Not long ago (15 years, say) you could buy a decent house in San Francisco for $40k down and $2.5k a month.
For many, that was doable, especially since it cost $2.5k to rent that same house. And, as icing on the cake, you got the appreciation ride — an upward rise that seemed all but assured because it had been a fairly steady up of 7 or 8% per year over the course of several decades, and which therefore generated an annual wealthflow well into the five figures. Over time, it seemed, the escalator went one way only, and that way was up.
(Yes, for all you tax wonks out there, you also got an income tax break on the mortgage interest, which brought your monthly payment down, in practical terms, to something in the neighborhood of $2k or less, but I leave that out here because that tax benefit would be just about used up by all the other constant money-outs arising from home ownership, such as insurance, maintenance, property taxes and the like.)
So $40k down and $2.5k a month bought you a home. Middle class people could, and did, accomplish this.
15 years ago, then, if you were here for the long or semi-long haul, and if (a) you had, say, $100k of stored-up wealth, $50k of which was in cash that you could use for a home purchase, and if (b) you could afford housing costs of, say, $3k a month, it was pretty much a no-brainer to buy.
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Today, not so much.
Today you need to double-and-then-some all those ownership numbers; rent, on the other hand, you needn’t even double.
So now the buying decision numbers-in at $80k, maybe $100k, for a down payment (I leave out FHA loans, which have very low down payment requirements), and $4.5k, maybe $5k, a month to the bank.
And the former icing on the cake, once so sweet, comes bundled with a bitter pill, as the nice appreciation ride now comes decisively bundled-in with the very real possibility of a depreciation tumble. The escalator now moves both ways.
At the same time, these days the renting decision numbers in at, say $4k, maybe $5k, a month for the same house.
So both buying or renting a house in SF involves a big monthly nut number, and buying involves coming up with $100k of cash to boot.
And that means, definitively, that middle class people can’t afford to buy, and often can’t even afford to rent.
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One of the most fascinating, most discussed factoids emanating from the wonderful book Outliers, by Malcolm Gladwell, comes from a study showing that professional hockey players tend to be born in the first quarter of the calendar year.
One explanation for this result is that (a) most professional hockey players are from Canada, which (b) uses a school-year that starts in January, which means that (c) when kids are first playing hockey in school with their classmates, the first-calendar-quarter-born children in the class are the eldest, which means that (d) the older kids are physically larger and behaviorally more advanced than the younger kids, so that (e) the older kids excel more in hockey than the younger kids, and therefore (f) the older kids receive far more coaching than the younger kids, which (g) makes the older kids even more advanced hockey players than the younger kids, which results in (h) the older kids getting even more coaching than the younger kids, which (i) makes the older kids excel at hockey even more, which, (j) over time, separates out the first-quarter-born kids from all the others — like a nuclear centrifuge separating Uranium 235 out from Uranium 238 — and turns them into professional hockey players at a much higher rate than kids born in any other part of the year.
Well, think about it: in their early years, kids develop fast, so that the difference between a child who is 8 years old and one who is 7 and a half years old can be substantial. Magnify that over the next 15 years and what you get is hockey players that are mostly born in January (er . . . hmmm . . . should all parents-to-be out there do what they can to time their deliveries to occur in the early weeks of the school year . . . ?).
A professional hockey player born in December, then, has had to really surmount some tough hurdles, rather like the case of a short basketball player. In both instances, the person has no control whatsoever over the quality that makes him or her more or less likely to become great in a given field of human endeavor (unless you assume that people have some control over their height, or when they were born . . . ).
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Do you see the connection? People now in their 50s and 60s and on had a chance to buy a home in San Francisco, at a time when doing so, while always terrifying (anyone who wasn’t scared when they bought their first house in SF wasn’t thinking . . . ) was pretty much a no-brainer.
But people in their 20s and 30s did not have this window of opportunity. For them buying a house might never be reachable, let alone a no-brainer, and it comes bundled in with a whole lot more very-scary than it did before.
Were the younger folks less smart or able than the older folks? Not at all. They just happened to be born at a certain time in the history of the American economy that dealt them a certain set of realities, and their reality is that home ownership might never be part of their life.
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Generally speaking, then, when people talk about how everything that they accomplished they accomplished entirely on their own and without anyone giving them a leg up, they are, at least, unaware, or, at worst, wrong and pig-headed.
And more specifically, when people in their 50s think that they are smart because they bought a house 20 years ago, and also believe that people in their 30s should stop complaining about how expensive houses are, as in, After all, I bought a house when I was your age, so why can’t you?, they are suffering from a lack of awareness — from an inability to perceive how of-a-time all that they have accomplished really is.
Instead they should be thinking, There but for the grace of [fill in your favorite grace-provider here] go I. If I’d been born 20 years later, I’d be in that same sorry boat.
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So if you had the misfortune to buy a house at the wrong time, or the great fortune to buy a house at the right time, remember, some of it is simply luck of the draw.
True, if you bought well, it might have been the result of your skill, cunning, smarts, prescience, wisdom and wonderfulness, but it could also be that you are a product of your environment and of circumstance — that you were born at a certain time, at a certain place, with a certain set of givens unto you, givens, it can be reckoned, that place you among the most fortunate people to have ever roamed on this old world of ours, regardless of when your parents embraced and regardless of when your patents conceived the life which is you.
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‘Til tomorrow, then, here’s to your financial health and may it continuously improve.
About 1,250 words — about a thirteen-minute read (sans linked-to content)
Hi John, I really appreciate your humor and info here on this explanation of what people go through emotionally when they are investing. And what to do about it!! And you do it all with an Andy Rooney sort of look at it. What you don't like Andy Rooney? That's OK he does not care. Carry on with your blog, I read 4 of them and they were jam packed with good info. Barbara Martin