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:
From My Actual Life
A note I wrote yesterday…
Moving day.
We moved into our rental in Nov 2020 after selling our house during COVID thinking we would leave CA.
The next few years had interesting twists…
I was at Parallax doing the WFH thing. My team moved to CO. We all sold our houses at the same time and even used my same realtor friend. In the meantime, we needed a place to stay. The realtor called her childhood friend who she knew had this house vacant.
They agreed to rent it to us. An old groovy Boogie Nights house. It needs (A LOT of) TLC but I describe it as a rich person’s house from 1969. Anyway, we figure it’s temporary. So as things start opening up we visit Denver/Boulder on a majestic weather weekend. Looks great.
We get back home and Denver weather made national news. It was 80 and sunny and they had a snowstorm the next day. I text @Elfonzerelli:
“bruh, the weather?”
Apparently that can happen.
Egyptian blood gets cold feet. I’m out on CO. I myself am a snowflake. I don’t need them in September.
Summer 2021, we travel for about 7 weeks in the US, including a month in TX visiting friends. We spend 4th of July in Austin and on the way back to our friend’s house in DFW area we swing by an open house. We called the realtor on the way to make sure she’ll be there. She warns us there’s 3 offers on the place already. No problem. We are looky loos and it’s next to our friend’s house so we still wanna look.
We step inside, love it immediately and the price seemed cheap (adjusting for coming from CA and TX property tax even).
I ask my friend who knows the market what’s the worst he thinks we could rent it out for. Satisfied we lift the house paying 12% thru ask. As we celebrate that week we tell our friends we will rent it out …but move there in a year!
We return to CA.
So it’s now spring of 2022.
We have the move to TX as this unspoken deadline in the back of our minds. Yinh and I are driving up to Napa. A telekinesis moment as we were driving thru the beautiful valley…I don’t remember who spoke first, the words could have been either of us:
“we can’t go to Texas”
Immediate agreement.
We do love it here. Our family is here. I left work a few months earlier, still not much of a plan, and while TX would have been way better financially, everywhere has warts…dealing with the high cost was the thing we’d rather bear.
We commit to CA then. No more wandering eyes. We sold the house in TX.
[Almost top ticked it but our first buyer backed out the week the market first dropped in 2022. We ended up eventually selling for about a 25% profit and that luck parlayed into more bc we jammed the proceeds into XHB in what turned out to be the low — long-time readers remember this as I wrote about in real time. It was a weird trade bc I got the inkling that year that I wanted to short builders, bc after talking to our TX tenants and their experience with buying a house from a builder I understood how the builders seemed squeezed on both demand bc affordability and supply cost inflation. They were like a broken crack spread. So I wanted to buy puts. But when I looked at the performance of REITs and other RE plays they were all flattish while the builders were crushed. Figuring they were now hated and be it that we were now “short a house” I held my nose and bought them! Anyway, dumb luck. Sold ’em after the 1 year mark from the basis.]
Anyway life again.
In late ’22, we are having “Sunday coffee with neighbors in the shared driveway” and learn that the tenants whose backyard is adjacent to us are moving out. We don’t know them, but our neighbor tells us. We walk to the house, introduce ourselves and discover the house isn’t listed yet. We call Yinh’s sister in SF.
“You have to move here”
This was out of left field.
We badger her and her husband all evening.
They agreed to come see it that week. By Friday they sign the lease. The 4 adults, 4 kids and grandma sharing 2 adjacent homes.
We remove part of the fence. Compound.
When my kids moved into our rental they were in COVID homeschool pods. Pre-K and 2nd grade. Tuesday, they go into 4th and 7th. These were big years. They will always remember the years “when they lived with their cousins.”
I’ve probably lived the best 2.5 years of my life. I’m sad to leave this house. The memories spanned important years (not to mention my own leaving work transition).
But today…the fence is mended.
We sleep in the new house tonight. It’s just around the corner, 3 min by bike, 8 walking. Kid goes to the same bus stop.
But this house and compound arrangement needed a tribute.
We hear our new neighbors are empty nesters. Our backyards are adjacent. We own the new place and would happily max lever to make the compound happen again but this time… permanently.
Moontower Weekly Recap
Posts:
- an impolite answer to “how do you get people to do good work” [this friggin post — I wrote it off the cuff and it ended up doing numbers. It’s probably the most read post of mine in the past year. I’ll take it, but not without some internal grumbling about the trash correlation of effort to reception]
- shadow theta