Get Out of a High Cost Area

You probably know that coastal cities are expensive. Actually, if  you’re reading this blog, chances are better than not you’re an educated person living in an urban area. It’s also not surprising that the high cost of living serves as a wall that prevents the migration of poor workers from e.g. Ohio or West Virginia. Interstate mobility in the US has decreased, and part of that can undoubtedly be explained by pull (family ties) and push (cost of living) factors. This has contributed to political polarization, overall wage stagnation, class-based segregation, and increased resentment all over the board.

The key tenet in my book is that wages are not going up, at least not as fast as cost of living. This article makes it abundantly clear that it’s driven by housing:

Housing costs have grown much faster in high-income places than low-income ones since 1960. Housing has always been more expensive in high-income places, but the difference is getting more extreme. In 1960, on average, US states with 10% higher incomes had housing costs that were 10% higher. In 2010, states with 10% higher incomes had 20% higher housing costs.

I would also add labour to that mix. As part of overall price pressures, you have to pay more for help, since they need to be able to afford to live there or otherwise be compensated for a long commute in from the exurbs.

So if you’re living in an expensive city, carefully examine your own life and entertain the notion that you may have more disposable net income after moving to the sticks. (Note: this doesn’t factor in the potential for career advancement and networking opportunities in the big city)

Better yet, take advantage of geographic arbitrage using techniques from my book.


Priced Out of Housing

While I recently published a post on housing, that was a more general look at the concept of holding a mortgage in the first place. This post will be more on the specifics of housing conditions in urban centers throughout the US. Namely, things have gotten increasingly unaffordable for middle class people in desirable cities.

Take this article, for example:

The median home value in San Francisco now stands at $765,700 – 10 times the city’s median household income, according to the census. As of March, the median rent for a one-bedroom apartment was $3,590 a month. With the median income in the city being $78,400 a year, this means the average household can end up spending as much as half its earnings on housing.

It’s gotten to the point where the city core will be filled with the wealthy, while the ordinary workers, teachers, nurses, and police officers have to commute in from miles away. That takes an incredible toll, both physically and financially.

Will things continue to trend this way? Central London has shown us that prices can remain out of reach for decades, if not generations, when houses become used as investment assets for the global wealthy rather than as places to live. Central banks by lowering interest rates drives hot money chasing returns into real estate. While mortages are lower, houses are not any more affordable given how much prices have risen.

New construction isn’t going to come galloping in like a white knight to rescue us. For one, since the last crash construction has shut down and is only starting to slowly return now, but not nearly at the pace needed to keep up with new household formation.

Currently, things maintain themselves at an equilibrium, albeit stretched at near breaking point. Ordinary adult workers shack up two or three to a house in order to live in the city.

What’s the solution? Cities have to look at becoming denser with better utilization of space, overriding objections of the NIMBY anti-density crowd. Simply raising wages without increasing construction won’t work – there will be more money chasing the same tight supply, which will result in even higher prices.

There are some nifty things that governments can do to alleviate the shortage by discouraging investors from buying and removing housing stock from the rental pool. This is more of a problem in the UK, where property taxes are low, as compared to the US, where it would be costly for a foreign magnate to let too many houses sit empty.

But these are all things out of our control that may or may not end up happening. What we can do as individuals is to vote with our feet and move to places that are still affordable, such as Salt Lake City, Dallas, and Atlanta. Envisioning life outside of the country can work as well, especially for those who have read my book on wealth and are interested in a mobile freelance life.


When Housing Becomes Unaffordable

A friend recently sent me an article detailing how Seattle has a major homeless problem (with the accompanying scourges of drug use, violence, and property crimes). It’s definitely sad to see. I’m intimately familiar with the growing 21th century phenomenon of unaffordable housing, having grown up in the SF Bay Area, which dealt with these issues decades before Seattle (and Portland). Realistically, I anticipate that the forces driving unaffordability will only get worse over time. Real estate in downtown cores of desirable cities, like Seattle, San Francisco, Vancouver, and London, is priced as an investment asset rather than a place for locals to live. There’s just no way middle class workers can compete with large pensions, hedge funds, sovereign wealth funds, and billionaire tycoons for property.

What can we do? Certainly economists have developed ways to combat homelessness through subsidies and affordable housing mandates. Others seek to curb foreign investment in housing or extract large taxes from absentee/nonresident homeowners. Those strategies will only go so far if we don’t address the fundamental issues of inequality. There’s simply too much wealth sloshing around looking for things to invest in. Nevertheless, I try to stay away from politics on this blog, instead preferring to approach things from an microeconomic perspective. As individuals, we’re unlikely to have much effect on changing things at a larger systems level, so all we can do is adapt, adjust, and try to survive.

How can we do that? Check out my book on wealth for tips on how to make enough money to buy that expensive house, how to structure the mortgage, as well as learn lifehacking tricks for how to compensate for expensive housing.