This Week in the Mayonnaise Clinic: Houses Are Consumption, Not Investment

Plus: Josh answers a rude question, for journalism

Dear readers,

We have another edition of the Very Serious podcast coming out tomorrow, with Juliette Kayyem talking about her new book on disasters and how to live better with them. I’ll be in your inboxes tomorrow with more thoughts on that, and on Friday I’ll be revisiting the topic of what it even means for someone to pay their “fair share” in taxes.

But now it’s time for the Mayonnaise Clinic! Let’s see what we dug out of the jar this week:

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Laura asks what to do about the insane housing market:

My husband and I have been searching for a house for nearly two years in the Boston suburbs. We have a generous budget and a small list of demands (a yard and three bedrooms). Sellers in the area are receiving 20+ offers on their houses, with waived contingencies, and ending up with 20% or more over asking price. Inventory is low, as sellers are having trouble finding new homes to move into.

We currently live uncomfortably in a small condo with a baby. Many of our friends are in the same position and have put family and life plans on hold. This is a major problem and nobody seems to be talking about it.

What are your thoughts on the housing shortage, and what, if anything, the government should be doing about it? How much will raised interest rates cool the market? Is it a bad financial decision to buy a house right now?

The long-term problems in housing policy in the US are largely on the supply side — we make it too hard to build houses, so not enough of them get built in the places where people want them — and the solution to that problem remains the same as it was in 2019: deregulate the housing sector so we can have more homes where people want them. I wrote a couple of months ago (second item) about some positive changes that Massachusetts specifically is making in this regard.

But what’s changed to make the market go crazy over the last two years has mostly been on the demand side.

Many of the demand-side changes are financial: Households generally have stronger balance sheets than they did pre-pandemic; jobs are plentiful and secure, so people are not afraid to spend; interest rates are low by historical standards, and until recently, they were very, very low. Those factors all combined to mean more people could put more money behind the pursuit of their housing dreams, leading to the bidding wars you’ve been observing.

But some of the changes are cultural, relating to what people want out of a home.

A substantial fraction of workers expect a permanent shift toward at least partial work-from-home. Homes feel more crowded as more people spend more time in them, and this means many households are looking for larger homes than they would have wanted three years ago. Some couples without children may have decided they need home offices and so they are bidding for two-bedroom homes against couples with children; many couples with one child are deciding (as you have decided) that they need homes with three bedrooms; and so on up the chain — people deciding they want more house than they used to.

This makes the housing shortage more acute as people demand more square feet per resident. And to the extent the shift to working from home is persistent, so should be the increase in the total amount of house desired in society.

You’re right to note that the market in Massachusetts is especially nuts. The state (excuse me, the commonwealth) now has the third-highest average home values in the country, behind only California and Hawaii. That’s in large part because the state doesn’t permit enough housing, but I think some could be a demand-side difference, too. Boston isn’t included in Kastle Systems’ “Back to Work Barometer,” but we’ve seen other blue-state and tech-heavy metropolitan areas (like San Jose and San Francisco) experiencing especially slow return-to-office. It’s likely that Boston is another place where a lot of professionals working from home — your competitors — are especially motivated to buy.

So all that makes it an unfortunate time to need to buy a house — I bet you wish you had bought in 2019 — but that’s not the same as a bad time to buy, if the house brings you more value now than it would have then.

People often talk about home purchases as primarily investing decisions, but really they’re primarily consumption decisions. If you’re capable of making the payments, any home purchase can be a good financial decision if you want the house badly enough and it will make you happy enough. I realize that answer is almost tautological and therefore maybe not very useful, but I think it’s important to emphasize the subjective nature of whether a home is “worth it” — people think the answers to these decisions are in spreadsheets when they really are in their hearts. What do you want out of life, and will this house help you get it?

You have a clear practical need for more space. One obvious question is whether you should rent instead of buy. Even though rents have been rising sharply, they don’t appear to have been rising as quickly as prices, at least nationally. So that’s a point in favor of renting — it’s become a relatively better deal. But renting and owning are not perfect substitutes.

You want a lawn, which I take to mean you want a single-family home. It’s easier than it used to be to rent a well managed single-family home, as single-family-home landlording has gone institutional, but there still tends to be a quality gap between the kinds of houses you can rent and the ones you can buy. There’s always the risk a rental house will sell, you won’t be able to renew your lease, and you’ll have to move. And if you want to make your house just as you want it, you need to own it, so you have the option to do construction work to it.

You have a young family and you may be ready to move into a home where you will live out the core of your middle age. This isn’t just a dwelling unit — it will be the backdrop of one of the most important parts of your life, and the life of your husband and child (or children). It would be totally normal to want to own that place so it can be exactly what you want. If that strikes an emotional chord with you, and you can afford to win one of these annoying bidding wars, then you should. When you’re selling to retire in twenty five or thirty years, whether you timed the market right to buy won’t be one of the most important considerations.

But if this isn’t going to be your forever home — if you think you’ll just need to trade up to a 4- or 5-bedroom in a few years — then maybe you should sell your condo, enjoy the sellers’ market, rent a home as a stopgap, and hope the market conditions cool a little bit before you buy something even bigger, more daunting, and quite possibly more expensive.

But even in that case I wouldn’t focus too much on timing the market. As you note, higher interest rates are likely to push down home prices, but that doesn’t mean affordability will improve, as mortgage interest costs will go up while purchase prices go down. Swings in the housing market are heavily driven by swings in what consumers can do and want to do — you’re not an island, and any factor that pushes down other consumers’ willingness to pay (such as higher rates) probably also pushes down your personal willingness to pay.

The key question then, as now, will be what’s worth it to you. Good luck.

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Mark asks:

Why are you such a self-involved prick?

This question is rude so I’m reserving the answer for paying subscribers, who are the only readers entitled to it.