And so it ends, not with a bang but with a whimper. I am referring to the defining factor of the American Dream -- home ownership.
Coming out of the Great Rescission something fishy is going on in the housing market, again; namely, one-third of home sales are made to corporations. These corporations are then selling the rent-streams to Wall Street and the Street is pooling them and turning them into a collateralized debt instrument or CDI.
Remember those? That is what the Wall Street did with mortgage loans...pooled them and turned them into CDIs.
When the bubble popped, CDIs almost brought down the entire financial industry...would have, in fact, if we (the government) had not stepped in to bail it out.
Will CDIs strike again? How do you think this will end?
And the percentage of residential real estate purchases being made by
corporations looks as if it is going to climb and keep climbing as they
become the only buyers with sufficiently deep pockets.
The average price of a home in San Diego is $300,000. Now that loan standards are back to normal, most purchases will require a 20% down payment. With costs, that means a buyer will need to bring almost $70,000 to the table.
You got $70,000? I didn't think so. And, if you did answer no, then you're out. No American Dream for you.
The problem is that real wages have been stagnant for a decade now. And what that actually means is that wage earners are becoming poorer.
And, if you can't afford to buy a house now at today's prices, what do you think your chances of being able to do so in the future if the current trends, declining real wages and escalating real estate prices, continue?
The answer is...forget it!
So, if you want to live in San Diego, San Francisco, in or around Washington, DC or Manhattan...and you are middle-class as defined by income...you are priced out of the residential real estate market if you do not already own.
And, even then, you are trapped in a very real way. If you sell and want to stay in the same city, a similar house will cost you the same or more as what you will be able to sell for. BUT...your property taxes will be more...likely much more! So, I hope you like your neighbors, because nobody is moving for a long time.
And the really bad news is that professional landlords are just waiting to pounce...and by pounce I mean raise rents...as fewer of us can afford to buy, the pool of renters grows...supply and demand! And if incomes continue to lose ground against inflation, and rents increase, guess what? The middle-class will be priced out of the rental market as well!
This is a great time to own properties; values and rents are climbing and soon will blast off yet again. On the other hand, it is not be a good time to be a renter...on the other, other hand...even if you make $100,000 a year, you can't afford to buy. Someday...someday soon...you might need to earn a hundred grand just to be able to afford to rent in San Diego (et al).
Does that sound as crazy to you as it does to me? Let's do the math:
Lenders figure that housing should be about 25% of gross income and total debt obligations should not be more than 32% of gross. Renting a middle-class house in a middle-class neighborhood in San Diego is gonna' run ya' about $2, 400 a month. Times twelve? $28,800 a year just to rent!
In other words, you already need an annual income of over $100,000 just to be able to afford to rent there!
Note to the last poor person to leave San Diego: Please close the door when you leave.
Elementary schools teachers and the parents of young kids…as young as two or three…have all been witness to their persistence. When they want something they just keep asking for it. Without any instruction in it, they know to ask for what they want. The most important lesson you can learn from a child is persistence; simply to keep going after what you want and especially after being told no.
As humans, our resistance tends to wear down; kids don’t know that, of course…not at first…but they learn without reason; that is, they assimilate the fact that if they ask enough, they will in many instances get what they want. They learn, in other words, to be persistent. And, then, as we get older, for whatever reason, some of us let go of the lesson.
Let me tell you something: Giving up is easy, getting up is hard. One step forward two steps back…and all that but the people who eventually are successful seldom arrived at their success on the first try. And overnight success is almost always anything but.
I went broke, learned my lesson and went on to achieve financial independence…not crazy rich…far from it…but I am proud of myself in this regard. Mostly, I am proud that I was able to muster the perseverance to keep my eyes on the prize for the twenty years it took me to get there.
Perseverance and focus…pretty much all it takes to achieve anything in life…that and a plan, of course. I have written before that failure is not the opposite of success; often, in fact, it is a necessary component of success. Failure is never fatal unless you allow it to beat you; giving up, I think, is the opposite of success.
The door never closes unless you close it. Keep knocking…like a kid who asks you, for the hundredth time, for the candy bar. Keep on keeping on. Living life is a lot like driving at night in that the road ahead reveals itself as you go; perseverance is like driving with the high beams on.
I do not believe in luck or fate; I believe in consequences. One day I was driving to Walmart and a full-sized pickup ran a red light in front of me. I was a second or two from the intersection. If I had left my house that second or two earlier, I doubt I would be writing this post.
I can trace the origins of everything that has happened to me. Our present is the consequence of our past and our actions day by day shape our future...one thing leads to another.
But here is the complication: It is impossible to know what the consequence of any action or decision will be much less might be, however seemingly inconsequential it might seem as it is happening, except in hindsight. And that truth is further complicated because the future unwinds forever…even after we are gone.
I was reading a newspaper once (remember those?) and came across an article about a young child who was killed by a small airplane that fell from the sky and struck him. He was playing in the park with some friends after school when he was supposed to be home.
The article moved me to write a song about what happened and this is a line from that song:
…and the girl he would have married, married someone else instead…
That effect of that young boys death will rumble through history and go unnoticed at the same time.
I am certain someone said to the distraught parents, “What terrible luck.”
Good luck, bad luck, who knows. What if the girl he would have married has a daughter by the man she married instead and that girl's great grand-daughter invents time travel? Was that plane falling good luck or bad luck…after all?
A story, then, from the Zen tradition:
Once upon a time there was an elderly farmer who had worked his crops for many years. One day his horse ran away. Upon hearing the news, his neighbors came to visit. “Such bad luck,” they said sympathetically.
“Good luck, bad luck—who knows?” the farmer replied.
The next morning the horse returned, bringing with it three other wild horses. “What wonderful luck,” the neighbors exclaimed.
“Good luck, bad luck—who knows? replied the farmer.
The following day, his son tried to ride one of the untamed horses, was thrown, and broke his leg. The neighbors again came to offer their sympathy on his misfortune.
“Good luck, bad luck—who knows?” answered the farmer.
The day after, military officials came to the village to draft young men into the army. Seeing that the son’s leg was broken, they passed him by. The neighbors congratulated the farmer on how fortune had smiled upon him.
“Good luck, bad luck—who knows?” said the farmer.
I do not believe in luck or fate; I believe in consequences.
And the chorus to the song? Well, it goes like this:
Ashes to ashes, they say dust to dust
Some hearts die on the vine, some they rust
Jesus do these little prayers get on your nerves?
Jesus do you even hear a single word?
You fall into one of two categories: You either live paycheck to paycheck or you don’t. The results of a survey from 2009 reveal that 77% of us in the US are living paycheck to paycheck. And that number has been growing. I can only imagine what it is today, almost five years later
When you do live paycheck to paycheck, there is no income to save. So, really, what it comes down to is that you are either a saver or you are not, right?
Are you a saver? The only way to save on a regular basis, monthly, let’s say, is to spend less than you earn, on that same basis.
And, so, if you do not manage to save some money every month, and you are spending all you earn, and you have no savings, you are walking a very thin financial tight-rope.
You need to, you must, get on a more secure financial footing…your life depends on doing so and you must make it your number one financial goal: To spend less than you earn on a monthly basis.
This will allow you to begin saving some of your income. And there are three ways to accomplish that goal: Reduce spending, increase income, or a combination of the two.
But there is a next step to this plan and a question that it raises, as well.
The next step is to continue to grow the margin between your monthly income and spending; that is, the amount you are able to save should be steadily growing. Maybe not month after month, but certainly year over year. A growing margin is a sign of financial health.
And the question it raises is this: How much should you be saving? The answer is also a two-step process: The first goal is to reach ten percent and you should reduce spending to get there. HACK YOUR BUDGET NOW!
And the next step is to simply keep your margin growing with the goal of eventually saving one-half of your monthly income. Does that sound impossible to you? Well, the truth is that it is entirely doable with the proper planning and execution.
With such a plan in place, you will be forced to grow your expenses deliberately, if at all, in the short term. And the good news is that there is an easy way to get there is just a few years’ time and even if you never spend any less than you are spending today!
You can read a more in-depth treatment of this subject in my book, Money Well Saved.