Risk-taker or risk-averse? Why I moved fast to close a condo deal in just 30 days, during the worst time in a generation to buy a home

I’ve been VERY enthusiastic about discussing my purchase with family and friends. Most people are, but my enthusiasm sticks out because a lot of it stems from thinking about it from a capital-markets perspective. Yes, I fully understand that buying a condo is about one’s personal enjoyment with living there, and not so much as the appreciation/depreciation curve. But I’ve spent my whole career thus far breaking down contracts in power markets and insurance markets into individual risk components, and I have a lot of fun thinking about these things. That said, here is the story of my home-buying process and how it unfolded:

Warren Buffett Lesson #1: Be fearful when others are greedy, and greedy when others are fearful

In April 2022, I complained about inflation and how my new lease was a total downgrade in order to keep rent the same. Someone suggested that I try house-hacking, which involves buying a place and renting out a part of it. I thought it was terrible advice, given I’d have to buy a house at that time (in retrospect, I still think that). In April 2022, most investors’ outlook were still rosy, and existing homeowners in booming metros were getting rich off of circumstance. If I had started my search then, the most likely outcome would have involved me buying a house at the peak of the market when cash-flush investors and multiple bidders were competing for properties.

Having avoided such a scenario, I spent most of the year planning to buy at least as late as 2023, when things would hopefully settle. For much of post-COVID, I sat on the sidelines as I avoided FOMO in the housing market, and I was happy to stay put. I even avoided buying Tesla stock and Bitcoin, which is unfortunately something only a small minority of my demographic can say.

Fast forward to the 4th quarter of 2022, and everything has changed. It’s been famously shared that it is the worst time in decades to buy a home. With home prices appreciating dramatically to their June 2022 peak, then with mortgage rates rising to above 7% from 3.5% at the beginning of the year, and incomes slow to catch up to higher monthly payments, it’s easy to see why. Plus, the buzzing market of the summer has now shifted into gear for a seasonally weak winter, where buyers are few and sellers are eager.

I saw a window of opportunity.

Short term pain for long term gain?

There’s no doubt that as an investment, the outlook for new buyers is full of stormy clouds. With economists now predicting a recession in 2023 and the Fed warning about stickier inflation, the general housing market is expected to fall in tandem with equities, and rates staying at an elevated level could mean that refinancing is years-away.?

However, I believe that this new economic consensus has finally opened an up-shot for those willing to take risks. Pockets of opportunity are appearing as sellers finally feel pressure to sell, and some are willing to accept a deep discount for liquidity. Volatile bond yields mean that timing the rates market is a game worth playing, since shopping around for lenders allows you to lock-in rates multiple times for free. Also, hot housing markets are now feeling the pain (Seattle, Austin, etc.) after hitting a peak in June 2022. But Chicago faced continuous out-migration in the recent years, with people relocating to warmer climates, spacious suburbs, lower tax jurisdictions, and safer places.?

I was talking with a friend about all the ways I thought a home purchase could go wrong, and to my comfort, he made a stellar counter-argument: Chicago is still the best city in the Midwest, and the younger demographic is still growing. Since he’s said that, I’ve visited several other cities in the Midwest, and I have to agree. I’ll take the higher crime and taxes. It’s totally worth it, and I believe others will continue making the same trade.

Does this mean that weak hands got shaken out during the pandemic? Is Chicago’s housing market temporarily suppressed because of the migration outwards, and will that trend revert over time? I thought so, and I recognized that other buyers/sellers may not have considered that. Certainly, the expectations going into the 2022 midterms did not pan out as most expected, and I saw that as a sign that people will not always put their votes, or their money, where their mouth is.

With that in mind, I started looking at condos that I liked, and I found one fairly quickly. The sellers had already moved out, and its proximity to the train’s rumble had supposedly turned off most other buyers. The conditions seemed right for me to feel confident putting together an offer.

Warren Buffett Lesson #2: The smartest side to taking in a bidding war is the losing side

On the morning of November 30th, the day I was prepared to make my offer, my agent broke the news: the listing agent had contacted her saying they needed my offer by noon, that they had a second offer, and that the second offer involved a 40% down-payment. I thought to myself, “I can’t compete with that!”?

I was prepared to put in 450k but actually lowered my offer to 445k on the news, after playing through a game-theory scenario in my head: if the second offer was good, I would lose either way, but if the second offer was bad, then 445k would be competitive. (For context, the listing price was 465k, and the place next door sold for 500k in May, although it had 10k worth of upgrades.

By the afternoon, after my offer was reviewed, the listing agent asked “everybody for their best and final offer”. This is when the situation completely flipped in my head for me. The agent’s choice of words, and timing of news throughout the day made me very skeptical of the legitimacy of competition. I felt rushed, but it wasn’t eliciting the response he was probably hoping for. I was 95% certain the agent was full of BS. He had known I was preparing to make an offer and the fact my offer was still in the running made me think the second offer was non-existent. To be frank, I was so upset by what I perceived to be dirty tactics that I got a second pre-approval for 442.5k to put in an even lower offer as my final and best. But, I actually wanted the home, so I refrained from playing dirty back. Another piece of wisdom: an eye for an eye makes the whole world blind.

My offer was accepted the next morning.?

Timing the rates market: A fool’s game?

I thought that a weak housing market would mean that agents and lenders would treat me better. I certainly didn’t experience that with the agents - my first one ghosted me after a tour, and the one I ended up going with had a plethora of communication problems, including going to Paris for a week and not telling me because she thought I wasn’t serious about buying. However, I had better luck with other services - lenders, attorneys, and inspectors were mostly very kind and put me first.

I offered to close on 12/29, which would be good for people’s quotas and good for the seller’s timing to not have to worry about future taxes. This was tactical, since I wanted them all on my side. There were other considerations, too: holidays gave me the most time to move and I knew I wouldn’t have time to close later with my next (and hopefully final) actuarial exam around the corner. Plus, the bond market was super volatile (I was watching the BofAML:MOVE index daily), so rate-locks were only good for up to 45 days.

In late November, I had thought that rates had moved down too much relative to my own expectations, and the expectations of the market gurus I follow (shoutout Neil Dutta, David Woo, Ray Dalio). The MBB ETF used to track mortgage backed securities rose from $88 to $94 in the prior month, reflecting how quickly rates moved lower.

And so I moved quickly myself to lock down rates, first at 6.6%, then at 6.3%, and finally at 5.5%. Locking in at 5.5% required me to work with three lenders over the weekend. Rates went right back up the following Monday and never came back down. It was the lowest rate since August, and saved me a couple hundred dollars per month in interest payments relative to the scenario in which I financed at 7%.

Timing the market when yields are volatile is possible because you can lock-in rates with multiple lenders. It’s effectively a buffet of free hedges. Amazing.

How far can prices decline? What if I’m too early?

With the rest of the closing set in place, I went through a familiar thought exercise: what was the downside risk? My thinking went as follows:

The stimulus measures of COVID were a permanent reduction in the purchasing power of currencies, and essentially destroyed a percentage of existing wealth via inflation. That I completely believe, because lockdowns, restrictions, and even recent sanctions greatly reduced real economic activity. As a result, I also believe that nominal incomes need to rise greatly to get people back to their former living standards. I also believe that while the Fed can tighten, they wouldn’t be able to tighten to the point prices deflate substantially, because that is a form of austerity and is too depressive to the economy, and risks a credit crisis for existing debt-holders. In addition, the re-shoring of jobs, large capex initiatives, tight labor market, perceived wealth inequality and increased union activity all meant that I could be confident that incomes would rise greatly in the next few years.

Putting it all together, my assumptions are in a nutshell:

• Chicago out-migration is basically finished, migration patterns are favorable going forwards
• Prices may come down, but prices will come down the most where they saw the most appreciation (not Chicago)
• Higher wages and wealth transfers will eventually normalize housing affordability
• A sluggish housing market may mean slower price-adjustments, capping the decrease to roughly 10% for my market
• I can refinance in 3 years. At 5.5%, I’m paying $300 more a month than an equivalent peer locked-in at 3.5%. Over 3 years, this difference is 10k. Then refinancing costs may be another 5k. If I can buy at a price 15k lower than fair value, then I’ll be even

Because the unit next door sold for 500k and had an additional 10k in upgrades, I needed to compare my 445k price with 490k, which is roughly a 10% discount. Taking into consideration the above assumptions, I am mostly covered in the downside scenario, and anything worse would be a reflection of a critically weak economy and not of my individual circumstances.

And with this framework, I was confident moving forward to close the deal.

There you have it - with haste, the process finished on 12/29/2022 and we now have a newly minted homeowner, who had an odd excitement about buying in this market. Are there other willing buyers in such a rough environment? Certainly. Are they as timely and tactical with the process? Unlikely. And that is a well earned win in my books.

Epilogue

In this reflection, I shared several pieces of wisdom that are timeless, two of which are shared widely by Warren Buffett. To be honest, I developed these wisdoms independently, and never expected to learn that they were commonly accepted ideas already. But one of my principles is to live a sustainable lifestyle, in terms of attitude, habits, and practice. The fact that I developed the same wisdom shared by Buffett and other arcane individuals has been validating for me as I pursue that lifestyle.