This little thing called equity
This thing called “equity”
I grew up in southern California, streets lined with houses and crowded apartments. People walking everywhere, kids playing ball in vacant lots and swimming at the public pool. Occasionally our parents would pay for our fee to get into the neighborhood waterslide park and we would stay until we were exhausted. Many of the local apartments had a pool and a handful of us kids would “pool-hop” until we got kicked out then go to another pool.
Swimming, biking, walking was what every kid did every day.
We weren’t rich but knew that anyone that lived in a house had a pretty good job or a lot of roommates to fund the mortgage or rent. Even back in the 70s the cost of living in a house was $1,000 a month compared to $250 for an apartment and gas was 25-cents a gallon. Many people that lived in a house back then had lawn chairs for living room furniture – why? Because they were broke. The houses were not in disrepair. As a child I didn’t know very many students that resided in houses.
When I was a child I witnessed how frequent people were the “working poor” because they could not afford to live well because of the cost of housing. I promised myself as a child that I would never live permanently in a high cost area because I wanted to live “well” and be satisfied.
As soon as I turned 18-yrs I moved to Oregon to go to college. It was dirt cheap to live there compared to California. People were incredibly nice too. I grew my career then around 2009 real estate costs began to rise significantly fast. Suddenly my condo was worth $100k more. The cost for a new owner to live in a similar condo was going to be $500 more than my current payment. All of us condo owners were also going to pay more in real estate tax and home insurance because of the new appraisals.
A typical house in Portland, Oregon is now $500,000+ for a tract home with a beginning mortgage cost of $2,400 a month plus tax and insurance. The average middle class income is $65,000 which nets $48,300. Annual overhead outlay PITI is $34,000 leaving $14,000 for all other reoccurring living expenses (medical & car insurance, fuel, utilities, food). Oregon is no longer considered an affordable place to live for most people.
In Memphis, Tennessee there are still hundreds of homes and land that still can be gotten for dirt cheap under $70,000. The residents that live there most reside in a house that is considered “owner occupied”. A luxury that most people in expensive cities don’t get a chance to enjoy because it’s too expensive. I have spent this past year researching databases for work purposes to find out who owns real estate that I may want to acquire. Most homes are controlled by descendants whose ancestors had built or bought the very home they live in. Probably 80% of the neighborhood homes haven’t had a mortgage in this past decade. A good third needs critical repair work that has been in disrepair for longer than five years. One fourth of the homes would be tagged by HUD if it were a rental unit and the landlord would be required to perform the repair. Whose responsibility has it been to maintain the physical condition of these homes? The current owner.
Similarly, the local businesses are also owner occupied. Hundreds of them spread all over Memphis. Many of the shops also need repairs and upgrades.
This is “equity”. The difference between what you owe to a lender and the current value of your property. In Memphis a lot of real estate goes without being repaired for years or decades and eventually the property gets tagged as unsafe and the government eventually puts the property on a list and tears it down. Properties that ancestors passed down to their descendants that didn’t perform the required repairs and who didn’t have a bank loan to pay. In too many cases the inherited properties fall to the government because the descendants lived in or owned the property and didn’t pay the city and county taxes. The descendants lost the very property that their ancestors worked hard for. It is truly heartbreaking to think about.
That was equity.
Memphis has miles of vacant and abandoned commercial buildings often in areas with random scraps of paper floating across one parcel to the next, paper cups, cans, bottles, and a lot of vehicle tires sprinkled throughout the busy streets. On any given day it looks much like the day after a major parade. It’s the crossroad of residents feeling overwhelmed by the amount of work it takes to remedy the bad habits of those that just plain don’t care.
I have sat through many advocate meetings regarding curing blighted neighborhoods after spending hours each week roaming these very streets. Often the homes have at least two sometimes four working-age adults that are physically able to be employed and perform the required repairs themselves. But the repairs remain deferred. In these advocate meetings the group brainstorms ideas. The latest is to create a fund to pay for the deferred maintenance because most of the neighbors aren’t working or have low paying jobs. I sit and listen while all of these situations are being ultimately blamed on someone that looks like “me” instead of the descendants the receivers of inherited property. I just listen.
I owned some property not very long ago in a small remote town in Kansas. The homes were dirt-dirt cheap to purchase and the rent was dirt cheap. As a landlord it was very hard to own rental property because the most you could charge for a house was $600 a month or $400 for an apartment because it was the average rent. The cost of repairing a living space after a tenant moves out could be the value of three months rent depending on different circumstances. The locals made a habit of working infrequently because it could cost $500 to $7,200 per year to live there and often they only wanted to work for as many earned dollars as they owed. The average home cost is still between $20,000 to $60,000. Very few people owned a business and the major employers were in manufacturing, trades or government work. It’s fairly easy to live like you are rich there as an average wage earner after you’ve paid off your home. The cost of vacations or anything else you may want is easy to acquire when all your regular reoccurring costs only amount to $600 a month for utilities, insurance and food. All it takes is pursuing a good career. – However, far too many working age adults haven’t figured this out.
Miles of Memphis might be very much like that town in Kansas with several exceptions. Memphis is considered a major city with an abundance of major employers, bus lines, job training, high school education and career centers, colleges of every kind, internships, grants, special loans and advocates – it has the gamut of everything at its disposal. I have never seen as many in any other city I’ve worked in and I travel a lot for work.
What’s happening now – the cost of real estate is skyrocketing from where it has been and it isn’t necessarily a good thing. The current residents have created their personal bar of where their skill, job experience, aptitude, and ability to garner an affordable wage that meets the increasingly new cost of living. The higher cost could put people who have already lived on substandard monies for years in a worse situation fast. The cost of taxes on older homes is about to go up significantly because it is compared to recent sales and cost to build.
The ironic conversations from Memphis residents I have listened to about gaining “equity” are voices of people that live in their inherited homes and businesses that sound as if they have zero equity during these conversations. The book Bright Side of Memphis which is easily gotten from the internet describes these neighborhoods and the homeowners with joyfulness. The mass majority of homeowners described and identified don’t look like “me”.
Equity is the difference between what you owe a lender and the value of your property.
Affordable living is only achieved when your cost of combined reoccurring expenses are at 50% or less of your net income. The average income in Memphis is $26,000 because of the quantity of residents that earn that amount. Memphis residents have not properly prepared themselves for an ever increasing expensive place to live.
There are a lot of people in very expensive cities that would have loved to have the same opportunity that residents in Memphis have enjoyed for generations.