This is one of those videos that I recorded, and I simply cannot afford just to send it over edition and let it sit for another couple of weeks before it was released. I decided to create this episode as if it was some kind of a live class. I’m going to do today is to go over the five reasons you should not buy a home or be investing in real estate right now (November 2020).
High Demand And Very Low Supply
Why shouldn’t you buy real estate right now at this very instant? One, there is a very high demand and very low supply. What does that create? It makes the houses that are hitting the market come out with a very, very high premium.
To evidence that for those who need proof. The Wall Street Journal already reported back then that US home sales are rising to a new 14-year high, offering a boost to the economy.
This is an article from back on October 22nd. If that’s not enough for you, I have another article, which came out very recently, back on November 12 in 2020, and it talks about how home prices are just rising everywhere.
Why is it that it’s rising? It has to do with many factors. One of them, it’s just merely the whole supply and demand dynamic. Very little supply, very high demand. In addition to that, we got cheap money. Cheap money in the sense that banks are loaning money, and we have historic low-interest rates, and everyone is FOMO. They’re just rushing to the bank and try to qualify for the loan, but still, even if you’re getting cheap money, that always doesn’t mean you should just jump at the very first deal and just get real estate for the sake of buying, just to say that you bought it. The numbers have to make sense, as well. This is something that we’re not seeing happening right now.
This is a property that we’re analyzing sometime this week (see picture below). I wanted to use this one as an example to prove that we are already hitting record-high historical prices and showing you that there is a lot of demand but very little supply. This is the area of Saint Petes in Florida. My search only shows one page with 15 houses, just 15 homes in the market. This wouldn’t have been the case about a year ago. Every time you searched any area in the market, you would have at least two or three pages worth of properties and worth of houses for you just simply to surf around, but we’re having only 14 places available in the market. As soon as they hit the market, they get sold. They get sold at a ridiculously high price.
What I want you to see is just to go down to where the stats are on Zillow. Here are the price changes over eight years, and granted back in 2011, the prices were relatively meager because we had just come out of the real estate bubble. The market was still trying to adjust itself. From then, eight years ago to here, we’re talking that the average prices have increased somewhere between four to five-time what used to be. You see, 50,000 here, and it’s on it’s way up to 250,000, so we are already in a bubble.
A lot of you might be wondering, what do taxes have to do with everything? It has to do a lot. For those who have been following me for quite some time, you will probably remember an episode that I released a couple of months ago. I talked about how you can negotiate your property taxes with the city or with the town where you have your property at. This year I wasn’t so successful in negotiating much because the appraisers in the area were telling me that the comparables in that area where I had my properties were actually at historically high prices. Even though I was not selling my properties, other people around me were flipping their properties up or just only selling it in the market just as it was without any type of renovations, and they were still getting top prices.
That in essence, what it does is that it increases the value of my neighborhood, which is excellent in a way, but it’s not so great when you are paying property taxes because you’re not reaping the full benefits of it, Not just that, it’s eating into your cash flow. I wanted to show you how prices nowadays have already exceeded the historically high prices from back in 2008. We’re talking about the range from 2007, all the way to 2009.
You can see here that the prices are somewhere around, let’s just round that up to 40,000. We’ve seen incremental changes, up and downs, but minor changes over those three years. Take it from that to today. We’re talking about 175,000 as an asking price for the same house, which back in 2008, supposedly, the time where the prices were at its peak, we’re talking about a much higher price, over five times more. I understand that this is only 175.000 of an asking price, it is an asking price at the end of the day, and it’s up to the buyers to decide whether they want to give the full asking price. Your logic might probably tell you, just offer less than the asking price, but don’t be surprised because this is happening in the market.
We have a high demand and low supply. You might be wondering, that’s one component, what else? It’s only one variable. Here’s the second one. People are getting into bidding wars. It’s ridiculous. Back to the point that we were talking about this house, in particular, we had the asking price of $175,000. We’re talking about people and families who are too emotional, who don’t seem to learn from history. They’re coming to the market and say, “You know what? This house is $$175,000. I love it!. I am in love with it! I do envision myself living in it.” What they do because they are so desperate to get the house and they don’t want to miss out on being homeowners, they come out, and they say, “You know what? I’m just going to make an offer of $175,500. I want to make sure that the seller is paying attention to me because I want this house.”
Then a second family comes in and finds out, “What? There’s an offer already for $175,500? You know what? I’m going to offer $176,000.” Then there’s a third family coming in, and they’re saying, “What? There’s already an offer in this market? No, no, no, I’m going to offer $200,000 for this property because I want it, and I know no one can outbid me.” Now we’re talking about a $25,000 increase over the asking price. That just only proved one thing. We’re in a bubble, and history is repeating itself.
We see it happen once again. People don’t seem to learn from bad instances from the past. You think that people will want to keep that in mind, but they always seem to think, “No, this time is different because we’re still working from home.” The reality is that everything is so uncertain. Just like you can work from home today, within six months, the whole scenario might change. Who knows, maybe a bubble will burst again. This is the reason why you should hold off on buying a property because you don’t know what’s going on. All we know, so far, is that we’re in the middle of a bubble right now, and it’s only going to continue to get worse.
Cash is King
What’s the third reason why you shouldn’t buy real estate right now, in November 2020? I’m sure you’ve heard of the saying, “Cash is king.” Everyone who carries cash around, typically you get to have the winning offer. Let me tell you, that’s not even the case anymore. This is something that I was discussing with my students over the weekend in our live class.
This is the scenario they’re seeing, and I can attest to that as well because it’s what I’m seeing. It’s 10:00 in the morning, you come in, and you see a property you like. You run in the numbers. You’re getting ready to make an offer. You contact your realtor at noon, and your realtor is already telling you, “I’m sorry, but the house is already gone. It’s sold.”
Assuming the house is not sold yet, because maybe the seller wants to take a couple of offers into account, usually, if you have cash with you, you have the most power. Why? Because you have time on your hand and you can ensure fast closing. For that, you can demand a more significant discount because people want to get rid of the inventory fast, and nobody wants a house sitting there for another week or another month because that’s costing the flipper or the property owner money.
What’s happening now is that even if you’re making the cash offer, people are unwilling to take that because they prefer to wait for the higher premium. Why? Because we’re talking about big premiums. We’re talking about five-figure premiums. We’re talking about $25,000, sometimes even $50,000. Sometimes you might even get $100,000. That’s worth your time waiting. What used to make sense with cash no longer works because people are more focused on getting the top dollars, especially because they know they can demand that because there’s no supply in the market whatsoever.
This hasn’t appeared in the news, and mortgage companies keep this very quiet, but it’s something that I experienced firsthand last month. I have a couple of mortgages with small local community banks, and they’ve been servicing my mortgage for the past three years or so. What’s funny is that now I see the transition from all these smaller banks to big companies like Mr. Cooper.
What does that mean? Mr. Cooper is not a bank. What they do is that they manage mortgages. They’re the ones sending you the bill, collecting the payments, in charge of distributing your mortgage payment towards your principal and towards the escrow account, and towards interest rate. Whatever is that, it’s making up your mortgage payment.
Now you might think, “Well, this is not a big deal. It’s just mortgages that get sold all the time in the secondary market.” Pay attention to this. We’re talking about timing. We’re talking about the timing here because we’re talking about transitioning lots of mortgages to a much bigger institution. Why? Because small banks think they are short on staff. They have a good work dynamic in which they work well as long as they’re handling a specific volume of activities, but why would they transition into a much bigger company? Because these banks, the market in general, is anticipating a significant change. It’s expecting a wave of foreclosures coming their way. These smaller banks don’t deal with the sheriff. They don’t want to go out to the EU. They don’t want to have to worry about executing a foreclosure. They don’t want to send their staff down to the courthouse and be fighting over liens and stuff like that.
The transition into more prominent institutions like Mr. Cooper, and they have the bandwidth. They have the capacity. They have a department solely dedicated to foreclosures, a department that’s fully dedicated to collect. It’s not widely or openly discussed in the news because politics and COVID seem to take up most of the news. In the meantime, this is cooking in the background. This is happening, and it only takes attention to details. Things like this, it’s what’s going to lead you, what’s going to give you the cues, “Hey, something big is about to happen, and you need to pay attention.”
What does that have to do with anything? Well, it just simply means that if they’re expecting many foreclosures, a lot of people will be unable to pay their mortgages. Second, we are in a bubble, which means that it’s about to burst anytime soon. Call it December, call it March. I don’t know, only time will tell.
I have spoken to a couple of experts. For example, my realtor is expecting to see changes somewhere around December and January. I think it will take a little longer than that because of the whole forbearance in place. Most banks, most lenders, allow people up to 12 months to 18 months. The real change, at least, on my end, I expect to see that somewhere around March to the summer months. Just stay tuned and see what happens, but it is coming, and that’s why you shouldn’t be thinking about buying a property right now. You should be, if anything, setting that money aside and waiting for it just to drop so that you can take advantage of properties at a significant discount.
They are ridiculously high, which only proves that we are already in a bubble. As I said, I had this conversation with my appraiser a couple of months ago, and he or they, because they’re a team of appraisers in different areas, they attested that “Hey, prices are going up, and we cannot help you.” I know you disagree with the assessment, but numbers don’t lie. This is what’s been recorded in our county, and these are the prices. It only shows that “Hey, it’s just simply going further up.”
Let’s just look at gold. You run that up to $1,900. You all know, or you all remember what happened somewhere in the middle of March, beginning of April. We had a big dip because that’s when the pandemic was officially announced. The markets rallied, the stock market went down, impacting everything.
Look at the rise in the price of gold (see picture). Why does it happen? Because investors are losing confidence. They’re losing confidence in the dollar, and it’s a behavior that people tend to adopt when they’re trying to preserve their wealth. They’re shifting from one asset, in this case, paper money, into the precious metal, which is a different kind of money to fight against inflation and preserve their money and keep its value.
Why does it have to do with everything, you might be wondering? Let’s take a look at this chart from 20 years ago (see picture). Look at the behavior. A lot of this will start looking familiar to you because history repeats itself over and over again. We have the dotcom buzz somewhere around 2001 and 2003. From this point on, we had a significant shift, a big increase in gold’s value. Look at what happened. We got to this point, and then in 2007, 2008, 2009, we had a big dip because that’s what tends to happen. The bubble burst back in 2009. The real estate bubble just burst it, and guess what happened? Investors are losing confidence in the market and look at the extreme rise. Very intense up. Then, they had a drop.
Gold has been fighting back to come back into the market, and gold has just simply hiding, staying low, waiting for the next moment to happen. Right around this time, somewhere between 2013 and ’17, we started enjoying the recovery of the market. People seem to have forgotten about what happened in 2008, the consumer price index. People are buying homes. Flippers are hitting the market again, and then they just continue to move.
Then see what happens in 2019. Except towards the end of 2009, that’s when you hear about the first COVID case in Asia. You start hearing it from China, and then from then on, it started expanding to Europe and Italy. That’s when the shutdown started happening. Once again, we have this big dip, and gold manages to come up. Then it drops also back in March, and then it just skyrocketed all the way. This behavior that you see here, here, and here it’s a historical behavior. It’s something that repeats itself. It helps evidence that “Hey, the market is fluctuating, and we’re in the middle of a bubble. There is a loss of confidence in the market, and therefore, you should hold off in investing in real estate.”
Other examples that I show you should be enough to corroborate my point as to why you should be held with all other articles. You can wait for the summer in January to see what happens, just like my realtor suggested, and if nothing happens then, then maybe my assumptions will be proven right, and perhaps the change will start happening somewhere between March and April.
Hopefully, this will help you make a better decision. As you can see, real estate is not about just only looking at beautiful houses, just walking in and saying, “Oh, you know what? This is great. I’m just going to jump in and buy.” No. Looking at beautiful houses is the easy part of it. The tricky part is putting your emotions to the side and trying to remind yourself, “Hey, you’re buying this property to invest. It’s not for you to live in. Second, be willing to run the numbers, and third, what takes the most work, be willing to do the market study. It is not just the market study of what happens around, but also connects all of these moving pieces together. Like you see here, this article right here, this right here, this changes in the mortgage servicing company. What happens to the goal? All of that plays a role in your decision making. I’m sure you are here because you want to learn.
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