holiday season

This week’s Afford Anything blog post is a well-balanced diet:

• Robert Kiyosaki predicts a massive crash — [philosophical]
• Sobering stats about the housing market — [analytical]
• Secret strategies to save on seasonal shopping — [practical]

The Robert Who Cried Wolf

Famed investor Robert Kiyosaki, author of Rich Dad, Poor Dad, recently caused an internet stir by predicting “the start of the biggest crash in history.”

Of course he did.

Kiyosaki is constantly crying wolf. It’s good for (his) business.

Bad news travels faster than good news.

People who prioritize attention over truth will use that to their advantage. Kiyosaki is a shrewd businessman. He understands the profit potential in strategic pessimism.

But that’s bad news for his followers. Per the law of large numbers, it’s reasonable that some people have kept their cash on the sidelines, rather than investing in the markets, after heeding his warnings. And that has massive lifelong ramifications on their wealth and retirement.

Lesson: Beware of anyone who peddles *negativity bias* in order to stay relevant.

These economic fear-mongerers don’t hold accountability for their track record of wrong predictions.

Their followers are the ones who suffer.

This is why it’s critical to choose your mentors carefully — and it’s precisely why you should never blindly enroll in an online class that’s taught by some random person whose ideas you haven’t vetted.

If you’re curious how often Kiyosaki has made the wrong call, note that Stanford-trained data scientist Nick Maggiulli, our guest on Episode 375 of the Afford Anything podcast, shared this illustration on X:

Pessimism has a visceral appeal. It’s evolutionarily advantageous to be hyper-aware of threats.

Our ancestors didn’t survive the jungle or savanna by appreciating the beautiful flowers. They survived by staying hyper-vigiliant of danger. This explains why negativity bias is so innate, so intrinsic. It’s a survival mechanism.

But in the modern developed world, pessimism keeps us overly conservative. We choose the “safe” major. We take the “steady” job. We tilt too heavily into conservative investments when we’re young, and we panic when our 401k’s start to decline. We avoid real estate investing and starting side businesses because these seem too risky.

Pessimism stifles innovation, entrepreneurship, and creativity. It locks us into mundane careers and middling investments as we muddle through risk-averse lives. In the end, we haven’t endured huge losses, but neither have we *embraced a shot* of winning.

As Episode 284 podcast guest Morgan Housel eloquently said:

“Pessimists get to be right. Optimists get to be rich.”

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No, The Fed Lowering Interest Rates by 25 Basis Points Is Not Going to Flood the Market with New Housing Inventory 🙄

A little history lesson:

Once upon a time, in 2008, there was a Great Recession. It scared many investors and homebuilders, and they stopped making new homes.

In the decade that followed the Great Recession, new construction reached its lowest point since the 1960’s.

By 2019, the housing shortage amounted to 3.8 million units. This means there were 3.8 million more families and individuals who wanted a place to live — either to rent or buy — than there were homes available.

Then the pandemic struck. The prices of copper, lumber and other construction items shot through the roof (no pun intended). Builders had to raise home sale prices due to higher materials costs. Prices soared.

In 2020 and 2021, people across the internet cried, “Why are they charging so much more than the home is worth?!” — not realizing that “worth” is a function of the cost of labor + the cost of materials + the premium of scarcity.

And when supply is curtailed — as it was by 3.8 million units as of 2019 — there’s an ample scarcity premium.

Then inflation climbed. The Federal Reserve raised interest rates 11 times during their 2022-2023 cycle, resulting in a rapid escalation of mortgage rates.

This created a “lock-in effect” among existing homeowners. Nobody wants to trade a mortgage with a 3 percent fixed interest rate for an alternate mortgage with a 7 percent rate.

Existing homeowners with a mortgage have a huge incentive to hold.

Sellers who *need* to get rid of their property — for example, because they’re moving to another country — list their homes on the market. But homeowners who simply *want* to upsize or downsize are, for the most part, staying put.

This has created even more housing supply pressure.

Meanwhile, homebuilders — who must borrow money to finance their operations — are seeing the cost of capital skyrocket. Many have curtailed new construction, putting further pressure on the supply pipeline.

So we have a long-running confluence of factors that, piece by piece, keep exacerbating the housing supply crunch.

And this leads to today’s takeaway:

No, this problem will not magically solve itself the moment that the Fed reduces interest rates.

The Fed is meeting today and tomorrow. They’re widely expected to hold rates steady. (They’ll make an official announcement at 2 pm on Wednesday.)

There’s rampant speculation that the Fed will lower interest rates in Q1 or Q2 of next year.

— And —

There seems to be a pervasive myth that once interest rates decline, those “locked-in” homeowners will rush to list their homes for sale, flooding the market with new inventory.

The supply-demand imbalance will tilt in the buyer’s favor, home prices will plummet, and housing will become affordable once again.

Yet that is pure fantasy, disconnected from the data.

Imagine 10 people. Nine of them have mortgage rates that are less than 6 percent. The stat is 91.8 percent of mortgaged homeowners, to be precise.

Wait.

Imagine those same 9 people, the 9 out of 10 who have a sub-6 percent interest rate. Here’s how they break down:

• One has an interest rate between 5 to 6 percent.
• Two have an interest rate between 4 to 5 percent.
• Six have an interest rate below 4 percent. The exact stat is 62 percent.

Let me say that again:

Six out of 10 mortgaged homeowners have an interest rate that’s below 4 percent.

Meanwhile:

One-half of mortgaged homeowners (49 percent) say they’d consider listing their home only if interest rates fell below 4 percent, according to a Redfin survey conducted by Qualtrics.

So this myth that if the Fed lowers interest rates, the market will get flooded with new inventory? — That scenario isn’t likely to happen for a long, long, looooong time.

As of Dec 12, 2023, the current average 30-year fixed rate for a buyer with a 740-760 credit score is 7.4 percent. Multiple reductions in interest rates won’t begin to approach the sub-4 percent rates of yesteryear.

The “lock-in effect” will last for longer than you might expect.

Lesson: Don’t wait to buy a home based on speculation about the market. If you have both the money and desire to buy a home, DO IT NOW. Homes are likely going to get more expensive in the future, not less.

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How to Not Flush AS MUCH Money Down the Toilet This Holiday Season

Yeah, I know.

The holiday season is custom-built for parting with your money. Every store is promoting sales, discounts, offers. Limited time only.

It’s scarcity on steroids.

Holiday deals tap into the part of our brain that says — “this deal is only available now; I should snag it while I still can.”

Our FOMO creates jobs and drives the economy.

Since holiday spending is human nature, let’s forgo the guilting, shaming and finger-wagging that’s so endemic to the personal finance and FIRE community.

It’s counterproductive. Guilt and shame over holiday spending doesn’t change human behavior, it merely robs the joy from it.

It’s like chowing down a piece of chocolate cake while simultaneously fretting about the sugar.

You’re eating the cake regardless. You may as well enjoy it.

Instead, let’s accept that some degree of holiday spending is normal, and let’s focus on how to find the best deal possible.

Here are four pointers. (If you have more to add, please share these with the Afford Anything community) —

#1: If you’re buying an item at a mid-size company’s website (i.e., a merchant that’s bigger than a mom-and-pop shop, but not a big box retailer like Target or Amazon) — move your cursor near the “back” arrow on the browser.

This is called “exit intent,” and it often triggers pop-ups with discount codes.

#2: For online purchases: Create an account, put an item in your cart, and then leave the website.

This is called “abandoned cart,” and often triggers an automation in which the company emails you a limited-time-offer discount code.

#3: If you’re buying something expensive (over $500 – $1,000 or more), track the price for a few weeks, especially around the holidays. On sites like Wayfair, I’ve seen prices fluctuate daily.

#4: The least useful savings tip: Googling discount / promo codes or pulling these codes from mass aggregator websites.

You may get lucky, but typically 9/10 are expired or don’t work; they just yield a bunch of extra open tabs on your browser.

There’s an enormous selection of third-party websites and browser extensions that claim to help with this, with varying degrees of efficacy.

I’m not going to recommend any specific tools; recommendations are both dynamic and better crowdsourced. Please share your experience with the community.

Source: affordanything.com