Time for a fun post. This one is going to be long, opinionated, and speculative. But bear with me because I think I’m onto something here. The media won’t let us forget it; millennials are not buying houses at the rate members of other generations have. They have a hundred theories about why – most of which involve student loans, rising real estate prices, stagnant incomes, structural economic shifts, or simple lack of “good old fashioned American gumption.” Of course I don’t know everyone or everything, but as a millennial with an at least above average understanding of business, finance, and economics, I believe I’m as qualified as your average pundit to do some positing of my own on the subject. From my perspective, while each of the issues I mentioned plays a role, they aren’t contributing to a crisis at all. To the contrary, the nonstop hand wringing isn’t necessary and in fact, things are actually moving in a very positive direction.
Who am I? I’m a millennial who went to a consistently highly ranked public university and graduated right into the heart of the worst economic crisis the country has seen since the Great Depression – and into a local economy that was struggling more than most for that matter. Between my college girlfriend and I, we had a pair of decorated academic records, close to $100k in debt, and zero jobs to speak of when we walked across the stage in our gowns and funny hats. Our graduation speaker’s summarizing message was “we’ve destroyed this once great country, you’re screwed, good luck.” It was about the most depressing speech I could have imagined and also rather redundant since our reality more or less already matched it. A little optimism would have been appreciated and appropriate as well.
Over the next few months, both of us scratched, clawed, and begged our way into the workforce. We each started out as underemployed temps (so no guarantee of tomorrow much less benefits or work that was in any way challenging or meaningful) serving in office drone functions making roughly $30k a year each and well aware that we were lucky to be that well off. It wasn’t an easy time but we were determined to get through it. Mortified by our pile of debt, we made a plan to pay it off in a maximum of five years and stuck to it, no matter how lean our life together had to be. We lived in a small one bedroom apartment and drove one car together to work since our jobs happened to be in the same direction. Luxuries like eating at restaurants were kept to a minimum. Over the next few years, things gradually got better. We each differentiated ourselves at work and got hired full time with small raises. My girlfriend became my fiancé and my fiancé became my wife. And yes, it was a relatively modest wedding – although a wonderful one as well. We both upgraded jobs a couple of times and suddenly things looked much different. We bought a pair of new cars – no luxury hood ornaments, but all the nicer features like leather, fancy rims, touch screens, etc. We upgraded our living arrangements from small one bedroom apartment to two bedroom condo style apartment to three bedroom duplex. We did all of this while remaining on schedule with our five year student loan repayment plan. A house might have been the next big step but we were not about to consider that until our student loans were 100% eradicated.
But that never quite transpired. We had married too young and while we had accomplished some impressive things together and grown immensely as people, that growth had taken us in separate directions. We divorced fairly abruptly, parted ways, and have never spoken again. Almost simultaneously, I got my current job and my income doubled overnight and continued from there. I worked hard and learned a lot and after a couple of years, a significantly more desirable territory opened up. I lobbied for it with all my might and got it and today I’m in Houston – over a thousand miles away from the part of the world that never managed to feel like home in over two decades of my living there. It has taken some time to develop this new territory and that is still a work in progress but my income has increased significantly since coming here. Plus my investments have continued to grow and I’ve started a profitable side business as well.
While my post college life (and pre as well) started out relatively bleak when compared to previous generations, I consider that an advantage as I look back on it. I learned to separate wants from needs early on – and significantly, I learned that before I had developed a taste for a more expensive lifestyle than the bare bones existence of a student from a low socioeconomic background. Gradually, in spite of the dismal economic conditions, I was able to grind my way into a successful career path. And today, well under a decade after setting out on that journey, my income has cleared the 90th percentile. I’ve developed a taste for the finer things in life but it has happened gradually and with the lessons of the past ever present in the back of my mind, I am unwilling to spend more than half of what I earn regardless of the circumstances.
Why the mini financial biography? I think the background of my basic experience helps to illustrate the point I’m going to make. By my age, most people in previous generations had a house and kids. I have neither. However, my net worth is substantially higher than that of almost anyone of previous generations at this point in their lives – adjusted for inflation, of course. Barring a total disaster, it will be in the seven figures less than ten years from now. At that point, I may or may not own a residence. But once again barring a total disaster, there will be no kids. I think extremely logically and have almost completely divorced myself from emotion when it comes to making financial decisions. Kids made sense when each one repaid the parental investment in full and then some, often in the form of free labor on a farm or in the family business. Today, a kid will cost roughly a quarter million dollars if you are a capable enough parent to prepare him or her to leave the nest by eighteen – otherwise more. This is one of the most important financial decisions anyone can make. Any argument in favor of having kids is 100% emotion based and thus, irrelevant to me. No, I am not a robot. But I am willing and able to override my feelings in order to put not just surviving, but thriving, squarely in the number one spot.
Obviously I am not a typical millennial. But I believe that more than members of any other generation, millennials reflect my way of thinking on at least some level. For example, the rate of reproduction has plummeted – in almost a perfectly inverse correlation with education level attained. Millennials aren’t ruining everything; in many cases we’re ruining bad things and making room for better ones. Motorcycles are about the most dangerous form of transportation imaginable and guess what – very few of us are buying them. Harley Davidson motorcycles are easily the worst possible variety of motorcycles. They are big, ugly, egregiously loud, and they have zero of the motorcycle’s three actual advantages – ridiculous speed, low cost, and great gas mileage. Here again, millennials seem to have it right; Harley is on track to be bankrupt in less than a decade because we simply do not buy their products. How about beer? Entire generations drank nothing but piss water and apparently it never occurred to them to ask for anything better. Millennials didn’t ask. We demanded. And today, quality beer is widely available while the mass producers of swill fight for dwindling market share with sort of clever commercials as they quietly buy up every craft beer brand they can.
On to home ownership – the foundation of the mighty American economic legacy. It’s true. We aren’t buying them in very high numbers. And yes, all of the problems I mentioned are playing a role. But I fought through all of them and could now buy a house without financing if I wanted to. Most millennials aren’t quite there, but plenty are succeeding in fighting their way through. The American economic engine has been finding creative ways to make things affordable for people who can’t actually afford them for a very long time – since before the Great Depression, in fact. I really don’t buy the general argument that millennials have just gotten such a raw economic deal that it can’t be done yet again. I think the biggest issue at play here is choice. Just like crappy, obnoxious, overpriced death machines (yes, I hate Harley and can’t wait to see everything related to the company relegated to Pawn Stars and similar shows) or piss water at any price, we are not buying houses because we do not want what is available.
Back to the example of my life since it’s what I know best. Yes, I am “throwing my money away” on rent from the conventional perspective. But am I really? I spend just shy of $1200 a month on a very luxurious arrangement. Sure, it’s only a 700 square foot, one bedroom apartment. But that is plenty of space for me, the few possessions I chose to keep when I came here, and the even fewer I have acquired since. It was built in 2013 and has granite countertops, hardwood floors, ten foot ceilings, beautiful track lighting, and a balcony overlooking a resort style pool complete with gas grills all around (the view from my balcony tonight is the featured picture for this post). In addition to the pool areas (yes, there are more than one), the complex has gated entrances, security guards on patrol, a serviceable gym (and I’m pretty picky about them), a clubhouse with a very nice pool table, coffee, and light refreshments, a computer room, several lounges that can be used whenever or even reserved for private events, a yoga studio, trash pickup at your door, about a hundred huge tvs everywhere you go that anyone can turn to any channel they like, and I’m probably leaving a bunch of stuff out. And by the way, I left out the best feature of all – portability. This area hasn’t turned out to be for me so in a little over a month, I’m moving to an even newer complex with even better amenities and in an area I think will be a better fit. And it will cost me roughly the same. If I were offered a better job in a different city, I could make a similar choice without having to worry about selling a house. Anyway, my current complex also happens to be located in an area where you’d be hard pressed to find a piece of real estate priced below half a million dollars. My new one will be in a somewhat more affordable market – if you consider $300k+ affordable when the median household income is around $60k a year. For the record, I do not.
And even if you were willing to spend that kind of money, you literally couldn’t buy what I’m renting because it doesn’t exist. The average American house has been growing consistently and today, it is around 2600 square feet. That would have been excessive when the average family was twice the size it is today. Every one of those square feet has a cost – mortgage interest, property taxes, time spent cleaning and maintaining, utilities to heat/cool, more money spent on accumulating and maintaining clutter, and more. The palaces people think they own are actually financial prisons and worse, they take up tons of their time as well. This is unsustainable. It was unsustainable in 2006 and society had a great opportunity to learn that. But somehow that didn’t happen, just like it hasn’t in so many other past opportunities, and the average house has only continued to grow.
I want exactly what I have – an appropriate sized residence with premium, modern features and amenities and as little maintenance as possible required – or preferably none. Sure, I could find a house or condo with less than 1000 square feet. But it would probably be old and either falling apart or shoddily renovated to attract buyers with as minimal an investment as possible. And that’s because for a long time, we’ve been building mostly modern mini mansions the average household can’t actually afford and almost no appropriate sized homes. As a millennial, it certainly seems like far more of my peers live in households of one or two than in households larger than that. Even among those who have kids, very, very few have more than one or two. And like it or not, millennials are now the largest generation in this country, which is why all of this is so significant. So why do we continue to build houses that could shelter small armies when almost no one needs more than 2000 square feet and most could get by with considerably less?
In theory, you should be paying more for rent than it would cost you to own something comparable. That’s the premium you pay for bearing almost no responsibility. But there are numerous, widespread scenarios where that isn’t the case and that’s if appropriate properties are even available to buy in a given area. My situation certainly falls into that category. Find me a property in my area reasonably close to the size of my apartment that offers even remotely similar amenities for $1200 or less and I will buy it and pay you every dollar of equity I build in the first year as a finder’s fee. That’s how confident I am that it’s not possible here. And I’m serious about that offer by the way. I could go into an in depth analysis of the numbers and maybe I will write a post on that one day but for now, suffice it to say that I’m a finance guy, I look around and run the numbers regularly, and this isn’t even debatable in many contexts.
I think we’re going to see housing change over time and I believe the process has already started. We’re already seeing it on the margins in the form of some extreme concepts like tiny houses, which started off as media curiosities and today are growing common enough that most people have heard of them. There is actually a market for those things and my guess is that if builders were to start building new, modern houses of a slightly more practical size, they would find that there is a huge market for those. Let me rephrase that. When they start doing that, they will find that. I think we will see a dramatic increase in premium featured houses being built in the 1000-1500 square foot range. In fact, if I see a builder doing this, I will seriously consider investing. In time, I think the average size will drop to 2000, and maybe even below, while the average age will decrease dramatically as tons of houses are built to accommodate smaller household sizes and the weight of those numbers pulls in that direction.
And we will all be better off. We as a country do not benefit when such a high percentage of people are “house poor” to the point where they are a few unexpected expenses or a moderate injury or illness away from foreclosure. I don’t believe it benefits the economy when all factors are considered and it certainly doesn’t benefit us as a society to have a bunch of people living in such a terribly stressful situation. It certainly doesn’t benefit us to have so much of our economy resting on the house of cards that is the mortgage backed security system. And no, that has not been fixed since the Great Recession. Just like the several previous times it has collapsed on itself, some politicians slapped some wrists and introduced some new, “this time we’re actually serious” sounding legislation that really just towed the wreck of the Titanic in to port, threw a tarp (no pun intended here) over the gaping hole in the hull, rearranged a few deck chairs, and sent it right back out to sea. The problem won’t actually be fixed until we address the real, underlying cause. But naïve optimist as it may make me sound like, I believe we will do it – at least to an extent that will make a substantial improvement. I believe we will “right size” houses and when the dust settles, it is going to be a very good thing for everyone. The media and society at large loves to rip on my generation and certainly plenty of it is warranted. However, I believe we have been brought up in just the set of circumstances necessary to have made us exactly the people to do what several previous generations have failed to. Disagree? I would love to hear your reasoning.