Unless you have been living under a rock, you’ve seen the recent brouhaha over the video of a podcast Gary Vaynerchuk’s video where he completely shits on homeownership. In case you missed it, the first part is all about homeownership:
The real estate commentariat more or less exploded, partly because Gary Vee has long been a hero to many a REALTOR (the reasons for that are a whole different series of posts), and partly because he’s a major (foul-mouthed) influencer.
The responses from the industry have been more or less predictable and largely correct. Homeownership builds wealth, renting does not. It’s stupid to rent if you can buy, unless you have some excellent reason for doing so (like you’re on a temporary gig for work or something).
Thing is, I think most of us are missing the big picture context of this, and I’m not excluding Gary Vee from the “missing the forest for the trees” deal. There’s a lot more going on here, and has more to do with inequality in American society — especially for the younger generation — and the changes in the rules for success that Gary Vee recognizes instinctively but does not articulate well, and the industry simply does not want to recognize at all.
Those of you who read my February Red Dot on Millennials know where this is going. The rest of you, well, come along for the ride.
The Response from Real Estate
This video from Byron Lazine and Nicole White is a decent example, and it’s worth watching since their videos go up on Inman:
Nicole talks about how people can buy houses with little or no money down. Byron quotes the real estate coach Tom Ferry’s tweet to Gary Vee about wealth appreciation. And ownership is forced savings.
Byron defends Gary Vee by suggesting that he was talking only about entrepreneurs whose needs for working capital are different from most people.
Indeed, Gary Vaynerchuk himself walks the podcast comments back. He talks about how what he said was just his personal opinion, for a very small percentage of the population (successful entrepreneurs), and so on. You can find it in this thread, which is what interested me to write in the first place. It comes from my friend Nicole Lopez-Cummins, a young REALTOR out of Houston:
In case FB loses Nicole’s post, or something breaks, let me post it:
Love me some Gary, however here in HTX, I can guarantee that “Sally” isn’t putting $20k down on a 100k home. Sally is likely an FHA buyer bringing $3500 down OR qualifies for SETH or TSHAC and is bringing $0 down. Plus, Sally is likely going to get beat out by investors paying cash for rentals.
It’s clear that this guy who offers big dollar real estate conferences doesn’t or hasn’t spent time inside the industry to understand the importance and intricacies of how real estate works. I’ve sold homes to 20-somethings who have turned around and sold a few years later at a high level profit that wasn’t subject to cap taxes and have walked away with 6 figures after.
There are few other opportunities that create that kind of return.
Plus if Sally is an entrepreneur Sally would benefit from the interest deduction and the ability to write off up to $10k in property taxes. Trust me, if you are an entrepreneur and 1099’d you need all the help you can get.
Cool theory. Flawed Logic.
Let’s talk about the importance and intricacies of how real estate works for a moment.
First of all, let’s point out that Sally isn’t going to put down $20K or even $3,500 on a $100K house, because none of the houses in Houston where Sally can live without constant fear of rape and murder are $100K. If she wants to live inside the 610 Loop, the median list price in the Heights is $489K, in Montrose it’s $590K, and in West University, it’s $1.1 million. In a safer neighborhood in the suburbs? Katy is $315,970, Sugar Land comes in at $418,995 and The Woodlands comes in at $447,995. Even at 3.5% FHA down payment, assuming Sally can qualify, she has to come up with a minimum of $11K for a median house in Katy, and $17K for something in The Heights.
Now… what if Sally is an entrepreneur? What if she’s self-employed?
The Problem of 1099
The real problem of being an entrepreneur for homeownership is that it is significantly more difficult to get a mortgage than if you are a standard W-2 employee. Every real estate agent knows this, because every real estate agent is a 1099 self-employed person. The lack of certainty in cash flow for self-employed people makes it difficult for a lender to evaluate them. This is not to say that there are no ways to get a mortgage, simply that is is more difficult than for a W-2 employee.
Look at the FHA guidelines for self-employed people as an example. People do do it all the time, but let’s not pretend it’s easy.
And then there are the assistance programs that Nicole mentioned: SETH and TSAHC. SETH is the 5 Star Texas Advantage Program, and provides down payment and closing cost assistance to a maximum of 5%, based on the loan amount. TSAHC is the Texas State Affordable Housing Corporation. Again, it offers down payment assistance of up to 5% of the loan amount to buyers with a 620 FICO score. TSAHC is limited to buyers earning up to 115% of the Area Median Family Income. I went through the eligibility quiz for my old Houston area neighborhood, and was told that if my gross income is more than $86,135 a year, I’m not eligible. Well, let’s just say that very few of my old neighbors were getting by on $86K a year in gross family income.
So to qualify for all this assistance, you have to be lower income, or at least not significantly above median income. But it’s tough to qualify for a mortgage as a self-employed person if you’re not successful and showing growth and stable income… which typically means higher income…. It’s a bit of a Catch-22.
Which brings us to the real issue.
The Real Issue: Elites vs. Non-Elites
Thing is, Gary Vee spent a ton of time walking back his statement, talking about “not a good use of capital” and “entrepreneurs” and such. At one point, he says that the title of the video clip in question was “I’M pissed I own a home” suggesting that it was just his personal take on his personal situation.
Now, I’m not a big Gary Vee fan; I don’t watch his stuff, I don’t go to his conferences, I know who he is, but he has little relevance for me. So I don’t know what the rest of his go-go entrepreneur stuff is. What I do know is that huge chunk of the people who call themselves entrepreneurs are not entrepreneurs by choice. That is especially true among Millennials and younger Gen-Z people.
Gary runs a $200 million media company, by his own admission. Prior to that, he dropped out of college to run his family’s successful wine business, and turn it into something more. That’s not most “entrepreneurs”. That’s the Elite entrepreneur.
For the Elites, homeownership is simply one option among many. The talk from real estate agents that homeownership builds wealth and forces people to save falls on deaf ears to people whose current net worth is already in eight and nine figures from their successful businesses. Ask yourself this: if Gary Vee wanted to buy a house, do you think he even needs a mortgage?
Just like with Millennials, when the media talks about entrepreneurs, they want to talk about the high-flying Elite entrepreneurs, who start cool venture-backed software startups, or high-fashion boutiques, or cool web design firms or craft breweries or whatever. They’re not talking about the guy selling knockoff Gucci bags on the street, or the handyman charging $20 an hour to do small repair jobs for you.
For the Elite entrepreneur, with hundreds of thousands of dollars in the bank, the choice is between spending $200K on the downpayment on a $1 million home (and let’s not pretend that guy is gonna qualify for 3.5% FHA loans, or even wants to), or spending that on a new CNC machine for his factory, or on a Lamborghini Huaracan.
The Non-Elite “entrepreneur”? That guy or gal is more likely self-employed not out of choice, not out of a passion, but because they can’t get a decent job. So they’re working at Starbucks, while driving for Uber, and doing web design gigs off of Upwork at night. That’s an entrepreneur, sure, but do you really think they can even dream about homeownership?
What Did Gary Vee Get Wrong?
If you watch more of the video I embedded above, you get something interesting that Gary Vee says. You have to watch across multiple clips in the same compilation video.
What he says is:
- I do not think the American Dream should be buying a home anymore.
- Parents are tricked forcing kids to go to college when 97% of kids should not go to college.
- College and buying a home was awesome in 1954 and 1973; problem is it’s 2019.
- I’m proud of the fact that I was a shit student.
- If you wanna work at Goldman Sachs, you better get great grades, and go to Wharton or Harvard.
- Reality is, the world changed. College was built to train workers for 1954. If you’re taking on debt to go to college today, unless you’re going to a top 3% school, you’re in deep shit.
In the February Red Dot, I quoted the following from an article on Huffington Post called “FML” (for Fuck My Life):
And so the real reason millennials can’t seem to achieve the adulthood our parents envisioned for us is that we’re trying to succeed within a system that no longer makes any sense. Homeownership and migration have been pitched to us as gateways to prosperity because, back when the boomers grew up, they were. But now, the rules have changed and we’re left playing a game that is impossible to win.
We start earning less money, later. We have more debt and higher rent.
Which means we aren’t able to save.
Which means we can’t buy a house or prepare for retirement.
Which means that unless something changes…
All of us are headed for a very dark place. [Emphasis added]
What exactly did the writer of FML and Gary Vee get wrong about the present situation of the vast majority of younger people? The rules have changed. The world has changed. It isn’t 1954 anymore, nor is it 1973. Tom Ferry citing statistics about 65 year olds who own a home vs. 65 year olds who don’t is completely irrelevant to the younger future consumer.
Of all of the gurus and commentariat talking about Millennials today, Gary Vee is the first person I’ve encountered who points out the obvious: a college degree isn’t worth very much, unless you’re going to a top tier school and have awesome grades. Goldman Sachs is not recruiting at your local community college. Google does not hire people with B averages from Nowheresville Technology Institute. You have a far greater chance of getting a job at a major tech company today by dropping out of high school, teaching yourself how to code from the Internet, becoming a hacker, then getting arrested by the FBI for breaking into some bank than you do by going to a second-tier state college and racking up $50K in student loans while getting an A- GPA in Computer Science. The rules have changed.
What Gary Vee got wrong, it seems to me, is that for that even-more-tiny sliver of entrepreneurs who are neither Elite (because they haven’t succeeded big yet) nor the gig-economy struggling types, whose businesses aren’t the kind that can scale hugely by investing in it (think local plumbers), then putting their cash into a house instead of renting might be the smart play.
But that’s an awfully small niche for real estate agents to be targeting, isn’t it?
The Rules Will Change Again
For the real estate industry, the real challenge of Gary Vee is something altogether different, and a bit subtle.
Gary Vee and his whole “entrepreneurship” shtick is based on his personal life experience as well as what he’s seeing for himself with his own eyes out in the world: the world has changed. He’s not just knocking homeownership; he’s knocking college and going into debt. He’s knocking the entire premise of the American Dream as we knew it from sometime in the New Deal up until (probably) the Great Recession.
In that, Gary Vee is merely noticing what Millennials themselves have been saying for years. The rules have changed, and they’re being called lazy and entitled and stupid and spoiled. In some cases, that criticism is deserved. In other cases, it is not.
The subtle challenge is what that means going forward for the rules. Homeownership in American depends upon decades and decades of government support. Read Nicole’s post above to see just how many programs and tax benefits and deductions and such are allotted for homeowners. All of that support might have been entirely justified in 1954 and 1973. Problem is, it’s 2019.
And homeownership rate among Millennials is 8% lower than it was for GenX and Boomers at the same age. And there are plenty of reasons to think that homeownership rates will never break 50% among Millennials. (Read the report if you want the full analysis; or trust for a blogpost that I’ve done the research.)
Do we really think the rules that make homeownership such an engine of wealth creation will remain the same, if 51% of the voters are renters?
Think about it. Really, think about it. Reflexive tribalism or “Get off my lawn!” stuff isn’t going to help. Think about it, because all of our futures depend on it.