Blog : Strategy

This American Dream

This American Dream

Dan, a member of the millennial generation, currently lives with his parents but said he plans to be a renter for life and never buy a home. He craves the ability to pack up and go, he said, and doesn’t want to be saddled with a home loan, property taxes or homeowners associations fees.

 

According to an article by Nicholas Padiak in last Sunday’s Chicago Tribune, this young man from Chicago, Dan, isn’t going to be a homeowner. He wants to “pick up and go”, he says. No doubt his nomadic desires are fueled by noble thoughts, but they are the whims of a 24 year old, not the realities of any responsibility ladened adult.  His fellow Millennials found out the hard way that home prices go up and indeed they go down. This left this new generation feeling uncertain as to the implications of home ownership. This is why they want to travel, instead. This is why they want to buy 298 square foot trailers (with a trundle dining table!) This recent housing cycle found many of them new owners in 2008, and many of them recently foreclosed on in 2017.  The Millenials aren’t home buyers, they’re surfers and programmers and stay at home dog-sitters. This is all a huge mistake.

But, but, they’re drowning in student loan debt! Drowning, really? A recent study found that an average college graduate is carrying about $34k in student loan debt. The same study found that an average repayment plan has a monthly payment of somewhere around $350 per month. This is not a small sum of money. A recent Time Magazine article claimed the college class of 2017 average starting salary is just under $50k. More if you’re an engineer or software developer, less if you plan to work at a call center or as a psychic at a not-for-profit veterinarian. So let’s go with the $50k number. Let’s say $10k of that is eaten up by taxes. $40k is left. Age 23, $40k in take home, or $3,333 per month.  That crushing student loan burden will consume around 10% of that.

Remind me how this is somehow unjust? How this debt is so horrific that life must stand still so that signs can be made and protests organized? In Milwaukee, the average rent for a one bedroom apartment is $1089 per month.  That level of monthly commitment would afford a $150k loan with a $3000 annual property tax bill. Yes, a $150k loan won’t allow a newly christened adult the ability to live in Lincoln Park or in the Third Ward, but who says we get to skip all of the steps to building wealth and just arrive where we feel we deserve to reside?  What happened to suffering for a bit, sacrificing for the sake of future gain? I’m not writing this as an old person, I’m writing it barely one generation removed from the current lot.

But it’s not about the money, it’s about the freedom, or so the Millenial would say. What freedom, exactly? The freedom to move across the country with no liability or asset exceeding whatever can be packed in the Vuitton duffel? What sort of freedom is this?  Under this guise, a homeless man is truly the most blessed, for he can wander without complication, wherever he wishes. The trick here is that the homeless man doesn’t have his parents’ basement to live in, with his mother’s turn down service and Tuesday meatloaf.  The freedom to put off adulthood is indeed intoxicating, but at what later expense?

This response to the Tribune article really isn’t just about Millenials. It’s about home ownership in general. It’s about the way a buyer turned owner engages in this ownership. It’s about passive versus active ownership. Passive ownership looks like this: Buy a house in 2006 at an elevated market price of $200k. Sell supremely overheated house, no changes made, deferred maintenance accumulating, for $160k in 2012. This is what passive ownership looks like.  Passive ownership is fine if the owner plans to live forever in the house. My parents’ lakefront home was worth a lot more in 2008 than it was in 2012. Did this bother my parents? Nope, because they weren’t selling in either year. They aren’t selling this year, either. If you’re never a seller, ownership is simply a stabilizer, and there is some bliss in not worrying about the fluctuations in market value.

But this is about Millenials, and their ownership. If passive ownership looks, at least to them, like a formula for devastating loss, then what does active ownership look like? In the active ownership model, the house bought in 2006 would have needed a new kitchen and roof. It would have been neglected. And weekends would have been spend fixing that up that old dump. Active ownership would have recognized a profit in 2008, and captured it. Active ownership would have likely bought again in 2008 or 2009, and yes, paid a premium. But with a large down payment (owing to the gain on the fixer upper), the fluctuations of the crisis wouldn’t have mattered as much.  Illness or job loss certainly would have been an issue, but this isn’t about the devastating outlier, this is about the mean. That same ownership would have led to another round of profit in 2015-2017, and the process can repeat.

Long ago I asked a house-hunting-friend how long it would take him to save $30k. Without answering, he admitted it would take a long time. Like just shy of eternity (based on his then income). So I asked him why he wouldn’t try to make $30k on a house, given that the only thing required would be a significant effort, and effort, more times than not, is free. Today I ask the same of Dan and his Millenial friends. Effort is still free, and living your parents’ basement is still lame.

 

Above, the kitchen in the first house I ever bought. It was even worse in person. 
Winter Selling Strategies

Winter Selling Strategies

I’ve driven to Marco Island at least twice. I don’t think I’ve driven there more than that, so it must be at least and at most, twice. The days were those days before kids, or before they were in school, back when my schedule had nothing to do with basketball practice and swim meets, back when there was little that I absolutely had to do. Back then, my wife and I would leave for Florida just after Thanksgiving, and we’d stay there for three weeks. What a luxurious thing that was, and what a strange thing it was. There we were, young and lacking money, and we drove to Florida like some septuagenarians to spend some of the winter. The market afforded that opportunity then, because it used to be painfully quiet in the days that fell between Thanksgiving and New Years. The market wasn’t active, at least not for me, and so I’d spend some time hurling fresh caught mullet into the surf, and at least once I caught a giant Snook that my wife caught only glimpses of on video. She didn’t know how to zoom out.

But that was then and this is now, and our market doesn’t sleep. It doesn’t make allowances for three week winter vacations, nor does it particularly care if you’re not paying attention because you’re busy shopping and baking. The market churns, and it churns in July as it does on the last day of November, as it will on the 20th of December. Now, it does slow on Christmas Day, and on New Years Day, because only the very difficult or the exceedingly lonely would wish to talk real estate on those days. But the rest of this next month, the market will be moving. Last weekend, after the rain of Thanksgiving, there were showings on Friday and on Saturday and on Sunday. There was activity in a market that the casual observer would assume is on hold.  I’ve always said that the best time to secure value at Lake Geneva is late November through mid December. That’s still true, but that’s direction for the buyers out there. I generally ignore the sellers, except for today.

It’s a terrific time of year to be a buyer, but it’s not such a fun season to be a seller. Sellers know it’s not fun to be available during the season when every active buyer wants a deal, which is why they’ve taken their properties off market en masse long before the last day of November. This has been the conventional wisdom for quite some time,  but it’s the wrong way to handle the winter. If it were still 1998, I’d have time to go to law school to avoid selling real estate, but more importantly, we could take our properties off the market and sit around to pass some of the winter before re-listing the homes. This isn’t 1998, sadly. It’s very late 2015 and the market doesn’t stop, which means inventory shouldn’t be pulled. If you’re a seller and you’ve been floundering on the open market all year, there’s no particular reason to let your home sit out the next 8 weeks.

There are exceptions to this new rule. If, for instance, your home has been for sale for all of 2015 and it’s grossly and disgustingly overpriced, then pull it. But only pull it if you’re intent on letting the property rest before bringing it back to market in the spring (Late January) at a much reduced list price. If the goal is to let a property rest, then reposition it in the market for the new selling season, the most important part of that playbook is the repositioning. A property cannot be repositioned to appeal to a new group of buyers if the property is the same old crappy house at the same elevated asking price. If you’ve been for sale all year and everyone loves your house but hates your kitchen counter tops, then pull the property, install some new counter tops, and re-list in spring, no price adjustment needed. However, if your house is listed at $2.5MM and everyone knows it’s worth $1.8MM, then pull it from the market, let it rest, and bring it back at $1.99MM in late January. These are two scenarios where it makes sense to pull and then re-list, but for everyone else? Leave the property on the market.

Last Friday, I had two showings at a condo on the lake that hadn’t been shown since the first weekend in November. If that condo hadn’t been on the market and had, instead, been pulled as is the old-timey conventional wisdom, it would have never had two different buyers take a look at it. It would have been sitting with its head in the sand, hoping no one paid it any mind until it came back to market, triumphantly (boringly) in late January.  Sellers, heed this advice. Leave your properties alone. There’s very little more appealing than walking a lake property in the still of winter, just after a fresh snow, and if your property isn’t on the open market, it’ll just be you walking the property, and you’re not a buyer.