Is This the Worst Time Ever to Buy a Home?

00:00:00.000 | (beeping)

00:00:02.160 | Welcome back to Ask The Compound,

00:00:13.280 | where I think we have one of the most intelligent audiences

00:00:15.280 | in all of financial entertainment.

00:00:16.920 | The people who ask the more in-depth questions

00:00:18.560 | have always done their homework.

00:00:19.640 | The people who ask more general questions

00:00:21.520 | seem to always be on the right path,

00:00:23.060 | so I like that we get a kind of mix of the two.

00:00:25.120 | We're gonna talk about a mix of those two today.

00:00:27.000 | Remember, if you have a question for us, email us,

00:00:28.960 | askthecompoundshow@gmail.com.

00:00:30.960 | Today, we are sponsored by our friends at Bird Dogs.

00:00:34.280 | One of the things I like to do in the summer,

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00:00:44.480 | on those little trailer bikes, you know?

00:00:45.740 | You hook it up to the back, so I got like three wheels,

00:00:47.540 | so I'm doing a lot of the work.

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00:00:57.160 | so I love the fact that you can do a little of both,

00:00:59.280 | look good.

00:01:00.120 | I had a friend last week, said, "What are those shorts?"

00:01:01.580 | I said, "Oh, come on, these are Bird Dogs."

00:01:02.920 | Get yourself a pair, so I think I talked him into them.

00:01:04.560 | Remember, if you go to birddog.com/atc,

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00:01:09.860 | which is kind of nice.

00:01:10.700 | You got one, too?

00:01:11.520 | - I remember mine today.

00:01:13.240 | - Do we still have to use the code to get it or not?

00:01:15.400 | - No code, just the URL now, /atc.

00:01:18.440 | That does it.

00:01:19.960 | - Screamin' deal.

00:01:20.800 | All right, let's do a question.

00:01:22.040 | - Yep.

00:01:22.880 | Okay, up first today,

00:01:25.920 | we have, "I'm in my mid-30s and my business

00:01:28.480 | "has done very well over the past three years.

00:01:30.600 | "I'm trying to decide what to do with the savings

00:01:32.720 | "I've stacked away in a high-yield savings account.

00:01:34.940 | "I was planning to pay off my $150,000 student loans

00:01:37.920 | "and invest the rest,

00:01:39.600 | "or I could pay off my $500,000 3% mortgage,

00:01:42.740 | "but I can't do both.

00:01:44.320 | "I'm weighing my options here while considering

00:01:46.200 | "that a recession could significantly reduce my income.

00:01:49.240 | "Which option is going to give me

00:01:50.320 | "the biggest nest egg in retirement?

00:01:52.420 | "Pay off my mortgage and use my mortgage payment

00:01:54.420 | "for investments, pay off my student loans,

00:01:56.480 | "and dollar-cost average into investments.

00:01:58.820 | "Keep my mortgage, make monthly loan payments,

00:02:01.280 | "and DCA, dollar-cost average, into investments."

00:02:04.760 | - Now, I feel like we're kicking this off

00:02:06.160 | with a not-to-brag today,

00:02:07.080 | but do the six figures and student loans

00:02:09.340 | also counteract that not-to-brag?

00:02:10.960 | And make it a little bit, right?

00:02:13.000 | - Yeah.

00:02:13.840 | However, it means that maybe they're pretty highly educated,

00:02:16.400 | so maybe that's a form of not-to-brag.

00:02:17.880 | - It sounds to me like the student loans

00:02:19.140 | were a pretty good investment.

00:02:20.400 | So let's go through each.

00:02:21.320 | We've got three options here.

00:02:22.160 | Let's go through 'em one by one.

00:02:22.980 | Pay off the mortgage and use mortgage payments

00:02:24.560 | for investments.

00:02:25.440 | I don't like this one one bit.

00:02:27.220 | I'm anti-pay off 3% mortgage.

00:02:28.760 | I have been for a while.

00:02:29.600 | I just see no reason to get rid of that

00:02:31.460 | when inflation is so high, interest rates are so high.

00:02:34.460 | I mean, yes, it would free up monthly payments,

00:02:36.080 | but why would you decrease your liquidity,

00:02:37.600 | especially if you're worried about what a recession

00:02:39.280 | might do to your business for variable income?

00:02:41.960 | Plus, that 3% mortgage is currently below

00:02:43.720 | probably what you're earning

00:02:45.080 | in your online savings account.

00:02:46.440 | Put that in T-bills, you're talking about 5%.

00:02:48.920 | I mean, you're essentially paying for your mortgage

00:02:51.760 | if you're doing that, and you have some left over.

00:02:53.520 | So I think either one of those options.

00:02:55.560 | I just, I don't like paying off the 3% mortgage.

00:02:58.120 | It makes no sense.

00:03:00.080 | I mean, I just, over my dead body,

00:03:03.120 | I'm letting go of this 3%.

00:03:03.960 | I wish I could like extend it to like 90 years

00:03:05.960 | and just never pay it off.

00:03:07.480 | So, I mean, you could dollar cost average into the market,

00:03:11.640 | but why would you do that with your monthly payments

00:03:13.060 | and not just do it with the cash?

00:03:14.320 | So the next one is pay off the student loans,

00:03:16.180 | but then you have some more money.

00:03:17.440 | I guess if this person can pay off their 500K mortgage,

00:03:19.840 | they have a decent amount of money.

00:03:21.700 | Saved up.

00:03:22.720 | So you pay off the student loans and then you DCA.

00:03:24.920 | This one depends on your rate for student loans.

00:03:26.960 | Are they more than say, I don't know, 5%?

00:03:29.560 | At that level, maybe it makes some sense to pay them all off.

00:03:32.160 | If they're below 5%, I think I might hold off a little bit,

00:03:36.000 | unless that debt makes you just violently ill.

00:03:38.240 | I just don't see the rush when interest rates are so high

00:03:40.080 | and inflation is so high.

00:03:41.600 | The third one is keep the mortgage, make the payments,

00:03:44.280 | DCA into investment, right?

00:03:45.840 | Keep all the debt.

00:03:47.400 | If you're okay keeping the debt,

00:03:49.260 | this probably makes the most sense with a caveat.

00:03:51.160 | Like you mentioned, the potential recession

00:03:52.880 | could reduce your income.

00:03:54.800 | So I think if you're in a cyclical business

00:03:57.120 | with a variable income like this,

00:03:58.520 | maybe increase your margin of safety

00:04:00.880 | and have a little bit more of an emergency fund.

00:04:02.920 | So I'd keep a cash cushion, potentially.

00:04:06.400 | But there's another option too,

00:04:07.360 | where you don't have to make one big decision with the money.

00:04:09.620 | There's no one forcing you with a gun to your head,

00:04:11.160 | saying you have to do this.

00:04:12.200 | Pick one, two, or three, door one, two, or three, right?

00:04:14.840 | You could pay off a small chunk of your student loans.

00:04:17.400 | You'd set aside some money for an emergency fund.

00:04:19.480 | You could even do a small lump sum into the stock market

00:04:21.720 | and then dollar cost average the rest.

00:04:23.080 | So you don't have to make one choice.

00:04:25.140 | You could kind of diversify your options,

00:04:26.640 | which helps minimize the regret, I think.

00:04:28.880 | But I don't know.

00:04:30.000 | It sounds like you're in a pretty good place to me.

00:04:31.920 | And if the yields on those loans

00:04:33.860 | or the interest rates on those loans are still pretty low,

00:04:36.220 | as long as you're okay holding the debt,

00:04:37.600 | I see no problem holding that for a while.

00:04:39.640 | And then you can always pay it off in the future as well.

00:04:41.740 | You don't have to make a rush decision now.

00:04:43.880 | - Right, yeah.

00:04:45.860 | And they mentioned that, you know,

00:04:47.520 | given the current environment for student loans,

00:04:49.600 | but yeah, we don't really know what the future holds,

00:04:52.000 | so it's hard to bank on.

00:04:53.560 | - Yeah, they kind of said people, you know,

00:04:54.840 | the government's been pretty, you know,

00:04:56.940 | liberal with student loans lately and payments.

00:04:59.560 | And yeah, I don't think there's a rush to do that,

00:05:02.240 | but especially a 3% mortgage,

00:05:03.600 | when T-bill yields are higher than that,

00:05:05.840 | that just, I don't see how that ever makes sense

00:05:07.960 | in today's environment.

00:05:09.760 | - Yeah, and so as far as debt goes in general,

00:05:11.760 | what is your number of like where you draw that line?

00:05:15.520 | - Well, T-bill yields are 5% right now, right?

00:05:17.500 | That's a pretty good place to start, I would think.

00:05:19.860 | Right, because that's your hurdle rate.

00:05:22.520 | Let's do another one.

00:05:23.360 | - That question's from Zachariah, by the way.

00:05:25.200 | So up next, we have a question from Casey,

00:05:28.040 | who I recognize from social media or the chat or somewhere.

00:05:32.300 | So Casey writes, what's the incentive here

00:05:35.340 | to buy AAA corporate debt versus just buying U.S. treasuries

00:05:38.440 | that are yielding slightly higher and are risk-free?

00:05:41.000 | Is this normal?

00:05:42.480 | - Casey, a very astute member of our audience here.

00:05:45.040 | No, this is definitely not normal.

00:05:47.000 | John, do a chart on.

00:05:47.840 | I have good data for the Federal Reserve

00:05:50.040 | on AAA-rated corporate debt and three-month T-bills

00:05:53.220 | going back to 1934.

00:05:54.780 | So the average spread of AAA corporate bond yields

00:05:57.900 | over T-bills is 2.4%.

00:06:00.240 | We've had T-bill yields higher than corporate bonds before,

00:06:02.360 | but it only happened in the early '80s and the 1970s,

00:06:04.480 | which makes sense, like now,

00:06:06.600 | inflation was much higher, interest rates were rising.

00:06:09.700 | However, this is very rare to see this.

00:06:12.040 | So there's almost 1,100 months in this data.

00:06:14.840 | These are month-end data from the Fed.

00:06:16.740 | By my calculation, 33 of those months

00:06:20.320 | saw T-bill yields greater than corporate bond yields.

00:06:22.360 | So we're talking like 3% of the time.

00:06:24.120 | This is very rare to see an inverted yield curve

00:06:27.320 | between short-term treasuries,

00:06:29.000 | ultra-short-term treasuries, and corporate bonds.

00:06:31.640 | So why should there be a spread?

00:06:34.360 | 'Cause corporate bonds are riskier, right?

00:06:36.160 | In corporate bonds, the default rate is relatively low,

00:06:39.200 | but businesses can and do get in trouble,

00:06:41.480 | and you could have some defaults.

00:06:42.720 | You also have the potential for getting downgraded

00:06:45.040 | from that triple-A rating, going into double-A or single-A,

00:06:47.680 | and then maybe, or high-yield, even.

00:06:49.800 | And at that point, the bond price is gonna get disrupted,

00:06:53.120 | and corporate bonds have a much higher drawdown risk

00:06:55.320 | than treasuries, especially short-term treasuries.

00:06:56.840 | So John, do another.

00:06:57.760 | We'll throw a second chart on of the day.

00:06:59.460 | This is just the drawdown profile for LQD,

00:07:01.360 | which is a corporate bond ETF,

00:07:03.760 | versus BIL, which is a one-to-three T-bill ETF.

00:07:07.160 | And you can see in 2008 crisis, corporate bonds fell 17%.

00:07:11.880 | They fell 20% in the corona panic,

00:07:14.000 | and then they fell 25% last year when the Fed cut rates.

00:07:16.280 | So those other two ones, it was relatively quick.

00:07:18.880 | You had this huge V down and V up,

00:07:21.240 | and that happened mostly because people

00:07:23.200 | were panic selling back then.

00:07:24.600 | They only wanted to own treasury.

00:07:25.800 | So corporate bonds got dinged.

00:07:27.280 | But this is the kind of thing in corporate bonds,

00:07:28.840 | you can get dinged like that during a financial crisis

00:07:30.980 | or a panic situation.

00:07:32.040 | So if the question is, do corporate bonds make sense

00:07:35.380 | right now relative to T-bills?

00:07:36.700 | No, they don't.

00:07:37.540 | The yields are higher in T-bills,

00:07:38.840 | and you have much less volatility as per interest rates.

00:07:41.640 | But we don't know how this, that's short-term.

00:07:44.680 | Short-term T-bills make a lot more sense.

00:07:46.380 | But long-term, corporate bonds still should,

00:07:49.160 | if there's any relationship between risk and reward,

00:07:51.120 | and I think they are always attached at the hip,

00:07:53.020 | although sometimes they break up.

00:07:54.000 | They go on a break, Ross and Rachel style.

00:07:57.160 | They still have those Friends reruns on all the time on TBS.

00:07:59.760 | So I just saw that we're on a break one the other day.

00:08:02.160 | Sometimes risk and reward go on a break, right?

00:08:04.880 | And don't get me in the comments here

00:08:06.320 | about how Friends is overrated.

00:08:08.200 | We had like 100 million people

00:08:09.120 | watching that show back in the day.

00:08:10.400 | I mean, hey, if Michael can say that Steve Carrell's

00:08:12.920 | not funny, then anyone can say anything.

00:08:15.200 | You know what I mean?

00:08:16.040 | Nothing is properly rated in the internet era anymore.

00:08:17.640 | John, do another chart on here.

00:08:18.720 | This is my table of long-term performance

00:08:21.220 | of different bond yields.

00:08:22.060 | So we're talking long-term corporates,

00:08:23.540 | long-term government bonds, five-year treasuries,

00:08:25.560 | and three-month T-bills.

00:08:26.400 | And the reason I wanted to show this

00:08:27.220 | is because you can see the highest returning asset

00:08:29.480 | is corporate bonds over this period from 1934 to 2023.

00:08:32.880 | Next comes long-term government bonds,

00:08:34.440 | then five-year treasuries, then three-month T-bills.

00:08:36.400 | And this makes sense.

00:08:37.240 | And you can see the volatility kind of goes

00:08:38.840 | in the same order as well.

00:08:39.760 | I was a little surprised to see long-term government bonds

00:08:42.360 | more volatile than corporate bonds,

00:08:43.680 | but they're still in the same ballpark.

00:08:45.840 | So this makes sense because risk and return,

00:08:48.480 | especially in bonds, are attached to the HIP

00:08:49.980 | where if you're gonna earn a higher yield,

00:08:51.200 | you should expect a higher risk

00:08:53.120 | and especially higher volatility.

00:08:55.680 | So I don't expect this current situation to last.

00:08:58.040 | I talk about how rare it is.

00:08:59.320 | This situation has basically been caused by the pandemic

00:09:02.000 | and government spending and the Fed.

00:09:03.760 | And so in the short term, things are weird and out of whack,

00:09:06.000 | and it seems like T-bills are the right choice to make.

00:09:08.580 | Over the long-term, you'd still expect corporate bonds

00:09:11.000 | to have higher long-term expected return

00:09:13.320 | once rates somehow normalize, if there is such a thing.

00:09:16.620 | Now, what are you supposed to do with that information

00:09:18.400 | as an investor?

00:09:19.400 | You could just change your allocation

00:09:21.600 | based on the risk reward profile all the time,

00:09:24.020 | or you could stand pat and say,

00:09:25.360 | you know what, I'm not gonna try to guess.

00:09:26.960 | I'm just gonna pick an allocation

00:09:28.240 | and fix something that works for me,

00:09:29.780 | and I'm gonna stick with it.

00:09:30.620 | And I think you just have to do what works for you.

00:09:32.080 | That's kind of where I fall down on this.

00:09:33.460 | I don't think there's a right or wrong answer here.

00:09:35.760 | - I have maybe a dumb question,

00:09:37.160 | but a junk bond, is that always a corporate bond,

00:09:40.580 | or can it be like a sovereign bond

00:09:42.180 | of a really risky country?

00:09:44.340 | Is it like a yield or what?

00:09:46.020 | - There are emerging market bonds,

00:09:47.180 | which could be sovereign bonds,

00:09:48.620 | but high yield is typically corporate bonds,

00:09:52.080 | just lower rated corporate bonds.

00:09:53.980 | So same thing, just a higher default rate

00:09:55.980 | in much riskier companies.

00:09:57.980 | - So perfect for my portfolio, is what you're saying?

00:10:00.260 | - You could buy some oat milk high yield bonds probably.

00:10:03.380 | - Okay, I might look for that.

00:10:06.860 | - Okay, up next, we have a question from Eric.

00:10:10.140 | One of the biggest tells for the housing bubble

00:10:13.140 | in the 2000s was the income to housing price relationship.

00:10:16.540 | I'm pretty sure Michael Lewis even wrote about this

00:10:18.800 | in the big short.

00:10:20.120 | I know the housing market is different this time around,

00:10:22.540 | but there is no way incomes have kept up

00:10:24.420 | with housing price gains, which are even bigger this time.

00:10:27.980 | Help me understand how this is not another housing bubble.

00:10:31.020 | This always sends a shiver down my spine

00:10:32.540 | just because that was such a rough period.

00:10:34.660 | I graduated college right in the middle of that.

00:10:36.260 | It was not good.

00:10:37.100 | - I think one of the first people I ever saw

00:10:38.620 | write about that relationship of incomes to housing

00:10:40.980 | was our very own Barry Ritholtz.

00:10:42.500 | Let's bring him in to help out on this one.

00:10:45.460 | Barry, you were writing about this.

00:10:48.460 | Was it for the street.com or the big picture?

00:10:50.160 | One of those two, I can't remember.

00:10:51.260 | - That was probably the big picture.

00:10:53.260 | I was writing "Bailout Nation"

00:10:56.020 | on the blog chapter by chapter.

00:10:58.420 | I'd throw up a couple of paragraphs.

00:11:00.020 | People would say, have you seen this data?

00:11:02.640 | What about this chart?

00:11:03.740 | What about this guy?

00:11:04.580 | And really, I had like a thousand co-authors.

00:11:07.820 | So it was really helpful.

00:11:09.260 | Remember back in the 2000s, the big driver of the bubble.

00:11:14.260 | First, it was really more of a mortgage bubble

00:11:17.380 | than a housing bubble.

00:11:18.860 | But the big driver was securitization.

00:11:21.300 | We're gonna take all these mortgages

00:11:23.100 | and slice and dice them and spread out the risk.

00:11:27.220 | But what fed that demand, what really drove that

00:11:30.960 | was all of these non-bank lenders

00:11:33.700 | that were popping up and writing mortgages for everybody.

00:11:37.540 | Remember all the nomenclature back then,

00:11:40.500 | the ninja loans, no income, no job, no assets.

00:11:45.100 | Yeah, exactly.

00:11:45.940 | No docs, stated income.

00:11:48.060 | The traditional FDIC banks weren't allowed to do that.

00:11:51.980 | They had to do conforming loans.

00:11:53.920 | But all the crazy loans, the 228,

00:11:58.020 | zero interest for the first two years,

00:12:00.180 | all that stuff came from the sort of,

00:12:02.620 | calling it the shadow banking sector is wrong.

00:12:05.380 | These were just non-bank lenders.

00:12:07.220 | And when you drop lending standards to zero,

00:12:11.840 | well, guess what happens?

00:12:12.940 | You're gonna give a ton of people access to capital

00:12:16.820 | that wouldn't have.

00:12:17.660 | It also, adding to the flame to the fire,

00:12:20.060 | was you had a period of flat wages

00:12:25.060 | while everything gradually increased in price.

00:12:27.580 | It wasn't very inflationary, but over time it adds up.

00:12:31.120 | And so people hate lowering their living standards.

00:12:35.100 | And so people were taking HELOCs

00:12:37.460 | and people were refinancing or just flipping houses.

00:12:40.220 | And that was credit-driven.

00:12:42.420 | When you look at today, you have two problems.

00:12:45.060 | One is after the financial crisis,

00:12:47.940 | builders just pivoted to apartments and multifamilies

00:12:50.820 | and underbuilt single-family homes for almost a decade.

00:12:54.620 | Depending on who you listen to,

00:12:55.820 | either the real estate agents

00:12:57.180 | or the Builders Association or whatever,

00:12:59.620 | we're two, three, four million houses short

00:13:03.020 | relative to how many new households

00:13:05.540 | and new people we have in the country.

00:13:07.460 | We're well over 330.

00:13:08.980 | - The irony of the last bust

00:13:10.220 | is that it helped create this boom, essentially,

00:13:12.140 | 'cause they didn't build enough

00:13:12.980 | 'cause everyone was so scared.

00:13:14.940 | - The fear of the last bust sent builders

00:13:18.200 | into apartment buildings and things like that,

00:13:20.700 | which by the way, arguably, we don't have enough of those,

00:13:23.600 | but there's a giant shortfall.

00:13:25.960 | The pandemic certainly helped create.

00:13:27.600 | People were buying second and third homes

00:13:29.880 | out of their primary city.

00:13:31.240 | Today, you have two problems.

00:13:32.320 | So you have too little supply.

00:13:34.120 | And then making that worse is when the Fed raised rates,

00:13:37.440 | hey, if you have a 3.5% mortgage,

00:13:40.640 | you're talking to the earlier question, a 3% mortgage,

00:13:44.320 | you're gonna be really reluctant to say,

00:13:46.160 | I'm gonna sell this and buy another house

00:13:48.640 | where my mortgage might be 6.5%.

00:13:51.200 | That's locking a lot of people in place.

00:13:54.920 | Perversely, the higher rates are causing, to some degree,

00:13:58.360 | higher home prices and higher rental prices.

00:14:01.240 | It's really a challenge.

00:14:04.560 | I think the Fed has kind of raised as far as they should.

00:14:08.120 | Otherwise, they're making the housing situation worse.

00:14:10.760 | So this is not so much a bubble problem

00:14:14.760 | or a demand-driven problem as it is a supply problem.

00:14:18.080 | We just need a whole lot more housing.

00:14:19.540 | - And the other part, John,

00:14:20.380 | throw up the mortgage origination chart here,

00:14:22.280 | my credit score, do the next, there you go.

00:14:25.320 | And so this shows people taking those mortgages

00:14:27.880 | in 2020 and 2021 had much higher credit scores.

00:14:31.680 | So the people who are sitting in these houses,

00:14:33.240 | even if housing prices were to drop 10 or 20%,

00:14:36.280 | like some people want to see happen,

00:14:38.200 | those people are still gonna be able to make their payments

00:14:40.640 | unless they lose their job.

00:14:41.760 | So that's the problem.

00:14:42.600 | Last time around, we saw all these people

00:14:43.760 | who couldn't make their payments.

00:14:44.880 | They're having these mortgages reset higher

00:14:46.520 | 'cause they took on the adjustable-rate mortgages.

00:14:49.200 | This time around, it was mostly fixed-rate mortgages.

00:14:51.360 | And so the people who have been buying homes

00:14:53.320 | are also much higher-quality borrowers.

00:14:55.160 | So it's not just the lending standards,

00:14:56.400 | it's that the borrowers themselves

00:14:57.600 | are in a much better position.

00:14:59.040 | - Yeah, look at that light blue.

00:15:00.400 | Those are all your best 760 and up.

00:15:04.360 | When you go back to the period before the financial crisis,

00:15:07.960 | they're a fraction of the borrowers here.

00:15:12.800 | They're the vast majority of the borrowers.

00:15:15.400 | - Yeah, so, right.

00:15:17.200 | It seems like if you just took prices alone

00:15:20.680 | and you mapped 'em onto what happened

00:15:22.440 | the last time around, you'd think this has to be worse

00:15:24.240 | 'cause prices are up more,

00:15:25.240 | but it's a much different situation.

00:15:27.280 | And it's probably more frustrating for people

00:15:29.680 | who want to see prices crash, like Duncan.

00:15:32.040 | - Yeah, yeah, I mean, it's unimaginable

00:15:35.320 | to buy a home right now for a lot of us.

00:15:38.240 | - It's tough. - We can dream.

00:15:39.880 | Not that we wanna GFC again, but prices to come down.

00:15:43.400 | - Right, okay.

00:15:44.400 | This next question actually is someone

00:15:45.720 | who is thinking about buying a new house.

00:15:47.400 | So let's see this one.

00:15:50.200 | Okay, up next we have a question from Zach.

00:15:53.400 | "My wife and I do fairly well,

00:15:55.000 | "but I'm a classic conservative planner/spender

00:15:58.160 | "and struggle to upgrade our life

00:15:59.640 | "or know when it's prudent to do so.

00:16:01.520 | "I would love to get a bigger home for our kids

00:16:03.320 | "as they grow, but also don't want to be irresponsible.

00:16:06.360 | "I'm 36 and make $300,000 a year.

00:16:08.920 | "My wife is 34 and makes $85,000.

00:16:11.600 | "We have $125,000 in brokerage/savings

00:16:16.040 | "and $400,000 in retirement.

00:16:17.880 | "I have $750,000 in equity at work,

00:16:21.040 | "but it's a liquid for the foreseeable future,

00:16:23.560 | "three plus years, though it does pay

00:16:25.320 | "a monthly distribution of $2,500,

00:16:27.320 | "which we currently save.

00:16:28.640 | "We have a modest home, 1,500 square feet

00:16:32.680 | "with a $2,500 mortgage and about $400,000 in equity.

00:16:36.680 | "We pay $15,000 a year for private school

00:16:38.800 | "and would like to not be house poor."

00:16:41.680 | Second page.

00:16:43.020 | "The problem is that we live in Orange County, California

00:16:45.200 | "and upgrading to a 2,000-square-foot pool home

00:16:48.280 | "would be in the mid-$1 million range,

00:16:51.180 | "and today's rates don't help.

00:16:52.920 | "I'd love to keep our home and rent it,

00:16:54.660 | "but we'd be really cash-strapped without a HELOC,

00:16:56.880 | "and I don't think we want the headache of being a landlord.

00:17:00.200 | "I'm completely paralyzed to make a move.

00:17:01.800 | "My kids are eight and five,

00:17:03.020 | "and I would love to give them a fun house

00:17:04.460 | "to grow up in for the next 10 years,

00:17:06.120 | "but I'm also trying to be responsible.

00:17:08.200 | "I'm well aware that I'm blessed to be in this position,

00:17:10.200 | "but it weighs on me nonetheless."

00:17:12.640 | - Okay, so as we mentioned in the last question,

00:17:15.080 | this is probably the worst time ever to be a homebuyer,

00:17:18.100 | supply being low, mortgage rates being high.

00:17:20.540 | The good news is this person has some home equity,

00:17:22.440 | but as with most things, there's a trade-off,

00:17:24.680 | especially when you're living in California, right?

00:17:26.840 | You could stay in your current house and sacrifice size,

00:17:29.240 | or you could move to a more expensive house

00:17:30.680 | and probably sacrifice some savings,

00:17:32.340 | or maybe move somewhere else,

00:17:33.380 | but then you have to give up on living in Orange County.

00:17:35.440 | So this is obviously more of a psychological question

00:17:38.280 | than it is a financial one.

00:17:39.160 | This person seems to be doing very well financially

00:17:40.960 | for someone in their mid-30s,

00:17:42.440 | so it's really like how do I get over

00:17:44.320 | that psychological hurdle of,

00:17:46.040 | I know that there are going to be trade-offs,

00:17:48.100 | and I know that whatever move I make,

00:17:49.520 | I'm gonna have to be giving up on something.

00:17:51.360 | So what is that thing?

00:17:52.820 | So how do you think about making financial decisions

00:17:55.680 | when you are kind of paralyzed and you know,

00:17:57.680 | I have this thing tugging me this way,

00:17:59.200 | but this one tugging me the other direction,

00:18:00.600 | and I can't figure out which one is which?

00:18:02.840 | - You know, you hinted at it.

00:18:04.720 | All these decisions involve just two simple aspects,

00:18:07.920 | human psychology and math.

00:18:10.400 | So if you're wrapped up in the psychology,

00:18:13.040 | do the math first.

00:18:14.840 | All right, they have four,

00:18:16.240 | first let's get being a landlord out of the question.

00:18:19.240 | When my wife and I got married,

00:18:21.000 | she was living in a co-op,

00:18:22.000 | she moved into my apartment in the city,

00:18:23.760 | we were a landlord for 12 years.

00:18:25.680 | It's a big pain in the ass, it's a job.

00:18:28.000 | - It doesn't sound fun to me.

00:18:28.840 | - And you really, you know, if you're busy,

00:18:30.920 | if your career is throwing off that much money

00:18:33.560 | at a young age, focus on that,

00:18:35.640 | not a side hustle for this particular person

00:18:39.160 | of being a landlord.

00:18:40.320 | It's really a job,

00:18:41.400 | and you probably have other things you wanna do

00:18:44.640 | with your time, so that's number one.

00:18:45.960 | Number two, the math sounds like,

00:18:48.480 | A, if they wanna renovate their house,

00:18:51.400 | spend a couple hundred thousand dollars,

00:18:53.920 | a HELOC is a really easy way to go.

00:18:56.080 | They have a ton of equity,

00:18:57.800 | they're not gonna cash-strap themselves,

00:19:00.360 | so that should be a no-brainer decision.

00:19:03.320 | The real question is,

00:19:05.080 | hey, do we wanna move out of this house

00:19:07.660 | to something that's a million and a half, $2 million,

00:19:10.960 | and that really depends on laying out a budget,

00:19:13.560 | looking at what you're spending,

00:19:15.160 | and saying, do we wanna do this?

00:19:17.300 | It looks like they'll be able to roll

00:19:20.280 | a half a million dollars or so out of this house

00:19:23.360 | between their savings. - And there's a down payment

00:19:24.400 | right there.

00:19:25.240 | - Right, so in other words,

00:19:27.080 | it's not like they're going out and dropping,

00:19:29.160 | hey, I'm gonna take a 7%, $2 million mortgage.

00:19:32.220 | If they move to a house that's a million and a half dollars

00:19:35.400 | and they're taking a million,

00:19:37.940 | they're putting half a million dollars down,

00:19:39.900 | well, even at 6%,

00:19:42.740 | it looks like 5,000 a month won't make them cash-poor,

00:19:47.260 | but they have to get past the psychology.

00:19:49.580 | If they feel like that's gonna be too much

00:19:51.740 | and that's gonna, then stay where you are, do a HELOC.

00:19:54.980 | Listen, when we moved into the house we're in now,

00:19:57.700 | which was a debacle and needed everything,

00:20:00.540 | we knew that going in,

00:20:02.120 | we just were, every year we took a HELOC,

00:20:05.060 | we did a project, we'd pay it down as fast as we could

00:20:07.840 | as soon as the HELOC was down to around 10, 20 grand,

00:20:12.480 | we'd do the next project,

00:20:13.880 | and every time you need a new roof, you need new windows,

00:20:16.640 | you have to replace all the flooring in the house,

00:20:18.640 | you have to, I mean, this was a real project house,

00:20:21.440 | the only way we could afford it

00:20:22.840 | was it probably would have been double what we paid for

00:20:25.320 | if it was in nice shape,

00:20:26.800 | and we got to do it the way we wanted to over time.

00:20:29.860 | So if they wanna stay where they are,

00:20:31.880 | HELOC is really easy to do.

00:20:33.360 | - Yeah, that's why-- - As long as you manage it

00:20:35.500 | and you pay it down quickly.

00:20:36.980 | - If you're in a position of already owning a home

00:20:38.700 | and you have equity, you're in a way better position

00:20:40.420 | than a first-time home buyer, sorry, Duncan,

00:20:42.900 | but 'cause you have that equity to play with

00:20:44.740 | where you can use it as a down payment

00:20:46.140 | or for the current house to fix it up.

00:20:48.780 | So I'd say, yeah, I would use that equity

00:20:50.700 | and then you can slowly pay it off,

00:20:52.860 | you don't have to pay it off right away,

00:20:54.060 | and then you're not having to touch

00:20:55.020 | these other forms of income,

00:20:56.420 | and then if you have that equity come through from his job,

00:20:59.060 | that sounds like it's a ton of money,

00:21:00.860 | you can pay it off with that eventually.

00:21:02.540 | - Just keep in mind, by the time they have

00:21:05.080 | a liquidity event for that job,

00:21:08.840 | typically the tide is raising all boats

00:21:11.120 | and that might be sending home prices up

00:21:13.520 | 'cause he won't be the only person having that windfall.

00:21:16.280 | So that's always the trade-off,

00:21:17.680 | is you have to think a couple of steps ahead.

00:21:20.200 | Hey, when my ship comes in,

00:21:21.520 | are lots of other ships coming in

00:21:22.920 | and the prices are gonna go up?

00:21:24.440 | So it seems crazy to think that at this hour,

00:21:29.160 | I'm gonna be able to lock in $2 million

00:21:34.160 | as a ridiculous home price.

00:21:36.460 | Nobody knows what they're gonna look like

00:21:38.100 | 10 years from now.

00:21:39.100 | - I'm guessing California has the most challenging state

00:21:43.300 | of all in terms of making these housing decisions.

00:21:45.540 | - Especially in areas like Silicon Valley

00:21:48.300 | and near LA and San Diego.

00:21:50.580 | There's still pockets that are less expensive,

00:21:53.820 | but it's expensive for a reason,

00:21:56.820 | a lot of people wanna live there.

00:21:58.620 | - Right, all right, we got one more, Duncan.

00:22:00.200 | - Question about that real quick though,

00:22:01.880 | what's the size square footage-wise

00:22:04.200 | that a family of four really needs, you think?

00:22:06.200 | It's very skewed for me in my mind

00:22:07.680 | because I lived in a 385 square foot place

00:22:09.960 | during the pandemic, so.

00:22:12.000 | - I had a 400 square foot apartment

00:22:13.920 | that was essentially a fridge and a bed and a bathroom.

00:22:16.460 | That was way back in the day.

00:22:17.300 | - We had a pocket door, we had a pocket door.

00:22:19.520 | - Depends if your kids are okay with,

00:22:21.200 | give 'em the pool, they'll probably take less square footage

00:22:23.280 | because that counts as part of the house in California.

00:22:25.120 | - And that's the nice thing about outdoor living

00:22:27.760 | is you don't need a giant house if,

00:22:29.640 | especially in places where the weather's so nice,

00:22:32.240 | you could be out all the time.

00:22:33.640 | That said, 2,000 square feet gives you a guest bedroom

00:22:38.320 | or a home office or a little breathing space.

00:22:41.200 | Sometimes if, especially these days

00:22:42.960 | where people are working remote,

00:22:44.680 | kids underfoot, it's not easy.

00:22:46.720 | So you could see why there's a desire

00:22:48.840 | for a little more elbow space.

00:22:51.340 | - Our debate on Animal Spirits was

00:22:53.320 | what size house gives you a mansion?

00:22:54.880 | And we landed on 5,000, so I say cut that in half.

00:22:57.760 | - That's my number, 5,000, right.

00:22:59.520 | - 2,500, cut that in half.

00:23:00.640 | 2,500 is probably good for a family of four.

00:23:02.280 | - 5,000 is just giant.

00:23:04.560 | And by the way, if you wanna live in certain areas

00:23:08.560 | and you don't want a giant house,

00:23:10.040 | you want a small house on a lake,

00:23:12.560 | on the water, in the mountains,

00:23:14.800 | everybody is building these immense things.

00:23:17.320 | There's no, you know, 2,500, 3,000 square feet

00:23:21.020 | for a couple that's downsizing.

00:23:23.440 | The kids are out of the house.

00:23:24.680 | Really hard to find things like that.

00:23:26.600 | - Yeah, unfortunately.

00:23:27.440 | - Also, personal finance tip.

00:23:28.520 | Give the kids the choice.

00:23:29.660 | Would they rather have a pool or go to private school?

00:23:32.280 | You know, let 'em pick.

00:23:33.700 | (laughing)

00:23:34.540 | - There you go, got those lessons early.

00:23:37.400 | - All right, up next we have a question from Cameron.

00:23:40.800 | What are your thoughts on what will happen

00:23:42.440 | to the economy when $18 billion

00:23:44.240 | in monthly student loan payments are turned back on?

00:23:46.800 | It seems as though it will significantly

00:23:48.440 | affect consumer spending and savings.

00:23:50.880 | - We've got a number of questions on this.

00:23:52.300 | So I think there's something like 27 million borrowers

00:23:55.300 | that were part of that moratorium,

00:23:57.160 | put their payments on hold.

00:23:58.000 | The idea is those people have turned

00:24:00.600 | those savings into spending, right?

00:24:02.920 | That was a boost for a lot of people,

00:24:04.880 | helping make it through.

00:24:05.720 | Now it's been a couple years,

00:24:06.920 | and it's gonna be hard for those people

00:24:08.120 | to go back to making the payments again.

00:24:10.960 | And friend of the show, Sam Rowe,

00:24:12.680 | put together a compilation of these estimates

00:24:14.680 | on his sub-stack.

00:24:16.760 | JP Morgan said it's gonna be like 0.1% of GDP.

00:24:20.840 | Goldman Sachs said like 0.2% of GDP.

00:24:23.980 | I think a couple of them said, you know,

00:24:27.060 | handful, it's like a handful of basis points.

00:24:29.860 | Sorry, not 0.2, but like 0.02.

00:24:31.260 | So it's a handful of basis points.

00:24:33.740 | And John, throw up the chart here of total household debt.

00:24:36.020 | Total household debt's like $17 trillion.

00:24:38.300 | Student loan is 1.6.

00:24:40.380 | That's pretty close to auto loans too.

00:24:42.180 | Mortgage debt is the big one at 12 trillion.

00:24:44.060 | So student loan debt is like 9% of total debt.

00:24:48.080 | But then you also have to take the percentage

00:24:49.740 | of those people in student loans

00:24:51.240 | who are going to have trouble making the payments.

00:24:53.980 | And I think that's where the rub comes.

00:24:55.980 | A lot of people think everyone's gonna have trouble

00:24:57.500 | making those payments, and I don't think

00:24:58.940 | that that's going to necessarily be the case.

00:25:01.080 | So I think a lot of people would like to see this

00:25:03.180 | be like an end times thing, and I think it's gonna be

00:25:05.300 | a much smaller impact than most people assume.

00:25:07.500 | - So let's put some meat on those bones.

00:25:09.640 | The U.S. economy is about 23 and a half trillion dollars.

00:25:13.540 | 2/3 of that is consumer spending.

00:25:16.020 | Let's call that 15 trillion dollars.

00:25:18.940 | And the question was 18 billion with a B.

00:25:22.580 | 18 billion a month.

00:25:24.100 | You're barely up to 216 billion dollars

00:25:28.860 | if everybody has problems.

00:25:30.760 | And you know that the vast majority of these folks

00:25:33.860 | aren't gonna have problems.

00:25:34.700 | So this is a rounding error.

00:25:36.660 | And this is also one of my favorite pet peeves,

00:25:39.980 | which is people looking at the liability side

00:25:43.660 | of the equation, but not looking at the asset side.

00:25:47.020 | What matters isn't total debt, because every year

00:25:50.340 | there's more people, there's more debt.

00:25:52.260 | Debt is always at a record.

00:25:53.540 | It's a scare chart.

00:25:55.500 | What you really wanna look at is the ability

00:25:59.540 | for individuals to service that debt.

00:26:02.620 | What's the ratio of total debt to discretionary income?

00:26:06.340 | And it plummeted following the financial crisis,

00:26:10.060 | and then went down even more after 2020

00:26:12.740 | when a lot of pandemic money flowed into people.

00:26:16.900 | - So I'll share that chart with you guys.

00:26:18.780 | It's really very, very manageable.

00:26:21.980 | Now when it reverses, when the discretionary income

00:26:24.680 | to debt spikes, it's telling you people

00:26:27.420 | are having a harder time carrying their debt

00:26:29.380 | and managing it.

00:26:30.360 | But all these issues, it's called double entry accounting

00:26:33.240 | for a reason.

00:26:34.180 | Liabilities on this side, assets and income,

00:26:37.340 | the ability to pay.

00:26:38.560 | On the other side, if you look at one without the other,

00:26:41.140 | you're only getting half the picture.

00:26:42.740 | - I showed the total liabilities at 17 trillion.

00:26:46.420 | The Fed publishes this once a quarter.

00:26:47.900 | The last one they have is through March.

00:26:49.460 | Total assets in this country is like 141 trillion.

00:26:52.280 | - Crazy, right?

00:26:53.120 | Giant, absolutely, absolutely giant.

00:26:55.740 | I'll find this.

00:26:57.900 | Just look for it on Fred.

00:26:59.940 | Discretionary income to debt, and it's just been falling.

00:27:03.900 | It's ticked up a little bit since post-pandemic,

00:27:06.300 | but it's so far below where it was pre-2010.

00:27:09.540 | It's a different world.

00:27:10.980 | - And I don't mean to make judgments

00:27:13.220 | on a big group of people,

00:27:14.220 | but if you have a high student loan balance,

00:27:16.740 | you probably haven't been a huge part of the economy anyway

00:27:19.040 | in terms of spending, right?

00:27:20.460 | And most of the people who have student loan debt are young,

00:27:22.880 | so they probably aren't really steering the economy

00:27:26.340 | as it is in terms of spending.

00:27:27.500 | So those people aren't going to have

00:27:28.620 | a really big impact either way.

00:27:31.140 | - Except on, I'd say a lot of independent coffee shops

00:27:33.900 | around big cities are about to have a real tough time.

00:27:37.460 | - They're just there for free Wi-Fi anyway.

00:27:39.220 | Let's talk-- - Yeah, it's true.

00:27:40.440 | No, that's what I'm saying.

00:27:41.280 | Someone sits there for three hours,

00:27:42.460 | they bought a $5 coffee,

00:27:43.900 | and now they're not going to be able to pay that.

00:27:46.500 | - That's true.

00:27:47.340 | - People will find a way to manage that.

00:27:48.820 | I'm pretty confident of that.

00:27:50.860 | - Okay, no show next week because of the holiday.

00:27:54.560 | We're taking the week off.

00:27:55.400 | I think we do have Animal Spirits next week.

00:27:57.060 | Maybe, is that the only thing on the compound next week?

00:27:59.020 | - Oh, no, no, no.

00:27:59.860 | We've got TCAF.

00:28:00.680 | We've got a special release on Monday, actually,

00:28:02.580 | for July 4th. - Okay, so we got

00:28:03.420 | other stuff going on. - So yeah, we got a lot.

00:28:04.820 | Yeah, that's why we're not doing this, though.

00:28:06.760 | We're not doing this, the compound.

00:28:08.240 | - Yeah, good thing.

00:28:09.580 | Thank you to Barry, as always.

00:28:11.100 | - Yeah, thanks, Barry.

00:28:11.940 | - Check out Barry at The Big Picture and at Bloomberg.

00:28:13.700 | You can email us, askthecompoundshow@gmail.com.

00:28:16.100 | If you have a question, always, again,

00:28:17.980 | feel free to send us a voicemail.

00:28:19.180 | That was kind of fun last week.

00:28:20.100 | Leave us a review, subscribe, all that good stuff.

00:28:22.620 | Leave us a comment on YouTube,

00:28:24.020 | and we'll see you next time.

00:28:25.320 | - Thanks, everyone.

00:28:26.260 | (upbeat music)

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00:28:50.600 | you

Is This the Worst Time Ever to Buy a Home?

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