We moved into the new house yesterday.
We’ve been buried, just been moving a bit every day for weeks since this house is around the corner from our rental. It’s exciting, the kids are stoked, grandma is over the moon and will be more so when her space is built. But there’s a lot to do (like get the internet working beyond just my office, “sorry honey just a few minutes!”).
I’ll try to be brief.
It’s top of mind, let’s chat real estate.
I mentioned Redfin chief economist, Daryl Fairweather, in Wednesday’s letter in the context of selecting work you want to do. Timely mention because I’m going to show you something cool.
A little background…the Epsilon Theory team (ie Ben Hunt et al) have been building an AI-driven real-time narrative analysis engine called Perscient. It turns data into storyboards or visualizations that spotlight how a narrative is evolving.
In a recent interview with Matt Zeigler, Fairweather reported a number of insights about the housing market. Matt ran them through Perscient and sent me this link:
The Housing Market: Truth in Five Charts (5 min read)
My reply:
dude, i really like this. sending it to my family. The chart is aesthetically pleasing, the content of them is fresh, and they are annotated to reduce cognitive load. Would love to see more of these.
The content upshot: it paints a picture of a housing market perched to roll over.
(Already happening in Austin & Florida according to The New Geography of Housing In America).
Money Angle
That article is tight, but I don’t need its crystal ball. I’ll tell you right now — it’s going down. I just bought a house. Duh.
On a less ego-centric beat, a downturn could have a silver lining.
On the one hand, if houses get more affordable, this will restore balance to the Force. Much of our political upheaval, in my humble opinion, stems from a sense that our future is going to be worse than our past because the American dream is out of reach. The average age people buy their first home is almost 40 (like 10 years later than your grandparents and possibly even parents!). Much of our malaise, according to Nick, is downstream of what’s happened to real estate. He explains in this week’s post:
It’s the housing, stupid (4 min read)
[He also talks about the 3x surge amongst households earning over $1mm/yr choosing to rent. If you’ve done the math, not that this is a pure or even primary math decision, this shouldn’t come as a shock. See The variable that balances the buy/rent equation.]
On the other hand, housing is a big part of the economy directly and indirectly has a wealth effect impact on consumption. It might feel hard to imagine the stock market and employment chugging along happily and decoupling from housing but then again, home prices decoupled to the upside vs income, so maybe it’s a window for normalization.
Anyway, I’m getting out of my realm. On housing stuff, you’re better off listening to Daryl and Logan Mohtashami who live in the data.
Personal observation:
Don’t delude yourself. Many home improvements don’t pay for themselves. The house we bought was meticulously renovated in 2018. The disclosures included receipts. The slab on the island alone cost about 1/2 as much as the kitchen we built from scratch in 2013 in our first suburban house (which had an even bigger island). And this is not even a price from the covid era or aftermath.
I’d estimate the price of this house was in line with its replacement value. In other words, the land was free. We know it starts at $650/ft to build a home here, plus you’ll spend 1.5-2 years renting while the miserable permitting process and construction play out.
This is the bull case on all housing here. Homes trade below replacement costs. The cost to build from scratch is at least $4mm for a 3k sq ft home on a 1/2 acre. And all of these numbers are a fraction of what it costs on the peninsula. (I rarely meet anyone who moves here from somewhere other than the peninsula since Covid. If geoarbitrage is part of the bull case though, that’s a live by the sword, die by the sword case — the replacement cost thing is really the support assuming stable employment.)
The bear case is pure affordability eroding demand — it’s the demand side of this equation that needs to modulate. The supply of existing homes for sale here was higher than I’ve seen for several years, but in CA the supply is constrained not just because of mortgage lock-in, an effect you see nationally, but because of Prop 13. Why re-base your taxes by moving? (The rental we are leaving would probably trade around $2.5-$2.8mm if they ever sold but the property taxes are just under $5k/yr!)
So…back to the home improvements you don’t recoup. I feel like buying this home, I was on the winning end of “home improvements that don’t pay for themselves” because we happen to like the taste of the upgrades. Yinh argues that the reno did pay for itself since they nominally got all their money back. But I do that whole thing where I’m “breaking even on investment you made 7 years ago is a disaster”.
Yinh says, yes but they enjoyed it. It was consumed.
No argument there.
Perfect example of the duality of housing as a consumption good and an investment good. For the 2 major upgrades we are doing, an ADU and solar, I’m fairly confident they pay for themselves and more. But there’s also a list of things that definitely ain’t paying for themselves.
My sorting sickness likes to place these things in their proper container, but I get that many people don’t. Our realtor has been a friend since we moved to the burbs, and she’s always joking with me that my way of seeing the world reminds me of her father and how having done this work for a long time says I assure you most people are nowhere near as cold as Yinh and I are when we look at a house. Part of this is finance brainworms but some of it is a defense mechanism — I like renting, so buying needs to feel really right to cross that rubicon.
Recent moontower posts about housing
Money Angle For Masochists
The idea that your primary residence can be seen as an investment has poisoned the country multiple times in the past 20 years, from the GFC to the restrictive zoning laws that have pulled the ladder up.
I have previously shared a dive on Georgism which in principle I agree with. If you want to follow the implementation experiments around the US you can check out Lars Doucet’s substack. Its title is a hat-tip to Henry George’s influential treatise.
One of the interesting things about Georgism is how it had fans from across the political spectrum as it had elements that sound socialistic and elements that are aggressively capitalistic.
Rory Sutherland hits the high points in this 10-minute vid:
He makes a point I’ve made in the past — Texas, despite being conservative, has tax policy that is quite Georgist — it taxes land heavily and leaves income alone. CA, meanwhile, is landlord heaven.
(Landlords love to bitch about the insane tenant rights here, and they’re not wrong when you see some of these crazy squatter cases, but on the whole, you could have no tenants and did better on an after-tax basis just land banking. I hate having distortions making up for prior distortions but these tenant cases are hard to sympathize with in the abstract given how insane CA has benefited landowners. Fiscal karma. Still I’ve also heard some awful personal stories regarding tenants that would compel you to subscribe to zerohedge premium.
A few trash tenants give tenants a bad name and a few rotten landlords give landlords a bad name but it’s important to put the emotions down for a second and trace this all back to poor policy broadly.)
I appreciated that Rory pointed to the error in economic theory from which Georgism sprouted:
Adam Smith thought there were three sources of wealth creation: land, capital, and labor. But future generations of economists thought it was too complicated to have three — it made the math difficult. So they pretended capital and land were the same thing. They’re not. Capital is potentially limitless — you can create more of it. Land is effectively a bottleneck. An artificial bottleneck.
He also reminds us that Monopoly was literally a game designed to point out the flaw in treating land as capital! It was designed by a Georgist as a cautionary tale and became the most popular boardgame in America non-ironically. Amazing work all around really.
Anyway, Rory touches on all this but if you find it as fascinating as I do feel free to continue with: