Purchasing a Home: Lesson One
Down Payments, Geo-Arbitrage, & WiFi Money in Home-Buying
Welcome back to the Theopetra Testament. Subscribe now so you don’t miss our weekly educational posts bridging the gap between cryptocurrency and real estate. This post, composed by our Self-Repaying Home team, will give you a high-level overview of financial markets in relation to housing before diving into the first part of our series on getting ready to purchase a home.
Current Mortgage Rates: 3.77% 30-year fixed rate, up from 3.27% at the end of 2021 (Bankrate.com)
Treasury bonds have been getting less love than the Patriots in Tom Brady’s retirement announcement. Yields have been rising as the Fed alerted the market that they plan to reduce asset purchases and raise rates to stem inflation. The reduction in Mortgage-Backed Securities (MBS) purchases has put additional upward pressure specifically on mortgage rates.
A whopping 5 rate hikes are priced in by the end of 2022 while geopolitically, everyone realizes Russia and Ukraine aren’t going to start WW3 a week before the Winter Olympics. Equities and crypto initially bounced back off the lows but look shaky again with Meta (formerly Facebook) doing its best $TIME impression. Expect more volatility until we get certainty about the underlying economic health over the next few months. Tomorrow brings the ever-important jobs report where we’ll look for signs of an Omicron-related slowdown.
Interesting Housing Headline:
Pulte Homes reported earnings this week and their CEO predicted that extensive supply bottlenecks in the housing sector will not get resolved this year. There are issues with roof trusses, appliances, siding, paint, cabinets... and of course labor. They also noted that a county where they do significant business has seen its staff of building permit processors drop from 37 to 7 making the county go from a capacity of 250 permits per week down to 12 a day. This has caused a backlog of over 700 permits. Yikes!
Lesson One: Saving and Planning for a Down Payment
Nearly 65% of Americans own a home and you’ve decided it’s time for you to take the plunge. The good news? Owning is the EZPass ticket to prosperity, and unlike rent, doesn’t offer a -100% return. The bad news? Home prices are up 15-20% nationally YoY and it is still very much a ‘seller’s market’. So how to save?
First, consider how much you need to save. Most traditional mortgages require a 20% down payment to obtain the most favorable financing options. Considering the average home price is now over $400,000 (St Louis FRED) this equates to $80K in needed savings. Along the same lines, the median first-time home buyer is now 34 years old. Using these ‘averages’ we can assume that the ‘average’ person will need to save ~80K over a 12-year horizon, which is roughly $6,667/year.
Timeout. How can it be that a first-time home buyer needs to save more over a 12 year period than the average adult has saved for retirement? Decades of “easy money” have created a situation where home prices have outpaced inflation due to 1) interest rates (ultimately the cost of borrowing money) being constantly lowered to stimulate demand, 2) the pure amount of money supply (as measured by M0) increasing 10x from 2000, and 3) the ‘financialization’ of real estate with Hedge Funds and asset managers such as Blackrock gobbling up entire neighborhoods to then rent to you. To put this in layman's terms, in the battle of Blackrock vs your balance sheet, Blackrock is a -10,000 Money Line vs your +12,000.
Time back in. Saving ~80K over 12 years requires us to stash away ~6.7K/year in post-tax savings for an average home. One can only cut expenses so much (cutting the cord, prepaid cell phone plans, only surviving on a head of lettuce / lentils / bananas, living in a 200sq ft basement with your bed against the fridge which is against the shower... you get the idea) so the best thing anyone can do is increase their top-line revenue and make more money. What’s the easiest way to do this? Go work where people are paid more and work for yourself.
Geo-arbitrage is the dirty secret that prior generations didn’t have to consider (Manufacturing jobs! Unions! Coal!) but in today’s 21st-century economy and within the trend of urbanization, the top employers who are going to pay you all to reside in the large cities. Hate to be the ones who break this to you, but generally speaking, the W2 rich reside in coastal cities. Average teacher job in Massachusetts? 82K. Average teaching salary in Mississippi? 45K. This pattern continues in most/all fields, and greatly impacts your financial forwards. Over a 12 year period, taking the average national average savings rate (8%) into account, the teacher in Massachusetts has stocked away ~$117K and nearly doubled the savings of a teacher in Mississippi who saves $64K under the same savings rate (assumes 6% yearly growth).
This $53K difference is massive for financial flexibility and freedom, even with both earners saving the ‘identical’ 8%. With $64K saved, an American can not even afford 20% down on the ‘average’ house ($400K) and would need to work an additional 6 years to catch up to the HCOL (High Cost Of Living) saver!
So should you drop everything and move to a big city? Maybe not. If covid has brought us one good thing it is the ability to work remotely. If you can, try to ‘have your cake and eat it too’ by obtaining a big city salary while living in a lower cost of living area.
Strike it Out on Your Own
Step two is ideally removing yourself from the W2 system (i.e. worker) and running your own business and/or generating side income. Robert Kiyosaki said it best: “A job is a short term solution to a long term problem” (Rich Dad Poor Dad).
An employer simply pays you the least amount of money you are willing to work for. There are entire departments within companies whose sole function is to underpay you (and then pat themselves on the back, smh)! Removing yourself as a pawn piece and leveling up to a Castle gives you better able to save for a home by 1) presumably increasing income via removing the middle man, and 2) gaining a plethora of tax breaks and advantages.
The HCOL W2 earner with $82K in income falls in the 22% tax bracket and has one major weakness: no large ability to deduct, credit, or depreciate their taxable income (and thus can only keep ~$64K in post-tax earnings / pays ~$18K in taxes). By working for yourself, you flip the table and unlock the key to reducing your taxable burden. That laptop? Probably deductible. Vehicle and gas that’s needed for business expenses? Go ahead and deduct it. Dinner out with clients? Deduct. Get the picture? Saving just $10K off the top line (via deductions/credits) results in saving ~$2K in taxes, nearly 1⁄3 the yearly savings target to buy a house!
No one needs to be Jeff Bezos in 2022 to start a business or earn a side income with sweat equity. Dog walking, ride sharing, blogging—the list is endless. If you can earn even just an extra $200/mo it makes a massive difference down the line: saving that side income over a 12 year period results in ~$42K, or more than half the savings target for a home purchase (assuming 6% growth)! That is the ultimate cheat code for saving for a down payment.
Wrap it Up and Next Steps
In this first installment, we’ve briefly discussed the driving factors of home price appreciation into how much Americans need to save for a home and provided some simple and easy ways to build $80K over a 12+ year period. Next, we’ll take that $80K and begin to go loan shopping, covering all of the options that TradFi has to offer and consider the most beneficial financing options for borrowers.
Great write up and easily understood. I appreciate the analysis and the perspective on home buying. The comparison of the teachers is eye opening.