A Mountain of Debt – But at Least We Have an iPhone

Whenever I encounter someone from the younger generation (40 years or younger), I make it a point to apologize for leaving them a country in far worse shape than the one I enjoyed.  Surprisingly, none of them believe that apologies are necessary, as most have no clue what I am talking about.




They seem to be totally happy that the national debt has quadrupled under the last two presidents.  They do not mind that their education was paid for not by their parents but by an ever rising $1.3 trillion debt that they are responsible for themselves.

They seem to be very grateful that we gave them the iPhone, iPad and similar devices so they can now post their photos and other personal data for the world to see.

The moral of the story:  When you have never seen the good times, you won’t know you are living in bad times.

Anyway, I digress, this post is actually supposed to be about real estate and aging.


A Very Different Real Estate Market

Should you buy a house?  Try thinking like a 30 year old.

Allow me to use an oversimplified example.  Say you bought a house at 30, financed with whatever down-payment you could afford.  You held it for 30 years.  You never refinanced (cash-out), never traded and never moved.  What you had was a roof over your head for 30 years.

Now the cost of that shelter is going to be greatly reduced with no more mortgage payments.  If you are lucky, you might have bought in an area that has enjoyed excellent growth and the value of your house may have appreciated substantially.  If not, you at least have a house that you now own free and clear.


1-US-CA-SF_Median_PriceIf you were lucky, you bought a home in San Francisco… – click to enlarge.


If you were in your 30s during the 1970s, the above scenario would have worked out extremely well, especially if you had bought in any fast-growing area such as Southern California, or the general San Francisco bay area including Silicon Valley.  If you were 30 during the 1980s, it was not too bad either.  In fact, even the 1990s would have been a good time for buying a house if you just stayed put and did not participate in the sub-prime schemes.

Kids turning 30 in the last ten years or so have seen a vastly different real estate market.  Almost a decade has passed since the sub-prime crash.  Corelogic just reported that 8.5% of mortgaged homes still have negative equity and 9.5 million homes have less than 20% equity.  Buying real estate is no longer as sure a thing as it was a couple of decades ago.

Now imagine a job relocation, a temporary setback such as becoming unemployed, or suffering medical problems, or another real estate correction/ crash: any equity you may have accumulated could be wiped out.  What if there isn’t sufficient equity to cover selling costs?  That dream home is now a burden, possibly making it impossible to make a career move.

Once upon a time, there was the magic of compounding.  Savers had many choices to invest their savings and watch them compound into a nice retirement nest egg.  Today, central bankers have put an end to that with zero and negative interest rate policies.  Any appreciation in real estate prices is due to intervention and accommodation by the Government.

What are consumers doing?  I find this report by the NY Fed very telling:  The Graying of American Debt.  As regards real estate, consumers are taking out mortgages later in life and carrying them longer into “old age”.


2-private debt lifecycleThe life-cycle of personal debt – click to enlarge.


Supply-Demand Imbalances

What else has changed? Retiring boomers may want to, but cannot move.  Millennials are not moving to where supply is abundant.  The resulting supply/demand imbalance has been labeled as an inventory shortage by amateur housing economists.

In reality, the supply shortage is only acute in select markets, and mainly due to brain-dead local politicians whose picket fence mentality only knows how to down-zone and NIMBY (not-in-my-back-yard).  They add costs and offer no housing solutions.

In other words, housing supply is in the wrong location and functionally obsolete.  Take San Diego as an example.  The group of condos in the photo below are probably the highest density and somewhat affordable ones in the middle of the city, just west of Qualcomm Stadium in Mission Valley.  In the middle of photo is a trolley station and to the south is a shopping center with movie theaters and restaurants, anchored by Target and Macy’s.  So far so good.

Except there is a river in the middle of the photo, running east to west!!!!

The two bridges to cross, one on the left and one on the right, are so far away that they are not even in the photo.  A couple of pedestrian walkways and footbridges could have linked these condos to within a quarter mile from all the services, as opposed to a >1 mile hike.


San DiegoNo way to cross the river…


The two largest demographic groups are the boomers and the millennials.  This is wasted prime real estate in San Diego that could have accommodated either group with higher density and better planning.  My point is that there is nothing Washington can do to prevent this type of local stupidity which is happening all over the country.



In conclusion, I believe as society ages, real estate has to change to match its needs.  Aging boomers need to move to more suitable housing and locations where services are nearby and the weather may not be as hostile.  The younger generations have changed and their dream homes are no longer tract homes in the suburbs.

The big bucks in real estate investment are going to come from converting existing locations from being obsolete to the highest and best use that meets the needs of modern times.


Charts by Paragon Real Estate, NY Federal Reserve




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