The Personal Finance Podcast - Should You Buy a House in a Red Hot Market?! (The Answer May Surprise You!)

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Starting point is 00:00:56 Find your advisor at IG Private Wealth.com. On this episode of the Personal Finance Podcast, we're going to talk about should you buy a house in a red hot market. Thanks, everybody, and welcome to the personal finance podcast. I'm your host, Andy, founder of Master Money. And today on the Personal Finance podcast, we're going to be talking about should you buy a house in a red hot market. If you have any questions about this episode, hit me up on Instagram. at Master Money Code. That's Master Money CEO.

Starting point is 00:01:49 And follow us on Spotify, Apple Podcasts, or whatever podcast player you love listening to this podcast to. And if you want to help out the show, leave a five-star rating and review on Apple Podcasts. And also, if you love video, check us out on YouTube at Master Money on YouTube. Now, at the time I'm recording this podcast, we are in a flaming hot market. This market is on fire when it comes to looking to buy a house. I mean, there's offers on houses that are coming in six figures over asking. I have a friend who's looking to buy a house right now who put an offer in at $75,000 over asking and lost out on that house.

Starting point is 00:02:35 There are things that are going on that are absolutely unheard of. People are waving inspections, which is something you should never ever do. if you are ever buying a house and someone tells you to waive an inspection, you should absolutely never, ever do that. And if you're looking to buy a house, you may want to pull your hair out because this is truly maddening for someone who is a buyer, because this is a major seller's market, the sellers have all the power, you have no negotiation power, you have no pricing power,

Starting point is 00:03:02 everything is in the seller's hand. Trust me, I get it. I understand how difficult it can be. And what we're going to talk about today is trying to figure out, Well, is this a bad time to buy a house because the market is so crazy? Why would someone want to buy a house in a market that is this crazy? We're going to go through some of that and talk through that as well. Now, why is the market so crazy at this time?

Starting point is 00:03:25 The very biggest reason is that supply is extremely low. We have a supply problem in this country where there's a lot of existing houses in specific areas where a lot of people are moving to and there's not enough inventory for those houses. So whenever that happens, prices rise. In addition, interest rates are at all time lows. You can literally get into a house for a 3% interest rate. 2.75 is what I just locked in back in December. And getting an interest rate that low is almost like you're getting free money.

Starting point is 00:03:57 You're obviously not getting free money, but it's getting close to getting free money. And in addition, new construction can't keep up with the demand. So they can't build fast enough. And there's an influx of a generation who's trying to buy. a home. In fact, 54% of people between the ages of 25 and 34 want to buy a home. And these are all brand new homeowners. These are people who want to buy a house, but they haven't been able to buy a house yet. And median home prices have increased 17% year over year. So these are fascinating numbers. This is a wild market. This is something we have never seen before. Even at the peak of

Starting point is 00:04:35 2007, it wasn't like this. Now, there was people getting houses at crazy prices. who were not qualified, but we have more protection systems in place to allow that not to happen. Now, are people still over buying for houses? Absolutely. There's people who are buying way too much house, way more than they can afford. I see it all around me. But at the same time, when competition is high, people don't make the best decisions. So we're going to talk about how to navigate a market like this, a super hot market. And this is something that is an evergreen type of discussion because any time there's a hot market, you can do the same exact things. Now, what are the positives in a hot market?

Starting point is 00:05:12 Specifically in this one, interest rates are extremely low. So when interest rates are low, obviously you can get a loan for much less every single month than you would have interest rates were higher. Now you're paying a higher price, so it kind of evens out in that sense. But when interest rates are low, it's a benefit to the buyer. In addition, you can sell your existing house at a higher price. Now, this is something where if you have a once-in-a-lifetime opportunity to say, sell a house because it's way over-inflated, then this would be the time to look into that and upgrade to the house that you want to stay in for a long period of time. But let's get into what you should do if you're thinking about buying a house and a hot market like this.

Starting point is 00:05:54 So when you're looking to buy a house at any point in time, it doesn't matter what the market is, there's a few questions that you need to ask yourself. But these become especially important in a red-hot market. If you don't go through these questions in your head, then you could actually make a mistake just by buying a house. Because not every single person is in a situation where you need to be buying a house. And in the future, we're going to have an episode, Buy versus Rent, where we talk about the differences of should you buy a house or should you rent a house. So there's a lot of reasons to not buy a house. And there's a lot of situations where you should not buy a house because buying a house is expensive. It's a very expensive endeavor.

Starting point is 00:06:32 It's expensive on the front end where you're paying. all sorts of fees on the front end. It's expensive to maintain. And even when you have the house paid off, it's expensive when you're looking at taxes and things like that. So we'll get into that in that episode. So make sure you're following this podcast so that you can catch up on that episode as well. But here's the questions that you should be asking yourself when you're looking to buy a

Starting point is 00:06:56 house. The first one. And this is the biggest one of all. And this is what I tell every single person when they're looking at buying a house is are you willing to stay in that house for 10 years? Now, why is 10 years the number? The reason why is, if you look at most market cycles historically, typically recessions happen in cycles that are around 10 years. So let's look at 2007 for an example. Because in 2007, the market was at its highest that we've seen since today. And 2007 is right before the Great Recession, the housing market

Starting point is 00:07:29 crash of 2008. Well, if you bought a house in 2007, the average price at the height was $297,000. So if you bought a house at the height in 2007 for $297,000, that same house 10 years later in 2017 would be worth $360,000. Now, these are the median home prices during those time frames. So what that means is, just like with investing that we talk about all the time, time is on your side when you buy a house. So if you're willing to stay in a house for a longer period of time, you're going to absolutely be okay over time.

Starting point is 00:08:07 Because if you look at a housing market, over time it goes in one direction. It goes up. The same thing. If you look at the average price of houses in 1965, it was $21,000. And in 2021, it's $408,000. That's a very nice bell curve for someone who's willing to own the asset of a house for a long period of time. is a house and asset, the one that you live in. That's a whole other discussion that we'll get into one day.

Starting point is 00:08:35 But time is always your friend in homeownership. So the longer you own a house, the less money you're going to have to pay out in the long run because you're going to have the benefit of appreciation. You won't have to pay those upfront closing costs and the sale closing costs. You won't have to pay agent fees. You won't have to pay all these other things

Starting point is 00:08:52 that you would have to pay if you were jumping in and out of houses every single five years. Typically, people who move a lot from their performance, primary residents, they typically do not make as much money as someone who stays in it for a long period of time. Now, when you're assessing if you're going to be able to live there for 10 years, look at things like your home life situation. Does it allow you to live in at one location for 10 years? Are you ready to settle down? Do you have kids? Are you married? Does your spouse ever plan on moving? All of these are considerations to look into before you make this decision. And the same thing

Starting point is 00:09:26 to look at is your career path. Is your career path going to be in this location for at least 10 years? Or is there the opportunity for you to maybe get promotions, but you're going to have to move to other locations? These are all things that you want to make sure that you're considering. And here's a big one. Are you going to be happy in a house within that price range for 10 years? Because a lot of people who are just getting into their starter houses, they don't want to stay in that house for over 10 years. So don't jump into a starter house just because you want to buy a house because in the long run, you could be making a mistake because if there's some sort of housing dip within that 10 years, we're going to be losing money on your house.

Starting point is 00:10:03 See, what most people do is most people, studies have shown, sell between five and seven years when they're in their house. This is how you lose when you're buying houses. And if you've ever wondered, if you look at a mortgage and you wonder why all the interest is front-loaded, this is why, because the banks know that people move every five to seven years. So they reap the majority of their profits up front, and these people are moving all the time, and they're just making more and more money. And then the other question to see if you would stay for 10 years is can you afford the size of the house that you need for that length of time? If not, then maybe it's not the time to buy yet. That's the first major question you need to be asking yourself. You need to be doing all of that

Starting point is 00:10:41 analysis to ensure that you're going to be willing to stay in that house for 10 years. The second question you have to ask yourself is will your housing cost be lower than 30% of your income? If you haven't heard our episode where we talk about the big three expenses, we go through this and why you need to keep your housing expenses below 30%. This is how you can truly build wealth. You're going to hear a lot of financial gurus out there tell you to cut back on lattes or don't eat avocado toast. But cutting back on the big things and making sure you're controlling the major expenses

Starting point is 00:11:15 is how you truly build wealth in this life. It's how you truly build generational wealth because you're controlling the expenses that matter that actually make an impact in your life. So controlling your housing expenses, controlling your transportation expenses, and controlling your food expenses are the big three. And housing is the biggest of all three of them. So making sure you're at least keeping your housing expenses below 30%, not at 30%, not 31%, not 32%.

Starting point is 00:11:42 They need to be below 30%. And if you want to achieve fire, if you want to pursue fire, I would keep that below 25, preferably 20%. Because housing expenses will absolutely kill you. If you buy more house than you need or you buy more house than you can afford, you're never going to get ahead financially. So making sure you're below 30%, preferably, like I said, below 25 or 20, is the biggest thing that you can do.

Starting point is 00:12:06 Now, what do I mean by housing expenses? Do I just mean your mortgage or your rent? That has to stay below 30%. No. What I mean by that is all expenses associated with your housing costs. That's your utilities. That's your taxes. That's your insurance.

Starting point is 00:12:21 That's repairs to your house. All of these are encompassed in that 30%. Because if you don't do this, you're going to put yourself in a house poor situation. Now, could you say walk to work every day and then get a house above 30%? Sure, you can make tradeoffs like that. Everything is a tradeoff. And if you make the correct tradeoffs, then you can still come out ahead and have a massive house, but maybe you bike to work every day.

Starting point is 00:12:46 There's things like that that you can do. But this is the general rule of thumb. making sure that you maintain your housing costs below 30%. This is one of the biggest keys to wealth building. And once you understand this, once the light bulb goes off, it's going to be life-changing for you. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible.

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Starting point is 00:13:59 So lately, I've been noticing how fast things are changing at home. The kids are growing like crazy. Clothes don't fit anymore and routines are changing. And it just hits you. Life is expanding. And when your life grows, your responsibility grows with it. That's something I've been thinking about more this spring, making sure the safety net we have in place actually matches the life that we're building. And that's where PolicyGenius comes in. PolicyGenius isn't an insurance company. They're an online marketplace that helps you compare life insurance quotes from some of the top insurers in America, all in one place for free. And their licensed team works for you, not the insurance companies. So they help you find the right coverage for your situation without

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Starting point is 00:15:26 Luckily, Jeff saved with Amazon and stocked up on antacids, ginger tea, and milk. Habaniero? More like habanier, yes. Save the everyday with Amazon. This episode is brought to you by Tell Us Online Security. Oh, tax season is the worst. You mean hack season? Sorry, what? Yeah. Cybercriminals look.

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Starting point is 00:16:35 is extremely important because you do not want to be buying a house too early just because you're worried about the market going up too fast. And there's nothing wrong with a low down payment, specifically if you're in a low interest rate environment. But if you want to consider hedging some of the risk of these inflated prices, then it would be better to see if you can put more cash down. Now, one other consideration to look at this is if you are going with a low down payment, maybe you're getting an FHA loan for 3.5%, or you're getting a traditional loan where you can go as low as 3% nowadays, you can actually get into a house for 3%. Yes, I know it sounds crazy, but you can if you've never heard of this before.

Starting point is 00:17:10 So we have an episode about the FHA loan that I'll link it up in the show notes as well so you guys can check that out. But this is something where you want to consider PMI insurance because private mortgage insurance or PMI is going to stick on your loan for a very long time if you don't put 20% down or more. So this is another consideration to have because you're going to have to carry additional insurance on your mortgage if you do not put that 20% down. This is one of the biggest downfalls to putting a low down payment down. but if interest rates are low, then it may wash. It just depends on your situation.

Starting point is 00:17:43 The next question to ask yourself, and this is a biggie, because if you're buying a smoking hot market, a white hot market, then this is something you definitely want to consider. Let's check your emotions here. Are you okay with the value of your house going down? I'm not saying just saying yes because you want the house. Think about this for a second. You're sitting there.

Starting point is 00:18:03 Are you okay with the value of your house getting cut in half? Because that's a possibility in a recession. It's a possibility to have the value of your house. You just paid $400,000 for a house, and it's get cut in half into $200,000. Are you okay with that? Because if you're not, you have to truly think through this decision. Now, if you're going to stay for 10 years, you know market cycles, you look at the housing market cycles. You'll see that your housing price will recover over time.

Starting point is 00:18:27 But if you're not willing to stay for long term and the value of your house gets cut in half, you're stuck with that house because you have no other decision unless you want to front six figures to make up the difference when you want to move. Now here's the thing about recessions. We had an episode about recessions as well that I'll link up in the show notes. But nobody knows when a recession is going to happen. If someone tells you they know when a recession is going to happen, then you can tell them to lace up their nikes and get to step in. Because nobody knows when a recession is going to happen.

Starting point is 00:18:53 Nobody has a crystal ball. I don't have a crystal ball. Do you have a crystal ball? So in this situation, you have to understand that a recession is a possibility at any time. Guess what? Recessions happen in cycles. It could happen at any point in time. It can happen 10 years down the line.

Starting point is 00:19:09 It can happen 20 years down the line. It can happen tomorrow. Nobody knows. But just understanding that you need to control your emotions if the price of your house gets cut and not panic sell or do anything like that. Because paying a mortgage on a house that is worth less than you're paying the mortgage on is probably a difficult thing. I've never done it before.

Starting point is 00:19:29 But it's got to be a difficult thing to do emotionally every single month you're grinding and going to work. And then you realize I'm paying a mortgage on a house that's worth less than what I'm paying it on right now. But if you understand recovery times and you understand that you're staying in this house for a long period of time because that's the decision you made off front, then you're going to be a okay. And then the last question, this is a big one. Am I excited about buying this house? Because if you're not excited about buying this house, if buying a house does not bring you true value, then what are you even doing this for? Maybe you're just trying to do it because you think it's the right thing to do, but you're not really that excited about it. Then you have no business buying a house.

Starting point is 00:20:04 If you're on HGTV every single day, lighting up every time you see someone remodeling a kitchen or shuffling around rugs or painting their walls, you have a poster of Chip and Joanna Gaines on your wall, then maybe you would be in a situation where you definitely would get value out of buying a house. I want a poster of Chip and Joanna Gaines on my wall. You definitely want to think through this and you want to have that consideration as well. Because as we always talk about, you spend lavishly on the things that bring you value and you cut back on the things that. that don't bring you value. So if your housing doesn't bring you value, but you love exotic cars, for example, then ball out with your exotic cars and just go rent at a cheap place. But if housing truly brings you value, you want a house, you want to be cozy and have huga or whatever else you want to do in your house, then maybe you're the perfect candidate

Starting point is 00:20:50 to buying a house. Now, let's get into some tips on how to find a deal in a hot market. Now I'm going to give you a few ideas on how to find a deal in a hot market. because if you're competing with traditional buyers, you're not going to really find a deal. I'm just going to lay it out for you. You're not going to go out there and find some crazy deal unless you get lucky because everyone is looking at the market right now. Every buyer out there is looking on Zillow

Starting point is 00:21:15 every two seconds of throwing an offer in on the same day. So what you want to do is figure out, well, what are the angles that I can take to make sure that I make the right decision throughout this process? And one of the biggest ones that you have out there is house hacking. Now, we have an entire episode about house hacking that I'll leave a link to it in the show notes. But if you don't know what house hacking is, it's a way where you can reduce the amount of money that you have to pay every single month by renting out a space that you have at the house.

Starting point is 00:21:43 Now, typically, the best way to house hack is by getting a duplex, a triplex, or a quadplex, and living in one unit and renting out the other. Now, this is not the best option for someone who has multiple kids and a family. If your family's not on board with it, if they are, fine. But if you're someone who wants to start building equity, you want to get into real estate investing, you want to do these types of things, then actually getting a house hack is a fantastic option for you. Because you can live in one unit. Someone else in the other unit is renting out the second unit and they're paying your mortgage for you. So you're either living rent free or

Starting point is 00:22:14 living significantly reduced rent. And so in a hot market, this can make sense because as long as you run your numbers correctly and you look at house hacking as that option, then you may be able to get an actual good deal on a real estate investment. Now, the second one is when you're buying a house, in some markets you can still do this? Can you find a house where if it's just your starter home, you're willing to rent out in the future? So if you don't know how to run your numbers on a rental property,

Starting point is 00:22:42 I have an episode for that as well. I'll link it up in the show notes. But if you understand how to run numbers for a rental property, then you can go into houses saying, hey, I want to buy this house. I only want to live here for five years. So if the market's down, what I can do is I can rent out this house in the back end

Starting point is 00:22:55 and collect some income on it. So understanding how to run your numbers is another creative way that you can get into this housing market and then you have an investment from there on because you're going to be holding that house for a long period of time.

Starting point is 00:23:09 Now, another great option is looking at something like Live Inflips and we're going to do an entire episode on Live Inflips because this is an amazing strategy that you can utilize if you want to build tremendous wealth and you want to live for free.

Starting point is 00:23:20 So what a Live Inflip is is that you buy a house that you're going to go ahead and flip. So usually it's a distress house. It's houses that have purple walls and the kitchen needs to be remodeled and the bathrooms need to be remodeled and that type of thing. You can rip out the floors. Cosmetic issues. And you look at this house and you're going to buy this house and you're going to live in it. And you're going to live in it for two years. And over the course of those two years, you're going to fix it up gradually.

Starting point is 00:23:43 After two years, then you're going to go out and you're going to sell that house. Now what this does is every two years, you're making $50, $60,000, $80,000 just for living in a house. Some people make even more than that. And this is a tremendous wealth-building opportunity for a lot of people because you can get a large lump sum of cash every single year in addition to your salary or however else you make money just by living and fixing up a house slowly. Now, when you do live in flips, you have to be willing to live in that house for a long period of time if the market takes a dip.

Starting point is 00:24:14 But if you're willing to do that and take that risk, then it's definitely a fantastic option. It's one of my favorite options out there. And then one last thing I want to talk to you guys about just to consider is consider, if you already have a house, an existing house right now, and you're looking to sell your house, consider building with a builder. Because building with a builder, you can pick all the choices you want, you can make the house look exactly how you want. But at the same time, you know your set price before you're selling your house so that you can get into the house exactly what you want for the amount of money that you have. Now, there's multiple ways to build a house. I'll do a whole

Starting point is 00:24:47 episode on it because that's what we did. There's multiple ways to do it. You can either go out and buy land and then find a contractor to build a house, that's a much longer process. Or you can work with an actual builder who's building communities, which is a much quicker process because they do it all day long. They have a ton of crews. They go through. They build houses within a year or less. So that's another consideration to have because a lot of times if you look at houses that are being built, specifically with those larger builders, it is somewhat cheaper for a more energy efficient house. You get everything you want. Everything's brand new. And you have the consider. that you know exactly what the price is going to be going into it.

Starting point is 00:25:25 You're making a deal with the builder and you know exactly what you're doing. There's no race to the top. There's no people throwing in offers $100,000 over asking. No, this is a black and white contract. This is a business deal. And when you do it with the builder, that is the cool thing about that process. It makes it much more simple, especially in a white hot market like this. So listen, I hope you guys have some things to think about,

Starting point is 00:25:47 especially if you're looking in the market right now. I know it's tough. I know it's tough to be looking at the market right now. I know how difficult it can be to be putting in 10 offers every single month and every single one gets beat out. But listen, if you're patient and you go through this process the right way, eventually you're going to find the house that you love and you're going to get it at the right price.

Starting point is 00:26:07 And there's nothing better than being in that situation because this is a lifelong lesson because this is a lifelong decision and it's an extremely important decision. You're going to spend most of your time in life. So think through these options and make sure you stick to your budget. That is the biggest thing of all.

Starting point is 00:26:24 Listen, if you have any questions about this episode or this market, hit me up on Instagram at Master Money Co. and follow us on Spotify, Apple Podcasts, or whatever podcast player you love listening to this podcast to. And thank you guys so much. So many of you guys have been leaving five-star reviews on Apple Podcasts.

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The Personal Finance Podcast - Should You Buy a House in a Red Hot Market?! (The Answer May Surprise You!)

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