May 08, 2008

HousingPANIC Stupid Question of the Day


Ever make the mistake of thinking someone with a big house, nice cars, expensive clothes and a lavish lifestyle was rich (when indeed they were simply jacked up to their eyeballs in debt)?

63 comments:

Anonymous said...

gotta link to this:

http://www.angryrenter.com/

Artur from Chicago said...

One of your predictions is coming to pass. Felons are being released from jails:

http://tinyurl.com/54oqc9

Anonymous said...

This dude sure does not look like a millionaire.

Hehehehehe.

Dny

Anonymous said...

Artur,

Funny how the release has "expired", while it's only 4 days old.

Keeps getting weirder and weirder.

Dny

America the Beautiful said...

I eventually get a shot at most of the stuff at $ .10 on the dollar right before they move.

Usually, if applicable, I get a shot at the wife (for free) in the early afternoon while daddy works his ass of trying to 'save' the family home.

Isn't this s Great Country?

Anonymous said...

What was that Ben Franklin line...

Go to bed in debt, wake up with regret.

(correct me if I didn't get that quite right)

Guess he was right. But Ben is soooo 18th century. Lets just get some bling and forget about that noise.

Mammoth said...

“Ever make the mistake of thinking someone with a big house, nice cars, expensive clothes and a lavish lifestyle was rich?”
-----------------------
Yep. Used to assume that all those folks flashing jewelry, wearing expensive clothes, driving new vehicles and bragging about their luxury vacations were just LOADED.

Now it is clear that these folks are loaded indeed – with DEBT. Thanks to HP for helping me see the truth.

Remember, dear readers – don’t allow yourself be fooled into believing the corporate message that your happiness depends upon buying THINGS.

Trust me, it doesn’t.

-Mammoth

Anonymous said...

homedebtor stooges.

It sure is nice renting and watching all the homedebtors battle it out.

Signed

Bitter renter

HAHAHAHAHAHAHA!!!

Paul E. Math said...

I once thought someone was rich who was really in hoc up to the eyeballs: America.

Remember the 20 years of prosperity that Greenspan tried to take credit for? That was just a slow but massive accumulation of debt that we are just now being asked to pay.

Greenspan's low interest rate policy got us all into McMansions we can't afford to heat, Hummers we can't afford to fuel, plasma tvs we can't afford the cable for and a retirement account full of tech stocks that have all filed for Chapter 11.

But the rest of the world will no longer let us put it on our tab. They don't want our mortgages, our auto loans, our companies with no viable business plans. And they are insisting we pay the 'real' price for their oil, copper, gold, rice and wheat.

Yeah, I once knew someone I thought was rich alright: us.

Anonymous said...

Debt is wealth

War is peace

Agent 99 said...

Yeah. I can't tell you the number of times I asked myself, "how can they afford that?" Well, well, well, they couldn't. So now all of us modest-living folk are really the ones with the dough (or at least no debt). There's a book called "The Millionaire Next Door". As it turns out, you'd never guess who really has the big bucks...and they probably do drive a Honda.

Anonymous said...

I heard yesterday that PAWN USA's business has doubled vs year ago.
You know, the guns, music and jewelry shops.

Anonymous said...

EXACTLY, agent99, anyone who thinks that people who "act rich" actually are rich, ought to read "The Millionaire Next Door".

It basically says that the lawyers who drive around in fancy cars spend so much on APPEARING prosperous, that they often have LESS net worth (RELATIVE to their income, at least) than, say, a lowly blue collar-type guy who happens to run his own car repair shop or local pizza parlor franchise.

Otherwise, why do you think the high income people are the ones crying for the Republican tax cuts?

There are millionaires among us and they are living MODEST lifestyles--and I know because there are a couple of these in my family that take the "modest" part to the EXTREME.

Common factors among the hidden millionaires?
They are often--
- married, and don't tend to divorce, and their spouses are just as careful about money as they are
- small business owners
- immigrants or children of immigrants
- they drive modest cars; even a Cadillac is rare
- they dress modestly and with no or modest jewelry

In the category of immigrants, apparently Scottish and Russian ethnicity are especially overrepresented among M.N.D.---the Russians because they have a very high occurence of small business ownership, and the Scottish (like my relatives), because they are CHEAP CHEAP CHEAP!

And other than small business equity, the magic of building wealth is---LIVE BELOW YOUR MEANS.

Anonymous said...

YUP The family that lived behind us lot's of toy's big house now there gone loss there house but our still driving big fancy cars . I am starting to feel the more stuff you have the more it weighs you down.

devestment said...

It does not take long to loose home like that in a recession, even with savings.

Anonymous said...

It's called Scottsdale

tangelo mozilo said...

Very insightful, Paul E. I second that, and further submit that it will soon become apparent who is loaded with wealth and who is loaded down with debt -- including the U.S.A.

Anonymous said...

The millionaire next door lives a simple life. The purchase a modest home, either do not have plastic or pay it off every month but only charging for things they need and keep the reward as a pure profit. They live under their means, the maximize retirement savings, purchase/drive ordinary used cars, maximize savings for their children's education, clip coupons, and keep life simple. They save up for big purchases (20% down for a home etc.) and do their homework cutting out as many middlemen and fee mongers as possible. But most importantly they understand the power of compounded interest and that if they put money away early in life even lowly 5% savings rates will bear huge dividends later in life.

Therefore outside of the super rich, I've always looked at people who have all the latest status symbols as actually being poor, financially, mentally, emotionally and socially.

I was born into a working class family and lived through the death of big steel in my home town of Pittsburgh, the disability and death of my father and the struggles of my family to keep it all together. Financially we were able to get by because of our thrift, and we had much fuller lives because we had each other and we did not need to fill it will "status symbols" that were just a waste of money. To this day when I buy something on the pricy side for my mother she scolds me and says she has no need for such things. I take it back, get her something more simple that is a necessity and remember how good we have it over these people trapped by their bling.

BubbleGirl said...

The one good thing I can say about this housing bubble is that I learned or I should say I finally learned that the way to feel financially secure is not how much money you make but how much money you don't spend. Live below your means and be frugal; reuse and recycle, fix things instead of throwing them out and of course, sock money automatically away from your paycheck into savings/401k. Debt is not good and credit cards are evil. I didn't buy a house because the numbers didn't add up and DID NOT want to be house-poor.

Just look at Warren Buffett: you know he is driving used cars, wearing normal business suits that are years old not Armani and he is obviously not spending much money on grooming. He is truly rich because he is frugal, smart and skeptical. Economics and finance are not complicated matters, simple math will do.

Most people are just trying to fill some void in their life by showing off with material things. It's pathetic and ultimately, it never makes you feel better. However, I do feel bad for people who have debt becaues of medical bills, that really sucks b/c in this country it just shouldn't be like that.

dwr said...

"Otherwise, why do you think the high income people are the ones crying for the Republican tax cuts?"

I agree with everything else you wrote, but the above part is just stupid. Why do they want tax cuts? Maybe because they pay almost all of the taxes to begin with?

Anonymous said...

"YUP The family that lived behind us lot's of toy's big house now there gone loss there house but our still driving big fancy cars."

Is there house the one over their by the pizza place where they'res a big sign that says "No child left behind"?

Anonymous said...

Otherwise, why do you think the high income people are the ones crying for the Republican tax cuts?


Get a clue, you kool-aid drinking moron. DemoCraps have been in control of Congress for almost two years and haven't even tried to raise the 15% income tax rate on their hedge fund buddies. I bet morons like you believe that Michael Moore is a regular working guy and Al Gore lives a "green" life. Anyone making over $40K/yr is considered rich to the DemoCraps. For all the bullshit Bush has given us, I will still vote for McStain.

William Behm said...

http://tinyurl.com/54oqc9

UNBELIEVABLE!!!

MSNBC EXPIRED THIS ARTICLE ALREADY (MAY 8TH) FROM MAY 5TH 2008.

This shows you how the owners of media control our information, and can downplay, hide, spin, manipulate, do whatever they want.

We are cattle.

I found the article at this link:

http://www.washingtonpost.com/ac2/wp-dyn/emailafriend?contentId=AR2008050402054&sent=yes

Anonymous said...

That guy looks like he was riding by on his motorcycle and stopped off to pose for a picture in front of some random home.

Anonymous said...

I think this crowd would like dave ramsey.

http://www.daveramsey.com/

I read the Total Money Makeover and it's pretty good book.

William Behm said...

Sorry, here is the correct link:

http://www.washingtonpost.com/wp-dyn/content/article/2008/05/04/AR2008050402054.html

Fiscal Pressures Lead Some States to Free Inmates Early

Solo said...

"""anon said:
It's called Scottsdale."""
_____________________________________
Exactly...you gotta see it to believe it.

pwnd said...

Paul E. Math for President!

Anonymous said...

In the category of immigrants, apparently Scottish and Russian ethnicity are especially overrepresented among M.N.D.---the Russians because they have a very high occurence of small business ownership, and the Scottish (like my relatives), because they are CHEAP CHEAP CHEAP!

can't beat asians (Koreans in particular) for small biz ownership....or cheapicity

Frank@Scottsdale-Sucks.com said...

Yeah I used to be like that. Everyone in Scottsdale looked so rich when I moved there, but it only took a few months to figure it out. Just seeing how angry and rude most people were gave away that they were unhappy and stressed inside.

My girlfriend thought the same thing, coming from NYC she thought everyone in Scottsdale must've been loaded with all their cars and bling, then also realized it was all debt.

"The Millionaire Next Door" is awesome but on the other hand, most of the people it profiles are of the "live poor and die rich" school of thought which I consider insane. I believe in the "live well and die rich" philosophy. Instead of living well below your means, get off your butt and work to INCREASE your means!!

Anonymous said...

I remember a rather famous case from several years ago that occurred in Palo Alto, California, one of the ritziest suburbs in the entire country.

There was a guy who killed his wife in a rage in their home. Naturally, it made all the news since crime in that area is virtually non-existent. All the media outlets were saying it would be a long, drawn out trial since they assumed that this guy MUST be loaded and would able to buy the best defense team he could muster.

Oddly enough, shortly after the made bail, his house was already for sale. After some digging, the truth became apparant:

Besides the house, the guy had absolutely NO net worth. No 401k. Barely any savings. And maxed out credit cards. And this was a guy in his late 50s!

It was one of the best examples I have seen to date of someone who "played" rich but was not actually rich. After living in this area (the Bay Area) for many years, I see just how prevalent that behavior is. For every one actual "rich" person you meet, the next 4 are just wannabes. They over-extend themselves, live the lavish lifestyle and try to play a role.

So this housing debacle came as absolutely no surprise to me considering the actions and behavior of all these wannabe players and millionaires. It just took a long time to unwind.

GT said...

millionaire next door. a must read after manias panics and crashes

my wife still thinks those flashy bling blingers are actually rich, and maybe 10% of them are, but they're not wealthy, my eyes have opened up to that

Anonymous said...

We was gonna buy us a nice big house but then we saw this site and now we keeps renting untli the price go down

Anonymous said...

Oh, hey Keith. Smug again. I saw this on Ben's blog today and it just seemed appropriate given what I wrote you earlier

"“Jay Butler, who teaches real estate at Arizona State University, said of the builders, ‘They really weren’t building homes. They were building mortgages that they could put into mortgage-backed securities in order to sell them to investors in China and France.’”

My comment - how true how true. I've always believed this to be a credit bubble chasing real estate and not a pure real estate bubble.

“Stuck in the middle are families like Brad and Sarah Milnes and their infant daughter Hannah. They recently bought a new house in Phoenix, but they have been unable to sell their home in Maricopa. And Brad, who used to sell houses here in the days when they sold themselves, has been laid off for lack of business.”

“‘We don’t want to give this house back for a hundred thousand less than we paid for it,’ Milnes said, but plenty of people have done just that. He has seen former customers and neighbors just disappear.”


I really do feel sorry for some of these poor som-bitches because many of them do not follow this kind of stuff and might not even really comprehend it if they did follow it on their own.

Anonymous said...

From AP:

Federal Housing Administration Commissioner Brian Montgomery said his agency has already provided help to more than 200,000 Americans with troubled home loans.

And he said that a temporary increase in the price of home loans that the FHA can insure will make it easier to buy and sell more expensive homes around the country.

"We believe that the new temporary loan limits will help more than 100,000 home owners," Mr. Montgomery said.

But he argued against some proposed government housing bailout programs.

"Some members of Congress want to sell bad loans to the taxpayers," Mr. Montgomery said. "I don't believe that taxpayers should pay off those bad loans."

He also voiced opposition to some plans that would provide federal funds to repair and help sell the thousands of foreclosed houses sitting vacant in many U.S. markets.

"That would primarily benefit lenders," Mr. Montgomery said.

Some of the costly housing relief plans being debated in Washington, are not "fair to American taxpayers who had no part in the subprime loan market."

Anonymous said...

what's up with that huge TV antenna on the side of the house?

Anonymous said...

"""anon said:
It's called Scottsdale."""
_____________________________________
Exactly...you gotta see it to believe it.


I raise it with a Miami and South Beach, and call your Scottsdale.

Anonymous said...

The architect who designed that house should be shot. WTF, is that some neogothic revival-sleeping beauty castle-tudor-folk victorian-renaissance style? Good lord!

the ex cable guy said...

Finally someone mentioned the bloody antenna on the side of that thing called a house! I thought I was the only one who noticed!

Anonymous said...

here in florida i used to think everyone is rich by the cars they drive and lavish lifestyles. Every other car down here is a luxury car, SL 500, 750i, Bentley coupes, I see drive by everyday. THere is a lot of money down here however there are also 2000 forclosures in palm beach county every month. I would say these cars were bought on equity. To be honest it is hard to live a normal life down here. From Pittsburgh myself, were everything is cheap and most of your income isn't spent on living everyday. I love pittsburgh it will always be my hometown. People live a simple life and family is important and it is a beer drinking sports town! Go Steelers!!! Penguins are going to win the cup!!

I know a few people personally who are screwed financially and it seems hopeless for them. I know a real estate agent who bought a $775,000 pre construction on the 12th floor in west palm beach who is getting slaughtered financially. The funny thing is when I see him around he has a different personality. He is a nicer person now then before! I still think he is a clown!

rich in fl

Anonymous said...

Having recently lived in Orange County, there were no shortages of people like this. Now we all know that most of them lived a financial lie. My wife and I lived in a nice condo, drove cheap cars and this afforded more vacations for us. In fact, my friends complained that we were always on vacation. 4-5 weeks a year is nice, but we made the choice to do this rather than live like they did. Now they don't have anything but debt and we have grand memories and a lower cost of living.

Anonymous said...

Be careful of the book "Millionaire Next Door". Don't get me wrong, it is a great book, but the people profiled in this book are likely the most boring individuals on the planet. What do they do except save and invest, not much. So when they retire, guess what they will do, absolutely nothing.

In fact, I have only met one wealthy person who actually does exciting things, albeit it at a certain luxury level. Where are the rich thrillseekers, the ones that if they could would take off for Africa for 6 months, or spend a summer driving through Canada and Alaska. Rich people don't do these things all that much, but average people like me do. I am solidly middle class, but I have been to 46 countries and have lived in Europe for over 6 years of my adult life. How do you put a price on that? Rich people are usually pretty boring at least that has been my experience. Take it with a grain of salt.

Anonymous said...

Hey Frank @ Scottsdale;

Would love to spend 30 minutes telling u my story. Decided, finally, after goiving u the benefit of the doubt (love your site though), u are a candy ass pretentuious piece of shit.

Love,

Greg ex-crackhead, ex-homeless, ex-cosmo wife, now attorney again which doesn't mean a fuc**ing thing either.
So Frnk, shut up.

P.S. Happy Mothers Day

Anonymous said...

My house is paid off, I have no outstanding loans, I have no debt.
I pay off my credit cards at the end of every month.


I own no jewelry, we have economical cars, we do our own home repairs, and we only buy when there is a necessity.

I flow 17% of my income to GVUL and 401K.

I flow another 8% to IRA, Roth IRA and Savings.

We do charity work, volunteer often and are involved in several groups like Block Watch, First Responders, Boy Scouting and the United Way.

We are in our early 50's and our net worth is substantial.

We do not go on fancy vacations, wear expensive clothing or flash money.

I am sure our neighbors believe we are just getting by.

We could stop working, and live in the same standard of living for the rest of our lives if that is what we wanted to do.

I like my job, I like what I do, so I am planning on working until they let me go.

I am absolutely sure there are people I know that look wealthy, but are living beyond their means and are living in debt and have no savings.

I'll take my situation over theirs any day.

Anonymous said...

Actually, people who loaded themselves with debt are better than you HP'ers who are living with mom and dad, driving a twenty year old Honda, shop at thrift stores, etc... People like me are in debt up to our eyeballs and I never intended upon paying back my debt anyways. So in the end the government will bail me out of my 799K townhouse (out of that I extracted 350K in equity and it was all spent). Thank God we don't have debtors' prison anymore!

Anonymous said...

Blogger Paul E. Math said...

I once thought someone was rich who was really in hoc up to the eyeballs: America.

Remember the 20 years of prosperity that Greenspan tried to take credit for? That was just a slow but massive accumulation of debt that we are just now being asked to pay.

Greenspan's low interest rate policy got us all into McMansions we can't afford to heat, Hummers we can't afford to fuel, plasma tvs we can't afford the cable for and a retirement account full of tech stocks that have all filed for Chapter 11.

But the rest of the world will no longer let us put it on our tab. They don't want our mortgages, our auto loans, our companies with no viable business plans. And they are insisting we pay the 'real' price for their oil, copper, gold, rice and wheat.

Yeah, I once knew someone I thought was rich alright: us.

May 08, 2008 4:19 PM

I disagree. The world needs America more than we need the world. The world depends upon American leadership and ingenuity to get things done. We are number one in business, culture, entertainment, fashion, etc... Everybody wants to be like us!

Anonymous said...

So you dopes saved your money and with hyperinflation in America it is slowly being eroded. Nice move, you guys are the smartest guys in the room!

keyser soze said...

Nah Keith, I've been a lender most of my adult life. The posers don't fool this ole dog.

Denton Ward said...

the misconception that most people do not understand. nice things doesn't always equal wealth, but instead debt. debt that won't create income streams or make them money in the long term

Frank@Scottsdale-Sucks.com said...

"what's up with that huge TV antenna on the side of the house?"

They can't afford cable or satellite since the house payment reset ... lol

Anonymous said...

Yes. I'm pretty naive. I live in San Diego and during the housing bubble I would get pretty depressed about not having enough money to buy a house. It seemed like everyone I knew had a nice house and nice cars, etc. I wondered: how come everyone is making so much money, but we are struggling even though we are highly educated and employed? It never occurred to me that people were taking on mortgages for 10x their income with artificially low teaser rates, and that they were not actually the *owners* of their houses and cars in any meaningful sense. In retrospect, I'm sure I could have been one of them if it had even occurred to me that a bank would give me a mortgage just out of the clear blue, not related to how much I make or my lack of downpayment. But I never dreamed that a bank WOULD do this, let alone do it for millions of people across the country.

Reality said...

Life is a little like portfolio management. Diversification and contingency plans are the key, because you never know when the 6-sigma or 9-sigma event might happen. Diversification is not just about buying different stocks. There are numerous classes of vehicles in which one can "save" in preparation for contingencies: stocks, bonds, demand deposits ("savings"), cash flow positive real estate, energy-efficient shelter, tangible and liquid stores of value in times of crisis, your own health, happiness and how they all might be sustained at least for a year or two in the event of your primary source of income evaporating for whatever reason.

All these asset classes take turns for their time in the sun; nothing go up linearly or exponentially forever. Putting all of one's eggs in one basket based on the most recent performance is a guaranteed formula for disaster. Living within one's means is not about being able to pay bills with current income or asset appreciation linearly projected to perpetuity. Linear projections of future profitability are guaranteed to be obliterated in our cyclical world. Those projections are for artificial entities like corporations that can use them to con money out of bag-holders at the peak of a cycle before spiraling down, declaring bankruptcy and start over; there is no reset button for life. While in prosperous times, there are public rescue plans like personal bankruptcy protection for the ill-prepared. In the coming hard times, when the land becomes lean and there's little resources to spare for anyone, the grasshoppers will only have their natural fate.

Anonymous said...

Reality Said (9 May @7:24 AM):
YES!!! And thanks for the well-rounded perspective. I hope you're a public school teacher.:)
I'm copying your comment to share via email. Hope you'll post a follow-up with how you WOULD define "living within one's means." Thanks!

theloknesmonster said...

Ever make the mistake of thinking someone with a big house, nice cars, expensive clothes and a lavish lifestyle was rich?

No.

I have always wondered how people could allow themselves to become debt-ridden. I think they somehow believe that they don't actually have to pay it back.

You hand over a credit card instead of money and it must not seem like you really have to pay for it. A bill comes, you write a check, and repeat.

If most people considered the amount of hours they had to work in a week to buy that unnecessary item, they would probably leave it in the store.

But they never do...

Anonymous said...

It's pretty easy to know who the truly rich are... executives who got shares or options, business owners who've got a good stable business (when the money is made too fast, chances are quite high that it will be spent just as fast).

Everyone else I consider wanna-bes when they expose expensive purchases.

I just don't understand why middle class people keep on extending themselves so much and put themselves in precarious situations to look better than other middle class people when it is so easy to see that they are just middle class.

The truly wealthy see right through it!

Frank@Scottsdale-Sucks.com said...

I just don't understand why middle class people keep on extending themselves so much and put themselves in precarious situations to look better than other middle class people when it is so easy to see that they are just middle class.

If they want to live so large, I can't understand why they don't just work to get out of the middle class. Then again, I suppose credit is the easy ticket.

Anonymous said...

I own no jewelry, we have economical cars, we do our own home repairs, and we only buy when there is a necessity.

I flow 17% of my income to GVUL and 401K.

I flow another 8% to IRA, Roth IRA and Savings.

We do charity work, volunteer often and are involved in several groups like Block Watch, First Responders, Boy Scouting and the United Way.

We are in our early 50's and our net worth is substantial.


And you also have no freaking lives. God almighty you are in your 50s and live like you're 93.

I am all for being prudent with money. But there is a fine line between prudent and stingy. I too have no debt and contribute a good chunk of money to my SEP every year.

But I also own a $75K classic sports car (bought with cash and now worth close to $100K thanks to the boom in this niche) and my wife has her share of bling. I know jewelry is silly, but whatever. I enjoy driving a "silly" sports car. She enjoys wearing big shiny rocks on her fingers. Each to his/her own.

Just like FBs live on one extreme end of the spectrum, being in debt up to their eye balls, you live at the other extreme. What good is saving all that money if you never enjoy it?

Ozymandebtus said...

"My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!"

Hardy Har Har said...

I don't care for P.J. O'Rourke, but he calls the required semi-cricular windows on all McMansions "yuppie scuppers". Hah!

Anonymous said...

It's pretty easy to know who the truly rich are... executives who got shares or options, business owners who've got a good stable business (when the money is made too fast, chances are quite high that it will be spent just as fast).

Let me tell you about business owners, the majority of them maintain a high standard of living based on supplier extended credit. They get paid on NET 30 and then pay the supplier late on NET 90 to support their fake lifestyles, until they lose the supplier and jump to another. Since that era of easy credit and stiffing suppliers is gone now because of the credit crunch and no more housing ATM, small business bankruptcy is skyrocketing, 44% higher than April 2007. And it will only get worse.

Anonymous said...

I admire Ivanka Trump's style. Not only she's hot and polite, but also very thrifty. Here we have a girl who was born into wealth but know the value of a buck. Got a degree in Finance from Wharton, honor student, works for Trump but prefers to fly coach to save a buck.

I had to laugh when a reporter asked Ivanka what she was wearing, expecting an expensive response or fancy designer. Ivanka told her that was a vintage dress that she had bought at some thrift store for 15 bucks. Nevertheless, she looked stunning in it. It's not a matter of money; it's a matter of principle. You can say whatever you want about Trump, but he sure knows how to raise good kids.

Reality said...

Anon 10:19,

Thank you for the endorsement. Please do feel free to forward my previous message. Some day, when I have more structured free time, I may consider putting together a 1-2hr lecture for graduating college seniors, a modern equivalent of a "home economics" class on how to channel their soon-to-arrive stream of income into long term economic freedom.

Based on the earlier discussion on the need for robustness for the personal wealth portfolio, I consider an approach that delivers that kind of robustness and long-term economic freedom as "living within one's means."

Long term economic freedom is the eventual goal that an acceptable level of living standards can be sustained indefinitely without the current primary source of income; in other words, retirement plan. That is a long term goal that will take 2-4 decades to achieve for most people (if at all), and has to be approached one step at a time, built up through savings in various monetary and non-monetary portfolio elements.

The robustness of of one's wealth portfolio is of much more short-term relevance. It relates to the ability to absorb disruptions in the markets and in one's own conditions for a year or two, on a cash flow basis. There should be enough non-interrelated marketable assets to cover 1-2 years of interruption of the primary source of income. For example, if a person makes $100k a year from his job, and has a mortage of $2000/mo, plus another $1500/mo fixed living expense, he should have at least $3500x12 = $42000 (or double that to $84000) marketable assets that are completely unrelated to the house itself: stocks, bonds, savings etc. Primary residence and real estate in general is not a marketable asset, aside from rental profit that can be expected in a year's time because real estate is not quicly sellable.

Once the retirement funding goal is met, and that short-term reserve amount is met, the person can start look for additional pesonal enjoyment. A car that has a monthly payment of $400? well, then he needs to have another $400x24 = $9600 addtional funds saved up first. Cash car purchase is usually preferable unless there are specific tax or incentive advantages. Want a house that has a $8500/mo fully amortized mortgage+tax+2%maintenance? Save up $8500x24 = $204000; of course not all in savings accounts, but mostly in assets with good appreciation yet unrelated to housing; e.g. tech stocks, commodity/commodity stocks, etc. not homebuilders or banks (which would have similar risk exposure as the house itself). Remember, those have to be liquid assets, not money in retirement accounts that are restricted by tax penalties if withdrawn; i.e. assets in addition to retirement accounts set aside according to long-term goals.

As you can see, in order to buy a million dollar house, besides meeting the cash flow requirement (fully amortized mortgage being less than 28% of income; the person needs to make about $300k+), there has to be some $400k already in the person's holdings: with half of it liquidated for the 20% down payment, and another $200k+ in other assets (non-retirement funds) as reserve. Another house worth $200k doesn't count as that would be co-dependent asset to the new million$ house in case of a major housing market event.

When these conditions are met, one can enjoy whatever he/she likes and know it's within his/her means, so long as corresponding additional assets are set aside as reserve whenever a new acquisition comes with liabilities. Of course, if you are making double or triple the money doing exactly the same thing as you had been doing five years earlier, you know chances are good that your industry is in a bubble; sock away for the coming 7 lean years instead of leveraging up the peak income rate. 7 fat years followed by 7 lean years; that's a story familiar to authors as early as 1800BC, as in the book of Genesis.

Anonymous said...

about a year and a half ago my wife called me while I was leaving work and asked if I would come help one of my daughters friends family move. It was like a tuesday in late winter. I follow the directions to a new suburb of 5000+ square foot homes, in a $1 million dollar neighborhood. Then i end up helping this family move in a borrowed u-haul type truck with like 300,000 miles on it that they borrowed from a friend. to contrast- When I moved a couple streets over, a few years ago, I hired a moving company to do all my dirty work, rather than burdening my friends/family for free labor. the price, $700. I thought wow, here I am helping these people move in to their $1M house, and they are too cheap to hire a moving company for $700.