I want to do something a little different today. This is going to be a vindicating post, given another post I wrote not long ago, but there is a much more important purpose than my own vanity. I’m not just writing this stuff for the fun of it. There are real people out there getting hurt because they don’t know what they’re doing and I want to help reduce such scenarios. I get my news almost exclusively in written format and in particular, I read a lot of articles about business, finance, and economics. Yesterday I saw one that is relevant to something I think about often and I want to discuss it here.
In this astute, sobering article on CNBC, author Megan Leonhardt illustrates the regrets a healthy majority of millennial home buyers have with their purchases. She theorizes that the common thread in these regrets is the lack of financial understanding far too many people go into these transactions with and then goes into detail on some of the different varieties of disappointment that result. And of course, she’s correct. However, I’d like to take this topic a step further. History is absolutely littered with stories of uniformed marks being misled en masse into major financial transactions that aren’t in their best interests and ultimately paying the price. It’s a story as old as the barter system or the word “speculation.”
I believe this is one major example of the greatest threat facing my generation: the menace of blindly following conventional wisdom that developed under very different circumstances than those we live in today. In this case, following the assurances of well meaning family members or desperate real estate agents with everything to gain and nothing to lose, people are buying incredibly overbuilt, overpriced houses they can’t afford in any remotely practical definition of the word, since “renting is throwing your money away.” When decent houses that reasonably met people’s needs were widely available and cost one, or maybe two times a typical annual salary, I would have been solidly in agreement. Today, the median house sells for roughly $250k while the median household income has only recently risen to around $60k. As a finance guy, I can tell you with the utmost confidence that the relationship between these numbers is neither workable today, nor sustainable in the long term, and that therefore, renting is not throwing money away, but paying more than one would prefer in order to avoid a very likely financial catastrophe.
We are looking at a structural problem and mark my words, something is going to give. It has to. Either the incomes of typical people will rise or real estate prices will fall; and either change needs to be a dramatic one if it’s going to bring the situation into a reasonable balance. Adjusted for inflation, incomes have barely risen at all over the last few decades. And given that the chief cause, technology/automation, is only going to continue to progress exponentially, with the graph turning nearly completely vertical very soon if it hasn’t done so already, I don’t see that trend changing in any positive way. Another 2008 style housing apocalypse seems far more likely, but I’m not even sure that would be enough to correct the imbalance. When it happens, and I genuinely believe it will, the government will have little choice but to step in and continue to paper over the problems that have been festering just below the surface of the American dream narrative for about as long as that dream has been viewed as a widely viable reality. It has done so many times before and it will certainly do so again. But sadly, if it is successful, it will probably only continue to propagate our current norm, in which far too many people live on the very brink of ruin and deal with the stress of that knowledge every minute of every day. Millions of people are (barely, in many cases) holding wildly overvalued, impractical assets and precious few of them are sufficiently capitalized to remain solvent when that overvaluation becomes readily apparent.
Even if you accept the values of these houses for what they are, the amount of living space per person has ballooned to absurd proportions. The average household of 2.5 people does not need a house anywhere close to the 2600 square foot average size of the behemoths that were built last year, nor even half that. We’re talking about numbers that have not been observed on a large scale at any point in human history. So we’re either looking at mass overvaluation or the mass existence of ridiculous overproduction that would be virtually impossible to divide up in order to “right size” it. After all, they can’t exactly start dividing these monster houses into two or three units each. Either way, my money is on some serious, widespread attrition.
The good news is that clearly I’m not the only one seeing this. The article I cited above starts out talking about how millennials are buying fewer houses than previous generations were at the same ages. Whether it’s because they see what I see, they’re being held back by financial constraints, or perhaps they just have an uneasy feeling they can’t quite place, many members of my generation are making the right choice and staying on the sidelines until further notice. What about you? If you’ve already bought something and feel overextended, which is what many of the regrets in the article boil down to, your options are to sell quickly while you can still get good value out, assuming you are in a position to, or to buckle up and attempt to hold on through whatever form the ugliness on the horizon takes when it gets here. If you’re taken down by another mass foreclosure event, the silver lining is that assuming you become insolvent, you will at least be free of that brick and mortar anchor you are currently chained to and you will be in good company as you work to rebuild your financial life. But if you haven’t bought anything yet, be thankful. Whatever has led you to the position you’re in today, I believe it has saved you from one hell of an ass kicking.
I would argue that another example of this unsustainable, blind following of conventional wisdom that is no longer relevant to current circumstances trend, is the constant pressure (often from the aspirational grandmothers, bless their hearts) to have kids very few people can reasonably afford. We’re talking about a quarter of a million dollars for one – likely a low end estimate once a couple decades’ worth of inflation are factored in – paid for by people who can barely keep their heads above water as it is in literally the majority of cases. And how many people have just one?!? But that is another post for another day. As a quick spoiler alert, however, if you are not a member of a stable, long term household with a sustainable income of $70k, or preferably considerably more, and you have not had comprehensive, realistic discussions about how you will handle this drastic, life altering change of circumstances, you’re making a dire error. For now, just remember this: if something feels off, it very well might be. In spite of what your family, the media, salespeople, or anyone else might tell you, there are very few times in life when you will lose out by taking a little more time to make sure you’ve done your diligence and feel comfortable before making a major decision. Do not let someone else, who will not be paying the consequences, put you in a position you don’t understand or are not fully, diligently prepared to take. This is your life. Take it seriously and your results will be much easier to live in.