Real Estate Market Update, Buffett Shareholder Letter, Inflation by Category

We had Scott Trench, the CEO of BiggerPockets (the largest online real estate community), on the podcast this week in Episode 426 and it’s an absolute must-listen.

The first half was a fun thought experiment on how to look at what you want your ultimate FI portfolio to look like and then invert it back to what you need to do today to get there.

But the 2nd half on a 2023 real estate market update was fascinating.

I implore you to listen to it, but I did want to curate four of my biggest takeaways:

Scott said, "When (mortgage) interest rates double, that crushes affordability. What has happened first is what we call this ‘lock-in effect’…you need to have a really good reason to move or relocate, so tens of millions of people are stuck." He went on to describe loan originations being down 70% year-over-year and the reason why prices haven’t come crashing down because "nobody is selling their property."

A massive number of commercial mortgages (Scott is referring to multifamily and apartments) with balloon mortgages and variable interest rates, and people not being able to pay but "prices have not come down significantly in a lot of places, and I can’t figure out why they haven’t. And that scares me very badly in the apartment space."

1.6 million new construction units are ‘coming online’ this year (700k single-family) which he believes will lead to a rent decrease on a nationwide basis and also significantly lower prices on a newly constructed home since builders will need to sell (the opposite of the ‘lock-in effect’). 1.6 million is the most ever to come online, per Scott.

On leverage in this new higher interest rate environment: "Go on the BiggerPockets rental property calculator and run a deal that might look good in your market. Use one example with a loan and one without a loan (fully paid off) and, depending on what you assume, you’re going to find probably more often than not that buying it with no leverage (mortgage) is going to have a higher return on investment over the next 5-10 years than buying with leverage…that was not true 2 years ago because interest rates were so much lower."

Warren Buffett's Latest Shareholder Letter

One of my favorite annual activities is running to my computer at 8am ET on a random Saturday near the end of February to download Warren Buffett’s latest Berkshire Hathaway Shareholder Letter.

If you’re looking for an incredible amount of financial and life wisdom in a short time, you could do a lot worse than checking out this page with links to all the letters going back to 1977. I’d suggest starting with some of the more recent ones and reading through them.

2022’s letter came out this past Saturday and I wanted to highlight a few things:

"We buy publicly-traded stocks through which we passively own pieces of businesses…Our goal…is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers. Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers."

"One advantage of our publicly-traded segment is that– episodically– it becomes easy to buy pieces of wonderful businesses at wonderful prices. It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. "Efficient" markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect."

Mr. Buffett included a nuanced discussion around share repurchases, essentially saying they weren’t inherently good or bad but that "when a company overpays for repurchases, the continuing shareholders lose" and "When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices."

Inflation by Category Since 2000

I found this interesting chart on the Visual Capitalist website that shows ‘Price Changes of Consumer Goods and Services’ from 2000-2022.

Give it a click and you’ll see the chart breaks out 14 categories of goods and services and shows the percentage increase or decrease in price from the baseline 2000 price.

Fascinating to see something like televisions drop 95%+ while, unsurprisingly, hospital services and college tuition and fees are the two categories with the most significant increase.

Keep in the back of your mind what we know about the ‘Rule of 72’: If something increased in price 3% per year, we’d expect the price to double in a 24 year period.

Therefore, anything on the chart that’s under a 100% increase is actually inflating less than 3% per year.

ChooseFI Community Taking Action This Week

Jarred said, "My 1% better was researching the process to have PMI removed from the home we bought in December 2020 (at a 2.5% interest rate!). We ordered a Broker Price Opinion (BPO) for $190 through our bank, Virginia Credit Union, and just found out that our home's value has increased significantly more than we thought. We now meet the 75% LTV ratio required by our bank to have PMI removed at the loan's current age, and they said it will be gone next month! Woo hoo!"
Megan said, "It all started with wanting to fund a big trip, so I started watching a few dogs on the side while I worked my normal remote job. A year later, my little side hustle has turned into 60k in income, which I have been able to invest a lot of into index funds to grow our retirement. In trying to get the 1% I discovered an easy and fun way to make more money - turns out a lot of people need a trusted person to watch their dogs while they travel!"
Carey said, "I've been falling asleep to Yoga Nidra meditation videos on YouTube for the past week and my sleep readings on my fitness tracker have been "optimal" for the whole week." (Brad Note: I’ve used this 10 minute Yoga Nidra meditation for the past handful of years (It is, coincidentally, the one Dr. Andrew Huberman recommends on his podcast) and it’s an extraordinarily restful 10 minute break)
FI Designer said, "My 1 percent better is recognizing my wife's love language and giving her words of affirmation every day for a month. I started this annual tradition in February 2020 after hearing ChooseFI episode 164R | What Are The 5 Love Languages. Every day I leave a 3×5 note card on my wife's bathroom mirror. On the cards are handwritten notes containing words of affirmation. The act cost virtually nothing and made a big impact."
Danny said, "My 1% better this week was negotiating working abroad with my employer and having them temporarily drop my hours from full-time to part-time. This reduction will allow me to continue investing and preserving savings while actualizing travel goals I've had since I was a kid. As a bonus, I will be keeping my health benefits despite the reduction in hours. I wouldn't have proposed this to my job without the saving habits, knowledge, and confidence that this community has offered me."
Kathryn said, "My 1% better occurred in 2022. For most of last year, I was living with my partner. During that time, I decided to rent out my house to traveling workers, such as nurses and construction workers. This allowed me to keep my house furnished and still rent it out. I easily charged twice my mortgage payment in rent! I made a bunch of money and gained some experience in owning a rental property."
Alison said, "I thought you would enjoy my win for the week- I started and hosted my first book club! It's a women's personal finance club in the small town of Bastrop, Texas! I moved here this summer and thought starting this club would be a cool way to make new friends and have the excuse to talk about money! And Choose FI was our first book!"

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