patrick.net

I know people in the Bay Area make a bit more than people in Ft Collins, but not that much more. WTF?

Not really, it's just that Bay Aryans are "poor" at the $200K income level.
www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/04/22/EDJK1097DC.DTL

A 200K salary cannot even comfortably afford a median-price house in the Bay Area (3x income). Enough said.

A salaried person is never rich.

In today's funny world of US Peso, even a billionaire American may not be considered rich.

Kurt, since the economy is a zero-sum game, the ability to privatize gains and socialize losses is the surest way to profits.

This guy has between $500k and $600k on credit cards at 0% or 1%. He told me last month that in 2007 he made over $50k from that alone.

So your buddy has not only found a way to pay only 0% or 1% beyond a teaser rate on credit cards, but a way to avoid the typical minimum payments,transfer fees, and credit limits. Not only that, he has can take that money and make a consistant low risk 10% return.

...the ability to privatize gains and socialize losses is the surest way to profits.

Well...if they can pull that off and students comply willingly forever. I would suggest it's not working well because obviously society (students) are resisting that degree of personal overhead. Textbook piracy via digital means is one result. I've seen this from the inside, which to me carries more weight than a clever aphorism wrapped in assumptions. Sorry--just being blunt here, but if businesses wants to survive in the coming economic climate, they're going to need to think outside the "smart" little box they've made for themselves.

Headset
obviously ptiemann's buddy is Bare (tm) Sterns and the credit cards are the Fed. The conversation he relates must've taken place before that little implosion thingy in March. It seems he was to shellshocked to come here and tell us the story earlier.
Sorry, could not resist either.

Sorry–just being blunt here, but if businesses wants to survive in the coming economic climate, they’re going to need to think outside the “smart” little box they’ve made for themselves.

Of course, adaptation is the only key to survival.

I would second the claim that the $200K couple are poor in BA, particularly if they are stupid enough to take up a $800K or $1M mortgage loan. If they don't commit themselves to a depreciating asset with fixed obligation, then they are doing quite ok.

But by no means are these people rich. Far from it. People who are rich make only passive income and get taxed at 15% max. If you HAVE TO get up in the morning to go to work, you are not rich. Rich people go to work by choice, not because they need to pay their bills.

If you HAVE TO get up in the morning to go to work, you are not rich.

If you have to fly airlines, you are not rich.

If you have to drive yourself, you are not rich.

If you have to live in one place, you are not rich.

Robert Shiller endorses taxpyer funded homeowner bailouts:

http://biz.yahoo.com/ap/080422/economy_shiller.html?.v=2&.pf=real-estate

And you renters thought that Shiller was on your side! HA HA HA HA.

Peter--
I'll apologize for being a bit of a hothead, lol. I thought the assumptions within that industry were incredibly short-sighted towards the end-user (no surprise, huh?). I have since consulted towards a leaner, more flexible approach and the continued resistance is wearing on me. That may be my problem, but at least my thinking is more forward. Anyway...just popped by for a rant, carry on...lol.

"If you have to drive yourself, you are not rich."

Not true. Paris Hilton, Britney Spears, and Lindsay Lohan all drive themselves. It is easy to know when the 3 of them are on the road since all you have to do is look for expesnive cars that are banged up after crashing into a tree.

Which Peter? :)

Not true. Paris Hilton, Britney Spears, and Lindsay Lohan all drive themselves.

Obviously they are NOT rich... although I am sure they can afford chauffeurs.

BAI,

LOL!

How about a guy in fly-over-land making $3,600/mo disability, is he rich?

He pays no income tax
Does not have to work
Can take a cab
Can live anywhere, job not an issue

Which private jet can he afford?

I lived in NYC and I NEVER dorve myself. I either took a cab or the subway. I guess I was rich, even though I lived on the Lower East Side :-)

Headset,

ok, I need to clarify, passive investment income, not just passive income.

If someone can get by with $30k expense a year and he made more than that through his passive investment income, he is richer than those who has a fixed expense obligation of $100K a year and have to get up early in the morning to earn that after-tax amount.

I don't think a disabled person can get by with $3600/mo, just think about the nursing cost alone. $3600 for a disabled person is very compromised lifestyle, especially if such disbursement doesn't catch up with inflation.

If he is not yet medicare age, can he even get his medical cost covered?

If the disabled person can't get medicare, then they can get medicaid.

I would second the claim that the $200K couple are poor in BA, particularly if they are stupid enough to take up a $800K or $1M mortgage loan.
Not to quibble, but historically the home price-to-income ratio in the Bay Area has been around 6x (source: HSBC report: A Froth Finding Mission, Jan. 2006) . Obviously, I do believe anyone who wants to buy in that range now could get more house for their money in a couple years.... and, yeah, it would be hard to consider them rich given the PITI on a loan that large (yikes!).

Rich people also don't *have to* get mortgages (though they may choose to). A 20M summer house to them is like a $200 iPod to us.

"Rich people also don’t *have to* get mortgages (though they may choose to)."

The $3.6 Million Mortgage

http://www.nytimes.com/2007/07/01/realestate/01cov.html?_r=1&fta=y&oref=slogin

Historical price to income ratio has been 6x??? How historical is historical?

This is certainly NOT the case in the early 90s, everyone I know (including myself) bought a home at 3x income or less. Even in late 80s when it was frothy, I know of several couples who bought at around 3x. My father-in-law bought his first home in 1982 at 3x on single income in Palo Alto. He had wanted to buy earlier but the mortgage rate was 20%!

So where did this 6x crap come from?

Mr Weinstein is smart.

Borrowing US peso to invest in hard assets and paying back in US Peso as it sinks further, on a scale of $3.6M, may well generate $1M profit if he plays it right.

He obviously doesn't need such mortgage, he is just using the mortgage as an arbitrage tool. I wish I could borrow $3.6M US Peso at such a low rate as well.

OO,

The example I gave is a relative. He has full VA medical benefits (includes doctor, hospital, medicines, glasses, dentist). He is 44 and needs no nursing care. He is able to drive, cycle, and do normal activities. A car accident impaired his mental abilities from what they were (although he seems to have average intellect) so the Army granted him disability. I believe this generosity is an over reaction to the initial subpar treatment of the returning Iraq War disabled vets. When public outcry forced the politicos to hammer the VA for improved disabled vet treatment, the VA went overboard and extended overly generous treatments to even non-war related mimimumly disabled vets.

My point overall on the "rich" issue is that someone with an sufficient passive income and low desires for extravegance may have enough of the same benefits as a rich guy, 'cept for the jet.

OO
it doesn't look like it dipped below ~6 since the late '80s.

Their data sources are described as:
Sources for all data: HSBC, Office of Federal Housing Enterprise Oversight, National Association of Realtors, Bureau of Labor Statistics, Department of Housing and Urban Development, Bureau of Economic Analysis, Census, Federal Reserve

My point overall on the “rich” issue is that someone with an sufficient passive income and low desires for extravegance may have enough of the same benefits as a rich guy, ‘cept for the jet.

But that jet is all important. It allows schedules that are otherwise impossible. ;)

Without that requirement, many Americans can become "rich" by simply moving to the third world.

I consider anyone who *refuses* to live within their means "poor"... and reckless. I make far less than $200k yet sleep like a baby at night.

How can such a "poor" person be so contented, you ask? A: I don't owe jack sh*t to anyone. And, I'm 100% debt-free and have liquid investments & cash = >2 year's net income. I don't live to impress my a$$hole neighbors, I carefully comparison-shop, I don't throw out stuff that's still useable, I do my own gardening and repair work to the extent I can, and I don't make extravagant unnecessary purchases.

F*ck the Jones's. "Rich" is a state of mind.

Would it not take less time to save for a house, and pay for it outright with cash, than to pay for one with a 30 year mortgage? I just don't know why this isn't common knowledge.

6X is a lie. Why? because of the interest rate. The reason why we can do 6x or 7x is because of the ultra-low interest rate.

When interest rate was at 10% (which was most of the early 90s), you salary cannot possibly support 6x housing price.

Let's just do a simple math. $100K family buying a $600K home with 20% down (that was the only way you could get money back then). So the mortgage debt is $480K at 10%. P&I alone is $50544. Back then banks would only lend at a DTI ratio of 30% max. Tell me how one can swing by a 6x housing price.

If someone can get by with $30k expense a year and he made more than that through his passive investment income, he is richer than those who has a fixed expense obligation of $100K a year and have to get up early in the morning to earn that after-tax amount.

That's pretty much my situation. I'd be making more if Helo Ben would quit slashing the friggin interest rates.

I have a friend who I guess is spending about $18K a month for mortgage and property tax on a McMansion in Monte Sereno. He sure seems stressed out about work most days.

Without that requirement, many Americans can become “rich” by simply moving to the third world.

Or Idaho. ;)

I don’t live to impress my a$$hole neighbors

But I do want to impress myself. ;)

I paid cash for a $142,000 home in 1995 (2400 sqft 4bed 2 car). The going mortgage rate at that time was 7.5% By putting what would have been the monthly P&I in the bank each month, I recovered my cash outlay in about 10 years. By paying cash, I also got a $7,000 discount from the builder, plus no origination fees or points. Without a loan puke around, I was also able to control closing until I got some punch work done.

Paying cash is unpopular because many with cash to buy outright will put that money down on a more expensive home. Realtors, bankers, and freinds will all tell you that paying cash removes the benefits of "leverage" and "tax breaks."

For those of you thinking it might be a good time to buy:

Yale economist Robert Shiller, who developed one of the widely followed gauges of home prices, said in a speech Tuesday that home prices, which have already fallen about 15 percent from their peak in 2006, may fall further than the 30 percent drop experienced during the Great Depression of the 1930s, so far the biggest decline in home prices in the country.

"Basically we are in uncharted territory," Shiller said, noting that the 85 percent rise in home prices from 1997 to 2006 after adjusting for inflation had represented the biggest housing boom in U.S. history, so the fall in prices could be just as historic.

So where did this 6x crap come from?
The 6x number is a 30 year average. To be fair (as Rob Dawg likes to point out), the 'eligible home purchasers' are drawn from a different pool than anyone contributing to the median income statistics. So you don't necessarily have a median income earner buying a median priced home (the buyer pool tends to be better off, skewing the actual home price-to-"buyer income" ratio lower, as your example using DTI suggests). Nevertheless, taken as a whole, the price-to-income ratio serves as a good metric to remind us that things are really out of whack -- which I think we all can agree on. :-)

I don't think 6x is a 30 year average (according to HSBC anyway).
See here, and select San Francisco.

http://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=6zOnlnEmxv6TSIlBSINU5CN&key=dpc74ypkpv&n=122667.XLS

The number doesn't smell right to me either but I don't know how to explain it away - I don't find the "it's a different mix of buyer's and homes" theory satisfactory.

Here is the historical prime rate ARM indices (which means homebuyers paid more).

http://mortgage-x.com/general/indexes/prime.asp

Just by glancing back 30 years, you could tell most of the time we were hovering above 10%. Most California mortgages are ARM.

With that data at hand, I smell rat in HSBC's data. They also lost my trust right there with the PV (present value of debt servicing) to income, because they add up all the interest payments but apply their inflation expectation for the 30 years. Hello, when people took out 13%, 14% mortgage rate, they were expecting CPI to run like this forever, and the PV discounter should also remain high. Therefore, the HSBC PV-to-income number is inflated.

I dunno why, but HSBC recently shut down its North American subprime division completely. Maybe there is no China wall after all.

The SanFran-SanMateo-RedwoodCity MSA from HSBC has an average of exactly 6.3x AGI from 1975-2005. There is no data in their published research after 2005, and they never revised or updated it. I emailed numerous times to ask for it.

Note that they aren't measuring simple gross income, which falls under the category of realtornomics. They use the more relevant but smaller AGI, thus the higher ratios are expected across the board.

If I measure only to 2001, inclusively, then I get 5.8x AGI, which is more believable for that MSA. The low was at the beginning of the set in 1975 = 3.5x AGI. There was a peak at 5.3 in 1980, then trough at 4.7 in 1984 then peak of 7.7 1989-1990, then another trough of 5.7 in 1996.

The new old high record was broken in 2001 when it jumped from 6.8 to 7.8 in a single year, only to go straight up from there. 11.3 by 2005.