Losing My Grip
I am increasingly feeling like an observer of the world as it rushes past rather than an active participant. Some of that feeling is inevitable as I get further and further out of the mainstream. I am still actively trying to remain relevant and I do that by keeping up on the news and engaging friends in lively debate when the topics are not too controversial or the people involved are not too sensitive. I also actively teach at the graduate school level and take on the available expert witness cases with which people feel I can help them. But none of that stops the clock from going around or the pages on the calendar from flying off, and with each passing day, month and year I find things that are surprising to me.
The topic which has made me go tilt today is the subject of home prices. I saw an article that said that the median home price in California is now about $800,000. And that is not an average, but a median. I’m sure with all the massively expensive coastal property along the 840 miles of its coast, as well as the three expensive urban hubs of the Bay Area, the Los Angeles Basin and San Diego County (not to mention the enclave towns like Napa/Sonoma, Carmel/Monterrey, Santa Barbara/Montecito, Newport/Laguna, and Del Mar/LaJolla, there are enough pricey residences to drive the average well above the median. $800,000 is a big number in my book. I didn’t pay so very much more than that ten years ago when I bought this hillside and while this is no mansion by any means, it is certainly a home that should be well above average in the array of typical American homes. According to my good friend Zillow, this house is worth a bit more than twice what we paid for it. That only compounds out as an average appreciation rate of 7% or so and that hardly qualifies as a wild appreciation ride by almost any standard.
And yet I found myself sitting at the nearby outdoor pub near us called The Sideyard. I go there when I feel like getting a proper lunch rather than a picked up sandwich or something. The guy sitting next to me seemed to be in his late twenties or so and we got talking about home prices. I had just seen the piece declaring the California median home price as being $798,000 and when I asked him to guess, he estimated $825,000. In other words, he was not surprised to hear the actual number. I then Googled the national median home price and saw that it was $428,000. This is up from $221,000 in early 2012, when I bought my house, and very much on par with the doubling of value Zillow has placed upon my home value in that span of time. When I got out of school in 1976, the median price was $44,000 and that was up from $18,000 in 1963. While the appreciation in the past two years since COVID began are quite uniquely steep in this sixty year history, the truth is that there has been a steady growth in housing values over that time except for the six year history between 2007 and 2013 after the housing bubble burst. The “bubble” that formed for the five years before that crash was far less steep than the bubble that has inflated prices since 2020.
I am currently down to one house from the days when I used to have several homes. I am very happy to have narrowed my operation down, but that is far less an investment call than a lifestyle call. I was speaking to a friend in Vermont today who has a half dozen extra homes in Vermont that she rents out through Airbnb at meaningful profit (especially over the past two yeas when families have fled the inner city to find solace and work-at-home opportunities. As I described how I am closing down my one remaining extra property over the next month, I asked her when she was a planning to simplify. She and her husband are older than us, so I think it is a very real issue for them and she implied that it is constantly on her mind. As a market observer, I would say that this feels more like a market top than a bottom, so I would definitely sell if I were her. I did not want to get into her finances too deeply, but you can pretty much bet that she is very much in a profit zone on all of those properties, no matter how many maintenance costs and renovation costs she has had to bear.
Going back to the guy next to me at the pub today. When I told him how much higher the California median house price was relative to the national median (God knows what it is in Waco, Texas or Laurel, Mississippi, whee those sweet but aggravatingly reasonable house fixer-upper shows are based), he shrugged and said that the national median was less than what he sold his first condo for a few years ago. He is a draft beer salesman. The average draft beer sales rep makes $42,000, but even if that number in California is higher and, say, $75,000, a median home price of $800,000 is 10.7X. If we assume he has married another beer sales rep and that they make $150,000 combined, that will mean that number drops to 5.3X. It used to be that the rule of thumb was 2.5X to figure on how much house you could afford. Now, it was recently reported that the average salary at Google is $300,000. It seems a Google employee can more adequately afford the new home prices since they are at 2.7X and therefore pretty close to the historical norm in terms of affordability. If that sounds a bit off-the-charts, you are not alone.
I remember when I was a banker in my prime pulling in the big bucks, I used to think about the older bankers who had retired before the gravy train became so lucrative. I remember in my early banking days preparing a retirement lump-sum check for a top IT&T executive that was $700,000. Now the mass market retirement services tell you not to even bother them if you do not have $500,000 to put to work. Retirement statistics show that the average 401(k) balance today for a 65-year-old person retiring is $255,000, but the median is just $82,000. Ouch! No wonder I read that the older people get, the more they say they are heavily relying on Social Security for their retirement income security. I am at the top of that social security bracket and I get about $3,000 per month or $36,000 per year. If I had a retirement fund of $82,000 and applied the a jacked-up rule of 4% to it by assuming I would get 10% from it to spend each year, that would give me a total income of $44,200. Since the median household income in the U.S. is now $75,000, a retired person living this way will be well below the median though still reasonably above the $26,000 poverty level. It is an eye-opener nonetheless.
I suppose there may be some salvation for the 64% of American households that own their own home since they will have participated in the appreciation of their home value and may have that as an added storehouse of wealth. That is particularly so if they have not done what many economists fear they have over the last number of years, which is to increasingly monetize that value accretion and use it to supplement their income and lifestyle as it grew in value.
I don’t think times are so much harsher now than ever before, but clearly the wealth gap is wider than ever. That means many will feel the pinch of aging more than others. So far, I am not applying for work as a greeter at Walmart, but I am beginning to wonder if some form of later-life work isn’t in the cards for many of us Boomers that are starting to lose our grip on economic reality as the medical profession keeps extending our lives out further and further and our children are less and less able to keep pace with the lifestyles that we accustomed them to in their youth. Hang on…the ride ain’t over yet by a long shot.