It wasn't that many years ago that the cost of a physician education was larger than the cost of a physician house. In most areas of the country, that is no longer the case. Now, doctors and similar high earners in most areas of the country are grappling with the substantial increase in the cost of housing over the last few years. Mostly due to a lack of supply, buttressed by a few years of higher general inflation and now combined with moderate interest rates, what started out as an issue for the average American has become an issue for high earners, too. Doctors in high cost-of-living areas (HCOLAs) have been dealing with this for a long time, but it's new for many of us. Let me explain.
My metropolitan area of Salt Lake City has long been considered a moderate cost-of-living area. The median house here now costs $561,000. Why are we talking about median houses? Doctors, who typically earn in the 97th-99th percentile, aren't really interested in median houses, neighborhoods, and school districts. Let's just look at my zip code. The median house there is $1.23 million. That seems about right. If you just want a “normal” home in my neighborhood without any recent renovations or incredible views, you could probably get that for under $1.5 million.
What kind of income do you need for a $1.5 million home to be reasonable? My rule of thumb has been to keep your mortgage to less than 2X your gross income. If one puts 20% down on that $1.5 million home, you need a gross income of $600,000 per year to afford it. Given the average physician income of something like $375,000 per year, you'd better have two of those salaries in the household. See the issue?
And we're not even talking about HCOLAs. The median house in San Francisco County is $1.8 million. It's also $1.8 million in the Flatiron district in Manhattan and $1.3 million in Falls Church, south of Washington DC. If the median DOCTOR can't afford the MEDIAN house in these places, who's buying them? Well, one of the following:
- People with family money
- Someone making a lot more than the median doctor
- Investors
- Someone who can't afford it
The going rate on mortgages as I write this is about 6.1%, and 6.1% of $1.2 million is $73,200. That $73,200 is in interest alone. If you actually want to pay that thing off someday, you'll need to pay $88,000 per year ($7,333 per month), plus property taxes and insurance. As you can see, it wouldn't be that hard in an HCOLA to be spending $150,000-$200,000 a year on housing. That's not compatible with building wealth as a physician, at least if you want your wealth to be in anything except a really expensive house.
What is a doctor to do?
How to Deal with the Housing Crisis for Yourself
Here are a few tips I hope you, as a young professional looking for housing, will find useful as you make plans and set your perspective properly.
#1 Recognize the House Is a Huge Piece of Your Financial Life
The first step is to do what I've been telling docs in HCOLAs to do for a long time. Recognize that your financial life will, in large part, revolve around your house, including its costs and its value. That's just the way it is. For many of us who bought houses in moderate or even low cost-of-living areas a decade or two ago, that's not the case. I have what I would consider to be a very nice house. Bought in 2010, massively renovated in 2020, and clearly affected by the inflation of the last few years, it's still a tiny part of our net worth, like a single-digit percentage. That's not the case for a typical mid-career doctor in a HCOLA, and it won't be the case for you. The value of their house often makes up 1/3, 1/2, 100%, or more of their net worth, especially in the beginning of their career.
Think about it. Let's say you have a $1.5 million house and a $1.3 million mortgage, $300,000 in retirement accounts, and $200,000 in student loans. Your net worth is $300,000. What percentage of that is your house? That's 500%. That's a little higher than a single-digit percentage.
So, what does that mean? That means you're going to have to spend much less of your money on other stuff so you can spend much more of your money on housing. What is that other stuff?
- Cars
- Vacations
- Eating out
- Kid's activities
- Private school
- Household assistance
- Recreational vehicles
- Second homes
- Early retirement
The old adage applies. You can have anything you want but not everything you want. If you want a reasonable house, you can have that. But you can't have that, work part-time, put your kids in private school, vacation in the south of France, and retire early. The math isn't going to math. To have this house, you will:
- Eat out less
- Drive a beater
- Travel to vacation at your sister's house in that beater and
- Work full-time until you're 66
That's it. That's the way it works. If that's not OK with you, you'll need to consider the alternatives, all of which will allow you to not spend so much of your income on housing:
- Rent
- Buy a much less expensive house in a different part of town or quite a ways from town
- Move to a lower cost-of-living area (geographic arbitrage!)
- Earn a lot more money between you and your spouse
#2 Shop Better
Here's another alternative. You can simply do a better job of house selection. Weddings are the classic “it costs what you're willing to pay” item. College education can be similar. Housing is less so, but some elements still apply. Do you really need 4,000 square feet? What if you could get away with 1,500? How much less would that cost? Can you do the landscaping yourself? What about a fixer-upper that you renovate slowly over time? How bad would it really be to live one school district over? Or have a 10-minute longer commute? Can you be patient and wait to buy in November when people who have had their house on the market since May are feeling a little more desperate? Can you rent for a while so you can buy opportunistically when something great drops on the market? You'll usually get a much better price than you would if you just swoop into town on a “golden weekend” in residency to buy.
#3 Finance Better
It isn't just the bottom line when it comes to buying an expensive house. How you pay for it matters. While it's great to get a 15-year mortgage, that's less of an option for many doctors now than it was when we bought (and paid that 15-year mortgage off in seven). So, get a 30. Or a 50. OK, maybe not the 50, but they're now being discussed. And just because that mortgage is 6.5% now doesn't mean it has to be 6.5% forever. As you build equity in the house, as your credit score and debt-to-income ratio improve, and as interest rates fall generally, you could refinance. And as your income (hopefully) rises at least somewhat with inflation, that fixed mortgage cost will eat up less and less of your income over time.
Let's consider a doctor making $400,000 who buys a house with a $1.5 million mortgage at 7%. That's a $10,000 per month mortgage payment, not counting insurance, utilities, and property taxes. That's 30% of gross income and maybe 43% of net income, way above any sort of recommendation a financial pro would make. But over time, some things happen. Income rises. Maybe it's now $550,000. Credit scores improve. Rates fall. The mortgage gets paid off. What if a few years later, the mortgage is down to $1.2 million and the interest rate is down to 5.25%? Now the payment is $6,700 per month, only 15% of gross income. Much better. It was a sacrifice for a while but not forever. Now, spending can go up, and retirement savings can catch up. You may not be working until 75 after all.
#4 House Hack
Here's another option. Yes, I know people call them “single-family homes,” but that's not actually a requirement in many areas. Still single? Get a roommate. Or three. Can you get away without that basement? Why not rent it out? Just for a few years. You can even rent out the garage and the driveway these days. If someone else is paying 10%-35% of your mortgage payment, the numbers all work out a little better. Or maybe your mom can come stay with you, and some of her pension or Social Security can go toward the mortgage. And maybe she can watch the kid and cut your childcare costs, too. Maybe help with some housekeeping and meal prep, too. Be creative.
More information here:
The Real Reason for the Housing Unaffordability Crisis
Is Renting Better Than Buying? Why We’re Financially Independent and Renting
How to Deal with the Housing Crisis for Your Kids
OK, let's turn the page now. Let's talk to those of you in mid and late career. Yeah, you've got your house. It might even be paid off. Based on some discussions I have had with WCIers, you might be swimming in cash. And now your kids are heading off to college or maybe even into their mid-20s or even 30s. The median home-buying age has now risen to 40 years. Forty years! How many houses did you buy before 40? I bought three. I can't imagine waiting until 40 to get my FIRST one. Ours was paid off not long after 40. If your kids have to wait until 40 to buy a home, that's certainly going to hold them back financially.
What can you do to help?
#1 Best to Help from a Position of Strength
Remember that important principle taught in pre-flight safety announcements to put your oxygen mask on first before putting one on your child? It applies to your finances, too. That's why you don't start saving for college for your kids until your own student loans are paid off. That's why you prioritize retirement savings over college savings, even though college comes before retirement. The best gift for your children is for them not to have to worry about YOUR finances. But if you can give a little more, that's great, too.
#2 Quit Going Bananas on 529s
Some parents go bonkers saving for college. That's so boomer. Don't do that. These days, what your kids need help with isn't college. You can probably cash flow college at most places, even if you didn't save a thing beforehand. Your kids need help getting into a house. Once you've put a little money into 529s, maybe start putting some money into a UTMA or even your own taxable account, so they'll have a substantial down payment. I'm not talking about a 20% down payment either. I'm talking 40% or even 60%. Remember, the median house in Salt Lake City—not some fancy pants place, just boring old Utah—is $561,000. And if you want them to live on the same side of town as you, that might be closer to $1 million. And your kid wants to be a nurse. RNs make $75,000 in Utah. Maybe your RN kid marries a spouse with a similar income, and they want an $800,000 house. I hope you've got $400,000 saved up for them, because they're going to need it.
#3 Save Regularly for Their House
If you've put away enough for their college by the time they're 10, maybe you can save from the time they're 10 until they're 30 for their house. Want to give them $400,000 for a house? If you can earn 8% on that investment, you can get there in 20 years with less than $9,000 per year. Hope you don't have too many kids.
#4 Boost Their Income
I spoke to a wealthy man not long ago about the dilemma the wealthy face about how much to help their kids. You don't want to kill their initiative and drive, but you don't want them suffering needlessly only to inherit a gazillion dollars when you pass. His strategy was to boost their lifestyle by 30%-40% above what they could afford. While Stanley and Danko would denigrate this as classic “Economic Outpatient Care,” it certainly jibes with the Die With Zero philosophy. If that couple had a household income of $150,000, maybe they'd give them an additional $50,000 a year. If that all went to housing, that might allow them to afford an $800,00o0 house instead of a $300,000 house. Now you get to see your grandkids AND know they're in a good school.
#5 Bad Ideas
There are a few bad ideas out there, too. For instance, co-signing on a mortgage or co-owning a house with them. Or being their mortgage banker. None of that seems like a good idea. You don't need the liability, and Thanksgiving dinner doesn't taste the same when you owe money to the person across the table.
More information here:
How to Help Your Child Buy a Home
5 Ways to Set Up Your Kids Financially Without Ruining Them
Will the Housing Crisis End?
Maybe this is all temporary. Perhaps we'll eventually build enough houses for all the people who want to own them. Maybe housing prices will crater or at least flatline for a while. Perhaps interest rates will go back into the 2s and 3s. I have no idea. If something can't go on forever, it won't, even if we can't see how it will end.
But as we've seen in HCOLAs, it can go on for entire careers. It's as if the rest of the country just also became a HCOLA. Better learn to deal with it rather than just praying it will go away.
What do you think? If you're a young professional, how are you dealing with the housing crisis for yourself? If you're an older professional, how are you helping your kids to deal with it?