Side Effects of Side Effects of Side Effects

61 thoughts on “Side Effects of Side Effects of Side Effects”

  1. So where do you see the debt imploding Johnny? In the scenario of the 2M apartments bought with capital gains could be there isn’t any debt. There might be debt to do the reno, but as soon as the units are auctioned off the investor is free and clear. Or are the people borrowing against their stock options and not actually cashing them in. That could get ugly in a downturn. But the jingle mail/bailout script is still pretty fresh!

  2. The situations Johnny describes here get me thinking of a booklet I recently read by the FAA about flying a small plane in the mountains. A common scenario is for someone to fly into a mountain valley. When they reach the end, where mountains on either side come together, they might find that their plane cannot climb quickly enough to get over the ridges, and that the valley is too narrow to turn around. The advice is, what Johnny calls a plan B, is to have alternatives ready before the flight. Landing fields that you can divert to and knowledge of the terrain. In this case, do not fly into a valley unless you have a way out. And of course sufficient fuel (money). Worst case is to look for the largest flat spot to attempt a landing. That would be the friend’s spare bedroom or even a couch.
    Having lived in rented quarters for my first three decades away from the nest I discovered that small repairs are better taken care of out of pocket if possible. Was once kicked out of an apartment for reporting a leaking hot water faucet that was causing mold to grow.
    Later I was lucky to find a unit in a triplex with nice owners that lived in the back unit. Over the two decades that I lived there I fixed many leaky faucets, did some fiddling to keep an old refrigerator going, took the trash cans to the street, and so on. The owners replaced the water heater when it leaked water out as fast as it went in and also the wall furnace when it failed after at least 30 years of service.
    I knew that the countdown had begun when the couple that owned the place became a single. My partner at the time, she had been with me for nearly ten years, had a reaction similar to Johnny’s friends. She just wanted things to stay the same as they had been.
    We were lucky, I had just received an inheritance which put us in the position to buy a house. This was 1998 before the bubble of the 2000s. Otherwise we would have had to look much farther away. As it was we went about 35 miles as the raven flies.
    That apartment was empty for at least a year after we left. The building had been bought by a large real estate company that had hundreds of rental units. Later there was a remodel, new windows and doors and probably makeovers to the kitchen and bath.
    Last time I checked, about 15 years ago, the rent was over four times what I had been paying. I am sure it much more now. For one thing it is near the shopping mall that has been leased by Google.
    Have a Plan B, and C, D, E and so on. Good luck is nice, but cannot be relied on. Tenants ‘rights’ only get one legal legs to stand on and can take a long time to have effect and with unknown conclusion. How many would like to continue living in a place where the owner(s)/manager(s) consider you a troublemaker?

  3. I’m surprised you haven’t blogged about the potential pandemic we have on our hands, Johnny. It looks like the virus is going to spread across the country and, at the very least, disrupt daily life (and consequently the economy) for an indeterminate amount of time. Would love to know your thoughts.

  4. My wife & I lived in an “English basement” in DC for a number of years. The landlord had bought the gracious rowhome in Dupont in the early 2000s before prices went totally berserk. He had grand ideas of renovating to its former glory, but it never really came together. He added some nice pieces of art & made it comfortable. We had an informal arrangement since nothing about the basement unit was compliant with anything. But the rent was reasonable & the location was ideal.

    Eventually, though, he wanted to retire & downsize to a condo a few blocks over, and the new buyers had little interest in having 2 adults & a dog in the basement, so the lawyers politely let us know we had to leave. All good things come to an end.

    We did the math & it wasn’t going to work with our sensibilities. So we ended up leaving the district entirely and moving to a lovely neighborhood of milwaukee right on the shores of lake michigan. Lots of great places in the country.

    1. Exactly! I am always amazed by how long and hard people will try to hold on to an insecure situation, because they either failed to prepare for change or just completely fear it. This is a wonderful country with opportunity and great people all over. By the way, a belated welcome to Wisconsin.

      1. Completely. What I’ve learned is that absolutely every “superstar” city neighborhood has comparables at 50-75% off somewhere else.

        For example, I had my eye on neighborhoods in Upper North West DC for a while. 4 or 5 miles / 35 minute transit ride to the White House. More trees. Small yards, etc. But still pretty close to everything. But the price was just not feasible. Not by a long shot.,-77.076018,3a,75y,117.08h,80.36t/data=!3m6!1e1!3m4!1sDwbccA0qCWlRbZCKEYAGrA!2e0!7i16384!8i8192

        Or, find it 80% off somewhere else.,-87.8801766,3a,75y,286.44h,94.66t/data=!3m6!1e1!3m4!1sBOIWPJR24N8En_pBxUhqoQ!2e0!7i16384!8i8192

  5. If the old lady who owns the house hangs on to it until she dies, it will likely pass on to her heirs free of tax (assuming her assets are less than $11M or whatever the current threshold is). That fact is keeping a lot of old folks hanging on their properties. It’s also keeping a lot of properties empty by affluent old owners who simply don’t want to deal with the headaches of being a landlord, especially in SF, but who also don’t want to sell and bear the taxes.

  6. Thanks for another on the ground report. I think you’re right about the housing stalemate. Short term, the beatings will continue until morale improves.

    Long term, with the age of globalism and cheap energy waning… the West Coast looks pretty isolated: Perhaps we can still turn climate change lemons into coffee ( and export to Japan in exchange for second hand solar elder care robots? 🙂

  7. Dependence on rent control (and tax policies) is fragile. Keep spreading the word, Johnny and commentators. Johnny inspired me to live in a few of the rusty places he’s mentioned on here, and it’s worked out well.

  8. Your friend needs to seriously consider living in another city. I live in Manayunk in Philadelphia. Bought a big, old 1911 Twin 5 bedrooms, 3 baths for 380k, my monthly payment including taxes & insurance AND sub 20 down insurance is 2500. There are 2 bedroom apartments for 1700. The neighborhood is hilly like SF but with a more English mill town vibe in the architecture. Lots of Tech, Pharma, Financial, etc. jobs in a city with major amenities and a food scene that can rival NYC at in some ways.

    1. I remember (not that many years ago) when Manayunk was a crap town people in Philly made fun of. Times change… Who knew Philly would get so pricey?

      1. Pricey compared with where? I recall in the 1980s housing bubble we considered moving to Philly someday. Then the bubble deflated, and we bought a house in Brooklyn.

        Ever since, every time there is a housing bubble in Brooklyn, Philadelphia is advertised as the 7th borough (Hudson County is the 6th). And when the bubble deflates, so does NY to Philly movement.

        Just to show the trend, Gothamist started in NYC. Phillyist came later, and subsequently dispersed (Sfist is still there). Curbed started in NY. Curbed Philly came later, and subsequently disappeared (Curbed SF is still there).

        How much does it cost to live where Silver Linings Playbook was filmed, a streetcar ride away from the center (with a transfer)?

        1. I believe I can speak on behalf of most of Philadelphia and say we generally don’t want New Yorkers moving in for rent/housing arbitrage.

          Silver Linings was shot in Ridley, Upper Darby and Lansdowne (west suburbs). I grew up in Upper Darby my grandparents have a house in Ridley. It varies wildly from neighborhood to neighborhood but you can find the same range of prices and higher in the suburbs. Generally your tax burden in the suburbs is higher than Philly and property values are the same to higher.

          1. On the other hand, quite a few people on my block in Brooklyn are originally from Philly, city of. Not recent arrivals either, but from decades ago.

            The question is, who will be living in these areas of suburban Philly 20 years from now? You want someone to go there, because not everyone stays.

      2. Huh. I moved to Manayunk in 1985, fresh out of college. It wasn’t all that lovely, but very safe and cheap. The real crap part of Philly, then and until recently, was Kensington. And Philly is still relatively cheap, especially compared to New York, Boston, or California.

        1. Kensington, Fishtown, West Philly, Southwest Philly, North Philly…all were sketchy in the early 80s, along with Manayunk. Roxborough was sort-of-ok.

        2. Kensington is still the bad part of town and of course sections of North Philly can still be called the Badlands for crime, blight, and other social issues.

          Its really weird right now with the gentrification of Fishtown and Northern Liberties having pushed up north to the edges of Kensington right against the opioid epidemic epicenter. I have a friend that lives in a a new construction townhome he paid somewhere north of 400k for 1 block away from a homeless encampment of addicts that needed to be dismantled by police.

      3. There are absolutely still cheaper houses in Philadelphia and even within Manayunk still. Small 3 bedroom 2 story row homes go for 180-200k and that’s just in Manayunk.
        I seriously considered buying a house in West Powelton years ago (North of Market and below Spring Garden, Between Lancaster and 46th street) right after college where similar 3 bedroom 2 story rowhomes were going for 80-90k.

        That said Philly has seen a lot of growth the last 15 years but we never experienced a housing crunch in quite the same way a lot of other coastal cities have due to a large amount of new construction with the tax abatement that was instituted.

        1. Powelton and West Powelton were also sketchy places when I was in college west of the Schuylkill back in the day, partly due to the original MOVE. But like Spruce Hill, they were starting to gentrify since Penn and Drexel staff, grad students, and professors did live there.

  9. I think I mentioned this in the discussion of another post, but I don’t think mobility is all its cracked up to be. You seem to have friends all over the country. But for most of us, moving means losing easy access to family, friends, etc.

    That can be costly as you get older. My wife’s parents were a train ride and one hotel overnight away. It cost a lot to be there as they declined and passed. My parents are plane ride away.

    I’m surprised a disaster prepper didn’t bring up the latest and greatest. I think our society is about to be audited. Will people co-operate with quarantine restrictions? Make sure their neighbors are OK and have food and medicine, or even know whose those neighbors are? Who can be trusted? Generations before had to deal with these things. Not us.

    1. Professionally mobility is a mixed bag as well, at least when it comes to moving from one big city to another. Moving might be necessary if the job market in one city craters or if your live in a small town.

      Living in one city long-term helps people develop deep roots that can help with changing jobs. I’ve known people who moved across the country, got laid off, and found themselves in a tough position. They can always move again, of course, but many companies don’t want to hire someone who requires relocation.

      1. This may in part explain why people end up packing into the big metros, which are soaring in cost.

        When we were young (mid-1980s) we figured we’d live cheap in NYC, save our money, and then move to one of the mid-sized metros Upstate (Rochester, Syracuse, Albany/Schenectady/Troy), near where we went to school. What we figured out, however, is that if we got a job there it would be THE job in one of those metros, other than perhaps the boss’s job after the boss retired. If we needed to change jobs, we would probably need to move, separating our (then future) kids from their friends and school, etc, and losing whatever community we had built. Many people who live in mid-sized metros have to shuffle around from one to the other. Two-worker families, and “trailing spouse” problems, make that even more difficult.

        It hurts on the other end too. As it happens, the founders of the real estate research company where I worked for 15 years decided to retire and sell, and the acquirer recently decided that the long, detailed quarterly metro area reports I and others wrote were not necessary. A short, mostly computer-generated report would suffice.

        Were I in Syracuse, I might have to contemplate an earlier than economically and socially appropriate (given the cost of an aging population) retirement. Moving would be a big negative, as my wife is still working, and friends are here, my kids are here where I live. As it is, since I’m in Brooklyn, I can look around for something interesting to do that will allow me to continue to bike to work. Good thing we bought a row house here in 1994.

        Somehow this has to get turned around. Is there a way that the Buffalo to Albany corridor could be one job market somehow? I wouldn’t want to drive from one to the other during lake effect snow season.

        Bottom line: Johnny’s friend may have to leave SF, but I can understand why she doesn’t want to. And unfortunately, the squeeze is turning some people even in open-minded places intolerant.“go-back-iowa”-fits-adams’-mayoral-strategy.html

  10. We had a falling out on her last day in the apartment. I was there to help her pack her belongings while contractors and designers were busy measuring the place for renovations. She had a breakdown. I grabbed her by the shoulders and told her to get a grip on herself. She lashed out. I left and we never spoke again. Last I heard she was living in a friend’s spare bedroom in Maine.

    No good deed goes unpunished.

    She had a pretty good outcome, IMO. She has a roof, running water, electricity and food. If she can’t afford food she can get food stamps. We’re all only one layoff away from selling and moving out. Most of us have a monthly tax bill north of $1k to stay in our homes, Prop 13 or not.

    I’m thinking of buying a semi-improved property in the boonies where I can be a hillbilly for awhile if I need to.

        1. I think you have to a pick a place you’ll fit in. Scots-Irish in the Appalachian South like guns and Trump. Rural people are also naturally exclusive of people who don’t fit in. Most urban yuppies, if they move out to rural areas with their attitudes and superiority, are in for a surprise. Help is frequently given by neighbors or withheld if your neighbors don’t like you. Similarly, the sheriff’s deputy is not going to drive 45 minutes across the county to help you if he doesn’t like you. You’re on your own.

          Johny strikes me as a guy who could fit in just about anywhere. Do a proper self-assessment.

  11. In my working-class family, the unofficial understanding with the landlord has been don’t call the landlord and the rent won’t go up. (This is in rent-uncontrolled Midwest.) I would have paid for the repair myself. Given the great deal your friend has gotten, I would have paid to get an immediate repair.

    1. That was the first option I suggested to my friend. It wasn’t appealing to her. My second suggestion was for her to brush her teeth in the kitchen sink for a few weeks. No big deal. She didn’t love that either. Her third option (which I discouraged) was to make a big fuss, demand her rights, and put pressure on her landlady.

        1. This is the correct answer for a lousy landlord, and ‘rent control’ is an irrelevant reason for it to take weeks to fix a sink. I don’t really get how asking the landlady to fix the sink is ‘putting pressure’ on her anyways when you are telling your friend to make plans to leave when she’s kicked out in the next few years. Not rocking the boat has a long-term payoff not a short term one.

          1. If it was me and I was the landlord I’d fix the sink immediately. That’s the responsible thing to do. But there are complications. Even with a living landlady my friend is highly subject to an owner-move-in-eviction if extended family needs the downstairs flat. “Grandma is getting old and we need to be close to her.” It’s better to pour honey in her ear than vinegar.

  12. Well, yeah, but the other side of the other side is that the new industries that created Buffalo, Detroit and Silicon Valley are part of an ever more rapid and powerful string of changes that aint gonna stop nohow. So for instance the autonomous vehicle, and the empty valleys and deserts to the east of the coast, could they be the next new frontier? Could autonomous vehicles and homesteading and 3d printed houses and cheap robot delivery of goods and telepresence be whats next in line? We shall see.

    1. Absolutely. But where is the locus of the next new thing? There are too many variable to know for sure. People talk about Black Swan events. But there are also Pink Flamingos. Surprise! Who could have guessed that in the 2050s the super heated economic powerhouse of the nation that’s sucking up all the smart young people and investment capital would be Jonesboro, Mississippi?

      1. No doubt. My bet is on some sort of re-ruralization and small towns. The middle class inevitably wants what the wealthy want when they can afford it and the wealthy want ranches in Montana and quaint small towns. Families love space, fresh air and a controlled number of neighbors. That means rural areas and small towns. Young people want urbanity and community, like the Mission or lower Haight back in the day, essentially small towns. And the low prices of these empty counties will be an overwhelming draw. As VR, telepresence, autonomous vehicles and expanded delivery options bring much of the culture and amenities of the city to the small town, makes travel times shorter and more convenient and allow for telecommuting that really works thats where people will go. So there wont be a center as far as I can tell, it will be dispersed across currently decaying small rural towns and counties all over the country. Though weather will likely be a prime factor in relative cost.

    2. All that stuff is never going to happen. We’re at the peak of our technology and will now likely regress since we no longer make most of the high-tech stuff we use or even the components. The engineering follows the manufacturing. “AI Winter” is your search term.

      We could clean up our cities using old tech, law and order, and old-fashioned urban planning, but we won’t. Instead, the new urbanism is all about Section 8 (what my tradesmen friends are building in SF) and ultra high-end housing.

      Sclerosis is our future.

  13. It’s a really big country and the parts of it that are affordable greatly outnumber the parts that are unaffordable. Unless you friend is stuck in SF due to career restrictions, it might be time to just say “it’s been a good run” and then find someplace more reality-based in terms of cost of living. She might actually like living around ordinary people for a change.

    1. That has been my standard pitch for a long time. In my own life I’m not the only person making these where-do-we-live decisions. So I’ve split the difference by continuing to live a pretty good life in San Francisco, but with the addition of a country home to fall back on and enough extra cash on the side to relocate if both fail for some reason. It’s all about compromise.

    2. Californians are the most arrogant people on planet earth. I was a police officer in Long Beach CA for 28 years. I retired in 2015. I took my calipers pension (+\- $8k per month), sold Two rental houses and my primary residence, and moved to my hometown, Cincinnati Ohio (I saw your recent Northside shout out, Johnny). I’m rich. Oh, and I sold the SoCal 4 plex that I bought in 1999 and 1031 exchanged it EVEN for a C Class 40 unit apartment complex in a poor but safe suburb of Cincinnati. Would I rather be living up in Paso Robles ? Maybe. Instead, I pay Ohio income tax (Instead of the 9.3% that I paid as a resident of California) and We fly out to visit California whenever we please. My reality was that I could leave California when I turned 50 and basically retire. Or I could have stayed in California and worked until I died, just to barely eek out a living. There is no such thing as a California birth right. Time to grow up.

      1. As I’ve written before, I attempted to have a foot in Cincy. Partly I didn’t go about it the right way. Partly the city didn’t give a damn about me or my goals. Complimentary neurosis on both sides. I’d do it differently today. Not sure I care enough about Cincy anymore to bother. Shrug. It’s a big country.

        I have relatives in LA who are struggling to move out of state, but it’s complicated. They lost everything in the 2008 crash. He’s 60. She’s 55. No savings. No real estate. No pension. Picking up and moving to a new place at this point is rough. The really cheap places have few economic opportunities. The places with better prospects are expensive – especially compared to their age and finances. They really are stuck.

        One word of caution to you. If California goes down your pension may not be as secure as you think. You seem to have other resources to fall back on. Good for you. But don’t be surprised if the arrogant Californians decide to pay you in IOUs when the state budget goes pear shaped.

        1. I’ve advised my cop friends to squirrel away as much as possible in their own retirement accounts and not rely on CalPERS. The reality is that it’s bankrupt and run by a guy who’s a member of the Ten Thousand Talents program. He may well have American pensioners in his best interest, he may not. The CalPERS board has hired some real losers in the past.

          California, financially, is headed the way of Illinois because of its pension obligations. In the end, the pensioners are going to take a haircut after they’ve driven all the taxpayers out (see my comments above about Section 8 housing). Buckle up.

          1. By all means, squirrel away as much cash and alternative investments as possible under your own steam. But I think you may be a bit naive about who’s running the private retirement accounts. Do you really think 401Ks and other such accounts are invested in anything substantially different than institutional pension funds? Do you really believe the private funds are managed by people with fundamentally different sets of incentives?

            1. Johnny,

              I put everything in passive, low-cost Vanguard index funds. If the stock market goes up, the funds go up. It’s this strategy. The corporate 401(k)s generally discourage active investing and usually funnel you to either Vanguard or Fidelity index funds. About half the money in the markets is indexed (passively-managed) now. I totally agree about the institutionally-managed funds, but this will gore someone’s ox on here.

              There are no guarantees with anything. I do have kids, so they can shuffle me from one house to the next if I go broke. This is the old-fashioned retirement plan. Maybe I’ll die in a fishing “accident” haha.

              1. There’s an old saw that in 1929 the stock market tanked around the time shoeshine boys started giving out stock tips. I got out of index funds around the time I saw a Twitter thread from a porn actress going around recommending investing in passive index funds.

              2. Yes, and when the market goes down, your funds go down as much as the index. In 2008 that strategy lost investors 35% and it took years to get it back.

                Active management can reduce downside risk, which is pretty important for people with significant principal to protect.

                1. Can you point us to evidence that actively managed funds can outperform the market on downside risk, in a consistent way? The whole point of index funds is that you can’t beat the market, period.


                    The takeaways:

                    “[K]ey results include the following:

                    -On the basis of returns, selecting the correct asset class tilt is approximately 10X as important as deciding whether to invest in active vs. passive funds
                    -Over the last 20 calendar years, the annual returns for Active Funds studied outperformed their respective passive benchmarks 57% of the time, across all asset classes
                    -More than ⅔ of the time, actively managed equity funds are more consistent and less volatile than their counterpart passive funds
                    -Selecting the “right” actively managed equity fund can lead to 10-30x greater returns, in relation to passive investing.

                    Essentially, advisors should have an approach that first captures the best asset mix for their client but also be aware of how different securities in that asset class could impact risk and returns.

                2. Sounds like I’ll see enough returns with you and ArgleBargleZarg managing my money to finally buy my yacht.

                  Actually, I tried active mgmt for 10 years. Like John Bogle and Burton Malkiel said, it significantly underperformed broad market indices and cost way more in fees and taxes. IOW, I wasn’t making any money with that strategy.

                  I can’t re-hash Burton Malkiel’s entire book in this thread, but he deals with the common objections in his book. Also, I’ve found that it’s impossible to make someone understand something when their livelihood depends on them not understanding it.

                    1. Good that you have found what works for you.

                      But most of the population does not have a defined benefit pension, and so we have some amount of tax-free retirement savings inside IRA, 401k, and Roth vehicles. Loss of principal is an increasing concern as retirement approaches (and after).

        2. Thanks for the thoughtful reply, Johnny. As to the CALPERS pension fail, the IMMEDIATE haircut should be to cut the pension to some arbitrary number. The first arbitrary number is $100k per year. If that doesn’t shore up the shortfall, then cut it to $75k per year. But neither of those things will happen until, 1. Prop 13 is revoked for commercial properties. 2. Prop 13 is revoked for residential properties. 3. The laws are changed with regard to funding state pensions. Retirees such as myself are already earmarked to be paid from existing pension funds. Current employees and retirees are two exclusive pools. Theoretically, the money that was “invested” during my working life are the funds that are supposed to fund my pension. The cities/counties/state are supposed to be funding the current employees at a rate that will successfully fund their pensions assuming a return of, I believe, 7%. With regard to CALPERS failing, if the largest pension fund in the world defaults/fails, the entire global market at that point will be in chaos.

          1. My guess is that the feds are going to absorb the local and state pensions as well as municipal bonds and state debt and pay them out with money they hallucinate from the ether. It’s the only short term solution that’s politically palatable. There will be horrific longer term consequences as money itself becomes increasingly worthless, but we’ll cross that bridge when we get to it. Short version – prepare for stagflation.

    3. Career restrictions are no joke. Many well paying specialist jobs are largely constrained to the “superstar cities” and leaving them for a smaller city can be tricky. Ask me how I know….

      1. Not too long ago Johnny wrote about a Canadian who had tired of housing prices in Toronto, moved out to a more affordable city in the Canadian Maritimes, and then was forced to move back.

          1. In theory I could do that now — become an independent consultant. Especially since the employer who decided the reports I used to write will be providing me with retiree health insurance.

            But does it really make sense for me to spend most of my time on sales, accounting, accounts payable, and getting lawyers to try to get people to pay me instead of doing things I enjoy and I’m actually good at? That’s the question.

  14. Too bad no one on either side of the US government is willing to face reality. They could use the same advice you have given to your friends…

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.