The Suburbs are a Ponzi Scheme

I was raised in an urban environment, center city Philadelphia to be exact, but now raise a family in a northern suburb of Dallas. The conveniences of raining kids here are wonderful: everything is new, safe, and schools are great. The problem is it’s unsustainable.

This is not a new or unnoticed issue. The suburbs being a Ponzi scheme is widely written about by Charles Marohn on his website www.strongtowns.org. He chronicles the history of the suburbs, their funding sources over time, the structural issues the funding sources have created, and what we can do to correct their course. His goal is to change how we develop our country and ensure it’s done in a sustainable way.

Because of his critical critique of how suburbs are managed he is often derided as anti-sprawl but he really doesn’t care as long as its sustainable. It’s a very interesting perspective as someone with a great interest in economics and he has a very laudable goal.

Sadly, my goal is much more selfish and is only to stay ahead of property value declines in my own area. To do this I need to review what the issues are.

The basic argument in economic terms is that the city council of my town, as do all the others, have incentives to grow the town through additional infrastructure projects but the true costs are borne by others many years later. When towns are quickly growing, the city issues long term bonds that are paid for by the boost to property taxes from nice new houses the residents moving in. These new residents are happy to pay to live in the shiniest new suburb.

City councils however are far too likely to underestimate the true cost of maintenance on this new infrastructure and the eventual replacement or upgrades needed to support sustainability. City councils are, after all, politicians so they are unlikely to raise taxes to pay for these costs escalations so another round of bonds are issued to do “upgrades” which they also bury some of the maintenance costs into as well. The can is thus kicked down the road until it becomes unsustainable.

Once the town starts to become behind on the maintenance to a point that is visible to the current residents, the most mobile (usually wealthier and higher property tax paying) residents begin  moving to newer, faster growing suburbs.  The suburb then enters a disastrous cycle of lower property values (as the residents move out) and increasing taxes (to make up for the lower property values). The increasing property taxes then makes the town less attractive for potential new residents, further decreasing property values, increasing the need for higher taxes… This is a death spiral for the town.

So where is the tipping point? Is my town at it or yours?

There appears to be two ways to look at it, either through the life cycle of the projects being undertaken and when they will come up for renewal/updating or by analyzing the population growth which pays for the new investments.

Looking at the life cycle of investments is a good start as it looks at the true issue and the cost associated with it. It should be pretty easy to find out when the largest capital infrastructure investments were made in your town as it should be public record. My town publishes its debt schedule online showing when capital was spent:

Debt Schedule

Because of the amazing growth the city has seen, the issuances before 2007 have all been paid off. That’s good from a debt management standpoint but the roads are still aging and will need to have ongoing maintenance.

The useful life of a concrete road, which these are, is 30 years. As the roads approach that age, they will require additional maintenance before needing replacement at the end of its useful life. Based on this, the first round of road replacements should begin in 2033 with another big bubble in 2036.

That may seem far off but it’s only 17 years.

Fortunately for my city, it’s still growing fast. Current population is 146K with a projected population in 2020 of 186K. The town as well as the greater Dallas area is booming, I can’t imagine a scenario where that population goal isn’t achieved. And as long as there is a continuous stream of new buildings and property taxes coming in, covering the cost of new maintenance expenses and debt service should not be a problem.

If there wasn’t such strong population growth, I would be looking at selling my house at close to the 17 year mark before taxes started to increase to cover the higher maintenance expenses and well as new debt service on the replacement road.

But my kids should finish school in 15 years anyway and my wife are planning to downsize. I can sleep easy and I hope you can too in the town you live in.

If you want more information on building or knowing if your town is a healthy one, check out www.strongtowns.org.

 

 

Handstand Pushups are Stupid

Captain obvious has finally landed and crapped on me. Until this point, my ego has blinded me.

My box’s workout today was a hero WOD called JT:

For Time:
21-15-9 Reps
Handstand push-ups
Ring dips
Push-ups

It took me over year to get my first HSPUs so whenever HSPUs are in a workout, I feel obliged to attempt them and hopefully get better at the movement. And I know it’s dumb. The movement itself is dumb. Trying to do it as I approach 40 is dumb.

Everyone says so, the best CrossFit podcast in the world: The Wodcast Podcast (wodcastpodcast.com, @wodcastpodcast) is always railing against how stupid these fucking things are.

I’ve already pinched nerves in my neck three times in the past doing these things…

But today I sit at my desk not able to move my neck because I decided to do these stupid things.

I’m done with HSPUs.

That is all.

(any post is a good excuse to post the beautiful Alex Parker doing anything though)

How to Invest a Windfall

Not to humble-brag but I have an expected windfall of about $50K coming my way which is currently not earmarked. My initial gut reaction was to pay down rental property debt with it.I’ll get into all reasons later but in recent months I’ve been reading some early retirement blogs and freeing up some cash flow associated with debt payments would be consistent with that goal.

But then I started thinking about if debt reduction really provided the best return on my investment and wanted to formally explore some other options in greater detail. If after I wrote out all the pros and cons of my choices, debt reduction was still the best option then it really must be.

These are the options I’ve considered so far:

Pay Down Debt on Rental Property

The only debt our household has is related to real estate, either on our primary residence or on the 3.5 rental properties (one of our rental properties is owned with a partner). We don’t have any student loans, credit cards, or car loans so the low hanging fruit is already taken care of.

The highest of any of the mortgages is 4.85% on the most recent property we purchased. It doesn’t seem like that high of a rate, especially since interest on a rental property is deductible against rental income. The issue is that the interest is not tax deductible for me since all of my properties show loses and passive activity losses can not be offset against ordinary income (our household modified adjusted gross income (MAGI) is above $150,000 phaseout for the exemption). Since the losses can not be offset against any positive income, the interest is not tax deductible and is therefore a 4.85% after tax interest rate.

Assuming a 30% marginal tax rate, the before tax rate that needs to be compared to all other investments then becomes roughly 6.3%.

Paying down debt is guaranteed however, creating quite a pro for the move. Every penny put towards it will achieve the forecasted 6.3% before tax return. As volatile as the markets have become over the past few years a guaranteed return is comforting.

It also places the funds out of reach.This could be good or bad depending on how you look at it. It’s good that it eliminates any desire to spend it but but it’s also bad since it reduces liquidity. A home equity line of credit could be secured on the house to ensure availability of this equity but there are fees associated and lots of paperwork associated with getting it set up and using it.

Purchase Another Rental Property

At one point in my life I had a goal of purchasing one rental property per year. Then some major real estate setbacks occurred, mainly losing about $25K on a failed property in a poor neighborhood in Philly. After that experience, I lost my appetite for investing in real estate and pulled back. It took me about four years to jump back in. Prices were not fully recovered from the 2009 crash but continuing to buy throughout the entire crash would have given me some great returns.  

Then in 2012 I found myself with some excess cash on hand looking for a home. I jumped back in and invested in a rental property and then less than six months later, purchased another in 2013. Both of these properties were purchased based on location and school districts and have been very successful so once again the idea of purchasing one property per year has been rattling around in my head.

The lump sum amount would be more than enough for the downpayment on another property, pay closing costs, plus any miscellaneous repairs that would be needed. $40K was the average investment of the last two properties purchased. Unfortunately, property values have continued to escalate since that time and to match the return realized on those properties, I would have to reach further into either more dangerous areas or areas further outside of my metro area that are “up and coming”.

This option is also less attractive due to my aforementioned passive loss situation. An additional property would create more passive losses without any offsetting income. Not very tax efficient.

Peer Lending

Peer lending has been getting a lot of press in the blogosphere but I have doubts about it. Having a wife who works for an advertising company, I’m well aware of the influence companies have over the message put out by bloggers. Not that I’m doubting the ER blogger intentions, but the attention they have focused on peer lending seems unwarranted compared to other investment options.

Peer lending is sure to have returns greater than saving accounts, standard CDs or bonds but that has to be obvious right? There is additional risk and work associated with this option, so it has to provide higher returns to attract investors. In this same category, are new peer investment options like PeerStreet which is basically peer lending with real estate securitization build in. Several of these blogger are posing their realized real-world results as a way of proving out the investment but these experiments have all started over the past few years in a recovering market. I’m nervous about what happens if the market turns. It could be devastating to these investment options.

With an estimated return (based on the sites own estimates) around 7%, it doesn’t seem worth the additional risks given better options are available.

Invest in Stocks

Compared to the other options, investing in the stock market seems the most pedestrian. Its boring, obvious, and a million other people are writing about it.

Still, this options provides more flexibility and liquidity compared to the other options and after reviewing the average return data, the highest average return. Here is the historical average for the S&P 500-Stock Index averaged by decade (all numbers assume dividends are reinvested):

  • 1980s:+14.1%
  • 1990s: +14.9%
  • 2010s: -0.9%
  • 2010-2016: +12.6% 

Now I am of the belief a correction is imminent but will it be worse that the 1987 correction? The 1980s still finished up 14% even with the crash happening towards the end of the period. It seems that the commonly sited average of 10% is more than accurate.

The downside of investing in stocks is that the money is sitting in a pretty liquid account, increasing the temptation that as the balance grows to make rash and foolish decisions with the funds. Five years ago this would have been a real consideration for me but over the past year I’ve really come to appreciate controlling costs with a goal of retiring early. I think I’ve outgrown (most) of my desire for never ending toys.

Conclusion

After reviewing the expected returns along with the pros and cons, I’ve ended up back at the boring choice of investing in the stock market. To end this entry, let’s just pretend I’m going to invest the full balance in low fee index funds.