Are you a first time home buyer wondering if you should buy now or wait? What should you consider when buying a house in the current housing market? Why is time so important when buying a home? What is The Long Game when it comes to buying real estate? In this episode, we discuss the long game and the importantce of long term thinking in home buying to help you become The Educated HomeBuyer.

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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/joshlewiscmc ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart

📩 – info@theeducatedhomebuyer.com

For Show Notes, See Below 👇

[00:00:00] ​ Jeb Smith, Huntington Beach Realtor: Today, we’re going to be discussing the idea of real estate being a long term game. At the moment, there’s a lot of people focused on what happens to real estate today. What happens to it tomorrow? What happens to it next year versus zooming out, taking a bird’s eye view and looking at where real estate is in say 10, 15, 20 years, or maybe even at retirement.

[00:00:29] So Josh, when I say real estate being a long game, what comes to mind? 

[00:00:34] Josh Lewis, Certified Mortgage Consultant: A couple of things. When we’re looking at direction of the market, people want to say, what’s going to happen? Is housing going to crash? Zillow’s out recently saying in most markets, we’re going to be up 10 percent in the next year. 

[00:00:45] Are either of those correct? Neither of those correct? I don’t know, but we do have a very long term history here going back to 55, 60 years. Prior to that, home prices had basically tracked inflation. They go up, whatever the general economy is inflating. And homes were really cheap relative to where they are right now.

[00:01:05] Most parts of the country, $5,000, $7,000, $10,000. When we go back to the thirties, forties, fifties. Even less. People have stories of their great grandparents, paying $1500 for their home. 

[00:01:15] Jeb Smith, Huntington Beach Realtor: But we also have to understand at that time too Josh, the annual income at that time was significantly less.

[00:01:21] If anybody made $100,000 a year, they were at the top of the food chain, so to speak. So it was a different world entirely. 

[00:01:27] Josh Lewis, Certified Mortgage Consultant: A thousand percent. And the only reason why I draw that distinction is the 1970s were when we kind of saw modern housing. So the numbers, I believe we’ve seen Jeb, Case Schiller goes back to the eighties or late seventies, early eighties. 

[00:01:40] It’s five and a half percent annual appreciation in homes. Nationwide. So that can vary. In California, we’ve seen over 7 percent over the last 40, 50 years. Other parts of the country, it may be closer to three and a half percent. 

[00:01:52] But the reason why it’s important to look at that is neither you or me or anyone else that you see on YouTube, in the media, anyone with a major academic index that tracks this knows what is going to happen in the next one, two, three years. We can say with clear certainty that over the next 25 to 35 years, home prices will continue to appreciate at a rate slightly higher than inflation. So the things that we’ve seen over the last 30, 40, 50 years that have led to wealth creation through real estate will play out.

[00:02:24] But they don’t necessarily over a one, two, three year timeframe. And the big one that we’re seeing right now, Jeb, I talk to a lot of people and we have two types of people. I have two great examples here in the last week, talked to someone who had reached out as part of the show, they’re paying about $2500 a month here in rent in Orange County.

[00:02:41] They said they would like to get a $600,000 condo. The two cities that they listed, there are no $600,000 condos unless we found like a studio or something in a 55 and over. But regardless of that, these folks made six figures combined and we could qualify them for the $600,000 condo. They were not comfortable with the payment.

[00:03:00] And when we looked at it, looked at their budget, their finances, I agreed. I said, you’re a hundred percent correct. So either we need to make more money or we need to look to other areas where we can purchase a lower price. Or wait until both income goes up, interest rates come down. 

[00:03:13] Now on the flip side, talked to another couple that we’ve talked about here on the show, probably two months ago. And they were looking in the Redondo Beach area. These folks make almost $250,000 combined. They’re paying over $5,000 a month rent. They did not like that to purchase a similar condo, $850,000 condo was going to cost them about $6700-6800 a month with current interest rates, HOA, taxes, everything all in. And for them, they look at go, we don’t want to do that.

[00:03:41] And that to me is what we’re going to talk about today. That’s the short sighted decision. Because if you look at the probability of interest rates coming down, probability of incomes going up, rents going up. It doesn’t take long, five to seven years, that rent is going to be more than what the house payment is.

[00:04:02] So we’re in a difficult market Jeb. Let’s not make any two ways about that. There’s really not a way to debate that this is a tough market. With prices at all time highs, interest rates at 20 year highs, these are tough decisions. But I think it’s getting increasingly easier for people to say, today, here’s the best decision, when we know that ownership over the long haul 10, 15, 20, 30 years for most people is going to be the better decision.

[00:04:27] So that’s the discussion that we’re going to walk through top to bottom today. 

[00:04:29] Jeb Smith, Huntington Beach Realtor: And if you’ve heard me say it, listen to other podcast videos, something that comes from a mentor of mine is people buy emotionally and they justify logically. And where that saying comes from is in buying a house, a lot of people, make things work because emotionally it feeds what they need in their life. 

[00:04:48] And therefore later looking back on it they justify it, right? It’s like buying the new car. You don’t really need the new car. You want the new car. It’s nice. It’s, all the new bells and whistles, everything.

[00:04:59] And then you justify making that work in your life. And real estate can be one of those things for a lot of people. But on the flip side, it can adversely affect you buying real estate. It can be emotional in the other way, right? That things are too expensive. You missed out on an opportunity.

[00:05:16] How can people afford this? Things have to adjust. This isn’t realistic, get emotional, and then you justify it logically by not making a decision and then here you are at the better part, three, five, 10 years later, still considering or dealing with those same emotions, so to speak. 

[00:05:35] And so we see both sides of it. And I realize Josh and I oftentimes come off as perma-bulls when it comes to housing. And I see it because we’re in it every day where we both do benefit from people owning homes, but we both have benefited from owning real estate as well. A lot of our clients have done very well financially by owning multiple properties.

[00:05:59] We have clients that, that, I had a client at one point that owned 80 something properties. And I know what that creates. And on the flip side, I understand how a lot of this stuff can be difficult to understand and comprehend. And so that’s where The Educated Homebuyer comes from, but also understand when we’re talking about housing, it’s coming from a foundation of long term thinking for one, but also looking at data, looking at what’s happening right now, in housing with inventory, with rates, with, things in general, and just trying to help you make sense of it. 

[00:06:31] So Josh, I thought it was important to point that stuff out because it’s something that often comes up, but let’s talk about the idea of real estate being somewhat unpredictable in the short run, in short timeframes.

[00:06:42] In our lifetime, Josh, most people have only experienced one really big downturn in real estate, which was the great recession, 2006 to 2008. And so, if they’re younger than me, because I was old enough to buy real estate then and owned real estate then.

[00:06:57] But a lot of the millennials that are going in that kind of prime buying age right now, they were kids of parents that went through that. And so it is a real emotion. It’s fear. They saw parents lose things. They heard about people losing things. And so that’s on their minds, even though it was the better part of 20 years ago at this point, it’s still fresh in their minds.

[00:07:20] So let’s talk about that unpredictability. If you will. 

[00:07:24] Josh Lewis, Certified Mortgage Consultant: It’s true in the sense that we’ve talked about on the show here before that there are both cyclical and non cyclical markets. And we used to say, really, what did you have you, the Bay area, Southern California, Boston, New York, a couple of markets in Florida, like Miami. Really just a handful of markets around the country that would appreciate rapidly when things were going well and would have these corrections.

[00:07:44] In Southern California here. We had a correction in the early eighties. We had another one in the late eighties, early nineties. And that kind of was a little malaise through the nineties where, believe it or not, in Southern California, there were people were saying home buying is just never going to be the same.

[00:07:59] It will never be the wealth builder that it was. If you didn’t buy in the seventies, you’re never getting rich off of real estate. And we all know what happened since then. If you bought any time between 2000 and 2004 and didn’t take cash out between 2005 and 2007, you are sitting pretty. Those were really the best years to get into real estate here in Southern California.

[00:08:17] And I would go so far as to say as most markets around the country. So when we look at that, now that we have a more connected society, national cable news, national media in terms of websites, internet, HGTV, Instagram, all of these things. I think we will see more markets be cyclical and be subject to a downturn.

[00:08:37] But the reality is you cannot look at 2008 as a comparison for anything that will happen in the future. And you say why not Josh? It happened before. Why can’t it happen again? The reason being is we now have laws in place that make it illegal and impossible to do the type of financing that took us where we went in 2008.

[00:08:59] If you look at the fundamental levels of where we should have gone, home prices should have peaked somewhere around 2004, 2005. And what do we mean by fundamentals? We mean, What can people qualify for making a down payment, having decent credit and the income to qualify. Most loans done, even to borrowers who could qualify in 2005, 2006, 2007 did not require any documentation. Whether that was just simply stated income, stated asset. No income, no asset. The media likes to get crazy with things and talk about ninja loans. No income, no asset, no job. 

[00:09:33] Never actually saw one of those. You did actually have to show that you had some source of income, even if you only had to write down on a piece of paper. Long story short, those are all gone. There was more than just on the street, were you as a borrower able to get a loan, regardless of whether you qualified for it or not with no money down, no decent credit history and no ability to repay. All of that is gone. 

[00:09:57] But what happened behind the scenes is what that did to the financial industry in the United States is it brought it to its knees. Without massive government intervention, our entire economy would have crumbled. So we talk about systemic risk. Are there other things that create systemic risk in the economy that could lead to a similar recession?

[00:10:14] Yes, but it’s not based in housing. And it’s not a nuclear bomb starting in housing and then spreading out. Something that could happen somewhere else and have a contagion into housing. But we will never see that again. 

[00:10:26] So if anyone talks about, Hey home prices are higher than they were in the last peak… home prices relative to incomes far less important now than then, because then the incomes got to high multiples based off of BS loans. Right now, incomes are at high multiples and the people buying homes actually qualify for them. 

[00:10:47] They’re making a down payment. They have the income. They have the credit. So very different situation. It doesn’t mean that we cannot have a downturn in home prices. It means that far less likely. And if we do, it will be nowhere near the magnitude of what we saw in 2008. 

[00:10:59] Jeb Smith, Huntington Beach Realtor: No good stuff.

[00:11:00] So the episode here is about the long game. The long game when it comes to real estate, Josh. Benefits of thinking longterm. And some of these, we know, like we talk about all the time. Shelter, right? You have to have shelter, whether you decide to own a house, buying a house or you decide to rent a house.

[00:11:18] Most people aren’t given the option to live at home, rent free for the rest of their life. And even if you are given that option, most people are going to choose to go do something different than that. So with that said, Josh shelter being one of the benefits what are some others?

[00:11:33] Josh Lewis, Certified Mortgage Consultant: It’s the fact that you’re able to fix that cost and then also allocate a portion of that shelter cost to an asset that is appreciating and that is going towards principal reduction. 

[00:11:46] So what do you mean by that? Let’s walk through all of those things. The first and easiest and most important is, let’s say if you wanted to rent here, we went through this previously, a really nice two bedroom apartment here in Orange County is 2,800 to $3,200 a month. 

[00:12:04] To own a nice two bedroom condo is probably 4,500 to $5,000 a month. So there’s a sizable difference, and a premium that you are paying to own. But that is today. So if we look at the numbers on a $500,000 mortgage, basically the rent in 10 years with 3 percent increases, and I went back around the numbers for going back, 25, 30 years, we’ve seen three and a half, 3. 7 percent annual rent increases.

[00:12:34] If that moderates down to 3 percent going forward, at 3 percent rent growth within 10 years, the rent is more. So that’s what we’re talking about today. Taking short view versus long view. 

[00:12:44] It is really easy for someone who can qualify and can afford the payment today to decide not to because the rents are so much cheaper than what the housing payment is. But they’re failing to realize that you’re fixing that cost and you don’t have to worry about the principal and interest on your mortgage going up.

[00:13:03] As a matter of fact, you have an option to lower it over time. Most everyone agrees that we are at or near a peak in interest rates. So even if we go back nowhere near 3 percent rates, if we get back to five, five and a half percent, that is going to mean that with 3 percent rent increases in four to five years, rents are higher than what that mortgage payment is.

[00:13:25] The second piece there, Jeb, that people fail to account for, and we see this in the comment section all the time. “Hey, in the first 10, 15 years, nothing is going towards principal. You’re just paying interest. So essentially you’re renting the house.” 

[00:13:38] And it’s not true. So we can debate what is a significant amount of principal reduction. But if you take out a $500,000 mortgage right now and you put 5 percent down, just shy of $5,000 a year will go towards principal the first year. So about $400, a little more than $400 a month. 

[00:13:59] So if we say it’s a thousand dollars, $1,200 difference, actually you’re going and putting some into your forced savings account, and that grows year by year. And by the time we get to year 10, you have about $10,000, just shy of $10,000 going towards principal. So in the first 10 years, $65,000. So on average, $6500 a year going towards principal reduction when you have that fixed payment and you’re not worried about things increasing, and you’re actually hoping for that opportunity to lower your monthly payment.

[00:14:31] So in addition to that long term view of what our home price is going to do, we don’t know where home prices are two, three, five years from now. We know that in 10, 15, 20, 25 years, they’re going to be significantly higher. We know the same with rents and we know that year by year, you are putting more and more towards principal in that forced savings account in addition to having the fixed payment.

[00:14:53] Those are the big ones before we really get to, the sort of the more advanced look at it. And the thing that I count less on, because the issues there that we just talked about are fairly straightforward. Substituting a mortgage for rent, cause you have shelter costs, regardless, fixing your costs and a portion of that going to reduce the debt and make that home yours eventually.

[00:15:15] Why don’t you talk a little bit about the impact of leverage and how that works over the long haul?

[00:15:19] Jeb Smith, Huntington Beach Realtor: Before we do that, Josh, it’s something came to mind when you said that I think is important to note. So we didn’t talk about tax benefits, which we’re actually going to do a whole episode next week where we get into tax benefits and owning real estate. So one of the advantages of owning real estate longterm is the tax benefits that you get over that time and owning that property.

[00:15:36] And again, we’ll go into it in more detail next week. So we’re not going to talk about it here, but I realized there’s some people listening to this that say yeah, you’re putting $400, $500, $5,000 a year, whatever the example was a moment ago into a forced savings account, you can’t access that, right?

[00:15:51] That’s money that you can’t access so it’s no real difference than me renting a property. There is a difference, because renting there are no benefits. You don’t get the tax benefits. You don’t get the forced savings. You don’t get the appreciation. So yes, there are maintenance costs. There are things with owning real estate that are part of being a homeowner. I get that. 

[00:16:10] But the pros outweigh the cons, eight days a week. And we could sit here and beat it up over and over again and explain why. It’s proven over time that the numbers actually pencil out. Now there are some instances. You buy with very little down, you have a shorter term time horizon. We go back to that short term mindset and home prices don’t appreciate. 

[00:16:33] And you end up in a position where, yeah, maybe you do owe more on the home than it’s worth or that that you’re having to short sell it. or whatever, those things do happen. So buying a piece of property and doing everything that we talk about here doesn’t necessarily guarantee you wealth or rainbows and unicorns at the end of the day, but it’s important to understand both sides and understand that we are looking at both sides too.

[00:16:58] We’re not just looking at this from the rose colored sunglasses and not even taking into account the things that a lot of you comment about in the chat. We do. We talk about all of that stuff. And I think that’s why I want to bring it up here. But Josh mentioned the word leverage.

[00:17:12] So one nice thing about real estate is that you can leverage real estate. When you go out and you buy stocks, for example. So say I want to buy a hundred thousand dollars worth of Apple stock. I’ve got to come up with a hundred thousand dollars to buy that stock. And if that stock goes up 10% I now have $110,000.

[00:17:34] So I made 10 percent on my investment. Let’s use the same example. And we say we buy a hundred thousand dollars worth of real estate. Now for most areas of the country, I realize, you’re going Jeb, you’re crazy. You can’t do that. Bear with me. We’re just using an example here. And let’s say that I put again, let’s just say I put 10 percent down in this case.

[00:17:52] And so I put $10,000 down and now I own, I control $100,000 of an asset. And let’s say that asset goes up by $10,000. So now it’s worth $110,000. My cash on cash return is sitting at a hundred percent because I only put $10,000 into it. It’s now worth $110,000 and I’m leveraging my money.

[00:18:16] You can’t do that in any other asset. And so one of the huge benefits of real estate is that by putting a minimal amount down in some cases, three, three and a half percent. You’re able to control this large amount of money and reap the benefits of the forced savings, of the appreciation, of the tax benefits, of we haven’t even discussed it yet, Josh, but the emotional things that go along with owning real estate as well.

[00:18:45] But is there anything we want to add on the leverage aspect? 

[00:18:48] Josh Lewis, Certified Mortgage Consultant: In terms of leverage, one of the biggest misconceptions that you’ll see people who are anti housing tell you, “Hey, I’m just throw all your money into a 401k. It’s the best thing you can do because stocks over the long haul, depending on what number they want to point out, get you roughly 8 percent year over year return”.

[00:19:04] But again, as Jeb said, I invest a hundred thousand dollars. I get that 8 percent return. I have 8, 000 buy a hundred thousand dollar house with 10 percent down and it goes up 10%. You get $10,000 on a $10,000 investment. That’s a hundred percent return. Now it goes down year by year. As you get more equity in the home, you are less and less leveraged.

[00:19:26] So your cash on cash return will decrease as time goes on. But in the early going, first five, seven, 10 years, a lot of people are seeing 30, 50, 60, 80 percent cash on cash return with very little home price appreciation. So when you look at it, it is absolutely a fact.

[00:19:43] So depending on whose numbers you look at, whenever I see those articles, they like to say, “The S&P has returned 7.94% a year since 1952 and home prices have gone up 3.1%.”

[00:19:54] This is stupid. You always want 8% versus 3%. Well, Again, it depends on whose numbers you’re talking about and what location you are in. For us in California it’s been over 7% going back to the seventies annually. And nationwide again, Case Schiller Index says, going back to the eighties, about five and a half percent.

[00:20:11] So when you look at that, a three to 5 percent down payment is going to get you a huge cash on cash return. Now, again, that’s not money sitting in a bank account that you can go write a check or pay a bill with. And that’s a good thing. Going back to the comparison of saying I should just rent because I can’t really access that equity.

[00:20:27] One of the comparisons I’d like to make, Jeb is a 401k. So now most employers will automatically opt you into a 401k with a three to five percent contribution when you get hired. The reason why is most people do that. They don’t miss it. They get by on 95 to 97 percent of their income and it grows over time.

[00:20:47] And much like home equity, if you want to get the money out of your 401k, you can take a hardship withdrawal. But you’re going to pay a 10 percent penalty if you’re not 59 1/2, and you’re going to be paying taxes on that. So can it be accessed? Yes. Are there downsides to doing it? Yes. 

[00:21:01] So most people don’t. So if we opt you in, you don’t miss the money. You still manage to pay your bills and you build wealth through being invested in your 401k and having some of those tax benefits. 

[00:21:12] Let’s compare that to home ownership. I don’t have access to this money that goes to reducing principal every month. I can get it back, but it’s expensive, difficult. I’m not likely to do it. 

[00:21:21] And that is one of the reasons why over the long haul, very common people end up having large amounts of home equity, large amounts of net worth because it’s structured in a way that little changes over long periods of time where it’s hard for you to waste, squander or not contribute to that account mean it grows over time.

[00:21:42] But again, back to the theme of today’s show, these things take time. It is very easy to pencil out a scenario where today or next year or the next three years, it would be a better decision financially to rent and invest the difference. You can absolutely make a case for that. So that takes us back to thinking short term versus thinking long term.

[00:22:05] And both of these things are appropriate. Jeb, I don’t think anyone would ever advise someone, “Hey, you can only look at long term factors when making your decisions.” You have to balance those. 

[00:22:13] We’re talking about some people don’t qualify at all today. So it’s not an option to buy. So they have to look at, Hey, here’s my longterm consideration. Here’s my plan. 

[00:22:20] Some people have both options, but they have to look, am I likely to be in this home longer term? Am I likely to get divorced? Am I likely to get married? Am I likely to have a kid. All of those are shorter term considerations. Getting married, divorced, having a kid or a longterm considerations with short term implications.

[00:22:39] So it is important that we look at both. It’s important that we don’t let the short term implications outweigh the longterm to your detriment. Because going back to if Jeb and I sound very pro housing, it’s because we are. Because over the long haul, we know the impact it’s going to have.

[00:22:56] It doesn’t mean we’re discounting the short term reasons why you may not be in a position or want to buy a home or the short term difficulties in penciling it out and going, Hey, this is the absolute right decision for me today.”

[00:23:09] It is very important that you’re doing your research and looking at both.

[00:23:13] Jeb Smith, Huntington Beach Realtor: And, you have capital gains benefits when you’re selling a property. There’s tax free gains. You pull money out of a 401k, you sell a stock you. Say that you had that Apple stock, you go to sell it. Guess what? You’re paying long term capital gains.

[00:23:25] Depending on how long you on it, short term, long term capital gains on that stock. Real estate, there’s exemptions up to certain amounts, $250,000 for an individual, $500,000 for a couple when you’ve lived in the property two of the last five years. Not going to get into a lot of that here, but just understand there’s other benefits of owning real estate.

[00:23:42] But Josh I look at my family, right? Eastern North Carolina. And most of blue collar workers a few in the family have done well. And, but most of the family are doing okay. Average, right? But one thing that they’ve done over time is they bought real estate, they bought land, they bought things that long term have held their value and gone up appreciation wise.

[00:24:06] And now we talked about the last episode about creating generational wealth. Again, generational wealth for different people means different things. But for our family, that is essentially what would be passed down. A lot of that land? A lot of that real estate has been in the family for years, and it will continue to be in the family for years.

[00:24:26] And probably won’t be sold. It’ll just be passed down and had it not started generations ago, then it probably wouldn’t be where it is today with the family owning it and that sort of thing. So again for every person, it’s different, but understand it’s taken time for that to take place.

[00:24:44] It didn’t happen in a year. Didn’t happen in five years. And quite frankly, a lot can happen in five, 10 years that can change incomes, that can change your position so that maybe put you in a better financial position to be able to act on some of this stuff. I realized a lot of people listen to the show and go, I’m never going to own a home.

[00:25:00] I can’t do this. How do people do this? This is so expensive. The American Dream is dead. It is if you think like that. There are opportunities. There are ways for you to change your circumstances so that you can put yourself in a position to become a homeowner. It’s just a matter of whether or not you want to do that and want to do what it takes in order to put yourself out there and gain I wouldn’t say financial freedom but put yourself in a better position to own real estate and to buy real estate. 

[00:25:29] So Josh, let’s talk about Maslow’s hierarchy of needs when it comes to the emotional side of real estate.

[00:25:37] And then we’ll give some examples we have thinking short term. You have one really thinking long term, which is really good example. And I have one on the opposite side, thinking the short term, and you can see the difference in, in how they turned out. 

[00:25:51] Josh Lewis, Certified Mortgage Consultant: Absolutely. When you start talking about psychology, Maslow’s hierarchy of needs, people go, oh, woo woo stop talking about that stuff but it’s true. When you look at the hierarchy, you go, yeah, that’s pretty, pretty much correct. 

[00:26:03] On the base level of that pyramid is physiological needs. And one of those is shelter. Sleep. So having a roof over your head, somewhere where you can sleep safely. We have a homelessness crisis in the United States.

[00:26:15] So thankfully most people listening here to the show are thinking of becoming a homeowner, not becoming housed period. But when you look at that, you understand that is a base level need. I have to have somewhere safe and secure to live. And for most people that requires owning or renting it from someone who does own it. So there’s no two ways about it. 

[00:26:34] But from there, once we have a base need fulfilled of having a roof over our heads, now we start looking at moving our way all the way up that to self actualization. So safety needs, the nicer your house is, the safer your house is, the safer your neighborhood, all of those things move you up that hierarchy.

[00:26:53] Love and belonging. Under there. We have friendship, family, how many times have we spent in your backyard barbecuing or on the 4th of July? Like those things are our memories. And it’s not saying you can’t do that in an apartment. It’s just different. Everyone has that grandma or uncle’s house that holidays were always at. And it most likely wasn’t a rental property. It was a place that the family gathered. 

[00:27:16] You work your way up to esteem, respect, self esteem status recognition. Now you can say these are bad things. They are natural pieces of all of our psyches. And we all want that. And moving from, Hey, I do live rent free with my parents. Hey, I’m out on my own renting. Hey, now I bought my first little place. Now I moved up to a nicer place. 

[00:27:36] That’s a natural progression of what people would like to do. And it requires you taking a long view of it. And you going back, Jeb was saying, we do hear from a lot of folks, “Hey, I don’t believe this dream is for me. I don’t believe I’m ever going to be able to do it.” 

[00:27:49] They’re voicing attention in that they’re saying psychologically, I want this. That’s the direction that I want to go. We talk about 65 percent of Americans at any given time and American households are homeowners. That is what people want. Not everyone and not at all times, but most of them at most times.

[00:28:07] So we do have this tension and we absolutely feel your pain. I talked to at least one or two people every week that there is not a solution right now for them to buy something that they would want in an area where they can or are willing to live. 

[00:28:20] That’s not fun. If we go back five years ago, even to 2017, 2016, 2015, most everyone that we talked to could buy something. So things have changed. Things are different, but us as humans, as individuals, those desires are not changing over time. 

[00:28:37] Jeb Smith, Huntington Beach Realtor: No. Let’s do that. Let’s go back to 2015, 2016 in an example here. So I had some clients that I probably started working with 2013 ish. Couple, young I’m not even sure if they were married at the time. They’re married now. They have a kid now.

[00:28:53] Younger couple, and they started looking at properties. And we were looking here locally in Orange County and we went out and looked at a couple of properties and everything to them didn’t fit what they were looking for because it was too expensive.

[00:29:05] They were under the mindset, the impression that prices should be lower. That things had just not gone down low enough. And understand we’re coming out of the great recession. Prices had more or less stabilized by 2010, moved sideways a little bit, as we talked about earlier, Josh. And then started increasing in 2013, kind of the beginning of 2013, like March-ish, if you remember.

[00:29:30] And that was probably about the time, right? We started seeing that increase in prices. And for them, it was like, whoa. Like they didn’t expect it and it started to get a little bit more competitive out there in the market. And they just, they never bought. We looked on and off for about a year and then things fell apart and they contacted me again in 2016. 

[00:29:50] They ended up buying a condo and owned it for better part of two, three years. So 2019 is when they ended up selling it. But during that time, they ended up being married again, might’ve happened before. I don’t remember, but they ended up having a daughter and they wanted to get out of that property and get into a single family home because they wanted a yard. They wanted that sort of thing. 

[00:30:10] And they were looking at the condo, looking at the housing market from when they bought in 2016 and when they originally started looking back in 2013 ish and said prices are just too expensive like something’s got to change here. And so they decided to sell that piece of property and they were going to rent until prices came back down.

[00:30:27] We probably know how the story ends. 2023 now. They don’t own another piece of real estate. They essentially got priced out of the market at that point. Because what they did was the money that they had taken from, the equity they had gained during that period of time. They had selling costs, they had different things, but they started renting and they were paying more in rent than their mortgage was.

[00:30:48] And here they are today. And they’re still doing that same thing. And more or less, the reason I bring this story up is because it was a short term thinking that got them in that position. It was back in 2013 they could have bought, they thought prices were too high, they waited. They ended up buying in 2016, paid more for that property than they would have if they had purchased a couple years earlier.

[00:31:10] And then ended up selling that property as it went up, thinking the market had peaked and again, missed out on 30, 40, 50 percent equity gain during that period of time. All by trying to time the market, Josh, and we’ve done an episode on trying to time the market and how it’s a fool’s game, whether you’re buying stock, you’re buying real estate, you’re buying bonds, whatever it is. You got to have some sort of longer term perspective. 

[00:31:33] Things can happen in the short run and you can benefit and you can, maybe make some changes in your plan, but nevertheless, you got to think longer term. So Josh, you have a story on the flip side of that where somebody actually took advantage of the market and, kind of reaped the rewards of it. So 

[00:31:48] Josh Lewis, Certified Mortgage Consultant: These clients came to me in 2006. They had been renting for 15, 16 years. They had actually done the math. They had a spreadsheet. They knew what they paid year by year in rent. They’d paid $265,000 towards someone else’s mortgage payment and owning their home.

[00:32:02] And they said, this is bull. We’re not doing this anymore. We’re going to become homeowners. I went through the reasons for them that I thought this was not the ideal point to enter the market. She says, you don’t understand. I am not going to be a renter anymore. I’m going to buy one house. I think they were late thirties, mid to late thirties at that time. And they said, we’re going to take this to retirement and I’m going to own a home. 

[00:32:24] So what did they do? They bought at the peak of the market. They paid $599k. I went back and looked, it probably went down maybe even slightly under $400,000. They lost at least 35 percent of the value in that home.

[00:32:35] They bought in 2007, they rode it out. They looked at this and said, don’t care. I can afford the payment. I don’t care what the home value is. I’m going to own it at the end of 30 years. So what did they do? They rode it out. In 2014 they refinanced. In 2017, they had another opportunity to refinance. In 2019, 2020 and 2021, each of those three years, they rode that down. 

[00:32:57] So they went from a rate, I believe we were about 6% when they bought in 2006. They’re now sitting at 3%. So they’ve paid $170-180,000 off on that mortgage over that timeframe. None of those loans were cash out. We didn’t keep extending out to 30 years ’cause we wanted to compress that payoff.

[00:33:14] And at the end of 30 years, They’re going to own that house. We still have another 14 years or so, but they are going to own that home. Now, do I pass that off as the ideal or to say it never matters when you buy, you should always buy and just post up for 30 years. That’s not the moral to the story. The moral to the story is that if you have a long view, it is very difficult to get on the wrong side of the market. 

[00:33:39] They bought within six months of the absolute peak of the greatest crash that we will ever see in real estate. But they bought a house they could afford. They made a 5 percent down payment. It was full qualifying. It wasn’t a stated income loan. They had good credit. They had money in their retirement accounts. They had good jobs and they rode it out and they have come out the other side. 

[00:33:58] Now we’ve got house worth a million bucks. They got $700-800,000 equity. They’re mortgage payment, all in, is less than $2,000 a month. To rent in the same neighborhood is $4,000 a month.

[00:34:07] So again, don’t want to pass this off as the ideal way to do it, but that is someone who literally bought at the absolute wrong time and having the long view, they came out better than fine. They came out good. And we can sit here and say, you guys know, I started flipping homes in 2008. By late 2008, we had already seen something close enough to a bottom and the discounts that we could get on distressed properties that I was buying.

[00:34:28] In 2010, I bought a house less than a mile from them. Much bigger lot, slightly better neighborhood. We went in, redid the whole thing, stem to stern and sold that thing for a hundred thousand dollars less than they paid. So if they had kept their powder dry, they could have got into the lower point and they still would have benefited from all the things they benefited over the last 12, 13 years.

[00:34:47] So it’s not to say that they did it optimally. It’s just the difference between short term thinking. Thinking you can time the market, thinking what’s unaffordable, what’s unreasonable. Or taking a long view, fixing your housing cost, taking advantage of leveraged appreciation and principle reduction and putting yourself and your family in a much better position over the long haul.

[00:35:05] Jeb Smith, Huntington Beach Realtor: No, Josh, and I think it’s important to note what you just said there is that, yeah, real estate can go down and there’s going to be opportunities in the future where real estate probably does go down. Doesn’t go up year over year forever. Does that mean a crash? No, it doesn’t mean that.

[00:35:18] But what I have found. In working with hundreds of clients over my career is that most people don’t have the wherewithal to pull the trigger in a down market. In a market where things have moved down, they think that it’s going to go down even further, that there’s more time, that there’s no reason to act.

[00:35:38] And in some cases they could be correct. But what I find more often than not is those people don’t act. Because again, emotion gets involved and they end up just hanging on and waiting and waiting. And as things go up, they say, That’s not the end of it. It’s going to come back down and then the opportunity is missed.

[00:35:55] So Josh, if somebody wants to think more long term, they want to have the long game, so to speak, what are some things that they can do to get that mindset? Because that’s ultimately what we’re talking about here is for the person that wants to think long term And so the emotion isn’t such a big factor.

[00:36:12] What are the things they need to focus on? 

[00:36:13] Josh Lewis, Certified Mortgage Consultant: So whether you’re single with no kids, engaged, recently married, married and have a couple of kids, there is a discussion that has to take place. Whether it’s with yourself or with the entire family to say, where are we today? Where do we see ourself in three years, five years, 10 years, 30 years.

[00:36:32] And that sounds crazy, but it goes back to Steven Covey and The Seven Habits of Highly Effective People is “begin with the end in mind”. What do we want this to look like? And then work your way back. You may say, Hey, in 30 years, I want to own my home free and clear, but I want to be in North Carolina with Jeb’s family. I don’t want to be in California anymore. 

[00:36:50] So that’s going to have a different end result than saying, Hey, I was born and raised in Colorado and I’m never leaving the Denver metro area. Say, okay, well I have an idea of what housing costs, what it’s likely to look like, and then I also know, hey, I’ve got two kids I’ve gotta put through school. My wife currently works. We don’t want her to work after the kids come. Any number of those decisions. 

[00:37:13] So really, what are you having to look at there, Jeb? What do I want in the long run? What do I envision for my career? Does my career involve needing to be flexible in terms of moving to other states, other cities?

[00:37:24] What’s going to happen with my relationship? Is my relationship going to take me to another state, another city? Am I in a rocky relationship? Does that mean, hey, I’m in a great position financially. I can buy a home today with no worries. but likely to be separating from my spouse and therefore need to be prepared and make that as simple and smooth and easy as possible.

[00:37:46] So taking that long view, I think is really saying every step of the way for the next five years, through the rest of your life and including thinking of what retirement looks like.

[00:37:55] I can tell you, for myself, just turned 50 this year. So from 20, when you first kind of, Hey, I’m starting to make money and I have to think my way through this to 50, going, Hey, I can actually see off in the horizon retirement is actually coming up, what I have envisioned has changed. So my plan has changed.

[00:38:11] But having that plan gives you a roadmap to adjust and correct. So probably the most important thing that I want you guys to take from this, having the long view does not mean buy a home today. Having the long view means being able to make the decision for yourself, is today the right time? Are all the cards aligned? Does it make sense for me? 

[00:38:32] Go back to the beginning of the show. We talked about the two different couples, both recently married. One, it is not the right time for them. The other is also deciding not to buy and I think it’s absolutely the right time for them. 

[00:38:44] But you have to go through that for yourself, if you’re single. Yourself and your family, if you’re married… not married, you just have someone that you know, we have more and more people unmarried, living together, even having children together. Whatever your family group is, you have to think through that for yourself of what that looks like going forward and not focus myopically on what is the best thing for me in the next 30 days.

[00:39:07] Jeb Smith, Huntington Beach Realtor: No, and I don’t know that I can really add anything to that. Other than just a reminder that real estate’s local, right? So not all markets are going to do the same thing. Some markets are going to react differently to different things. Job creation, job growth, just stability in different areas, changes because of various factors.

[00:39:26] So understanding your market, what drives your market. Inventory levels in your market, that sort of thing. That’s the things that if you’re planning on buying somewhere understanding, not just the macro what’s happening nationwide, but what’s micro what’s happening in your market is also important because that could dictate different things in the future.

[00:39:45] It might change when you decide to act on it. So, you know, That said, make sure you’re working with a professional locally that understands your market. There’s a link in the description below if you need one that’ll also get you in touch with a lender if you want to start the process and go through that pre approval process, it’s never too early to start that either.

[00:40:03] Again, the advice always comes back to our slogan here, which is Buy Right, Borrow Smart, Build Wealth. And again, a reminder, none of that’s going to happen immediately. The building wealth part takes time, which is why we’re focusing on the long game. So appreciate you guys listening. As always we appreciate the support until next time 

[00:40:22] adios 

[00:40:22] Josh Lewis, Certified Mortgage Consultant: amigos! 

[00:40:23] ​

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