KlangFool wrote: ↑Sat Mar 27, 2021 8:30 am
jj45 wrote: ↑Fri Mar 26, 2021 4:30 pm
It's easy to say prices are insane and everyone is in an irrational frenzy. It might even be true. But I wonder if something else is going on.
Here is one theory that seems consistent with the 30-something professionals I know.
The past few decades have seen an enormous growth in income inequality. Many of the young professionals I know make much more than their parents.There are a lot more people with high incomes and two-income families are the norm. Their household incomes are $200K-$500k. Most of them grew up solidly middle class and don't have expensive tastes. They don't want fancy cars, they don't want huge houses, they don't want private jets. They want to live in a nice house like the one they grew up in and in a nice neighborhood with a tolerable commute. Their middle-class lifestyle means they have a lot of disposable income and they are willing to use it to buy the house they want. So they bid up the price to get what they want.
Spending 50% of your salary on housing may seem insane but other expenses don't scale with salary. Percentage of salary is not the right metric. They don't eat 4 times more food than their lower income friends, they wear jeans and t-shirts like everyone else, and they drive modest cars. So take a family income of $300K, $200K after taxes, spend $150K on housing, and you have $50K for everything else. About the same as someone making $80k, which is 2.5x the median income.
In this picture, there is a large group of people with high salaries living modest middle class lifestyles and the excess income all goes to buy what used to be solid middle class homes. And there are enough of them to bid up the home prices. Is it true?
jj45,
And many of them work in the tech industry and a substantial part of their compensations is based on RSU. This is exactly the thinking that encouraged many of my peers to overspend on their houses before Telecom Bust and DotCom Bust. They felt good about their job security and their salaries could only go up.
Then, Telecom Bust and DotCom Bust happened. The houses destroyed them financially.
Being in the 30s means that those persons are too young to experience Telecom Bust and DotCom Bust. Hence, "this time it will be different".
The story had repeated itself many times.
KlangFool
Market risk certainly is legitimate. What I see is people taking on vast quantities of personal, individual risk. I don’t like risk, particularly.
Sure, some people have contingencies and mitigation’s and plans upon plans, however most people do not - falling into the trap of “you don’t know what you don’t know” and using “the norm” as justification. That’s fine, until it’s not.
The special difficulty in these bust periods is that the pendulum swings so widely that it’s nigh on impossible to get out without disaster or loads of pain. Add that to many people involved lack the historic perspective (or, like you said, feel that this time is different because of xyz justification) to realize the risk involved.
Random Example: discussions of interest rates on savings...where 0.25% is beating 0.15%...whoopty-do..historically, those are both nadda earned).
I agree with the conservative view that No Way would I get into the massive mortgages commonplace in some areas, even with multiple 6-figure incomes. No. Way.
In my lifetime, our house and the others (I.e. grandparents’ - properties with a long time horizon for ownership) I know fit the rule of doubling every 10 yrs, but - like the stock market - it can be a wild ride. Our family grew up in the greater DC area - within a commute, but not super close (though, what is a commute, these days?). Anyway, housing generally followed that “double every 10 years” rule, except special circumstances, of course. Dad’s house, bought for about 80K in 1979, once worth (based on neighbors’ actual sales) about $600 pre-bubble, dropped precipitously 2008-9, slowly rose, and sold last fall for about $1.1M with a complete redo to be beautiful, expanded, vault the ceilings, high end marble white and gray everything, custom this and that. I don’t know if the sellers took a loss, but I bet it was close.
So if I’m doing the rule by decade, not actual value, I’d expect:
1979 - $80K
1990 - $160K
2000 - $320K
2010 - $640K
2020 - $1.28M
Not far off. I like that “rule” because it is a broad brushstrokes ballpark that stays out of the details of was the kitchen updated last year, was maintenance pristine...on average and barring something crazy in the market like a pandemic. Long term it’s fit the houses I’ve owned or know of in the family. Obviously,our house is not an investment where we expect to have doubled value in exactly 10.0 years, and the truth is we moved more frequently, but in the very long run, it’s fit.
Lately, we’ve looked for a second property and haven’t found what we wanted. So we wait, and we sit on the funds. So be it ! I don’t expect an drop, but I do know that deals can be found in any market if you’re patient. We can be patient.
Please spell out new acronyms. Thank you.