Here is the complete transcript of the podcast
Welcome back to Success with Srini. Today’s podcast episode is again, based on a question that I made up, completely I made up. Not really, in fact, I just had a conversation with a friend of mine for about 30 minutes talking about Silicon Valley real estate. Where this is heading, where is this going, what’s gonna happen, and all that. Interestingly, that’s not the only conversation I had. I have several friends who have been asking me about real estate markets in general, specifically Silicon Valley. And I thought I should record a podcast, not because I’m talking to friends, we all talked to friends. That’s not the point. But then, I had been listening to this question multiple times on the radio, I have several friends who do shows on the radio. And I’m hearing this question across multiple channels, across multiple shows people calling in asking questions like, Where is this market going? Should we buy it? Should we wait? If we buy which should be bought? Should we buy in San Jose? Should we go to East Bay? How far can we go into the East Bay? I’m listening, I’m hearing all these questions. I thought, based on my interactions, based on these questions, I should answer this question myself. I’ll tell you why I want to answer this question.
First of all, I was a very serious investor myself. I bought and sold houses, I held apartment buildings and condos, and I even bought houses that I rehabbed myself. Those were my glory days. And I also did seminars on real estate. In fact, I promoted some of the top real estate experts at my events. And I silently supported many of the real estate gurus in successfully running their events. So they pick my brain for putting people into rooms. So I’m very close to the topic of real estate. And I carry one of the largest libraries on real estate investing. And I had been to multiple seminars as a student, myself, and I learned from the best of the best. So I have some understanding of the topic. But the biggest understanding is not from all this activity. The biggest understanding is from me investing and losing money in real estate while making money. I have lost houses to foreclosure. I have lost houses to short sales, that gives you an idea. I’m not doing this because I have a podcast and I just want to record a podcast, not really. I’m doing this because I see the pain in the market. I’m doing this because I have personally gone through it. And I also have this itch to go back and buy more at this point, seeing where this market is the case in point, I think I have some credibility to answer this question. That being said, let’s get into this. What to do with the real estate market? If I’m a first-time investor, I’m a first-time buyer, what will I do? What should I do? So let’s look into the indicators. So here is the as I’m recording this, this podcast today.
I do not know when this is going to go. When this is going to be live on my podcast. I’m recording hoping that I’m going to give some value. I’m going to listen to this recording myself. And I’m going to play this recording with my friends. If they like it, then I’m going to release this on my podcast. If not, I’m gonna delete this. Okay, so that’s the disclaimer. So there are a few indicators. First and foremost is the stock market. So at the time of recording this podcast, we have successfully completed one week of the stock market, the longest streak of decline since 2001. For one week, that’s where the stock market is today. As I’m recording, one full week is gone. Losing so continuously stock market is falling for the last seven days. So that’s the state so the stock market is going down. They see the truth.
Okay, let’s look at the second one. Have the companies have they started laying off people? Yeah, in a way, people companies are starting to bring people back into the office. and also have stopped, gone a little conservative on hiring. And there are one or two companies that I know for sure, have started to lay off people. Okay, so layoffs are starting to happen. Interest rates are going up 5%, 30-year fixed something somewhere around there. So interest rates are high and houses are starting to stay longer in the market, multiple beds are going away. So these are the indicators. So all these indicators, they are telling that, yes, the market is slowing down. Let’s accept the fact that is slowing down. Now, where do you as a first-time investor come in?
If you’re a first-time investor, then this podcast today’s podcast is again targeted at first-time investors and first-time buyers because that’s the question I’m trying to answer, because I hear that on the radio. So as a first-time buyer, let me tell you something. You will be as confused today as you were or as confused you are today as you were just three months ago, three months ago. We saw the real estate market at a 19-20% rate of return. Like if you put money in let’s say you bought a house in 2021, you probably had a 20% of appreciation, literally, by 2022. First-quarter of 2022. Now Fannie Mae came out, and now Fannie Mae said that, yeah, that was about 20% depreciation in the Q1 of 2022. But then, by 2023, the end of 2023, we’re going to have maybe 3% depreciation not more than that. So they are now resetting expectations. So Q3, Q4 of 2023 next year 2023 towards the end, you will have only 3% depreciation. So if you buy a house in 2023, you’re expecting to have 3%, year after year appreciation, which was not the case at the beginning of this year, which is 20%. Crazy.
Okay, so we are going back to pre-pandemic levels in terms of appreciation that is going on there. Let’s look at the core question, the core question, when a caller calls on the radio, the core question they’re asking is this. If I put money into real estate, will I lose money? The first default thought is that if we are investing in something, we shouldn’t lose money. Of course, we want to make money, but we shouldn’t lose money. Let me answer that part of the question. If you buy a house today, will you lose money based on my understanding you want? Because the only time the real estate market collapsed, was back in the 1930s. I was not born, my father was also not born, maybe he was. So there was a collapse and that was a national collapse. Then the second-biggest collapse in real estate happened in 2007. And the primary reason why the 2007 collapse happened, which by the way, is also at a national level is because of overleverage. So there were no regulations, anybody could borrow money, anybody could buy money, people started buying houses with zero down, all that happens. So there were no conditions, there were no restrictions. And there were irregularities when it came down to lending. So people borrowed money, me too, I also borrowed money. I bought houses, what is your down?
So obviously, there was no quality in the transactions which is why it collapsed. Okay, fine. Let’s take that into account. There was no qualification in the transactions back in 2007, everything that was leading to the 2007 crisis. Let’s look at it now, there is quality in credit. As of today, that means people are making money, people are putting down money to buy houses and they’re credible, as credible as their jobs are. So the stock market is credible, the jobs are credible, hence, the investors are credible, if the job market is not there, if the stock market is not there, then they are not credible. So, at least as of today, the credit quality is good. That’s what Fannie Mae is saying. And there is less leverage. But what Fannie Mae is saying, that people are not borrowing a lot of money to buy houses. So that putting down 10, 20 I think 20% At least recently I started seeing 5%, 10% loans, but again, and now I’m also seeing interest-only loans coming in and you know, term loans coming. All different kinds of so are fixed. 30-year fixed, 15-year fixed. Those are, I’m hearing less and less of But, and I’m hearing more arm loans. Anyway. So the point is still there is less leverage. So given that this market is reasonably better than in 2007 is what experts are saying.
Now, clearly, let’s go into the interest rates for second interest rates are going up. Now, because of that, what it means is, it’s difficult to borrow, let’s look at construction for a second construction has to happen. In fact, by 2030, you need 2.5 million houses in California, we need 2.5 million houses in California. So construction has to happen. But construction will stop if the interest rates are higher because builders cannot borrow money freely. So because construction is not happening, there will be demand for the existing houses. People will say, Well, I’m not getting the price that I’m expecting as a seller. So I’m going to defer the sale. So there will be fewer houses for sale, and hence there will be a demand. And because of that, I don’t think you will lose money if you buy a house today. Now, if you ask any broker, or any agent about houses, they will tell you, anytime is a good time to buy and anytime is a good time to sell. Understand, they are an agency business. So they make money when you buy they make money when you sell. Well.
Honestly, the reason why they say that is because it’s difficult for anybody to time the market. If your question is, and if your thinking is that you can time the market you are incorrect. Because understanding the real estate market is very difficult. Computational brains cannot figure this out. There are so many variables, that it’s very hard to time the market. We try sometimes we succeed, and sometimes we fail. I’m telling you that from my personal experience, I couldn’t time the market. There’s nobody can time the market. See this is what’s going to happen. And this is what’s happening. Recently, a friend of mine bought a house. And he was waiting forever to buy a house and an investment house in the western property. And he got it because I told him to do it. And he got it because he knew he was not buying it. He was getting a $100,000 discount, I kind of got him a deal on this. Let me put it that way. He did it. Now, the point is, even though the market resets, let’s say by 20%, he’s not going to lose the money anyway, because he got it, he got this deal. 20% below the market. So he’s okay. But the point is, there are many people who are who were waiting for this market to go down. And they did not do it. And they probably got into the market just now at the peak. And now the market is starting to regress. These people are going to get into a situation where they’re over-leveraged, they probably put in whatever the minimum downpayment is. And they were confused to begin with, they did the deal because they never wanted to be left out. And any kind of a correction in the market. These are the first people to quit the market.
Now the question becomes is, are you qualified to buy a house? That’s the big question. Just because you have a job just because you have investments. Just because you’re paying rent, you may not be qualified. I’ll tell you what the qualification is. And I also get this question a long time ago, after I started investing in real estate. And then I started losing money in real estate I first foreclosure happened, I went back and I said, Wait, did I make the mistake. And the mistake was that obviously, I had zero down on the property. But then I never understood the math. The math is simple. There is a finite income that you’re making. And a finite proportion of that money should go into a liability. A house is a liability. It’s an asset, but it’s a non-performing asset. That means you’re living in it. It’s not making any money. Yeah, you are avoiding paying rent. But you are also banking on the fact that the house is gonna depreciate and when you sell the house, you’re gonna get back the money. But then the statement in itself needs a lot of other variables to play out. But given that you have only a finite income coming in and a finite amount of money should go into the Real Estate, what should be the math, the math is simple 25% of your take-home money should be the mortgage. Any mortgage payment that you make, shouldn’t exceed 25% of your take-home, net, take-home income on a monthly basis. This equation is violated in Silicon Valley. I don’t see this happening. I don’t see this going this way. And I learned that lesson. And now I stay with that statement. That means I have to make a lot of downpayment. That’s where I’m going with this. How much downpayment should we make 100%? That’s my standard instruction to everyone. Now, you need to if you have the money, go buy the house outright, if not figured out a plan where you shouldn’t be able to pay your entire mortgage, but 25% of your take-home pay. Because there are other expenses that are highly inflated. Everything is inflated. So, you need to have enough money to deal with those expenses. It’s not just about the house, if you get in into a situation where you’re putting the least amount of money, and you’re buying the most biggest amount of house. And now you are dependent on your job. And you are now a slave to that investment. You don’t want to be a slave to investment. I can tell you one thing for sure.
Let’s come back to the market for a second in Silicon Valley. You see, there has been no local crisis in Silicon Valley. 1930 was a national crisis. 2007 was a national crisis. There’s no local crisis. So the market, in general, is very hot, because the companies are here and all the dynamics playing out. Now, one time, I was on a radio show, a friend of mine has an incredible radio show. And he got me in as a guest there. And he asked me a question about the real estate market. I said, Listen, I look at Silicon Valley real estate as the Bitcoin and there are all coins and there are shit coins in crypto markets. Okay, excuse my language in here, but that’s what they say. Those are the appropriate words to use in that world. Given this is Bitcoin, that means starting all the way from Marin County, and all the way to La Jolla, this strip of land is the Bitcoin. So if you put money into this, it’s going to hold its value. And that’s why Bitcoin is a store of value. It holds its value. Yeah, it’s, you know, 52% down since the highest point. As I’m recording this bitcoin is down 52%. Yeah, it lost its value, understand I get it. But understand that Bitcoin was trading at 5000, just two years ago, and is still at 29,000.
And there are multiple reasons why Bitcoin actually makes sense. Now, I’m not promoting it. But I’m telling you, it makes sense knowing what I know about blockchain, knowing about what I know about consensus-driven mechanisms for transactions and stake proof, and knowing what I know about blockchain and public ledgers and consensus-driven algorithms. What I know, I don’t know a lot, I know a little bit but whatever I know, understand the value of Bitcoin. So I look at this piece of land from La Jolla, all the way up to Marin County, this piece of land incredible land. So best whether or not everything is going right. I think that if you buy a house today, let’s say you do buy a house, it’s going to hold its value is how I see it. Now, I’m not saying that you want to make 20% or 15%. That’s not the point, at least if you go by the suggestion, or the guidance that is given by Fannie Mae 3%, year after year is what this is going to go. I think I answered the question, at least I tried. I said construction is going to keep the artificial demand going, less construction is going to happen, and there’s gonna be more demand on the houses rental market is going to go up. All that is true.
Now, there isn’t another dynamic that I want to share with you, which is if you buy a house and you pay it off. Now, you are in an incredible situation, where now you can do what is called seller carry back transactions, which means that about a year or two from now, the way this economy is going and the way the inflation is coming in the way the markets are behaving. Let’s say that we are and some people are saying that we are already in a recession. Let’s say that this is true that we are in a recession and everything is going to pull back then with a paid-off house. You now are in a situation to finance your transaction if you want to sell so you become the bank. You can qualify your buyers if they are unable to get a mortgage from traditional lenders. So, the seller carries back is, so I did this kind of transaction 2005, 2007, I believe. I bought a house where the seller did the 100% seller financing for me. And the seller did that because he was unable to find buyers who were qualifying through the general market at the time.
Now, let’s talk about interest rates for a second, it’s a very interesting thing that’s happening. And this is another data point that I want you to consider if you’re looking to buy a house, I’m sorry, this recording is going too far out. And too long. I’ll see if I can live and publish this podcast or not, we’ll see. I’m gonna keep going here for a second here. Talking about interest rates from 1980 to the year 2000. The interest rates were consistently above 5%, the federal funds rate was above 5%. But between 2007 and 2016, it went down less than 1%. And why because quantitative easing came in. And fiscal monetary policy changed fiscal policy changed money was pumped in Fed was buying out Fed was incentivizing and giving all kinds of stimulus and all that this was administration doing all this, they wanted to keep the economy going very simple. Now, in 2017, 2016, with Trump coming in, Trump administration, we started for the first time he started seeing interest rates going up. First time beyond 1%. It almost touched 2%. And that’s when COVID happened. And again, Fed started cutting rates. Why was the interest rate kept low, very simple, so that banks could lend out money and lend money for assets that are much more valuable than the money they have on hand. Clearly, real estate is one such asset where it’s more valuable than the money that they had on hand. So more money was available. Everybody did what they did. And here we are in this current situation. So what should you do as a first-time homebuyer to sum this up, need to put as much down as possible? Get a house, anywhere between Marin County all the way till the water all the way till La Jolla. It’s not about the location as much, it’s about your personal dynamic. So if you can afford it, my suggestion is that 20% of your take-home should be going towards a mortgage not more than that. So if you can afford that, if you somehow can make that math work, then go buy if not renting is okay.
Now the question is, will rentals be available? That’s also the question. That’s a whole different discussion itself. We can pick it up later on. As you see, this is a never-ending discussion. It’s very situational. It’s very personal. So it’s very hard. I see people trying to answer these questions on the radio. It’s hard to answer this question. It’s such a personal thing. There are so many variables playing and interplane. And usually, when somebody is looking to buy a house the first time, it’s not about one individual. There are a couple of other people involved in the back. It could be the spouse, it could be children. So there is more to this. But I’m gonna tell you something. The math is always right. You got to get the math, right. It doesn’t matter what your personal situation is. It doesn’t matter how many jobs you have, what all you do, and where you’re going to live. All that doesn’t matter. One more question also, before I wrap this up, should I buy a house in Texas? And you know, this was a question I heard before to no comparison. There’s no comparison. There’s nothing that compares with Silicon Valley real estate. I’ve made the comparison very clearly between Silicon Valley real estate and Bitcoin. So there is no substitute for Silicon Valley real estate, not that I know of.
Okay, I want to stop here. I know you’ll have questions. If you do, just let me know. 888-818-0404 Text me and I’ll wait for your questions I love to answer your questions on this topic. Okay, that’s all for now. Wherever you are, be safe. Take care. I’m gonna go back and listen to this recording. If I like it, I’m going to publish it. If not, it never happened. You will ever come to know. Bye now.