Ask the grumpies: How to address the affordable housing crisis in expensive cities

Yet another pf blog asks:

What policies do you think are best to address the affordable housing crisis in expensive cities?

Definitely not rent control!  I cannot tell you how many lectures I’ve suppressed on this topic when being a tourist.  (Instead I say, “Sorry!  I’m registered to vote in another state and cannot sign your petition.”)

The big answer is:  Loosen up zoning to allow more high-rise apartment buildings to be built.  It is as simple as that, so long as you make sure that the developers and additional taxes contribute to the additional pressure on local public goods.  But there are a lot of SF suburbs that only allow 2 or 3 stories to be built.  The second big answer is reliable public transportation (my favorite is light rail, but commuter rail and buses with special highway lane access are also good) to places outside that have affordable housing so people can commute to work.  Even our best subway and elevated systems could use expansion in terms of number of trains, number of lines, and just plain maintenance.

Ask the grumpies: Do summer homes make financial sense?

Sandy L. asks

Summer homes. Do they ever make financial sense?

In the grand scheme of things, probably not.  They’re really not something that I understand at all.  Most people would be better off just renting a place for the small amount of time they use the summer home, especially if that home is not the only place they vacation in each summer.  But people don’t do summer homes for the financial reasons.

HOWEVER, there are some scenarios that can make financial sense.  If you can claim the summer home in another state as your main residence, you might be able to get a break on state income tax.  If you rent out the summer home the 9 months of the year you’re not using it, you may be able to make some $ if it’s in a desirable area (particularly if it’s someplace in CA where property taxes are frozen and you bought years ago).  If you turn it into a B&B/Air B&B place it might make $.  And if you’re lucky enough to buy someplace that magically goes up in value after you’ve bought it, you might be able to sell for enough profit that it’s all worth while (particularly, again, if it is in California).

If you use it also as a weekend home, you might save money over staying in a similar place that you don’t own each weekend.  If it keeps you from jaunting off to Europe on a regular basis, it might also save money.  If your second choice would be extremely high priced rental lodging for you and all your servants, then sure, it might make financial sense.

Those of you contemplating summer homes, keep in mind that federal tax treatment of the mortgage deduction for these may be changing in the near future (getting rid of the mortgage deduction is a good thing economically in the long run), making second homes more expensive to own.

Any experience with summer homes, Grumpy Nation?

Ask the grumpies: Is a single house a good investment for retirement?

Amin asks:

My husband and I own a house in a city with a very high cost of living and expensive real estate. We bought the house at a very good price because while it was structurally sound it needed (still does) some aesthetic renovations. We currently have a lot of money saved up, and we’re debating what to do with it. My question is basically: are we naive to think that putting in new windows, finishing our basement, and upgrading some insulation would be good investments? We put money into TIAA-CREF every month and our universities match our contributions, but we’re hoping that in 20 years we could sell our home, buy something smaller or outside the city, and use our profit for retirement. Do you think real estate is a reliable investment? Homes in our neighborhood are currently in high demand and often sell within a few weeks (sometimes with cash offers!), but I worry that the real estate market is too fickle and unreliable for retirement plans. Any advice?

Investing in a single property is a high risk potentially high reward proposition.  No, it is not a reliable investment. Sometimes you get lucky and sometimes you don’t.  In addition, everywhere outside of California, increasing home value leads to increasing property taxes which make the cost of ownership more expensive.  So no, don’t rely on a single house in a single real estate market as a big part of your retirement (most people who have retirement wealth have that from their house, but that’s because they don’t have any other wealth).  It might work out but it might not.  It is far more risky than a diversified portfolio of index stock and index bond funds.

If you’re talking 20 years time, then most of the renovations you’re talking about will be out of date and not worth as much in the market at that point anyway.  Possible exceptions for things that tend to have a high return, like adding a second bathroom.

That doesn’t mean you shouldn’t renovate if you can afford to do so and want to.  Insulation and new windows can cut your energy costs (which is a form of investment depending on the break-even point).  Finishing your basement can increase the usefulness of your house.  But you shouldn’t consider them investments in the same way that your 403b portfolio is invested.  For the most part, these renovations will be consumption.

In terms of how much should you save for retirement, you should aim for at least 15% of your income, and more if you have catch-up savings to do.