my rent is only going up $50 this month on renewal of my 12 month lease, from $1150 to $1200.
        Second, speaking with an agent last month at a new development she said that all the heat is in entry level $350 to $400k market. Get north of $500 and it’s already looking soft.

        I’ve already zero’d out my debits and am making short term investments while I wait to see what the market does for another year before I make a move.

  55. I decided to listen to the audio version this time. With that ending, I’m glad I did. I wish you would push the audio version more, both through your writing and through your UI. But I understand it’s still in a somewhat experimental stage.

    As for the RE market, it sounds really similar to crypto. I can tell you that a lot of people buying now will think one of two things:
    1) It’s gone up a lot so it’s going to keep going up.
    2) It’s going to go down but I can be the smart guy who sells before everyone else realizes.

    Both very dangerous games to play. Ends up with a lot of people doing mental gymnastics to backwards rationalize a lack of research/patience into getting screwed by the market, not caring about losses, etc.

    Of course, as you said, some people also know the risk and take it willingly. There is upside too, after all.

    1. Thanks for listening. The podcast is really for me to practice oral communication and let my boy have a library of audio clips for him to listen to if I were to pass prematurely. If readers find enjoyment in the audio version, they can always find it on iTunes or sometimes at the end of each post. I’m constrained due to time.

      Regarding comparing real estate to cryptos, at least real estate has an income stream that creates an embedded value. It’s just problematic when people are paying record prices while that income stream is declining. Buyers beware!

  56. We sold our Long Island condo at the height of the previous housing boom in 2006. Turned a $7,000 down payment in 1998 into a $250,000 profit in 2006. And then the economy tanked in 2008. But not before Mrs. G and I bought our Charlotte, NC, home for $225K. It’s on the market now for $250K. As long as we get at least $240K, we’ll get our exactly what we paid for it (damn those realtor fees and closing costs!). Yes, the real estate market is a fickle beast. Thanks for sharing your wisdom, Sam. Peace.

  57. At the height of the 2008 financial crisis my house dropped from $650,000 to $400,000. My neighbor bought at the top at $650,000. I joked about it as it spiraled downward. Now my house is appraised at 1,045,000 dollars and I see 30 people at one time at any open house. I live 40 miles south of San Francisco. My area increased 37% in one year. Ouch

    1. Indeed. Think how much the house you one day aspire to move up to has appreciated. And how much the houses that your children will eventually buy have appreciated. Think how easy it will be for your children to achieve financial independence once half of their income has to go towards housing. Housing price inflation is so great that we should wish for it in other areas, more expensive cars, computers, more expensive energy, insurance, food, medicine.

  58. We bought our first house together at the peak of the 2007 cycle. We could’ve kept renting, but had a good relocation package with our company so we bought. When they transferred us 5 yrs later it sold for 15% less (~$33k) than what we paid for it, and that wasn’t including the $20k of improvements we put into it. Fortunately, the company reimbursed us within 90% of our purchase price, but it was still a loss.
    Now we’re moving for a job again, and we will be buying this summer. Our current house may sell for more than we paid for it, but again, we have put a lot into it over the last 5 years. No way we’re getting any of that value back. That’s fine, because we got to enjy those improvements while we lived there. I also don’t look at our residence as a great investment so it doesn’t pain me that we haven’t made money on one yet. C’est la vie. At least with this next place we will most likely just buy it outright or have a very low mortgage on it.

    1. That’s great your company hooked you up. I was thinking of taking an offer in NyC for a hefty raise in 2011, but I decided the move wasn’t for me and I didn’t want to sell my house. But in retrospect, it might have been a good idea to rent out the house and see what NYC was like again as a senior exec.

  59. Frugal investor

    Hi Sam,
    Do you think it always makes sense to take out a mortgage? If you pay all cash at least you don’t need to worry about foreclosure during the next downturn.

    1. It doesn’t make sense to always take out a mortgage. The mortgage is taken because we want to buy something we can’t really afford. But it also has to do with the limited supply of funds and the desire to diversify by investing in equities and other investments as well.

      If one is wealthy enough to buy a house with cash and then by other investments without leverage, more power to them! I plan to be in the state in around the year 2023.

      I’m currently saving money to buy that Hawaiian dream house. It’s a fun talking to her.

      1. Troy Buckland

        Aloha Sam,

        I live and have invested in real estate here in Hawaii. If I read correctly, you’re trying to buy a high end home on a dip and locate out here by 2023? So you’d be expecting this dip to come somewhere in and around 2020-2023?

        I was thinking about trading in one or two of my small condo rentals by 2020 to upgrade to a high end fixer upper home investment property.

        1. It clearly seems like the high end has been fading for a long time now (3-4 years), at least in Kahala, Honolulu.

          I will buy when I think prices have bottomed or there is a catalyst in site. Or, I will try to get a deal within 5 years before my son goes to kindergarten.

    2. If you have the cash but still decide to take a mortgage (e.g. To diversify or to soften the blow of financial repression through artificially mandated low interest rates(*)) then the impact of the next recession will be small. You can still use the saved cash to pay your mortgage once the recession hits. In addition you also have the extra option of walking away and sticking the bank with some of the loss, if the downturn is severe.

      (*) Why accept the financial repression of suppressed monopoly interest rates through government fiat, which essentially suppress your returns on safe investments to below inflation, in order to indirectly redistribute it to borrowers? Take out a loan too and balance things out for yourself!

  60. We bought our 3 BR Northern Virginia townhouse in late 2005 for $510k. Lived in it for 4 years, watched the value plummet, and rented it out from late 2009 to late 2011 while we lived in NYC. Moved back in for a few years, then bought our current 5 BR single family home a few miles away in summer 2015.

    We tried listing it in August for $540k (comps had gone as high as $550k that spring, but the units were nicer inside). Put down new flooring and paint. No luck. We cut the price several times (I think down to $515k), but it sat on the market for 5 months. The local market had a glut of similar units in horrible shaped listed way too high that were hurting everything. Finally decided to put renters in it Jan of 2016, who rented for 13 months.

    Relisted in early March 2017 for $530k, and had multiple offers in the first 3 days. We did put in about $2k worth of landscaping. Went with the strongest offer (full list) and closed a month later. I negotiated a 1% listing to my seller’s agent, and 2.5% to the buyer’s.

    I learned just how seasonal real estate is (at least in our region), and how much your home’s value can be affected by comps. I don’t think the agent matters terribly, although there are certainly bad ones out there. We used the same agent both times.

    1. I’m impressed you were able to negotiate the selling agent fee down to only 1%! Well done there! Can you sure the starting commission fee. And how you did it?

      Do you think you’re a five bedroom house has appreciated in value? Where in Virginia was your townhouse? Ours was in McLean, northern virginia.

      1. As I understand, many brokers will ask for the traditional 6%, which is split 50/50. I think a more reasonable starting fee structure in a high cost area is 5%, again split 50/50 between buyer’s and seller’s agents.

        That said, I have seen plenty of “discount brokers” advertising 4.5% listings. I’m not sure how they split, but I’m betting either 2.25% to both sides, or maybe the listing agent only takes 2%.

        In our case, Redfin had made an aggressive move on the DC area, offering 1% listings. I took that info to an acquaintance who I knew was a realtor at a full service broker (Long & Foster), and asked her if she was interested in matching it, which she did. She asked me what I wanted her to offer to buyer’s agents, and I told her to go with 2.5%. I probably could have gone with 2% and still sold the house, but didn’t want to get greedy.

        My experience is that realtors love getting listings, because they can just throw a lockbox on the door and let the buyer’s agents do a lot of the work. They also get to throw their sign in the yard and get the free advertising that comes with it. I let our agent put up a “coming soon” sign a full 30 days before the house hit the market.

        My primary regret was letting the house sit on the market so long in fall of 2015 (5 months). I should have moved more quickly to get renters in, since sitting empty kills cash flow.

        If you’re ever looking for an idea for an article (and haven’t done this already), I think you could do something cool on online real estate sites. The history of Redfin, Trulia, and Zillow is fascinating, and reads like something out of a book or movie (think “The Social Network), complete with massive IP theft and betrayal. The business models have changed so much, and the realtors really do seem to have won the battle against tech disruption.

        Our townhouse was in Vienna (just west of McLean), as is the current single family home. We paid $840k for that, which I think was priced pretty perfectly. It has the largest floorplan, basement, and garage of any house in the development (4,600 sq ft, including the basement. 2.5 car garage with double-high ceilings). It has a large, flat lot (2/3 of an acre), sits on elevated ground (no drainage issues), and backs to protected forest. The previous owner was an interior designer, and spent a cool $150k renovating it.

        Watching sales the past 3 years, unrenovated houses go for somewhere in the $700k’s, and renovated houses go for $850k-ish. In our case, we bought within 2 years of the renovation (everything is still new and shiny), and I really like the previous owner’s taste. So much of what I see is still being done with cherry cabinets and black granite… very 2005. I’m bullish on the whole Northern Virginia area, but especially anything close to Tyson’s Corner, which just continues to blow up. We’re a mile from the silver line metro. Great schools… We have a community pool about 1/8 mile away (easy walk).

        The big decision for us was whether to stay in the 1800 sq ft, 3 BR townhouse. We were really tempted, but I’m so glad we upsized. I love to entertain, and we now have the room to throw large (100+ people) parties. No more shared walls and listening to the neighbor’s piano practice. No more getting door dings from careless neighbors in the parking lot, worrying about hail ruining the car, or having to carry small children through the rain/ice/snow to & from the car. I have a place to do my own automotive maintenance. I’d like to say no more kids’ toys in the living room (we have one of the bedrooms set up as a playroom), but that would be a lie, because small children want to be close to mom & dad, which means they drag their toys into the living room where everyone else is.

        Our parents live far away (mine are in Seattle); we now have a dedicated guest room and bathroom that is on the same level as the living areas (no stairs for aging grandparents to deal with). We also have friends with kids that live in other metro areas and want to come visit; they no longer need to stay in hotels (we put the parents in the guest room, and the kids have 2 bedrooms to split).

        Both my wife and I agree upsizing was a great decision for us!

        1. Everyone should negotiate the listing commission fee to 1% in high priced areas (or 1.5% in others). The agents will cry and balk and you will get many excuses why they provide a better service than the next guy/gal. But it’s not brain surgery and many great realtors out there willing to negotiate with you. I live in SF bay area and have sold numerous homes for 1-1.5% listing fee and 2.5% to buyer’s agent. Especially in a hot market, you do 1-2 open houses and get multiple offers. The most experienced agents typically prefer to only list as they know this is much less work. I know this field very well, with many close friends in the business. It’s exactly as Reisen described above.

          Reisen, can you tell us more about the online real estate site battle you described? Would be interesting reading. The Association of Realtors have a monopoly as they control the MLS. If you look at the business model it is definitely a monopoly and they spend a great deal of money (lobby) to keep this monopoly going. I would love to see technology disrupt it.

          I have come to really LOVE Redfin (so much awesome data, user friendly, and accurate). It allows you to draw the boundaries of a neighborhood with your mouse, put in your parameters (size, price, etc), create a custom label name (‘My Hood’ for example), and when such a listing hits the market, you get an instant email notifying you “One new listing in My Hood”. So you don’t have to be searching all the time all over the place. My one agent friend admits to using Redfin to do her own house search even with her inside access to the MLS. The RE associations have their own online presence with Realtor.com, but is not nearly as good as Redfin in my opinion.

          Sam–Contact Redfin! Do a series of posts to educate your readers about the real estate sales process and how we can all be smarter consumers (and better negotiators). I hope companies like Redfin will challenge the industry and give us consumers more choice. I hate when an industry is controlled by one source and we are at their mercy. It feels un-American and anti-Capitalist!

  61. Perhaps it’s just a terminology issue but I find it unrealistic to talk about a housing oversupply in San Francisco. In The Bay Area there is only extreme undersupply which justifies a x10 house price premium over the rest of the country (or at least many market players think so), and not so extreme undersupply where prices drop to an 8x house price premium over the rest of the country. But there’s never an actual oversupply.

  62. Sam,

    What are your thoughts about buying your primary residence at the top of the cycle? Knowing your of the belief that you are shorting the property market by renting (I agree with this), would you still advocate buying a primary residence regardless of the environment? (I’m in Australia where property has gone up for about the last 20 years)

  63. Hey Sam, My wife and I just bought our primary residence in one of Silicon Valley’s nicer neighborhoods a couple months ago before the fed raised rates. We proceeded with purchasing even acknowledging this might be near the top of the market, since we see ourselves staying in SV for a long time and want to lock ourselves into in a neighborhood with great public schools for our daughter. We could rent, but who knows in the long run where prices will go, and I want the stability of staying in the same house instead of being at the mercy of a landlord raising rent or kicking us out.

    Our thinking has been – in a market meltdown scenario, equities (our down payment) would take a hit, and lending is likely to tighten up. We’re young and rely on lending to purchase our home – It seems like unless you’re a buyer with lots of cash, it might be hard to take advantage of price drops. Do you agree?

    One move we did make as a hedge – the house we bought is comfortable for the three of us at 1600sqft, but a bit of a fixer-upper, and on a lot zoned for a 3000sqft home. In the event of a meltdown we may be able to take advantage of out-of-work home builders to renovate and add back what value we lost during a correction.

    Time will tell if this was a good or bad decision, but for now we’re happy in our (maybe overpriced) home

    1. I really like how you have a hedge regarding expanding the property. Expansion really is what will make you money, given building costs are cheaper than selling prices.

      Worst case decline can’t be worsethan the previous crisis. In the previous crisis prime property was down no more than 25%. And if you plan to stay here long term, you’ll keep making money, keeping down your mortgage, and keep building wealth.

  64. Ms. Conviviality

    Back in 2014, it was dreadful to see the value of my condo still down 62% from the purchase price of $132,000 in 2006.  After repeated but unsuccessful attempts to get my bank to agree to modify the loan from 6.25% to 3.75% I stopped making payments on the mortgage.  It wasn’t easy when I made the decision and I felt even worse every time the phone rang with a telephone number I didn’t recognize or got yet another letter from the bank letting me know I was late on the payments.  It wasn’t until 12 months later that the bank finally agreed to modify the loan.  Even with the bank’s offer, I was still on the losing end of the deal because the 22 years I had left on the loan turned into a new 40 year loan.  That added about an additional $200,000 in payments to the loan. There were a few reasons I kept the condo even though keeping the place wasn’t financially the best move:               
    1) Extreme guilt for not being an honorable person. This, in combination with discovering FS and reading about how he kept paying on his underwater Tahoe property and how real estate values will get better even if it’s just due to inflation.         
    2) At the time I reasoned that it would take 3-4 years before rent provided positive cash flow.  It’s been 4 years now and although rent has gone up it’ll be another two years before breakeven.  The bright side is that the condo is in a great location so I never had any vacancies.
    3) I didn’t want to have a foreclosure on my credit history because I want to have the option to take out loans in the future because I have entrepreneurial goals.

    Today, the condo is 50% underwater.

    1. Kathy Abell

      Can you please explain why you didn’t go through a different financial institution to refinance your existing mortgage to a new loan with a lower rate and shorter term? I don’t understand why you would simply stop making payments. Did you lose your income? or all the equity in the property?

      1. Ms. Conviviality

        The mortgage balance was $121K in 2014 and no bank would loan that much for a condo with a value of $49K. Although the condo was being rented out at the time, rent only covered part of the mortgage and it was costing an additional $600/month to pay the rest of the mortgage and association fee. The thought was that the $600/month could have better returns elsewhere. It turns out I would have been right. If I had put the $600/month into the S&P, starting in 2012 when I initially tried to get the bank to allow for a short sell, this is what the returns would have been:

        Year S&P Returns End of Year Value
        2012 15.89% $8,501
        2013 32.15% $19,634
        2014 13.52% $30,006
        2015 1.38% $37,674
        2016 11.77% $49,759
        2017 21.64% $68,546

        And what would you know?! The value of the condo is now $66,000. Looks like I should have put that extra cash into the S&P and bought back the condo today in cash and still make a profit!

        To answer your question on why I stopped making payments on the mortgage: It seemed really unfair that I was held captive to the property since the bank would not allow a short sale. The condo was my first home purchase so I bought the place because I liked the location and it was perfect while living the single life; lived there for 6 years. I had no intention in it being a forever home and was too naïve to know that a housing bubble could exist. In addition, the bank denied a reduction in the interest rate from 6.25% to the rate at the time of 3.75% so I consulted a real estate attorney and he recommended not making payments since he noticed that banks only modified loan terms after there were missed payments.

  65. We purchased our townhome in 2005 which wasn’t exactly the peak, but high enough where we haven’t seen any real equity gains for a decade. It’s now a rental, but I definitely deluded myself into thinking it was an “investment” from the beginning. :)

  66. We purchased our 2 bedroom condo at the peak in 2007. The price is just back to that point recently. I just kept paying the mortgage. We averaged down by buying another condo in 2011. I think it will work out okay in the long run.
    I don’t think Portland is quite at SF or Seattle level yet. In the past, we usually lag behind about a year, but who knows. The market is different now. There are so many new buildings coming up. Affordability is a big issue too. Hopefully, I can sell before the real estate market drops. It’s okay for now, as long as the rent is coming in.

  67. As you may know Sam, I’m an avid reader of FS and follow your advice in many aspects of my financial life. You had posted once that 10% of your gross income for your house expense was ideal if you wanted to be independent sooner rather than later. I was able to do that in spite of buying at the top of 2008 -I way over paid but I like the place and fixed it all up the way I wanted it which was even more money. But here we are, the price has re-flated while I was busy working my day job and I suggest others do the same, focus on what you can do.

  68. We bought our home for approximately the same price that the previous residence paid for it 10 years earlier. The owners we bought from paid 2x times the owners they bought from 5 years earlier. The owners we bought from basically over paid, imho. Generally, I think we got a good deal.

  69. Casual Observer

    I still think this analysis is being done with broad strokes and that any real estate analysis needs to be more segmented. Multi-family is certainly hurting from over supply that will continue to hit the market (completions) through 2019, and will depress market rent growth over the next 5-10 years. Second-time move up and luxury single-family is certainly overextended as well.

    But the entry level product (think Inland Empire in Southern CA) has so much pent up demand…we are forming 1.3-1.6 million households a year for the last 5-10 years and have had starts around 1.0 million – 1.3 million. When you factor in existing homes being knocked down intentionally, going into obsolescence or being hit with a natural disaster (think Houston last year), there is clear pent up demand that we are probably going to have to hit 1.5-1.6 million starts for a 5 year period in order to meet. People delayed family formation / kids (you are a great example!) because of 1) changing lifestyles and 2) hangover/uncertainty from the recession. Now, birth rates are accelerating – and these buyers are looking to move out from urban multi-family into entry-level suburban product.

    So yes – bearish on multi-family everywhere, bearish on the top 40% of product (price wise) in each market, but incredibly bullish on the entry-level product, which is going to have to be primarily built by new construction. Look at the existing home sales releases – the detail of them, not the headline. “Existing Home Sales up just 1% This month”….Yeah, but inventory was down 20%…that relative spread tells you that its not a demand problem, its a supply problem.

    Anyways – I also had another question for you Sam (just my own curiosity). Where you in M&A/ECM/DCM, Equity Research or Sales & Trading? I’m in research but starting to think about next steps.


  70. Sam, I read this post over the breakfast table for my husband and he turned pink and teary from the last two paragraphs! Of course, he believes that in 90 years everyone will be living underground. Covered the Earth’s surface with solar panels. Grow vertical gardens… anyway he’s crazy but even he was moved!

  71. Financial Orchid

    That’s the stark difference between America and Asia. Bankrupt and a new man again in 7 years in America. Over extend and reset.

    During the Asian Financial Crisis of 97 people flung themselves off buildings when they could not meet their mortgage(s) anymore rather than declare bankruptcy. Granted it was a lot more insane with individuals carrying anything from 10 to 30 mortgages (using the prior flat as collateral for the next acquisition creating a domino effect). Also probably due to face and pride to family and business relations.

    1. Financial Orchid

      Oh,your ending was a bit sad. That’s LONG ways away. A LOT of other things unforseeable will happen before then.

  72. Sam,

    Thank you for the thoughtful analysis. Always enjoy reading your blog!

    Living in Seattle, I share the same view/concern on the topping of coastal housing market. With that said, in your last post, you mentioned that you deployed three quarters of your house sale proceeds into stock during the market turmoil in Q1. I am wondering why you did that if you foresee doomsday of the current economic cycle.

    1. Sure. First of all, with a seven out of 10 rating for the stock market outlook, I don’t think that is the definition of doomsday. If I had a one or two out of 10 rating, that would be more appropriate.

      But a doomsday could be pretty cool! Can you share the specific passages where you think I think that way? I need to work on my delivery because I thought I ended the post with a discussion how nothing really changes if you buy the top of the market.

      I reduced risk by $815,000 in 2017. So even if I reinvested 100% of the proceeds in the stock market, my risk exposure is still $815,000 less.

      How about you? How are you preparing for Armageddon.

      1. Maybe I am not reading closely enough but I don’t understand why $815,000. mortgage = risk explosure. I guess if you had low % equity and the market declined you could lose all your equity or even have a loss if you had to sell. I always think leverage lowers risk because you have less invested and smaller increases in MV are multiplied. Of course you have to be sure you have enough cash flow to make payments. I keep my interest rate as low as possible and the payments the lowest the credit union will let me, so I can always make sure I can make the payments. In my case, two small rental units within the house plus my small pension pull in enough to cover all my housing and living expenses.

        But I agree with your decision to sell the rental house. Way too much maintenance and hassle to manage property like that. You have plenty of real estate exposure.

        As for mistakes, I have been through your Tahoe scenario of emotions a couple of times and lived through it. I have also been invested in several of the biggest runs in residential real estate in my city.

        My worst real estate story is so scarring emotionally that I can’t describe it. But after 9 years of hanging on to a crappy condo, the market took off, and I was off to the races with $35,000. Sold the condo, built a new house, sold after 6 years, my equity was $165,000 and a rental suite had paid the mortgage payment for the 6 years.

        Coasted in another condo but on the west side of the city this time for 10 years, and then bought a big house even further west in a rising market. 13 years later house prices here have increased many fold and my equity is now in the millions. I should have done much better given my Urban Land Economics and Accounting background, but still my knowledge did help a lot in assessing markets.

        I don’t like living in condos and dealing with strata corporations, and have not done well financially with them. For liveability, duplexes and fourplexes are okay. That being said, due to affordability, condo prices have skyrocketed here too. Recreational property is also much riskier than residential real estate. Bare land is also not a good investment due to carrying costs and other factors. Building a house is not for the faint of heart. I have built 3 and renovated a couple. Cost overruns and costly delays are certainties and will empty all your contingency funds. Very stressful and I was in the commercial construction and construction financing industry so I know all the problems that are possible and inevitable and how to mitigate risk.

        Yes, I strongly advise buying a house in a good location, having mortgage helpers, not worrying about paying off mortgages (the only good leverage). I would not invest in real estate in a market that I was not very familiar with. Buy the best house you can afford in the best area you can afford (no capital gains tax on principal residence in Canada). Exception, if you can’t hang on for 10 years, you impulsively make drastic changes in your life, or you leave life to chance.

        How long do we have to wait to find out whether your predictions are correct? One predictor of falling prices I have noticed is the stock price of Home Depot, which has been falling since beginning of January 2018. What do you make of that?

        1. Sure. I can either have $2,740,000 (price house sold for) of exposure with no debt, or $2,740,000 in exposure with debt.

          I don’t believe leverage lowers risk unless one has the plan to welch on their debt contracts. Because I always plan to honor the contracts I sign, debt equals risk exposure to me.

  73. Interesting graph that shows Chicago in the “early recovery” stage. As a 2Y MBA student headed to investment banking in Chicago, I’m currently grappling on whether to rent or buy. Part of me really wants to put down roots for some stability for my kids. The other part realizes that it makes more financial sense to rent for a few more years to save up money in order to afford a better house. Decisions!

    1. I presume this is going to vary somewhat based on neighborhood. I am in the midst of plunking down for a townhome in River North which has averaged 2.5% appreciation since 04’. Doesn’t seem to be overheated, but new construction looks a bit more frothy..Sam would probably say the best time to buy is yesterday, unless the market is in the exuberance phase.

      1. Looking at the chart posted – it seems like we are at the end of a 10-year cycle and it should come down. Luckily I still have another year to wait to see what happens. Chances are I will need to wait in order to save up for higher downpayment and extra cash for the insane property taxes.

    2. You should probably wait to see 1) if you like your company, 2) if you like investment banking, 3) if you really want to stay in Chicago.

      So much opportunity right out of business school, and the Chicago market looks like it’s not going anywhere anytime soon with rents so weak.

      1. Chicago needs to go thru its full reset though the economic indicators in the workforce looks solid right now. I was there for 10 days…

        For a city/state that can raise RE taxes and re-assess property values anytime they want, that takes a big bite out of one’s home appreciation potential

  74. I like the second option, where even if you buy at the top of the market, life goes on as normal. As long as you’re holding real estate long term, you should be able to continue on without anxiety and know your asset value will increase in the next cycle.

  75. Great topic! You described the stages really well. Nobody wants to admit they bought at the top early on but as time goes by reality starts to sink in. Your plans to take your family up to the Tahoe property sound priceless. Love your descriptive imagery of the future!

  76. Thanks for the insight Sam! So whats your best guess as to when we see the bottom and re-entry point into the coastal real estate? (ie SF, NYC and your Hawaii dream home!)

    My thoughts are end 2018/early 2019. It feels more money is sloshing around then in previous cycles so my view is things snap back quicker then the past

      1. I would pick further out than that.

        It’s 2018, + two years for all market participants to understand that real estate is down + 3-4 years actually in the down market.

        Bottom could be 2022-24?

      2. My crystal ball says September 8, 2020!

        The homes I’ve been eyeing in Honolulu have literally been sitting on the market for 3 years. It’s been honestly nice to see. Give me 3 more years of saving money Honolulu! ha

  77. Being around DC, the intricacies of the real estate market get even more complicated because we have the worst traffic in America and how close your home is to our Metro system also adds an additional factor. For instance, my home never declines as much as the rest in the region when things go down because I’m within walking distance of a Metro station. But I’m a good 15 minute walk to the station – that matters too! For many Americans, even a 15 minute walk is too much (sadly).

    So a lot of folks here who bought at the “top of the market” or near it saw that their house barely went down much when things declined because they’re near a Metro. And driving in the DC area is so torturous that most would choose death by tiger-mauling over it.

  78. Sam,
    Being in the Bay Area, I still see prices moving higher (literally by the week) and most of the money coming from overseas. Do you see any real catalyst that will slow that $river?

    I’ve been keeping close tabs on the local market and it seems like folks’ irrationality is beyond my comprehension.

    Great article and especially love the charts!

    1. I hear yah man. Nuts! The only catalysts I see are people realizing rents have plateaued and that they can get a better deal by just renting. Eventually, the typical person cannot afford to buy the median $1.5-$1.6M home, but it’s hard to see prices go down by much when Airbnb and Uber IPOs are up next.

      It’s hard to tell when things will turn. I remember everybody buying property in 2006 as well with no regard for fundamentals.

      At the end of the day, it’s just money! No risk, no reward.

      I just donno how the renters in SF who want to buy a home are ever gonna buy. If I haven’t bought yet, I would decide to leave, especially if I wanted to start a family.

      Related: Why Real Estate Will Always Be More Attractive Than Stocks

      1. Price appreciation and multiple bids are finally slowing down as I write (2nd week of May, 2018). My wife is a realtor and I work at corporate megaTech.

        Folks I know are having 2nd/3rd child and need to move up. Buyers can afford these homes at $1.2-$2M with their RSU’s and stock portfolios rich with AMZN, GOOGL, AAPL, NVDA, NFLX, FB, INTC… not to mention the foreign buyers.

        So I think that as long as these stocks keep steady (AAPL has Warren Buffet’s and its own $100B buyback support), the housing market will be hitting new highs. It only takes 2 bidders to move a house price up.

  79. Doctor Nancy

    It is impressive to see people win real estate bidding wars in this market when the stock market is showing signs of uncertainty.

    At the end of the day, it’s just money. If you lose it all, you can always work for years to get it back.

    1. “you can always work for years to get it back”

      Hahhahaha are you kidding me?!

      Time is the most valuable thing we’ve all got and being set back financially for the better part of a decade or more is a huge deal. I know people who still haven’t recovered to back where they were before financially from the when the Great Recession began years ago.

      They were in their late 20’s or early 30’s back then and now they’re in their late 30’s or early 40’s financially worse off their parents were at the same age by a large degree. Still stuck paying off school debt for the most part too though the end is in sight there for some of them.

      None of them, me included, ever expect to retire and all of them, me included, are expecting to be be unable to help their kids with their college costs, housing costs, or even their 1st car.

      And if you reply don’t even say word one about work harder or mention “bootstrapping”. We’re all either working 2nd jobs or the 1 job as hard as we can. A few are even working 3rd gig jobs to squeak on by. Our parents never had to do that just to squeak on by.

      Hell my dad was the only 1 working most of the time as a kid and we had a house too and could still afford to go out from time to time. Really you have to go back to the Great Depression Era to see a similar economic condition for your average working adult these days.

  80. Sam, what are your thoughts on areas like Boston, where there’s a huge concentration of top universities, strong R&D presence, and very low inventory of housing? How do these other factors affect what you described above? Thanks!

    1. Boston seems like an obvious next hot spot that could go bonkers. It’s amazing how much of a discount Boston trades to NYC, despite being relatively close and despite having the finance, R&D and academics presence.

      Boston winters are horrible, just like NYC’s winters so I’ve gotta believe the upside is there.

      That said, the last time I went to Boston was 25 years ago!

  81. Great thoughts and analysis as usual Sam! We bought our current house right at the peak in our area in early 2006 and I’m not convinced we have even gotten back to break even yet. Do I care? Not really. I need a place to live, the school district is fantastic, and I’m not planning on moving for at least another 10-20 years. I just keep paying the mortgage (which will be gone in a few years) and I don’t lose any sleep over it!

  82. Being on the outskirts of a high priced coastal area does it make sense to buy a house lot, sit on it for a few years, then build?

    1. Jon Wallace

      Outskirts??? how far away is outskirts? House lots are always useful..A.if they are not very expensive B, you can afford to buy and hold for 10yrs…..check for the county and regional water restrictions, etc. A lot in Cambia, Ca is very nice, but worthless until a large desalination plant is built sewer lines and treatment plants are built and building permits are available. Due diligence is required for these fringe lots and areas……my guess, in 100yrs the lots in cambria, ca now vacant my be buildable, but until then?? Don’t forget the folks taht don’t like others around them…….N. Pelosi and D. Feinstein built on a hill in SFO with CCnRs saying no Asian folks…common area street..a separate tax parcel on the front of all of the homes at this “Compound” hoa failed to pay the taxes on the street……years later, some bright/smart Asian investors bought the street parcel in a tax auction……how do you spell toll road for the HO’s who blew off the taxes on the road parcel……”Helicopter Access, or ????? KARMA ” JW

  83. Hi Sam,

    Has anyone ever told you that your voice sounds just like former US Treasury Secretary Tim Geithner?

    Been listening to old NPR Planet Money podcasts from the financial crises era…

    1. Nope! Sounds like a smart and calm fella though. Let me check out his resume..

      “Geithner spent most of his childhood living abroad, including Zimbabwe, Zambia, India, and Thailand, where he completed high school at the International School Bangkok.[8] As did his father, paternal grandfather, and uncle, Geithner attended Dartmouth College, graduating in 1983, with an A.B. in government and Asian studies.[8] He studied Mandarin at Peking University in 1981, and at Beijing Normal University in 1982;[9] and earned an M.A. in international economics and East Asian studies from Johns Hopkins University’s School of Advanced International Studies in 1985. He has also studied Japanese.”

      Wow, no wonder why we sound alike! I studied at Beijing Normal university as well, but in 1997. I also spent a year in Zambia when I was 1 and attended International schools in Asia for 13 years. President of Warburg Pincus is a pretty good job he has.

      1. Sam,
        I can’t tell you how I love your charts. I am currently following your advice after the sale of my residence, I’m sitting on the cash for at least 3 months maybe longer. I’m really glad I am. I know the feeling of buying at the top and you describe the emotional process perfectly. Thanks, I know you work hard to get the blog together and I really appreciate it.

  84. Sober Finance

    I like the smoothed-out graph that you posted – really shows the effect that time has on good investment property, assuming of course that one purchases at the correct price and has the cash flow to pay off the mortgage (big assumptions, I know).

    Curiously, I didn’t see NYC as a market in the smoothed-out graph. I assumed NYC was currently in the contraction/early downturn, but am curious as to your thoughts on it.

      1. Many signs of oversupply here in Brooklyn.

        Dirty secret in NY real estate is it’s driven by international demand. Many properties are owned by people outside the country, some who will never visit them. Also, there’s negative net migration into the city among native-born Americans, the growth in population comes from immigration. Should our current Republicans federal government make people in Asia and Europe think immigrating to the US or buying a property in NYC right now is a lot like buying your Tahoe lakehouse in 2007 I think we’ll see a 20% correction take place soon.

        1. robert ferguson

          The usual scenario is over building, over supply. Out here on the West Coast that is not happening for a number of reasons and cited as why the market will continue to go up. Maybe the most alarming threatening all markets is the unprecedented debt of the government, the corporate world, and households. How long can the Fed keep it all going without a bigger and bigger bust that will affect all, including real estate?

    1. It doesn’t matter 2 me what is happening in the economy for when when I’m ready 2 move forward in my life that is the right time for me. “When it’s time 2 go, it’s time 2 go.”

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