Do home prices shift too much income from the price of being responsible?

[CTNative]

One of the ideas I've been considering is that I don't think most people realize how much money housing diverts from the "true" costs of a responsible life. Or maybe they do, but make the conscious decision to disregard it.

By that I mean, if we are really going to admit to being responsible about our future and our families future, we should be funneling a lot of our income into...

1. Maxing out our 401k's (husband & wife, both)
2. Additional retirement vehicles beyond 401k (since 401k won't be enough)
3. Setting aside money for each of our children's college tuitions
4. Setting money aside for long-term healthcare assistance so we don't become burdens on them in the future (you know...at Shady Acres... )
5. A six-month rainy-day fund
6. Appropriate levels of car, homeowners and health insurance, not just the "mins"
7. Umbrella insurance?
8. Life insurance
9. Burial Costs
10. Being debt free (No credit card, student loan or car loan debt)
11. And optionally - Funds for each daughter's wedding / each kid's car at graduation / house down-payment assistance for each kid

#11 is open for debate, and each to his own, but #11 aside...that's still a substantial redirecting of income that I think most people don't do, including me.

If everyone was setting aside money from every paycheck for all of those things, which I think we all can agree are the "right" things to do...how many people would be left that can afford to buy a house and pay the mortgage every month?

I think home prices include a "deferred responsibility" premium where people are willing to sacrifice more and more of these responsibilities (#1-#11) in order to buy ever more expensive homes. This in turn creates a new floor in home prices that everyone else must then try to reach, by deferring as much responsibility as they can themselves, creating a new floor, and so on.

Eventually, you get families that sacrifice all responsibilities and take on loads of debt to meet them as they appear in the future while diverting the bulk of their paychecks every month to paying for a house, to the detriment of the entire families future.

Any input?

 

[test]

I think the opposite is true for most people.  I see lots of people in apartments driving a brand new $150k Mercedes Benz.

 

[CTNative]

I think the opposite is true for most people.  I see lots of people in apartments driving a brand new $150k Mercedes Benz.

Oh, I definitely agree with that. I've seen some really nice Mercedes, Porsches and Jaguars in a few places I've lived in.

I just think that even those people that are renting and driving Hondas and Toyotas buy houses forgoing all of the "setting aside" they should be doing if they wanted to be "responsible."

The opposite of the $150K Mercedes at the apartment complex is the well-worn $20,000 Honda(s) parked in the driveway of the $1M Irvine home. Could be they are frugal...could be they are....not....and that's all they can afford with the money left over from paying their mortgage.

I remember a few years ago at the height of the bubble when lofts/high rises were selling like hotcakes for $750,000 to $1M and I used to chuckle when I saw the ones they sold and on the balcony were cheap mismatched Big Lots plastic chairs and a table. You would think for $1M, you could get some real balcony furniture...unless you can't afford furniture anymore (or it was a flip).

 

[irvinehomeowner]

Do parents still pay for their kids weddings?

Our parents didn't pay for ours.

Maybe FCBs parents (jokes!).

 

[CTNative]

Do parents still pay for their kids weddings?

Our parents didn't pay for ours.

Maybe FCBs parents (jokes!).

, LOL...I have no idea if that practice is still around or DOA. My wife and I got married in our early 30's and we had good careers going so it just didn't seem right to accept money from either side. We thought maybe it made more sense back in the "old days" and/or when the 18-25 y.o. crowd gets married...fresh out of school, just trying to get running, etc... but we thought for a couple that's established with good incomes, it doesn't make much sense.

I think my wife's been making me watch too much "16 & Pregnant" on TV lately, so it seems that wedding fund is a good idea...and a shotgun...and extra ammo. 

 

[usctrojancpa]

One of the ideas I've been considering is that I don't think most people realize how much money housing diverts from the "true" costs of a responsible life. Or maybe they do, but make the conscious decision to disregard it.

By that I mean, if we are really going to admit to being responsible about our future and our families future, we should be funneling a lot of our income into...

1. Maxing out our 401k's (husband & wife, both)
2. Additional retirement vehicles beyond 401k (since 401k won't be enough)
3. Setting aside money for each of our children's college tuitions
4. Setting money aside for long-term healthcare assistance so we don't become burdens on them in the future (you know...at Shady Acres... )
5. A six-month rainy-day fund
6. Appropriate levels of car, homeowners and health insurance, not just the "mins"
7. Umbrella insurance?
8. Life insurance
9. Burial Costs
10. Being debt free (No credit card, student loan or car loan debt)
11. And optionally - Funds for each daughter's wedding / each kid's car at graduation / house down-payment assistance for each kid

#11 is open for debate, and each to his own, but #11 aside...that's still a substantial redirecting of income that I think most people don't do, including me.

If everyone was setting aside money from every paycheck for all of those things, which I think we all can agree are the "right" things to do...how many people would be left that can afford to buy a house and pay the mortgage every month?

I think home prices include a "deferred responsibility" premium where people are willing to sacrifice more and more of these responsibilities (#1-#11) in order to buy ever more expensive homes. This in turn creates a new floor in home prices that everyone else must then try to reach, by deferring as much responsibility as they can themselves, creating a new floor, and so on.

Eventually, you get families that sacrifice all responsibilities and take on loads of debt to meet them as they appear in the future while diverting the bulk of their paychecks every month to paying for a house, to the detriment of the entire families future.

Any input?

I have a little feedback for your list.  With the limited selection of investment funds in most company run 401Ks, I think you might be better off investing the money yourself  (after you contribute enough to get your full company's match).  Something like 80-90% of mutual fund managers can't match their comparable index over the longer term.  Also, I have subsidized stafford student loans limited at an interest rate of 1.50% for the next 20 years so I'm not in any hurry to payoff debt with that kind of interest rate. 

 

[iacrenter]

I think the opposite is true for most people.  I see lots of people in apartments driving a brand new $150k Mercedes Benz.

When I used to live in an IAC town home, I loved listening to my neighbor start his white Lamborghini Gallardo. That  V10 sounds sick--almost like a motorbike scream. It also made me laugh that his other car was a Prius--I guess you need some environmental balance.

 

[LAtoOC]

USC - if your interest rate if 1.5% you must have graduated pre-2005. Most of the student loan rates have skyrocketed and my wife's subsidized stafford from grad-school is 6.8%, private loans were 8%, undergrad rates are still 4.5-5%

 

[CTNative]

I think the opposite is true for most people.  I see lots of people in apartments driving a brand new $150k Mercedes Benz.

When I used to live in an IAC town home, I loved listening to my neighbor start his white Lamborghini Gallardo. That  V10 sounds sick--almost like a motorbike scream. It also made me laugh that his other car was a Prius--I guess you need some environmental balance.

LOL...that is awesome. 

 

[usctrojancpa]

USC - if your interest rate if 1.5% you must have graduated pre-2005. Most of the student loan rates have skyrocketed and my wife's subsidized stafford from grad-school is 6.8%, private loans were 8%, undergrad rates are still 4.5-5%

I finished grad school in 2005. I did a consolidation loan for my Stafford loans that got me a fixed rate of 2.75% and after 24 on-time payments my interest rate would be lowered by 1.25%.  My monthly payment is less than $200/mo for that loan.  Then I got private MBA loans at a rate of Prime minus 0.50% from SallieMae so my rate on those is 2.75% with a monthly payment of around $150/mo.  Once the Prime rate starts going up after the Fed begins to increase rates then I'll probably pay off those private loans but the consolidated stafford loan I'll just keep paying on.

 

[iphb]

I wouldn't say that families are not responsible financially these days, but they are dealing with an unfortunate reality today: housing is so dang expensive. What used to be affordable a generation or two ago on a single income now requires both spouses to be working full time. Add the other expenses like daycare, two cars, and things like that and many families feel like they're just staying afloat, much less even saving adequately for retirement or an emergency fund. If one income is lost due to illness or layoff, the risk of a financial crisis rises dramatically.

There's a good book called "The Two Income Trap" that discusses this.

 

[roundcorners]

CT welcome to TI... sorry I don't think anyone has officially welcomed you and your questions...  they are very good and thoughtful...  most of us old-timers have discovered for ourselves the answers to what you ask... and some of us didn't like what we found...

Keep seeking the truth for yourself and your family, but just be ready for answers you didn't expect or like...

As you can probably tell already, Irvine is not a normal city; in almost every sense... good or bad, it is what it is... it's the pinnacle of extremes that people either love it or hate it; people are rarely indifferent about Irvine... Just be ready when the scales tip one day and you realize the infatuation is now disgust...

 

[CTNative]

CT welcome to TI... sorry I don't think anyone has officially welcomed you and your questions...

Thanks roundcorners. I really enjoy reading everyone's posts on this board. Unlike other boards, blogs and websites, everyone here seems to be asking good questions and looking for honest answers. There is very little antagonism and personal attacks. It seems to be, for the most part, an honest discussion.

I especially enjoy many of the comments by the "regulars" on this board where it is clear they've really thought out their responses and positions on things, and if a comment is not on par, there are plenty of rebuttals to take into consideration.

You are right about Irvine...I can't imagine anyone being indifferent. When I came here in '92 Irvine was one of the "best" cities to live/buy in. I was only 19, but I knew that much about it. I wonder if people who bought in Irvine 10 years ago could afford to do so now. I am thinking, no. It seems to be gentrifying to a new level, but when I think of gentrification I think of homes with roman columns, big lots, an Olympic pool and a circular driveway. In Irvine, it's more money for the opposite. Confusing. I wonder what Irvine will be like in 20 years. Will people buying now be priced out like those who bought 10 years ago or will it go the other way, where today's pricing is not sustainable and a return to the way it was 10 years ago is on its way. I can't tell.

I know what my wife and I want, and I know what we are willing to pay (and I'll try my best to include all the "responsible" costs, but I might end up in a shack if I do that - or Montana (no offense to Montanites)), and if I can find it in Irvine...great, if not...I'll just find it someplace else.

Thanks for the welcome roundcorners, and to everyone's great comments on my posts and others, and I look forward to reading more on this board about...anything.

 

[irvinehomeowner]

You are right about Irvine...I can't imagine anyone being indifferent. When I came here in '92 Irvine was one of the "best" cities to live/buy in. I was only 19, but I knew that much about it. I wonder if people who bought in Irvine 10 years ago could afford to do so now. I am thinking, no. It seems to be gentrifying to a new level, but when I think of gentrification I think of homes with roman columns, big lots, an Olympic pool and a circular driveway. In Irvine, it's more money for the opposite. Confusing. I wonder what Irvine will be like in 20 years. Will people buying now be priced out like those who bought 10 years ago or will it go the other way, where today's pricing is not sustainable and a return to the way it was 10 years ago is on its way. I can't tell.

Great post.

Being here longer than that... I have seen the changes and also wonder what it will be like in 5-10 years.

Irvine was much more affordable 10 years ago but was still above the curve... as it is now (although the gap may widened a bit).

Maybe when all those homes from the Great Park hit... we'll start to see some normalizing.