Housing Psychographics

Last week I got a call from young friends who wanted my opinion on whether or not to buy a particular house. It was a simple two bedroom one bath 943 square foot (87 square meter) cottage that was built in 1895. The location was in a fashionable small semi rural town in Sonoma north of San Francisco. It was on the market for $600,000. I said I couldn’t make that choice for them, but I could give them my interpretation of the pros and cons.

I started by asking them if they could reasonably afford the house. They said they could pull together a 10% down payment, take on PMI (mortgage insurance for less than a 20% down payment) and their monthly mortgage would be about the same as their current rent. They were comfortable with those numbers.

Then they sent me the official inspection report. The roof was well past its expiration date with active leaks. The electrical and plumbing systems had various code violations and required health and safety upgrades. There was dry rot. There were termites. The water heater and furnace were at the end of their life cycles. The windows and doors didn’t function properly. There was lead contamination. The list went on.

I told them that I’ve bought several homes over the decades that were in similar condition. All these things could be fixed. It’s just a matter of time and money. I personally love tinkering with old houses even with all the inevitable complications and unpleasant surprises. I find great pleasure in renovating and gardening and I’ve done well financially as an accidental side effect. I also like owning real tangible physical things that will keep me warm, dry, and fed. But that’s just me.

Then I explained that back in 2010 in the aftermath of the 2008 financial crisis I almost bought a very similar house directly across the street. I dug up my old photos. I’m a big fan of buying the worst house in a premium location at the bottom of an economic cycle. I ended up buying a different house instead, but looking back I would have been happy if I had chosen this place. It sold for $179,000 so if I had bought it I probably would have made a lot of money even if I didn’t do much improving. The value of the dirt under the house has risen tremendously in the last decade and the Covid surge only pushed up values even higher.

That brought us to the question of market conditions. Will property values continue to rise forever? Or are we in another bubble right now? I don’t know. No one does. It’s all a mystery. You pay your dollar and you take your chances.

So I asked my friends if they loved the house. Would this be their forever home? Did they want the next several years of their lives to be about the care and feeding of this property? Or were they good with a place to live that had some structural flaws that could be left as they were? No one says they have to transform the house. It’s been around for 126 years and it’s still functioning more or less. Or perhaps they wanted to give it a light cosmetic fluffing. They have great style and taste and I’m sure they could do simple inexpensive non invasive things that would make it look lovely even if the underlying issues weren’t fully addressed.

In the end they decided not to buy the house. They realized they enjoy the freedom that comes with renting. They didn’t want to be stuck with a never ending fix it project. They wanted their disposable income to go to travel and good food and the wiggle room to move when it suits them. And this house represents a lot of debt in a freaky economy.

That same week I visited friends who had just moved in to their newly purchased townhouse condo down in Silicon Valley. They paid $1,300,000 for the place. One of them is a dedicated cabin-in-the-woods type. But his job in law enforcement meant he’d have to settle for a suburban location closer to work to avoid a hideous physical commute. The other works from home much of the time and loves the city, but understood marriage is all about compromise and owning a home is part of “adulting.” They would both have preferred a fully detached single family home with a yard. However, in this part of the world the worst piece of crap next to a freeway exit and a Burger King costs well north of $2,000,000 with multiple competing all cash offers above the asking price.

This condo is the opposite of a fixer upper starter home. It’s been fully renovated to a high standard by the previous owner. It may actually have been over improved relative to comparable properties in the same complex. It’s very nice.

They see this property as an interim arrangement that they can leverage up into the kind of home they really want in a few more years. There’s talk of a proper house in the same town or eventually cashing out and relocating to another less expensive state for early retirement. On paper and under the current circumstances they can technically afford this property. The general assumption is that even if it’s a stretch in the short term and even if the market fluctuates a bit property values will continue to go up over the long haul. There are tax advantages along with the security of owning a home. It just feels different than renting.

With all this talk about property I couldn’t resist a look-see at a place that’s for sale around the corner from my present abode. Three bedrooms, three baths, a two car garage, quiet side street just around the corner from the park, multiple roof terraces and a wee little back patio all on its own fee simple lot. That’s right. No home owners association! It’s an actual single family home, San Francisco style. Lebensraum in the city. $2,200,000. Who knows what it will actually sell for after the bidding war. Property tax would be a serious annual hurdle all by itself.

There was a period of mental gymnastics. If this account were drained and that thing was sold off and this other stuff was squeezed real hard and blah, blah, blah. Yes, on paper this was within the zone of a house that could be bought. Then I thought about our cozy 700 square foot one bedroom apartment around the corner. Is it really that terrible? We got through the last year in one piece. And no divorce. Do we want to give up that much money for a little extra space? The answer was easy. No. Not even close. We’re happy where we are with a modest home and equally modest mortgage that’s mostly paid off at this point.

Meanwhile, I’ve been getting regular email updates from my cousin and her husband about the home they just bought. They’re part of the exodus of Californians setting down at least one foot in greener pastures in other states. My cousin and I grew up together and we’re more like brother and sister. Her family was hit hard by the 2008 crash and they worked tirelessly for years to recover. Then the Covid lockdown hit and things began to bend backwards again for them.

For the last dozen years I suggested we work together in a mutually beneficial arrangement to solve each others problems. I wanted to buy an additional property in a less expensive part of the country as a Plan B. Earthquakes, forest fires… whatever. I’d like a little in-law suite that’s ready to go just waiting for me if the need were ever to arise. And I needed someplace to invest some retirement savings that wasn’t a digital mirage.

We looked all over the country from Hawaii to Ohio. But this place was too rural. And that place was too urban. This place was too small. That place was too old. This place was a fixer upper. That place only had one bathroom. They could never live in the Midwest. They couldn’t possibly live with strangers on the other side of a thin wall. They couldn’t make their daughter change schools. They couldn’t make my elderly aunt move with them against her will. Their list of objections was endless. This went on for a decade.

Finally (I’m a bit slow) I realized the problem and switched tactics. Instead of me buying a house with them I offered to provide them a 20% down payment on any house of their choosing. No questions asked. No strings attached. It would be a gift, not a loan. But they needed to find a bank that would grant them a mortgage for the property based on their own income and credit rating.

A few months later they had worked their way down their theoretical “must have” and “won’t tolerate” lists and arrived at this place. 91 years old, small, a fixer upper, one bathroom, an hour and a half from the nearest population center in rural Wisconsin - and they’re talking about how they could retrofit a portion of the house into an income producing suite.

They needed two things. My cousin needed to hold on to her life in California and pretend that she might move someday when the stars all aligned. I doubt she’s ever going to spend much time at the new house, but it’s there for her if she ever really had to move. And her husband needed to own his own damn home so he could hold his head up high in church on Sunday and proclaim his independence and self determination. He had his pride.

I want they should be happy. This house was ridiculously cheap even by Wisconsin standards so the 20% gift was easy. It’s a win / win / win. These are the psychographic forces that shape our national real estate dynamics. Economists have no more chance of sorting these things out than a ouija board or crystal ball. Humans are just weird.