Moontower #34


Homeownership is a fetish.

Americans buy homes that are about 4.5x their household income which is about 33% more than they spent when our parents were forming households in the 70s and 80s. The trend looks like it started exactly a generation ago.  Why? I could speculate uncritically — lower interest rates, wealth effects, more square footage per house, tax codes, the Property Brothers. That last one is a half-joke only. Wikipedia told me HGTV launched in 1994 and in 2016 overtook CNN to be the third most-watched cable network.

For those making ends meet in HCOL areas, the home price-to-income ratio looks like a bodybuilder who skips leg day. There’s an awful lot of weight being held up on stilts. In SF, you’d need to make nearly $300k a year to afford the $1.5mm median home That would put you in the top 5% of Bay Area income and top 2% nationally. Most people are overstretching to own just a median home.

When the average person stretches for a home, our comparative instincts propagate the distortion up the status ladder. If you have a high salary, you probably feel that a median home won’t cut it. The Joneses only swim in heated pools. And everyone knows a SubZero fridge keeps vegetables fresher longer. The flip side of your high salary is a high cost to your employer. While you shop RH outdoor furniture, your boss is being pitched a SaaS solution to replace you for 20 cents on the dollar. Even less when they consider the full cost of employing you. (I can hear the push back now — “my boss is my friend”. Well, what if the board cuts them in on half the savings. And since they know the same logic applies to them, they better take while they still have a seat. Managers answer to owners and owners answer to markets.)


I’ve recently heard anecdotes of homes in the $2-$5mm range in NYC and CT being “no bid”. This is no doubt symptomatic of the bloodletting occurring in finance and fund management which are overweight industries in those areas. But the lesson of software eating your margins is not just a finance story. We’ve talked about the hollowing of the middle here before. As automation crawls its way up the skill stack, accountants, radiologists, and everyone whose job that looks like a recipe will find themselves pulled into middle-class quicksand. And before you overestimate how complicated your recipe is, I’ll remind you that no-limit hold em was only until recently thought to be immune to the robotic intrusions the chess and Go world witnessed.

How about software engineers? Like any of these fields, the best will be spared. But just as WordPress abstracted away the need to write HTML, the growing world of no-code lowers the price of reproducing software. And that may just be an interim step before software writes itself. The fact that elementary schools are teaching it means the skill will simply be less scarce. If it still sounds far fetched, you can see that it is one of the most searched queries on

Spending 6x income for a house is a bet on everything continuing to go right. Just ask doctors. They were driving Lambos in the 80s. Be careful. Mean reversion is the highway patrol lurking to give you a ticket for reckless extrapolation.

Feel Better About Renting

The tax code, your parents, and biased myths like “build equity” all conspire to make “throwing money away on rent” seem financially irresponsible. Anyone that has dug into the full economic math including opportunity costs knows the buy/rent decision depends on many variables some of which are extremely personal. In other words, there is no overarching advice that suits everyone and if somebody tells you otherwise watch your wallet.

If it’s your well-meaning parents point them to this article. It is my reference for analyzing the factors which affect the buy/rent decision.

  • Walking through this calculator will give you numerical intuition for the levers.

More links from my “Don’t Buy A House” support group

  • ArrivedHomes is a startup. Instead of buying a single home, you buy into a pool of homes allowing you to “build equity” instead of rent. You get the financial consequence of homeownership without the double-edged sword of geographic concentration. Without a deep dive into the model, I’m guessing you are overpaying for diversification but worth a closer look for people who want to merge their need for shelter with a desire to be long real estate.
  • Just how stubborn have realtor fees been in the U.S.?
  • Remember that a home is land + a depreciating structure whose buyer in 20 years will hate everything you did to the place. Don’t kid yourself. The economic force of inflation acts upon land and structures differently. Plan accordingly.
  • Finally, my favorite real estate writer is John T. Reed. Extremely experienced, smart, and numerate. If you are interested in RE investing, he’s probably one of the best sources for useful, no-nonsense education. Here’s a snippet from a more editorial piece I keep in mind:

Do not buy a BIG house. 3,000 square feet is about all anyone needs. And no gold faucets or five ovens (“for entertaining”). Just keep trading up to better and better LOCATIONS. Do that for 30 or 40 years and you would have ended up in one of the premier rich people communities in the U.S.: Malibu, Manhattan, Newport Beach, Honolulu, San Francisco, Palm Beach. I ended up in the San Francisco suburbs. (We lived on Russian Hill on the cable car line in the city from 1977 to 1980—but as tenants.)

My Own Take

We have all heard that buying is better than renting if you plan to stay put for a long time and while often true, it’s an overweighted aspect of the analysis. The big thing that jumps out at me is how people stretching for homes are putting themselves in sneakily fragile positions. They are making a huge, leveraged purchase. One that requires 10 maybe 15+ years commitment to make the math pencil out. But if you believe the rapid rate of change in technology is shortening career half-lives and intensifying winner-take-all dynamics, then how do you have more than just a few years of visibility? The option to be mobile is probably worth more than the economic benefit of long-term ownership. So if you buy, be honest about how much stretching really makes sense for you. And if you can afford more, be careful about why you might want to.

As I said before, the decision is personal and economics are just one part of it.

Full disclosure: I personally don’t enjoy homeownership. I’ve owned 3 homes. A fixer studio in Manhattan. It was a coop which was slightly annoying but overall that experience was unremarkable and benign and the coop inconvenience was worth the discount in this case. The second was a new development loft in Long Island City that we bought in 2007 off of plans. Closing was delayed. I moved in when it was a construction zone. We were part of a class-action suit against the negligent developer. The winter of 2009 in NYC was super cold and we had no hot water so I showered in the Nymex gym for a few months. Finally, our current home which we gut renovated. Houses are not apartments. Let’s just say, that if you are not handy, you are signing up for a parade of asymmetrical dealings with vendors. For those with no interest in home improvement or maintenance, all caveats about ownership apply double. I long for a rental on the 40th floor of a doorman building, but they don’t allow them in my town. If you want more homeownership dissuasion, this post has an impressive litany.

The Money Angle

Byrne Hobart on the toxicity of the 30 yr mortgage

Class is in session. Here’s a challenging and fun look at the innovation we know as the 30-year mortgage. All sorts of perverted effects on markets to untangle plus a dive into American financial history. An excerpt:

The option vega that is embedded in the mortgage prepayment option consumers have means that Freddie and Fannie short gamma creates artifical volatility that spills into interest rate markets via the 10 year bond. so the ten-year US Treasury is the benchmark long-term interest rate for everybody, everywhere. Ultimately, every asset gets compared to it, directly or indirectly. So if there’s artificial volatility in the ten-year, there’s artificial volatility in every market. All this, just so American homeowners don’t have to think about floating-rate debt, a problem so daunting it can only be handled by homeowners in every country in the world except the US and, for some reason, Denmark.
The rate of return on everything since 1870

This monster paper is a nice look at equities, real estate, and all types of assets across the world. The discussion of how they normalized data like rental yields is worth a look for those of you interested in methods of standardizing cumbersome data sets. Equity returns are higher than real estate returns. But not when we switch to geometric returns. If you understand why without looking, I know you have been reading Moontower lately.

Climb Higher

If you are sitting on a pile of capital gains from this 10-year bull market, you have probably heard about opportunity zone funds. These funds were recently allowed by the tax code to promote growth in areas of the U.S. that have been left behind. The tax benefits are astounding and provide a way for you to roll your investments into a structure that can dramatically cut your tax bill on gains you have incurred thus far and continue to enjoy if the funds perform well.

This letter explains how they work in detail and includes a list of resources to learn more.

This is not investment advice. I have some conceptual reservations about how these things might work out, but if you are way in-the-money on prior investments and don’t need liquidity, the chance to neutralize the taxes warrants your own investigation. Deadlines are looming so definitely read the letter if it sounds relevant to you.

Last Call

  • Derek Sivers’ definition of rich. Sivers is an interesting cat. I showed up for his book summaries and notes but his About Me page sucked me in.
  • Podcast link and notes for Indistractable: How to Control Your Attention and Choose Your Life with Nir Eyal. The notes are worth a read if you want to see why technology ‘distraction’ is a symptom. Get to the root rather than tricks like blocking yourself from your phone or logging screentime.
  • H/t to Avi for this Cheddar video about Lexend. A font that makes you read faster.
  • This week I learned that Seattle passed a 3% tax on all home sales north of $1.5mm. That’s the median home price in SF. Call me crazy but I doubt Seattle will ever inflation adjust that threshold.

From my actual life 

I’m writing this section on Sunday and I just wrapped up cleaning the gutters. That’s a fun chore I rediscovered from my high school days. At least I got to see my first black widow since moving to Lafayette (widows are quite common around here and I see their webs sometimes but the spiders are more elusive…widow webs are much stronger than our typical house spiders).

This week Yinh and I had a low-key celebration for her birthday. We went to 2 spots in Oakland that are worth a look if you are local. We had dinner at Hopscotch. It’s a small spot with intimate seating and a laid back vibe. The buttermilk chicken lives up to its billing. And if you’re looking for a hip spot for a drink after, go to Bar Shiru. A Tokyo-inspired cocktail den with high ceilings & an extensive, jazz-centric record collection. The Bay Area’s first hi-fi vinyl listening bar. We focus on playing records in their entirety on a fully analog sound system. The interior is minimalist and cool. There’s a nice selection of Japanese whiskey but we were able to try SF-made sake by Sequoia. We tried their flagship sake as well as the bourbon-barrel sake. I thought the flagship was outstanding but the bourbon-tinged one barely registered as sake.

And for fun…my good friends’ fourth-grader allowed me to reprint this here. It was an assignment he did for class. It speaks for itself.

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