A Basic Necessity – Part 3

“What can we buy?” This was what most prospective home-buyers asked. It was the wrong question. The right question to ask was “what should we buy?” Or, “should we buy at all?”

For us it didn’t make any sense to buy, even though we had zero debt, enough cash, and liquid assets. “Cash” sounded great in years when the markets were down, but it was the worst possible situation during times of super-inflation and every equity market at record highs.

So we needed a place to put our cash to protect it from inflation. Was an expensive house the right place? My instinct told me no, at least for where we had chosen to live.

The featured image showed Federal Reserve Economic Data (FRED) on the median sale price of a house over time, as of 2020. It would shoot up another 25% to around US$600K by the end of 2021. This was the median price for all Salt Lake City. In communities where people actually wanted to live, it was closer to US$800K.

So was it cheaper to dump our cash into an eight hundred thousand dollar house, or was it cheaper to rent a house worth that much? As it would happen, my brother’s friend owned a house valued at US$800K around the corner from us, and he wanted us to rent it. We were probably in the top 5% of most reliable renters in America, but when I spoke to the landlord it felt less like a renters’ market and more like a prospective tenant’s market.

They wanted US$3000 per month for the place, and they were giving us a discount over what they’d charge strangers. We were a single income household (sacrificing a second income for parental childcare), so this rent would put us in the “distressed” housing category, paying more than 50% of our pre-tax income on a place to live. However, it was nothing unusual around here and it kept us in the neighborhood where the kids went to school and our friends lived. Plus, we had cash that was burning up due to inflation, and we had to spend it somewhere. Was it better to pay a landlord’s mortgage, or our own?

Rent versus buy on a US$800K house, monthly expense.

Rent: $3K. This included the water bill.

Buy: there were a couple ways to go here. Buy it all or pay the minimum. For now, I’d go with the minimum, 20% down on a fifteen-year mortgage, as we were not staying in the U.S. more than fifteen years.

20% of $800K was $160K down, so we’d take out a $640K loan. According to an amortization calculator I found online, this would be around $1800 interest per month, plus $2700 toward the principal. So, $4500 per month. (This payment alone was more than our total after-tax, after retirement investment, monthly income.)

$1800 interest per month was throw-away money. So was an estimated $500 per month maintenance, $500 per month property tax, and $100 per month property insurance.

Not to mention there would be at least $25K in closing fees, amounting to an extra $140 per month for FIFTEEN YEARS!

Total throw-away money to buy: $3040 per month.

Total throw-away money to rent: $3000 per month.

And these calculations assumed that housing prices would continue to go up forever, which seemed like an unsustainable economic situation.

It wasn’t very often that equity markets shot up 50% in two years. I was betting on a crash, and so was everyone else.

Everyone we knew who wasn’t a current home-owner was in the exact same situation. They preferred to rent over own. One family we knew finally gave up settling here permanently, and moved back to Japan. Some other friends of ours moved to rural Vermont. These was anecdotal examples, but a good sign of what was to come. Housing price had outpaced household income for decades, the gap between what people earned and the cost of living continuing to rise. In Salt Lake, it median home price to median household income was around 10:1.

It was no surprise to see American household debt was at an all-time high as of early 2022.

The last time household debt was this high was in 2007, and around that time I visited my dad in Las Vegas. He had lived there many years, and was looking for a house to buy. We went around with a realtor together, and she made a statement that would stick with me forever: “I don’t know how people are avoiding these prices. I guess they’ll just have to make more money. That’s how the economy works!”

I was no economist, but the real estate agent’s comment was jarring. Sure enough, a year later the housing market crashed through the floor nationwide. There would still be houses in Las Vegas underwater fourteen years later, worth less than the original price. The Las Vegas realtor was nice, but I would always remember her as one of the biggest idiots I had ever met.

In early 2022 the atmosphere in Salt Lake City felt the same.

We had done the math. It was still cheaper to rent, even considering skyrocketing rental rates. Why pay someone else’s mortgage when you could pay your own? Paying rent was throwing money away? These old adages no longer applied. So yeah, we were happy to pay someone else’s mortgage until the bottom fell out of the market, or for as long as it made sense.


A Basic Necessity – Part 2

Housing is not a right…

The other day I went to the local hardware store to buy a 1’ x 6’ board to make some shelving. At the register I was shocked to find this single plank of wood cost US$65. I took it back to the lumber section and asked them to cut it in half. Three feet would do. Back at the register, I remarked to the cashier, “Holy crap, wood is expensive! Good thing I’m not building a house.”

“You can thank the president for that, honey,” she replied.

At first I thought she meant the president of the hardware store company, but then realized she meant the President of the United States. For a moment I couldn’t even remember who the president was. Did it matter? I had lived overseas for a decade and had never given it a second thought.

I disregarded the cashier’s comment as typical American political polarity, but decided to research it when I got home.

As it turned out, the cashier lady was not incorrect. According to an article on NPR, the previous president had jacked up tariffs on Canadian lumber, America’s number one source of foreign wood, to about 9%; but the current president had double-downed on this move, raising the tax on Canadian wood to almost 20%. This gave the American lumber industry a virtual monopoly, so they could sell it at any price. And if an industry could sell something at any price, well, then things got expensive, and the hardware store could charge sixty-five freaking dollars for a single board of wood.

The NPR article related these facts in an apologetic kind of way, because, presumably, even to a news outlet that could be expected to support a Democratic administration this seemed insane.

We were in the middle of a full-blown housing affordability crisis in America. Housing prices in many American cities (including the one to which we had decided to move) had tripled in the past decade (TRIPLED!), mainly due to low supply, and supply would not increase if building costs were high.

The current level of housing inflation was unprecedented in all of American history. Was this really the best time to jack up tariffs on foreign lumber? The U.S. lumber industry must’ve had some damned good lobbyists, was all I could conclude.

The apologetic NPR article attempted to end on a positive note, stating that at least the current administration was pushing the multi-trillion-dollar “Build Back Better Plan,” whatever that was. How were they were going to build anything back better with lumber prices through the roof?

For me, this topic hit much deeper than the price of a single board of wood. I was on a twenty-seven-year employment streak. Every weekday for the past quarter century I had done the exact opposite of what I wanted to do. For ten years straight I had dragged my physical meat mass through a two-hour round-trip commute aboard the trains of Tokyo metro to serve my daily sentence as a wage slave. Every day for a decade I had grit my teeth, gazed down at the tracks as the train approached, understanding why some chose to end it all. But I got through it.

Two prevailing ideas had kept me off the tracks and repeating this routine for five hundred consecutive weeks: one, my extra “hardship” pay allowed my family to enjoy a unique life in one of the best communities in Japan; and two, I was saving enough to buy a house in America when we finally moved to the States.

Housing was a basic necessity, but it was not a right.

Still, I couldn’t help but feel I deserved the opportunity to buy a house for my family at a price that would not jeopardize our financial future. I was probably in the top one percentile of most financially responsible people in America, having maintained steady income for three decades and provided for my family without incurring a single penny of debt. Hadn’t I earned my way into decent housing at a fair price?

It was entirely possible that my sense of entitlement came from a financial worldview that was no longer the norm. In my world, debt was bad. In the real world, debt was good. Everyone was in debt. Low-interest debt allowed financially average people to “own” a big house. So what if the loan was eight times what your household made in a year, if monthly payments were low?

Even cold, hard math favored debt. In a lot of cases it was just cheaper to maintain massive debt than it was to pay off a house in cash. But life wasn’t all about math. Sometimes it was worth paying more to have the feeling of actually owning something (as opposed to claiming you “own” when you were really paying rent to a bank). Actual ownership also massively lowered monthly expenses, allowing for more financially flexibility and opportunity in life.

For a long time there was this old adage, probably started and propogated by real estate agents, that used to be true in most cases: renting was throwing money away. In early 2022, even with elevated rents, this was clearly no longer true.

I did the math on a few rental houses in our neighborhood, each listed at about US$800K, and determined the throw-away money in buying a house was actually more than the throw-away money of renting the house. There was the maintenance cost, the property tax, the insurance, and all interest stacked in the first decade of a thirty-year loan.

Not to mention that we were at the peak of a titanic housing bubble. It was one thing to buy now with the funny money of inflated housing equity on the sale of your old house, but we were basically first-time home-buyers again. A 20% drop in the housing market seemed an imminent (and perhaps conservative) occurance, which for us would mean kissing that cash down payment goodbye. That was the equivalent of a college education for one of our kids that would take a decade or more to recover. We may have had the money to buy, but we also had brains.

In most cases, “owning” a “home” was fundamentally the same thing as renting anyway, except more expensive and less flexible. Banks owned two-thirds of American homes, so in most cases renting was like paying a middleman, a landlord who skimmed a few percentage points off our rental payment before giving the rest to the bank. In exchange, we renters enjoyed a tax-free, insurance-free, maintenance-free, hassle-free living experience.

These were the kinds of things I told myself during the biggest housing bubble in all of American history. Things were changing fast, and I believed they were changing to favor first-time home-buyers like us. Interest rates were going up, and residential real estate sales were going down. Soon the prices would go down, too.

In a year things would look much different indeed!


A Basic Necessity – Part 1

Eighty years ago, on December 7th, 1941, the median house price in America was ~US$7K, or around US$130K in 2021 dollars. Median, annual household income in 1941 was about US$2,500. That’s a ratio of 3.5:1, house price to household income.

In the 50’s the ratio evened out at around 2:1 in favor of buyers, and stayed that way for a couple decades, until it started ramping up in the 70’s, culminating at 4:1 in 2020 nationwide. However, in many American cities the ratio is more like 8:1 or above, even in the so-called fly-over states.

My family and I live in a fly-over state, and our house-to-income ratio is around 6:1, at least for houses we’re willing to consider a home. And even those houses aren’t that great, compared to the house I bought in Dallas in 2003 (which happened to be in line 1941 median house prices, around US$130K, as compared to the median price of $400K today).

Bottom line: housing is expensive as hell.

Welcome to the new normal. It’s probably not going down. My instinct tells me the whole market is rigged, but it’s hard to get solid facts on what’s happening because there’s high-dollar incentive to obscure the facts.

One thing’s for sure: we’re entering uncharted territory for the price of one of three basic necessities, a house.

Equity-poor, first-time house-buyers are screwed. (Including me, as I haven’t bought a house in the U.S. in over three years).

Note that I will never use real estate lingo like “home”. A cardboard box can be a home, as George Carlin once pointed out.

Residential real estate is property and a structure that supports living. If you pack emotion into what will most likely be the most expensive thing you ever buy, then you are a fool.

Like most people, I don’t want to be a fool. I want to understand the trends and new realities, because we are entering a new reality, for sure.

Is owning still a thing? In real estate lingo, “owning” means paying another landlord, the bank, with many more expenses tacked on (insurance, tax, maintenance, time). So how do these expenses compare to rent?

This is the first of a series of residential real estate explorations. At this point, I don’t even know where to start. But I’ll find out.

Oh, and December 7th, 1941, is a day that will live in infamy, as one of our greatest presidents phrased it. Having dedicated a decade of my life working with forward-deployed Navy in the Pacific (in Japan, no less), the day resonates with me. In those days people had resilience. I will, too.