S2E23 – The Risk Of NOT Buying A House In 2023

Should You Buy Now Or Wait for The Housing Market To Improve? What are the risks of buying a house in 2023? What is the risk of not buying a house in 2023? In this episode, we discuss what you have to consider if you’re weighing your options with homeownership as we help you become The Educated HomeBuyer.

✅ – Want to get connected with us or to a local expert in your market, please reach out at http://www.theeducatedhomebuyer.com/expert

Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith

Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: josh@buywisemortgage.com ➡I N S T A G R A M ➳ https://www.instagram.com/borrowsmartjosh ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart

📩 – info@theeducatedhomebuyer.com

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For Show Notes, See Below 👇

[00:00:13] Jeb Smith, Huntington Beach Realtor: Chances are if you’re listening to this podcast, you’re interested in becoming a homeowner. In fact, 65% of Americans choose at some point in their life to become homeowners. So why is there so much out there with regards to headlines about not buying a house, about waiting, about buying at the perfect time, trying to pick the top, pick the bottom, whatever.

So in today’s episode, Josh and I are gonna talk about the risk of not only buying a home, but the risk of not buying a home. The things that you have to ask yourself, the questions that you need to ask yourself as a potential buyer. Out there looking to buy in this market. Josh, you and I both have our biases.

I’m a real estate professional. You’re a mortgage professional. So when people hear that, they automatically think these guys are pushing home ownership so that they can line their pockets, so that they can benefit directly. When in all reality, we only benefit from the people who work with us. But you and I have both benefited from home ownership in creating some part of generational wealth, and that’s really the backbone of today’s conversation. 

Josh, let’s start really simple here and say, who should own a home? 

[00:01:28] Josh Lewis, Expert Mortgage Broker: So you hinted at something very important. At any given time over the last 80 years, about 65% of American households choose to be homeowners. So two-thirds, two out of three. And there’s some important numbers there that we talk about. Homeowners have a little more than 40 times greater net worth than renters. So let’s put it in actual real terms. $255,000 median net worth for homeowners, $6,300 median net worth for renters.

So you can see two outta three families choose hope, aspire, and become homeowners. And the long-term result for them is 40 times greater net worth. Now it’s a unique form of net worth. It’s not money sitting in the bank. It’s not money in stocks. It’s not money in crypto that you can cash in and go buy a car or pay for a trip to the emergency room, but it is still very much wealth.

And the most important thing we get, a lot of the times people say you’re just cherry picking, because homeowners tend to be older. Older people are wealthier. Homeowners tend to be more educated people tend to be wealthier. Any number of things there. So a hundred percent correlation does not equal causation.

But when we come back to it, 65% of homeowners net worth is in home equity. So there is a very high correlation. Enough that we can say it is causing you to become more wealthy. So we can go through all the intangible reasons why people wanna become homeowners. A place of your own nest, somewhere to raise your family, somewhere that you wanna put a wood shop in the backyard, a she shed.

Whatever you want to do, it is yours. You own it. You have your own piece of the [00:03:00] world and you get to do it. So I don’t really think at this point, there’s even a debate, Jeb. At any given time, two thirds of people given their druthers would choose to be homeowners. So today what we’re talking about is how do you decide if now is right for you, based off of what are the potential risks of not buying now?

What are the potential rewards of buying later? Because what we get a lot, Jeb, is someone saying, Hey, I’m waiting until these prices come down. And you go, okay One of the things that I repeatedly mentioned on this show, on the live show, is if you think something is going to happen, what you really owe to yourself is to think all the way through and say what has to be true for the outcome that I believe is going to happen.

And what would have to be true for me to be wrong? So a lot of what we’re gonna go through today, Jeb, is exactly that. We don’t have the answer, right? Neither. You don’t have a crystal ball. I don’t have a crystal ball. We have some data that tells us where we think the puck is going, but we don’t know exactly where it’s going.

[00:03:57] Jeb Smith, Huntington Beach Realtor: Part of the problem, Josh, is that at the moment, there’s so many forms of media out there. Anybody that has an opinion can put an opinion out there on multiple platforms, and in fact, it can make its way around the world quicker than you and I can have a quick conversation here.

As much as people believe the idea that home ownership is important and that provides stability and that it does all of these things for their family, On the flip side, they’ve got people in their ear, right? Family members, friends, talking about how they bought at the last top, how they did this or that. And that stuff as much as it, you don’t want it to matter, it does matter, right? 

Because it’s negative feedback in the loop, if you will. And that stuff can end up having an impact here. And so Josh said, you said something important. That if you think something is true or want something to be true, then you’ve gotta go back and ask yourself all of the questions of how does that become true?

And if these things that I’m thinking, are going to happen, don’t happen, then what is the effect of that? And so that’s really the conversation, like you said, Josh. So when is the right time in your life? Because some people. Buy homes as soon as they graduate college, they’re 18, 19, 20 years old.

They’re coming outta college, they’ve got good paying jobs. They decide at that point, home ownership is right for them. And then you’ve got people that are 35, 40, 45, 50, 55 years old. I just went up basically the entire age bracket there. But people choose to buy homes at different points in their lives and for different reasons.

So when is the right time? 

[00:05:34] Josh Lewis, Expert Mortgage Broker: And Jeb not to take you off track of your thought, but I don’t know if you saw the data the other day but some numbers came out that says Gen Z has the highest home ownership rate at age 25 of any of the last five generations. And if you go back to the housing bust, that happened right in the middle of millennials coming of age, 

[00:05:53] Jeb Smith, Huntington Beach Realtor: Am I GenZ?

[00:05:54] Josh Lewis, Expert Mortgage Broker: No. Gen Z is after millennial. You’re Gen X. Oh, 

[00:05:58] Jeb Smith, Huntington Beach Realtor: I’m GenZ. I don’t know. I get so [00:06:00] lost in the in 

[00:06:00] Josh Lewis, Expert Mortgage Broker: You’re right there on the border. You were tail end of Gen X. Front, front end of millennials. But millennials were like, remember, they were gonna live in their parents’ basement, never gonna own a home. Home. Ownership is awful. 

And yet we got to Gen Z, which had some tailwinds of really low interest rates. And I still say that’s difficult. Like for me in Southern California in a high priced area, I don’t see hardly any Gen Z buyers. We’ll get one 25 year old a year total. So it’s not common, but the numbers don’t lie.

Nationwide, they have the highest home ownership rate at age 25 of any of the last four or five generations. So this hasn’t changed over time. There’s something inherent in us as Americans that we want to do that. And as you said, some people are doing it at very early ages. There are some headwinds.

It’s getting more difficult, but that stability, it really is not a question of should you buy a home? Do you want to buy a home? Most people should. Most people want to. The question comes back to when is it right? And we hammer this regularly. It’s that stability in your life. You have a point in your job and your career because income is a huge component of being able to qualify and being comfortable in making that payment.

So when we say job and career, Jeb talk a lot about, being in one location. Some people to be upwardly mobile with their company or in their industry. Say, I go take a job in Portland. Hey, I’m getting moved to Fort Lauderdale. You have to have that flexibility when you’re young. 

When you’re young, most people are not settled in their relationship. They haven’t found their significant other. Whether they’re getting married, not getting married, having kids, not having kids. Much of that hasn’t been decided. And as you point out all the time, Jeb, transaction costs of getting into and out of real estate is high. You don’t want to jump into it willy nilly. You don’t wanna get on the wrong side of it. You don’t want to have a short window. 

So that stability of job and career, stability of family, stability of your finances having achieved a credit score that allows you to get good terms and some savings that allows you to put some money down, possibly cover your own closing costs.

Those are the things that I like all of my buyers to have achieved. And most people that are calling and reaching out, I’m sure the same with you, Jeb. If someone’s asking or saying, I would like to get pre-qualified, or I would like to go out and look at homes, they generally tick those boxes because you in your head, wouldn’t be comfortable with the thought of buying a home if you haven’t reached those levels.

[00:08:14] Jeb Smith, Huntington Beach Realtor: No, and there’s three things that I always. Tend to focus on when I’m telling people to buy homes and it’s, having money in the bank, being comfortable with that monthly payment, regardless of what that is. Rate’s high rate’s low, doesn’t matter what the rates are. Are you comfortable with the monthly payment?

If something happens, are you able to continue making that payment? Are you buying that home with the intent that interest rates are gonna come down and then you’re going to be able to afford it? Or are you buying it with the intent that, hey, It doesn’t matter what happens. I’ve got a fixed payment here. I’m going to be good. 

And the last thing I always like to think about when talking about the stability piece is time. Now having time on your side. Now this is something you can’t control a hundred percent of, but if you’re at that point in your [00:09:00] career in your relationship where you’re traveling, where you’re doing things, you’re not sure where you want to settle down, where your job is going to take you, if you’re gonna be with your partner’s family in Florida, if you’re gonna be with your partner’s family in Montana or whatever it is, then maybe buying right now isn’t the right move because of some of the things that we’re gonna talk about in today’s video.

We’ve seen historical appreciation on single family homes or in real estate in general average about 4.6% over the last 60 years. Here in the state of California, it’s actually higher. It’s closer to six, 7% on average, that appreciation. But when you see two, three years of rapid appreciation like we’ve seen over the last couple of years, right?

We saw 35, 40% appreciation in a two to three year period, which would normally take a decade to get. Then there’s a chance that you see prices move sideways. Prices move down slightly in some areas. In some areas you might see prices continue to climb because of some of the other factors that we’re going to talk about.

But having time on your side. Something we talk about all the time, Josh is real estate is a get rich slow scheme. Doesn’t happen overnight, and the expectation that it should happen overnight, in my opinion, is looking at real estate the wrong way. So if you have all of the things that Josh talked about, you have the things that I talked about, you have time on your side, then I feel like you have that stability, which is going to take you to essentially making the decision of whether or not at that point, Is buying a house right now the right thing for me.

So Josh, I think it’s important to start, let’s talk about the risk of not buying a house right now, right? Counterintuitive, but what’s the risk of not buying today? 

[00:10:51] Josh Lewis, Expert Mortgage Broker: So we talk a lot about affordability in terms of what happens with trajectory of prices going forward. If there’s not a volume of people able demand, so not just people willing to buy a home, but able to buy a home because of low affordability. It’s hard for prices to move upward. 

But when we have limited supply, a supply demand imbalance, there are not enough homes for people to buy, we’ve seen homes continue to go up, even though affordability is at or near record lows. So the risk of not buying is affordability could get worse. Maybe this is the new normal.

Maybe going forward, interest rates are six and a half and people adjust to that, and home prices just continue to go up. So you don’t have an improvement in interest rates further down the line that you’re waiting for. You don’t have a decrease in home prices, and therefore your entry point becomes worse.

You’re having to either allocate a greater percentage of your income to the same home. Or you’re having to look at lower priced homes. Maybe you go from a single family to a condo. Maybe you go from a 2000 square foot house to a 1500 square foot house. But those are the things that you may end up looking at in terms [00:12:00] of all of your thoughts in terms of does this get more affordable? Does it get less affordable? 

We have a lot of people out there, Jeb, who are imagining, hey, affordability is an all time low. It has to get better, but it doesn’t necessarily have to get better. It could indeed get worse.

[00:12:15] Jeb Smith, Huntington Beach Realtor: We talk again, a lot about willing and able demand. Everybody in my eyes is willing to own a home. Everybody wants to own a home. Whether or not they say they do, the reality is everybody wants to become a homeowner, right? For one reason or another. So we have a lot of demand out there.

So depending on what happens with inventory, what happens with interest rates, you could see the potential for increased competition because millennials are still turning prime buying age, and you still have a population that is what’s after millennials, gen Z, the numbers are really high. 

Over the next couple of years of people continuing to turn prime buying age, which means, even if demand essentially stayed the same to some extent, you’ve gotta have changes in other things like inventory in order to make buying a home I guess less competitive out there. So by waiting, there’s a chance that people continue to say, you know what? I’m not waiting. I’m going to do this and they eat up the supply. 

And because we know that 90% of Americans have an interest rate below 5%. There’s a lot of people locked into property that for whatever reason, are not going to sell that home unless you see interest rates much lower. So if things stay the same, Josh, like they are presently today, increased competition would be another risk for not buying a home at today’s market. 

[00:13:47] Josh Lewis, Expert Mortgage Broker: Jeb, a really important point on that competition front. Almost everyone has heard the very valid point that from 2020 to 24, Millennials were coming into prime home buying age.

If we look we go baby boomers to Gen X, to millennials. Gen Xers were essentially a baby bust. So that generation was much smaller than baby boomers. So we overbuilt during that period of 2004, 2005, 2006, 2007, at the same time that the prime demographic cohort coming of home buying age was much smaller than the one previously.

Now since then, we’ve underbuilt and we had this big generation of millennials coming into the market, but there’s no bust behind them. If you look at the chart, there were a couple of really baby boom years of millennials where there are more of them born that year, but we go out all the way through Gen Z. There was never a bust. 

So there’s no smaller generation coming behind them where you’re gonna have less 32, 33, 34 year olds to battle against if you’re looking at buying your first home. So we have this wave of increased buying demand, but that wave is not really gonna wane. It’s gonna stay level for the next 10, 15, 20 years.

I [00:15:00] don’t know what the generation is beyond Gen Z and what their parents were doing and how many of ’em there are going to be. We’ve talked about population growth still growing in the United States, but not growing as fast as it has. Very small positive population growth but in terms of generations going forward, if you’re looking at buying a home in the next 5, 10, 15 years, there is no relief from a smaller demographic cohort coming of home buying age.

That demand is going to be there. We have not kept pace in terms of building of what needs to be built. That’s worse in some parts of the country. Especially where we are here in, in densely populated Southern California, Bay Area, other parts of the country, Texas, where they can build more, not as big of an issue.

So you have to look regionally how big of an issue that is for you. But we’re not necessarily looking at having any less people to fight against in terms of competition to buy or any more supply to choose from. So if we look at it we really don’t have much of a recipe for a better, more affordable entry point going forward.

[00:16:00] Jeb Smith, Huntington Beach Realtor: Josh, let me ask you this question. So what about the people that say we’re in a recession right now. There’s a lot of people out there, really smart people that believe we’re already in a recession and that, the Fed the government essentially hasn’t admitted to the fact that we’re in a recession yet, that, they’re usually a year off, if you will.

But regardless, we’re in a recession, we’re headed into a recession, we’ve got slower economic growth. What do you say to the people that say that is on the horizon, therefore, I’m gonna take a step back and I’m gonna wait for that to play out, because that’s a risk if I buy a house now. 

[00:16:35] Josh Lewis, Expert Mortgage Broker: So an interesting concept, Jeb.

I listened to an interview this weekend with David Rosenberg, really smart guy, and he pointed out, there’s two camps right now. We’re gonna have a soft landing, or we’re in, we’re heading into a recession. He goes, what’s the difference? He says, in a soft landing, your bonus gets cut. He says in a recession, your pay actually gets cut.

So there’s actually a secondary piece to that, beyond just your pay getting cut. If you’re able to keep your job, you actually have unemployment going higher. But unemployment generally increases the most at the lower end of the pay scale. Those aren’t so much the people that are buying and selling homes.

So do I think a recession is gonna have a huge impact in housing? I don’t. I do think we’re gonna have a recession. I don’t think it’s gonna be tremendously bad. And I don’t think it’s gonna have a huge impact on housing, but what it does we talk about do we have a recipe for upwards pressure on home prices?

I don’t really see it. Affordability is low. Home prices are high. Rates are high. Even if they improve, they’re still gonna be high relative to what people have come to expect over the last 12, 15 years. And we then have employment and wage pressures in a negative way. So it tells us there’s not a huge recipe for home price appreciation going forward.

That being said, this is completely anecdotal. Have a client here in Southern California, they found a home they loved last week for $759,000 before they could get their offer in, there were already 10 offers in the highest one at [00:18:00] $815,000. So we can talk about, was that home price too low to begin with? Is that a unique price range in a unique area? 

Long way of saying, We anecdotally, Jeb, get lots of comments on the YouTube channel. Lots of comments on the live show. People saying, no one can afford homes, this can’t go on. And yet I have a guy qualified to buy that home. There were eight other people qualified to buy that home and push it higher.

So long way of saying, I don’t think your typical home buyer is the person who’s going to be impacted by a recession. We have a different demographic situation with many of the boomers retiring, the workforce of skilled labor, the people who make good wages and buy homes is smaller. So when we’re coming off of three and a half percent unemployment rate, If it doubles and goes to 7%, we’re still a full 50% better than we were in 2008.

So would a recession impact housing? Yes. Is it gonna cause home prices to come down? I don’t think so. It will prevent home prices from going up would be the most likely outcome. And again, that is my educated expert opinion from 27 years of doing this and reading really smart people. But there’s no guarantee that’s how it plays out.

[00:19:08] Jeb Smith, Huntington Beach Realtor: I have several stories myself as a real estate agent putting in a bunch of offers, I’m coming up short almost every week. And it’s almost embarrassing, right? As a real estate agent, I wanna tell you, I get every deal accepted. I write the best terms, the best contracts. People can’t resist my offers.

No, that’s not happening. We’re writing really strong offers. There are just people out there with cash willing to pay more, do things that my clients aren’t willing to do to get property. The story from yesterday, purchase price around a million dollars. We came in at $1,180,000. That’s essentially the top end of my client’s budget.

They could qualify for more home. They’re choosing not to. That’s where they’re comfortable with the payment. $1,180,000. At the time, the conversation yesterday emailed the agent and he said, you wrote a really strong offer. You should get a counter offer. About four hours later, his wife called me and said at the moment, you’re not getting a counter. We’re only countering the top three offers, and all three of those offers are over $1,250,000. 

That’s $70,000 higher than we were and $250,000 higher than the original asking price. And you’re saying, yeah, it could be under priced. Yeah. Yeah. All of those things could be true. But the reality is there’s at least three people willing to go $250,000 above the asking price. Just craziness out there in the market.

And Josh, you said something important that I want to make people aware of. We’re not here trying to tell you the direction of the housing market. I think that’s important to note, right? As much as it comes off as, Hey, we know this is what Josh and I believe to be true, doesn’t necessarily make it true.

Like I mentioned at the beginning of the episode, we have our biases. Josh has been doing this 27 years. I’ve been doing it nearly 20 years. So combined, there’s a lot of experience here in dealing with sellers, dealing with buyers, dealing with multiple types of markets, talking to multiple agents across the United States, talking to [00:21:00] multiple lenders across the United States, gathering that information and trying to package it in a way

that we feel is beneficial to becoming The Educated Home Buyer so that you can ask the right questions in your life if it’s the right time for you. So that said, Josh, what are the risk of waiting to buy a house? We’ve talked about the risk of not waiting. What’s the risk of waiting?

[00:21:23] Josh Lewis, Expert Mortgage Broker: I wanted to throw this in before we move on to that and it will help us as we continue the discussion o of the potential re rewards for you to wait. Everything we’re talking about here everything that we look at, everything that we analyze, thing in terms of conditional logic. If, then. I don’t know the precedent condition, I don’t know what is going to happen with interest rates.

[00:21:42] Jeb Smith, Huntington Beach Realtor: We have an opinion and we look and steady and research that, but no one knows. But what we can do is sit back and say, if rates go higher, here’s what’s likely to happen. If rates go lower, here’s what’s likely to happen. If builders build more, here’s what’s likely to happen. So everything we’re looking at is in that if then situation.

So with that, what could be the possible benefits to you of waiting. The big one, Jeb is affordability improving. There’s three components to affordability, home prices, interest rates, and wages. Wages we don’t have a lot of control over. They have generally a steady upwards trend of three to 5% annually.

Some years they’ll be a little less. Some years they’ll be a little bit more, but they track home prices over time. They track inflation over time. So really the things that could move in the short run are home prices. Or interest rates. So let’s start with home prices, Jeb, because If I had a dollar for every time someone told me.

Generally online, not really in a phone call or in person. I’m waiting for home prices to drop 20% and then I’m gonna come back in the market. Jeb is too. 

I’m your competition. If home prices drop 20%, guess who else is your competition? The other 300 million Americans out there looking to buy homes?

No. In all reality, yes. What’s the likelihood of prices? What do you need? Wait, we said this earlier. What are the questions you have to ask yourself in order for prices to drop? Josh, I’m asking that question to you. What has to happen in order to see lower house prices? 

[00:23:16] Josh Lewis, Expert Mortgage Broker: Interest rates would have to go higher and remain elevated. So as we record this, we’re about six and a half. In the last 12 months, the best we’ve seen interest rates was about 5%. The worst was about 7.1%. But in the last 6, 7, 8 months, the best they’ve been is about 6%. So six to 7% is this new range. If we were in that seven to eight percent, and we stayed there for two, three years home prices are gonna come down. 

They won’t come down 20%, but is 10%, 12% is something like that realistic. And are there areas that are escalated or elevated higher than that, that could see 20? Yes, some areas could, but on a nationwide basis, a long extended one to two year timeframe of seven to 8% interest rates would bring prices down.

So what would have to happen to [00:24:00] make that be the case? We would have to have continued high inflation where investors require that type of return to tie up their money in 30 year mortgages. That’s a different show. We’ve done it a million times. If you want to hear more on it, show up on the live show.

We put inflation data up every week. I was just looking at a chart here that basically shows other than core services inflation, we are exactly back to where we were in 2019. The biggest component of core services inflation that remains high is the housing component. So they have a couple of different measures in there and due to the base year effects, it’s going to be coming down over the next few months. 

So I believe inflation has moderated. As inflation moderates. The spreads between treasuries and mortgages will decrease. So do we have a recipe for 3% interest rates again? No, we don’t, but we have a recipe for rates significantly lower than the six and a half that they’re at right now.

[00:24:49] Jeb Smith, Huntington Beach Realtor: But you just said something that is what’s the word? An oxymoron. I believe is the right word. I might be wrong with that. But you said housing affordability would improve with house prices dropping because interest rates are higher, that wouldn’t necessarily be true because if interest rates go up, even if prices come down, chances are housing affordability doesn’t really improve in that scenario.

Is that right? And more importantly is, oxymoron is not the right word. What is the right word? 

Paradox, paradoxically, there we go, 

[00:25:20] Josh Lewis, Expert Mortgage Broker: Don’t call me, don’t call me an oxymoron again… 

[00:25:25] Jeb Smith, Huntington Beach Realtor: No but in all seriousness, affordability didn’t improve in your scenario necessarily because if interest rates go higher and stay higher, you gotta see low home prices drop way more than 10%, more than 20, probably close to 30% in actually in order to see an improvement in affordability.

[00:25:44] Josh Lewis, Expert Mortgage Broker: Home payments, affordability. Home payments is much more sensitive to interest rates than to prices. So everyone says, I would rather buy a home at a lower price and a higher interest rate because I’ll be able to refinance at some point in the future, and I get the best of both worlds.

If I buy at a high price, I never get to refinance my home price. That is set forever. So there’s absolute logic to that, but there’s an underlying premise that says there’s going to be a point where you can buy at a lower price. So the two components that we think can and will change that affect affordability are home prices and interest rates.

And the thing that would bring home prices down is higher interest rates. And the paradox that you’re talking about there, Jeb, is it would not lower payments, it would not increase affordability. So home prices could come down, but it won’t increase the affordability to you. And the conclusion of that inflation data that was giving. Interest rates are going to continue to moderate. 

Who knows where they end up leveling out at? Is it five and a half? Is it 5%? Is it four and a half? But it’s definitely lower than where it is right now, which is supportive of home prices. And more importantly, the paradox you were talking about. You are going to be better served by the lower interest rates than by the lower price [00:27:00] in terms of getting you a lower monthly payment, enabling you to afford more home or a home period.

[00:27:07] Jeb Smith, Huntington Beach Realtor: Well, let’s go the other direction. One of the rewards of waiting to buy could be lower interest rates, right? You’ve said inflation’s gonna come down or is coming down. With that, we should likely see interest rates moderate. With that, that should improve affordability on a monthly payment scale. Is there a reward for seeing lower rates?

I wanna see lower rates. I think that’s great. For people looking to buy homes for potential people looking to sell homes to buy other homes. So how does that play out? 

[00:27:36] Josh Lewis, Expert Mortgage Broker: Lower interest rates have a much, much larger impact on your monthly payment, which as you’ve talked about a million times, people are generally looking at their payment, they’re less concerned with their interest rate and the home price than they are.

Is, am I comfortable with making that payment? And I can tell you, talking to buyers every day, running through numbers, that’s a question that I ask is part of our pre-approval interview. How much are you paying in housing costs right now? Whether it’s rent, whatever it may be. And what are you comfortable with?

Then we go through the numbers. Cool, you’re looking for a $700,000 house. Here’s what the number is in terms of a monthly payment. So interest rates will have a much bigger impact in bringing that down. Jeb, the next point that we have here on the list is a potential benefit of waiting would be less competition. 

We talked demographically that’s unlikely to be the case. But if interest rates come down, it moves it at the margins. Right now I don’t have the number in front of me, but I think for us here in Orange County, I think affordability is about 17%. 17% of households can afford to buy the median home right now. And that’s a very low level. 

[00:28:38] Jeb Smith, Huntington Beach Realtor: I think that’s California, but yeah, somewhere in there. 

[00:28:41] Josh Lewis, Expert Mortgage Broker: But mortgage rates dropping a percent. Maybe it takes it up to 20%, 21% still, it’s still historically low, but now we have 20% more buyers in the market. We have more competition. So in terms of potential benefits for waiting, the problem is they all kind of work at cross odds of one another, because I think prices coming down would be dependent on rates going up. It didn’t help your affordability. 

Rates coming down, increases affordability, increases the competition. We’re already at very low levels of affordability, which is why I say we don’t really have a recipe for even on trend, which you said 4.6% for the last 60 years. On trend growth, I think we’re gonna see 3, 4, 5 years of below trend growth.

One, two, 3%. You could see a year at zero a year at negative one, negative 2%. But it’s positive growth because rates are gonna come back down. We’re gonna have a little bit more affordability, and there are enough people out there buying the few homes that are for sale because most people have record levels of nested equity, record low interest rates, and are just saying, I’m cool. I’d like to buy, I’d like to sell my house and buy something else. But when they do the math, they say I’m cool. 

So again, for our audience here who’s primarily first time buyers looking to enter the market[00:30:00] those are the things that would have to happen to make a better entry point in the future.

And I don’t think you get multiples of those lined up where there’s a significantly better entry point. There could be pieces of it that are better, but I don’t think you’re getting all of them. 

[00:30:13] Jeb Smith, Huntington Beach Realtor: No and so with that, you might see some more supply by waiting, right? So if you’re in a market that has a lot of new construction being built, this is a conversation Josh, you and I were having prior to coming on here.

New construction is one of those components of the housing market that quite frankly, we don’t have a lot of familiarity with here locally, because there’s not a lot of it, right? And I don’t mean there’s no new construction, it’s just we’re not building at a pace that makes a big difference in the actual supply of homes for the most part.

We get people all the time in Texas and some of these areas that have a lot of land and they’re like, there’s houses being built everywhere. They can’t sell these things. Builders are doing things to entice buyers by reducing the prices, by giving builder incentives to help unload homes. 

If you’re in one of those markets, I think the number at the moment is somewhere around 700,000 new construction, single family homes that are due to be completed at some point between 2023 and 2024. If you’re in a market that has a lot of these, you could see some more supply and with that supply, there might be a benefit to wait especially if you’re looking at the market now and saying, I can’t find what I’m looking for. There’s nothing out there. 

By seeing more of this inventory come to the market by seeing new construction, if that’s something you’re interested in, that might be a benefit to you. But Josh, you and I talked again prior to the show. I look at the market here. We’re in Huntington Beach, California. Orange County, California. And in Huntington Beach, we don’t have a lot of new construction, but we’ve had a couple new pockets being built infill developments over the last couple of years.

They tore down a school. They’ve built a housing development. They’ve changed zoning for something. They’ve built a small housing development. There’s homes being built at the moment. There’s two different complexes that I can think of as we’re having this conversation. One, starting prices are just over $2 million.

Those are single family homes on small lots, right? And I say small lots. These are 3, 4, 3 3500 square foot homes on 4,500 square foot lots. So the home is taking the majority of the lot. The other ones are town home style properties that are tri-level two to three level properties with very little land at all, just patios and that sort of thing.

And those are starting at one three to one four. Yes, there is new construction in some of these markets, but I ask you as a buyer, when looking at it, what is your price point? Are the homes that are being built affordable? If they are fantastic, like you’re probably in the lower percentile, and that’s great.

I, I hope that it benefits you in some way, but what I’m seeing. Because of the cost to build, especially here in California, a hundred thousand dollars just to break ground because of all the permitting and all the craziness that goes along with building a home and the lot sizes. These builders are looking to maximize projects and they do that by building as big of a home on a small of a lot as possible so that they can maximize the price per square foot.

Therefore, Yes, maybe it creates affordability if you’re in that price point, if [00:33:00] there’s a surplus. But for the majority of people out there that new construction I’m talking about here isn’t even an option because of the price point. So Josh, when you hear that and you hear the new construction dynamic, what are your thoughts?

[00:33:13] Josh Lewis, Expert Mortgage Broker: It’s a nothing here in Southern California. And the funny thing is, I say that Jeb, last night I received a purchase agreement that was for new construction. I forget the exact city, but it’s in the Lemore area, which is central California. Okay. Central California, we have a lot of land, a lot of farm land can be converted to housing, much more affordable housing.

A $360,000 purchase price. That’s mind boggling to me. New construction for $360,000 right here in California. But for a lot of the country, that’s typical. So if a builder can get land reasonably cheaply they can build homes with a little bit of land, modest upgrades and improvements and still make a profit off of that.

So if you’re in an area where that’s the case, it’s different than it is for us here in, in Southern California. But 100% in dense, urban built out areas, the supply issue is unlikely to improve because we are built out. There’s a finite amount of homes. I think we have less than 1% of single family home vacancy rate right now, meaning 99% of those homes are occupied.

There aren’t multiple investors with empty homes. They’re either rented out or they’re living in it. And they have ’em at really low interest rates with a lot of equity in them, so they’re choosing not to sell. So I don’t see anything there for those of us in more urban built out areas. That’s going to change that.

Now, if you’re in a Georgia, a Texas, a lot of the south where they’re building. Florida, where there’s building and building in affordable price points maybe that’s a different answer for you. But for us, in our areas here where we primarily do business, it doesn’t really help the supply. And nothing good really coming on the horizon to assist that. 

[00:34:44] Jeb Smith, Huntington Beach Realtor: So what should the educated home buyer who’s taken 40 minutes or so listening to this podcast do if buying is not the right time for them. Josh, one of the quotes that I heard within the last year and it’s become one of my favorite quotes, came from Dave Ramsey and it said, renting is buying you patience until you’re ready to buy a home. 

And we’ve talked several. Nothing wrong with renting right there. There’s absolutely nothing wrong with renting. Renting might be part of the plan to get you to the next step, but I think it’s all about having a plan to start with, which is really the foundation for helping you to get to that next step.

Josh, when I say what should people do? What should they work on? Is there a way to get in the game if affordability is outta reach in their area? 

[00:35:31] Josh Lewis, Expert Mortgage Broker: So this is funny, Jeb. You and I have been talking a lot recently and I’ve been rattling through my brain a first time home buyer course.

What do you need to know a to Z? And more importantly, what you’re asking here is the prerequisite or the pre-course for that. If you are not ready to buy or even get pre-approved, what are the things that you can be working on that anyone can be working on? Let’s say you’re a 22 year old college graduate.

In your mind you say, I want to be a homeowner. I [00:36:00] know I’m not ready because don’t know where I’m gonna be at career-wise, don’t know where I’m gonna be at relationship-wise. So I am no way ready to be a homeowner, but I want to be someday. So the answer is the same for all of these people. 

Start with saving. We need some money. Even if you had a zero down option. We want reserves when you move into that house. In case something goes wrong, in case you need to do upgrades, money for closing costs. So you want to be saving. You want to spend less than you make and have a savings and investment plan. 

You want to maximize and optimize your credit. If you start from nothing, if you’re a recent college grad, you don’t really have a history of credit it is not all that hard to work your way to a high 700 credit score within two to three years. If you’re someone who has some dings on your credit and you’re in the low sixes, high fives not all that hard to get over a 680 in a one to two year timeframe.

Get to saving. Work on your credit. Work on your income. Jeb one of the numbers that you and I talk about every week on the live show is, what is wage growth on the most recent numbers for job stayer versus job movers. So in the last year, people stay on the same job they’re getting five, 6% wage increases year over year. 

The people changing jobs are at like 10 to 14%. It’s trending down also. Both of those numbers are trending down. But I think most people get comfortable. They’re in a rut and they don’t understand that there is a lack of skilled qualified workers.

If you are a good worker, you show up on time, you bust your butt, and I don’t mean you’re some sort of white collar, great worker. You could be a plumber, you can be a welder, you could be a contractor. Like I as a business owner, it is hard to get good employees, people who will do their job, whatever that job is, work hard, give good customer service.

So know your value. You can probably make more than what you’re making right now. You can go to your employer and say, Hey, I am young. I wanna buy a home. What can I do to be more valuable to this company so that I can earn more and put myself in a position to be able to own a home? 

Most good business owners. Want their employees to succeed, they will work with you on that. Those are the big ones, Jeb. We’ve got a couple of other options that really are more on the real estate side. But financially, putting yourself in that position, those are the big ones that I would focus on. Get your income up, get some savings, spend less than you make and maximize, optimize your credit scores.

[00:38:23] Jeb Smith, Huntington Beach Realtor: Yeah. And there’s a couple others, and these are things that typically people don’t want to hear because it’s not necessarily the right answer for many people. And one of them is moving to another area. Maybe if you live in southern California, orange County, and the median home price is $1,200,000, and you can only afford 700,000 and you want a single family home, chances are that’s not achievable in Orange County at the moment and not likely to be anytime, within the near future unless something major happens. 

So you might consider moving to a more affordable area to be able to get that. Maybe it’s outta state maybe it’s in state, but just a little bit more inland. [00:39:00] Or perhaps you want to stay in the area that you’re in. Maybe you consider buying a property out of state as a rental just to get in the real estate game, be able to create a little bit of cash flow there and still continue to rent where you are. Now, I don’t necessarily think that’s the perfect answer, but it’s an answer that gets you starting to own some real estate, gets you starting to get some of the benefits the tax deductions, all of these things that real estate can allow you to do, which will ultimately lead to longer and greater wealth down the road.

We unpacked a lot of information today. Appreciate you guys sticking around. I’m sure there’s some questions around this. If you have them do us a favor, you can comment on the video here on YouTube or on the podcast, we’d be happy to have that conversation with you. But we, we definitely appreciate the support you guys sticking with us to have these conversations.

It’s because of you, we continue to do it, and for that we’re thankful. So until next time, we’re outta here. Adios 

[00:39:58] Josh Lewis, Expert Mortgage Broker: and Vaya con Dios!.

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