Nobody Can Afford Anything

Jesus, Seth. Listen, if you really wanna do this with your life you have to believe you’re necessary and you are. People wanna live like this in their cars and big f–kin’ houses they can’t even pay for, then you’re necessary. The only reason that they all get to continue living like kings is cause we got our fingers on the scales in their favor. I take my hand off and then the whole world gets really f–kin’ fair really f–kin’ quickly and nobody actually wants that. They say they do but they don’t. They want what we have to give them but they also wanna — you know — play innocent and pretend they have no idea where it came from. Well, thats more hypocrisy than I’m willing to swallow, so f–k ’em. F–k normal people. — Will Emerson

When it comes to homeownership, the down payment discussion gets short shrift.

That may be due, in part anyway, to flexibility on the part of lenders as to what counts as an “acceptable” down payment. I’ll politely eschew the temptation to weigh in on that question.

Instead, I’ll note that when home prices are appreciating as rapidly as they have post-pandemic, it doesn’t much matter. Irrespective of whether a borrower puts 10% down or 20% down, the implied outlay is substantial for the vast majority of Americans.

The median existing home price rose to $416,000 in June, NAR data out Wednesday showed. Even if you assume just a 10% down payment, $42,000 is a lot of cash in a country where, according to a Bankrate survey conducted in January, just four in 10 families could fund a $1,000 emergency with their savings (figure below).

Believe it or not, that was actually a very good result. In eight years of polling, the highest reading ever recorded was 41%. January’s 44% thus counted as a stellar read on Americans’ capacity to absorb an emergency.

A more recent poll, conducted late last month, found that 58% of adults were concerned about the amount they have in emergency savings, up 10 full percentage points from 2021 and 14 percentage points from 2020.

A lot doesn’t add up here, and while I understand that it can’t, we should at least acknowledge the reality laid bare by Paul Bettany’s Will Emerson in the 2011 film Margin Call.

I’ll be the first to admit that the abrasive quote excerpted here at the outset (from the film) is overused. Indeed, it’s almost a cliché. But it’s important. Because it’s reality. And it’s not a Rick Santelli redux.

Emerson’s (Bettany’s) point was that nearly everyone’s a “loser,” as Santelli infamously called Main Street, during one of the single worst moments in a long history of cringeworthy on-air rants. An “unsubsidized” mortgage is, in some respects, a misnomer. If you have a mortgage (and I assume Santelli did at some point in his life), you can’t afford your home. It’s “subsidized.”

With that in mind, let’s return to the second Bankrate survey mentioned above. In the same June poll, Bankrate found that just 40% of Millennials could cover three months’ worth of expenses with their savings (figure below).

I’ll assume that one month’s expenses are $4,500. That suggests only four in 10 Millennials have $14,000 in unencumbered cash to their names.

Even there, the definition of “unencumbered” is fuzzy. I prefer to manage my personal affairs (all of them, actually, not just my finances) like a business. It’s an unforgiving existence and I wouldn’t necessarily recommend it, but in my opinion, what we should be looking at if we really want to be conservative, is net worth not including mortgage debt. That latter caveat is irrelevant for this discussion because we’re talking about people who don’t yet own a home.

So, the question is this: How many Millennials can fund a 10% down payment on the median existing home with unencumbered cash, where that means cash net of the total balance of outstanding student loans and revolving credit (two types of debt Millennials are likely to have)? The answer, I imagine, is almost none of them.

I assume most readers are apprised of how this works. Mortgage bankers pull a credit report and based on what’s in there, they adjust (lower) the monthly payment a prospective borrower can afford. That counts as “responsible” lending, but how responsible is it really? If a Millennial has $50,000 in student loans (i.e., assuming the amount Progressives argue Joe Biden should forgive), $5,000 in credit card debt and $40,000 in a savings account, there’s something manifestly ridiculous about the idea that such a person can “afford” a $400,000 house.

That hypothetical homebuyer (and I think the financial situation described above likely represents a lot of Millennials in America) has a negative net worth, and is saddled with thousands in variable rate, high-interest debt at a time when interest rates are rising. If that person takes on a $360,000 mortgage (i.e., $400,000 minus their entire savings account), both the borrower and the lender are complicit in pyramiding debt.

I’m not a mortgage banker. And given the harsh standards I’ve alluded to above, that’s probably a good thing — otherwise the dream of homeownership would be even more far-fetched for many Americans than it already is. But I simply don’t see how this math works for as many people as it apparently does these days.

From a common sense perspective, affording a home (in a strict sense of the word “afford”) that costs nearly a half-million dollars requires a $100,000 down payment drawn from totally unencumbered cash (so, savings net of other debt), a solid six-figure income and proof of sufficient additional savings buffers to cover a year of mortgage payments.

Some readers will scoff. Indeed, most readers are likely feeling contemptuous at this point, even those for whom none of the above applies by virtue of fortuitous financial circumstances.

To be clear, I do understand that “ability to pay” can’t possibly mean “ability to buy, right now, in cash.” Otherwise, very few people would own cars, let alone houses. So, the point here isn’t to make a serious suggestion about revised lending standards. Rather, my point is threefold.

First, I don’t think it’s realistic to suggest that the demographic currently pursuing first-time homeownership can afford a 10% down payment. A 20% down payment seems totally far-fetched.

Second, adjusting for installment payments on other interest-accruing debt when determining how much a borrower can afford to pay for a new, far larger, interest-accruing loan, only counts as “prudent” if you can get past the fact that stripped of the civility, it’s an absurd exercise in debt pyramiding.

Third — and far less controversial — home prices, like the rent, are too damn high.

Let me close by reminding readers that credit (and, interchangeably, debt) is just a manifestation of faith in the future. If you’re a bank, and you lend to a small business, you do so on the probability-weighted assumption that the business will thrive, that you’ll be repaid (with interest) and that everyone will be better off for the deal — borrowing and lending expands the proverbial “pie.”

By contrast, it’s not clear what we accomplish when we deify consumption and create the conditions under which prices for things like education and homes spiral ever higher, compelling us to contort the definition of “afford” such that everyone can afford everything, when, on a strict interpretation, almost nobody can afford anything.

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11 thoughts on “Nobody Can Afford Anything

  1. Purchasing a home from a financial planning standpoint is not the be all and end all for someone less than about 30 years old these days anyway. In order to make a home purchase pay, a buyer has to figure on being in one place for at least 5 years. A great many folks younger than 30 end up moving around quite a bit anyway. From a public policy standpoint- education debt has held back consumption for many in this generation- especially home buying. I don’t want to cast stones about younger folks- generally they are just as hard working and decent as any previous generation. However, many took on foolish debts to attend college and selected fields of study that realistically had little chance of paying that debt. And many non-college bound did not get training in technical fields that would enable well paying careers. And I am not speaking about coding exclusively either- plumbing, electrical, car repair, and many other technical fields can be well paying as well. The US generally fails miserably to prepare younger folks for careers and the world of work- and I am speaking about high schools and colleges. Preparation for how to budget and operate in the world of work financially is woeful as well. I chalk that up to a poorly educated parent population, and a failure at the high school and college to prepare young folks for these challenges. Tax policy over a long period of time should equalize the tax treatment of renting vs. buying a home. And the younger generation needs far better education on the practicalities of doing well as an adult.

    1. Young people get terrible, terrible advice about college. Guidance counselors are stretched too thin, parents only reflect their experience (whether good or bad), and very few do a cost-benefit analysis (and why should they–we are dealing with 17 year old kids!!).

      I tangentially work in this industry and I’ve seen kids who want to be teachers and nurses go to schools that will cost them and their parents $60K a year (those loans have zero chance of getting paid back), kids pass on full scholarships for the school with the cool wine bar on campus, and kids / parents balk at paying the extra 2K a year to go to an Ivy school for an institution that graduates less than 30% of their students in 4 years.

      The student loan problem is real and I’m all for cancelling it, but it will build up again without a serious change in how we teach high school students to choose colleges in the first place which, if done correctly, will require massive regulation in how colleges and universities can market themselves.

  2. Sometimes luck is involved in picking a college major or minor that is lucrative. But there are some obvious ones that won’t pay and unless your college is subsidized or otherwise paid for -these majors should be avoided unless you wish to struggle- exception if you plan to go to graduate or professional school. And if you graduate high school without any technical training or skills in this economy you are at a severe disadvantage.

    1. There are two or three key things to keep in mind here. First, something that is under-reported about college debt is that the worst debts are often incurred from attendance at for-profit colleges and tech schools. Regional state universities can offer a student a very nice education for a much lower price.

      Second, college is not, and was never intended to be, a training school for a trade. For forty years I told my students the worst job they would ever get was the first one. I told them they must do whatever they can to rise above that job and get into a better position in 12-18 months or they would be in trouble. The job of college is to teach people how to think and develop themselves into an effective individual “business” with skills that give them a sustainable competitive advantage. I used to ask students what they were paying for in college. Wrong answers include “training to get a good job” and “to make a bunch of money.” A right answer would be that they are buying the syllabi for 40 courses, each of which guides their learning in one subject and adds something to their skill set. At the end of their senior year they should be able to write their own syllabus for a new course, to teach themselves. To be successful, by their own definition, a person must learn how to be better at something than anyone else an employer would look at to hire for a given position and keep being better than others who come behind them. My daughter went to a pricey small liberal arts college (the worst possible place according to many) with the goal of becoming a doctor. She double-majored in Psychology and Anthropology and never did anything in either field. She started her work life as a medical assistant, then moved on to be a technician at a large urban blood bank, where she taught herself quality management, became the firm’s CTO and was co-inventor of a superior blood platelet collecting machine. She then took her self-taught quality management skills to a large software house and became co-director of the quality function and supervised employees in three countries. Her clinical, management, and quality skills took her to a custom software builder where she became a senior project manager. She now is a senior director who co-manages a large data warehouse and cloud facility serving international pharma clients. She didn’t go to college to learn a trade, she went to get smarter and create herself, which she did quite nicely. She currently makes much more than I ever did as a professor with 40 years experience.

      College is only worthwhile if one learns how to learn and to build a superior personal skill set on their own. It is not worthwhile for someone who goes and expects to be “taught” stuff. Any 18 year old who can read can read all the books he or she will see in college by themselves in six months or so. What college does is help them understand what they are reading and why, as well as what else they should read and understand to become the best personal business they can.

  3. How the housing market has changed. Inflation over the years has had some unpleasant effects for sure. In the mid-sixties my parents bought a new home on a big lot in a distant suburban area that cost them $16,500. My father made a $1,000 downpayment, which was not a small amount of money for him. In 1992, not yet 30 years old, I paid ten times more than that for a modest Oak Park home, built very early in the 20th century. It was on a lot-and-a-half, near the train and a grocery store. And like all of Oak Park, it had lots of large trees.

    After living there for 20 years, we sold the home for 3x more than we paid for it. Now my wife and I have a lovely condo on the 6th floor of a modern building. I don’t have to do yardwork. We have a large kitchen with all the useful and fun amenities for storage and cooking, and a living room with a wall of windows that provides a wide view of the city. It has two bedrooms, one of which doubles as an office. Our small mortgage is our only debt.

    I had no debt when I was young either. I left the university in my junior year because I ran out of savings. Nor were my parents in a position to fund my ongoing education. My future was uncertain, to say the least. But I distrusted banks that would immerse me in debt when I had no idea how I would make a dollar and pay rent.

    Oddly enough, I found a low-paying job as a teller in a bank near the university. I found a fleabag apartment nearby. At first, I had no social life and no money, but I did not wish to go backwards. I never completed my degree. But had I the burden of a large school debt, I would not have felt free to explore what the world offered. The debt would have been suffocating.

  4. H-Man, hammering the proverbial nail on the head. There was an article (which escapes me at this moment) that to save the down payment on the average price of home today will take 11 years. So owning a home under the current conditions is nothing more than a dream.

  5. I’ve been talking with trades people for the last couple of years. The plumbers and electricians in particular are mostly older, much older. They tell me they can’t find young people to come into the trade. These are good paying jobs, six figures if you’re aggressive AND you can be the boss if you choose. I’m at a loss to explain this. I’ve heard the ‘lazy, selfish, spoiled’ comments but that seems to simple an explanation.

    1. I’ve had those same conversations with guys in the trades. I don’t get it either. I can’t help but imagine that educated, younger folks aspire to other pursuits and careers. I wonder what kind of investment the trades require to learn them.

      Makes me wonder whether the expanding availability of a college education in the 20th century inversely affected participation in the trades?

  6. I was born in 1953. I am 69 years old. I dropped out of college to work as a musician. At the age of 26 , I decided to go get a legit job. I couldn’t get a $3 an hour job at Mcdonalds, so after 47 attempts to get a job on wall street, I got a job. I floundered for years, and then began a year year apprenticeship and became a b player on wall street. I bought 3 nice homes over a 15 year period- the first for 1 years income, the second for 2 years income and the third for 6 months income. Can my children do that? No. The decline in affordability of just about anything has been progressing since the late 1970″s at least. I voted for Ross Perot in 1992 because he was the only one of the 3 candidates who seemed to remotely give a shit about this…2022- we have about a dozen different fires to put out. In the meantime, we elected George Wallace in 2016, and have to live with this shame forever.

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