The 4-Horseman of the Economic Apocalypse: Affordability

[Joseph Medina]

Hello All, 

The first horseman, a conqueror with a bow and crown, rides a white horse... 

The title is more or less to grab your attention; however, if left unattended it could be the end. This is going to be a 4 part post for the month (1 each week) of what "I" think will cause the economy to crumble if something doesn't change. Affordability, Inflation, Employment, and Education. 

Affordability. in this weeks BP Podcasts Ken Mcelory (one of my favorite guys to listen to) has been talking about this housing affordability issue, and to be quite honest its a catch 22 situation. on one side of the coin you have businesses and their wages and on the other hand you have workers and their needs. 

Now in a post I made prior I discussed why I am here in REI, because my education is not worth anything. (the following is my opinion) During the last recession it shook a lot of businesses to their core, and this past COVID thing did the same thing but worse. I don't think employers ever got back to where they were before the Great Recession started with decent wages per education levels, and it just got worse after.

Now this would not be so much an issue if inflation stayed where it is supposed to be, which is around 2% with it regularly being around 2.5 %. If you listen to what the FED pushes out inflation is only 5-ish% NOW and inflation is measured by the CPI. In the trading world everyone knows the CPI (consumer price index) is a load of Bull-ish and is highly manipulated, but if its high we buy the dollar, and if its low we sell the dollar that's really all we care about it.

the CPI is measured by what a basket of goods a 100$ (I think) can buy. https://www.bls.gov/cpi/factsh... ( if you care to see the math portions of it.) 

So those that live in California and the north east you basically get one gallon of milk and a slice of bread. In the Mid-West you guys can buy an island and a private jet with your 100$ and us here in the south we get on gallon of milk, a loaf of bread, and ONE egg. Those of you in Hawaii and Alaska you guys might be able to get a lick of ice cream if its on-sale. 

So, with the joke above everyone gets it might smile, but if the CPI remains true a 100$ in the Ca should be the same $100 in Fl. So, Dub-TF?!?! 

Enter the Chapwood index http://www.chapwoodindex.org/. It is not backed by any institution and uses 500$ instead of $100, but it does make sense as to why 100$ is different in other parts of the US. 

I live in Houston, Tx so I am going to use an example from my area. 

Okay, so from a quick google search of "gallon of milk in 2000" we got a result of 2.78$. so now we go to the based on the CPI milk should only be 2.83$... Well it must be nice to live in Kansas where you plant your chocolate milk cow and reap the rewards of cheap chocolate milk, but everywhere else this is a different story. In Houston according to the CWI (Chapwood Index) our inflation rate is an average of 8.9% so now lets figure out how much our gallon of milk runs. 2.78 * .089= .24. So our price has increased basically a quarter. so 2.78+ .25= 3.03$ how accurate is this? tak a look yourself. https://www.heb.com/product-de... (if you dont, know, but here in the United State of Texas we Use HEB coupons as cash!) a gallon of milk is 3.38$ so we are still not there yet. Its more like 20% inflation, but the point of the exercise is to illustrate the ineffectiveness of the true CPI. All of this is multiplied largely when it comes to housing. if you grasp the concept of the change in a gallon of milk you can grasp the change of prices where the gallon of milk will live after its bought. 

"Well, get a better job" How nice must this be right? Well lets talk about that. Everyone remembers when McDonalds caught all sorts of He** for coming out with their "budget" of how their salaries are fair for their line workers. saying stuff like paying 700$/ month for rent and like 100$/ month on groceries and stuff like that... Wages are not keeping up with inflation. Every year if you don't get a raise that is at least the same if not higher than your city/ area listed on the Chapwood index you're falling behind. Plain and Simple. if you do then great you're keeping on PAR to remain the same of where you're at currently if you get more then now you're getting ahead in life. (which is all the more reason to get into REI) :).

So, How do I get a better Job so i can afford to live. Well society tells you to go to school and get a degree. Great! What do you want to major in? "Hmmm I like everything" Great General Studies it is for you. Fast forward 4 years and welcome to the higher education realm. You passed go and you collected a bill of 200$. Student loan debt of 70K$ (being modest) "eh that's alright ill find a job to cover that" Well you better because if you got a sally mae loan the federal government will hit your credit score each number of times you took out a loan. So lets say 4 years of school two semesters a year that's 8 times hitting your credit report for not paying 1 month. well if I cant pay ill file chapter 11. Well, you cant bankrupt your way out of student loan debt. less that 1% of filings allow this. 

Well lets find a job. lets use a popular job board like indeed. So, when we do we get a lot of postings. (especially now due to our labor shortage which will be discussed here in a second) we will say that the average wage POSTED (not payed) is 20/ hr. 20/hr is ROUGHLY 40k a year. NOT INCLUDING TAXES. with taxes you're looking at clearing roughly $28,000/ year. Well, now you're a BS/ BA degreed individual clearing 28K$ a year which is the equivalent of making 14/ Hour. ;) way to go hot shot! degree really paying off now isn't it?? ( I used being taxed at 30% and not doing a state income tax as Texas does not do that) 

Lets mix things up a bit. (enters COVID-19). it F***** everything up and the governments response is giving out $1000/ week for unemployed benefits (again here in Houston) and 3 stimulus payments, and now monthly child stimulus checks. So, now i have been forced out of work and the government is paying me 52K a year to sit on my ***!! this is the life. Okay COVID step back. Employer calls Susie Q wanna come back to work making the same wage? "Uh, no I got a pay raise to not work AND I DONT HAVE TO PAY RENT! Bye Felica" 

Well, now me Mr. employer does not have any workers to work so I cannot produce the same which means I have to charge more for what I have, and now we have forced inflation instead of forced appreciation. 

Lets add a little more to the mix. 

Lets buy a house on my 28,000$ after tax dollars. you go to the bank and because you have a pulse AND a JOB (because were not trying to graduate a class like that of 2008!) you get cleared for 250,000$. Now, for those in Cali and NE enjoy your VCR box, in the Mid-west you now can buy the country of Romania, and us here in the south we get a decent sized house. Those of you that live in HI and Alaska...that's some nice air to breathe. Just for simplistic sake your monthly mortgage will be around 1000$ your take home from work is $1120 after taxes! (remember 14/hr) (14 * 80= 1120). Soooo, now the majority of your check is going to mortgage not including car and other stuff. not including your student loan payments 

Well, i will just rent! I have to make 3X the amount of monthly rent with my pre-tax dollars so I can afford up to a 1000 month rent and my expenses will be cheaper across the board. 

Before, too much longer you will not be able to afford the rent because it will go up around 3% a year, and you don't make enough to save for a house. If you think you're going to get a raise, the average MIGHT be 5% a year. Well if not... i don't know what i will do :( "UNCLE SAM I NEED HELP" 

 This is why this Affordability thing is something that needs to be discussed. Because, unless I live under a rock in the middle of the ocean and my best friend is a sponge this is the trap most American's fall into my self included. 

[Lake Lutes]

Joe - you're well articulated with great thoughts (and maybe had too much coffee?). For the most part, your thoughts are coherent and true, however there are some assumptions being made that won't always hold true. The above example is the classic example of, not necessarily the story of inflation, but someone plain and simply in the rat race - your average joe American: go to college, incur debt, get a low paying job not leveraging your degree, not able to cover or pay off the debt, and move along down life's line feeling sorry for themselves. I think what's lacking in your example is creativity. Every partner I have ever had in real estate, or financial mentor I've had in life, started off much of the same way the story above starts. Go to college, incur debt, and find a job out of the gates that doesn't cover life's expenses. The important thing is to not settle and strive for more. Leverage free time to make more income via side hustles. Eat ramen and bunk with parents or friends for a year to save $3K a month instead of breaking even every month, etc.

While I can and do acknowledge inflation as a major issue, especially in the COVID era, there are ways to continue moving upward and being successful for those who go and get it, and don't settle. By the looks of your well articulated piece above, I'd venture to say you have much of that drive and ability to make it happen. Best of luck man! Thanks for the read.