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Old 08-22-2007, 09:38 PM   #61
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It depends. The high-end really isn't that much different except for a few factors: buyers have a ton of ego and generally the ability to weather financial blows, and greedy builders tend to create too much inventory.

In my area, high-end properties are sitting on the market for a long time, and there's on the order of a year's worth of inventory. Probably the worst segment from a supply and demand perspective.

Which is why I think that segment will get hit the hardest in the end, just as I witnessed during the SoCal crash of 1990-1996. Big discounts a comin'.

I figure the big sale starts this fall. I came up with a name for it last year.

The Great Fall of 2007

What do you think?
I think a $3 million home in Birmingham or Cincinnati probably is in a different market from the ordinary house. But in high end areas on the west coast not necessarily so. A good performer in middle management can get into one of these with his option winnings, and make payments aided by his bonuses. To me this is vulnerable.

A $1mm place right across the street from me has been for sale for about 6 months. The owners rehabbed it-lots of marble and stuff, but an incredibly bad layout and really just an old house, ok looking but nothing special. They have already bought down in Leschi, so they have 2 sets of payments to make. (Something the agent most kindly told me about!)

Prior to moving up here I lived for a time in Montlake. The house next to me down there has been on the market for a year also at $1mm. The owners moved there, had a baby, and decided they didn't want to raise their kid in Seattle. He works downtown, so they now live on Bainbridge and make 2 sets of payments. I have been in the house, and although it is much better than the one up here it is really just an old house on a not very nice street. A selling point is that it is one of the few places that one can live in Seattle and have a short walk to an express bus to the software employment on the Eastside.

My guess is something happens and these prices start to crack, but so far people seem to be hanging tough, the realtors(TM!) talking a good fight, etc.

Vamos a ver!

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Old 08-22-2007, 10:33 PM   #62
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I know some people around here in that same situation: bought a new place without selling the old place. And both places are over $1M. That's gotta hurt. Ziprealty.com will give you some interesting stats. In my area, we've got 236 houses listed. 116 of those have reduced prices -- 50% of the listings have dropped their prices. And this is pretty much peak season, so the fall and winter should be interesting.

I think this is when we'll find out who really needs to sell and who is just fishing. My guess is that the higher rates on non-conforming loans will drive the last nail in the coffin, sellers will give up any idea that they can hold out for a recovery, and we'll see a rush for the exit.

BTW, I just checked craigslist and saw an interesting listing in my area. $1.3 million. For a mobile home (OK, it's on a waterfront lot, but that's still an insane price).
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Old 08-23-2007, 03:08 AM   #63
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Gee Whiz! $2-$3mm houses. I am in the mid-west. That sort of house very large. Many rooms, much furniture and stuff, a lot of upkeep. Need housekeepers, etc.

What would be a reasonable salary to support a $2MM house and the accompanying lifestyle?

I suppose there might be a range from the person in fairly good financial shape (not distressed) to the person on the edge of just making it.

I calculated a $2mm mortgage @ 7% for 30 years. The payment is 13,306 per month or $159,672 per year. A house like that would probably need a lot of furniture, utility bill, insurance, prop tax, etc...


There is a rule of thumb that a mortgage should not exceed 40% of salary.
That would mean that the salaries would be:

Bad shape guy income range (50% - 60%) : $266k/yr - $320k/yr
Good shape guy income range (30%-40%) : $400k/yr - $533k/yr
Extreme LBYM guy income range (10% - 20%) : $800k/yr - $1.6m/yr

Remember this is for 30 years if it is a working stiff.

Not sure it the 40% rule is linear for higher salaries... therefore, the illustration might be an extrapolation that is not realistic. Plus people may be well enough off to pay $1mm down.

Of course if it is someone who is making millions of $ in a windfall... it is a different story.


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Old 08-23-2007, 10:07 AM   #64
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What would be a reasonable salary to support a $2MM house and the accompanying lifestyle?

I calculated a $2mm mortgage @ 7% for 30 years. The payment is 13,306 per month or $159,672 per year. A house like that would probably need a lot of furniture, utility bill, insurance, prop tax, etc...


There is a rule of thumb that a mortgage should not exceed 40% of salary.
That would mean that the salaries would be:

Bad shape guy income range (50% - 60%) : $266k/yr - $320k/yr
Good shape guy income range (30%-40%) : $400k/yr - $533k/yr
Extreme LBYM guy income range (10% - 20%) : $800k/yr - $1.6m/yr
I would call your "good shape guy" the "not so good shape guy". You have neglected property taxes (probably 20K-40K depending on location) on that $2MM house and insurance (another 4K or so). So, in your example, the annual housing payment could be pushing 200K

When I was working, the rule of the thumb was that you could buy a house costing 2.5 to 3 times your gross income. So I would argue someone buying a $2MM house should be earning at least 700K to be in good shape. IMO, someone carrying a $2MM mortgage with 400K of income is an accident waiting to happen, unless he is on a very fast corporate track.
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Old 08-23-2007, 10:20 AM   #65
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When I was working, the rule of the thumb was that you could buy a house costing 2.5 to 3 times your gross income.
I hadn't heard that one (always went with the 0.28 times gross income if no other debts). I think yours makes a lot more sense, though. I multiplied that out for my own case, and that is a sensible upper limit to spend on a house for someone with my income.

More than 3 times my gross income would have been financially ruinous to me (ER plans or not), I think!

My present house is worth 2.5 times my income, and was worth 2.7 times it when I bought it back in 2002.

Since my house is paid off, I plan to continue to live in an equally nice house after ER, but due to lower gross income after retirement, it won't fit into that formula quite as well.

OK, anyway, a $2MM house at 2.5-2.7 times gross income would imply an income of $740K - $800K. Uh huh. Not likely in my profession.

Not only that, I really don't need a house that extravagant! Never have, never will. It would just be a pain in the behind to maintain, clean, and navigate, not to mention the electricity bills. I had a house once where I nearly had to use roller blades to get from the laundry room to the master bedroom. Been there, done that, not doing it again in this lifetime.
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Old 08-23-2007, 10:54 AM   #66
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Since my house is paid off, I plan to continue to live in an equally nice house after ER, but due to lower gross income after retirement, it won't fit into that formula quite as well.
That's ok. My formula is just a guideline for a typical person purchasing a home with a fairly large mortgage. For us "older folks", who don't have a mortgage, the house value to income ratio will, in most cases, be considerably larger. You can still use your 28% rule, but it would only have to apply to the property taxes, insurance, and estimated upkeep of your house and property.
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Old 08-23-2007, 11:05 AM   #67
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Our house is about 0.9 x our annual income, so I guess we really are LBOM! Or it's just that we're in the mid-west where houses are really cheap.
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Old 08-23-2007, 11:33 AM   #68
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Our house is about 0.9 x our annual income, so I guess we really are LBOM! Or it's just that we're in the mid-west where houses are really cheap.
I think that is wonderful, even in the mid-west. Housing may be cheap there, but also high paying jobs are probably not as plentiful there as in coastal areas, either. You are definitely LBYM!
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Old 08-23-2007, 01:11 PM   #69
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My house is worth 23x my annual income .Luckily it's paid off . That's why I think selling and renting would be a good idea for me now .I could sell my house and invest the money even with renting a place on the beach I'd still have a good chunk left over .In the meantime the principal would stay safe ( I'd do a low risk investment money market or laddered cd's )so when I got tried of renting I could again buy .Am I missing something in my plan ?
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Old 08-23-2007, 05:23 PM   #70
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I would call your "good shape guy" the "not so good shape guy". You have neglected property taxes (probably 20K-40K depending on location) on that $2MM house and insurance (another 4K or so). So, in your example, the annual housing payment could be pushing 200K

When I was working, the rule of the thumb was that you could buy a house costing 2.5 to 3 times your gross income. So I would argue someone buying a $2MM house should be earning at least 700K to be in good shape. IMO, someone carrying a $2MM mortgage with 400K of income is an accident waiting to happen, unless he is on a very fast corporate track.
I used the information from some mortgage site that indicated no more than 40% of income for the house payment. I did not look closely to see if it indicated before tax or after tax income... I did this in the morning while drinking my first cup of coffee. Maybe the 40% was one of those subprime high risk lenders that is in the news.

Never the less, when I saw someone talking about a $2-3mm house, I thought it would be an interesting illustration.
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Old 08-23-2007, 05:40 PM   #71
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Never the less, when I saw someone talking about a $2-3mm house, I thought it would be an interesting illustration.
Here are some listings from a popular city of Seattle neighborhood. Not the most expensive, but one that I know 'cause I walk around here.

Summary List - TheMLSonline.com | 425-467-6577
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A million dollar mortgage
Old 08-23-2007, 05:41 PM   #72
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A million dollar mortgage

is the most that is deductible which is why most really expensive properties have small or no mortgages. The real cost of a house is something like double what you pay for it though when you consider depreciation, maintenance, repair, utilities, taxes. With an equal amount invested you don't need an earned income.

Have you considered transaction costs? Property taxes? The latter could make a big jump if your assessment is below market. Inflation will depreciate your money if you spend your interest. Near term prices should decline too so that may not be a problem, just be careful for when they switch. Invested, it could only provide 4% safely, so can you rent something you like for 4%?
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Old 08-24-2007, 08:27 AM   #73
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[ Invested, it could only provide 4% safely, so can you rent something you like for 4%?[/quote]


I could easily rent something I like for 4% of the income of the invested money and still have a good chunk left over .
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Old 08-24-2007, 03:37 PM   #74
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[ Invested, it could only provide 4% safely, so can you rent something you like for 4%?

I could easily rent something I like for 4% of the income of the invested money and still have a good chunk left over .[/quote]

Hmmm, if I want to leave my spouse or children a financial legacy of some sort, and I have $3 million, and I'm relocating to another part of the country having just sold the old homestead, I'm thinking that I should probably buy instead of renting, especially if I move to a state with favorable homestead exemption from creditors, like good ole Texas! If I buy, I could put a boat-load of cash into a house, and if my health goes bad, I won't have to drain all my expenses for health-care costs -- I have good old homestead and medicaid (which allows you to shelter up to $750K in home equity) if things really get worse and I've run through all my savings and portfolio -- that home would go to my spouse or kids.

Now, if I rented, and my health gets really bad, all of my creditors will be able to get to my portfolio and drain it for my expenses -- I have nothing to leave my spouse or kids.
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Old 08-24-2007, 05:00 PM   #75
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Thanks chris ,I forgot about that issue .
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Old 08-25-2007, 12:38 AM   #76
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kcowan, In a world of financial uncertainty, there is a concept you can safely stake every dime you are worth on.

Wages for the vast majority of Americans will not rise substantially in coming years. Let's say 80% and probably more like 95% of wage slaves will never do much better that keep up with inflation. This is an absolute.
If Joe6Pack & Jason Winecooler were to have a 10% total rise in real inflation-adjusted wages over the next ten years, it would be stunning. A miracle.
The Earth is more likely to cease rotation.
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Old 08-25-2007, 01:55 AM   #77
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kcowan, In a world of financial uncertainty, there is a concept you can safely stake every dime you are worth on.

Wages for the vast majority of Americans will not rise substantially in coming years. Let's say 80% and probably more like 95% of wage slaves will never do much better that keep up with inflation. This is an absolute.
If Joe6Pack & Jason Winecooler were to have a 10% total rise in real inflation-adjusted wages over the next ten years, it would be stunning. A miracle.
The Earth is more likely to cease rotation.
I agree. It is an economics issue (supply/demand) for the factors of production or service... one of which is Labor. For example IT jobs seemed to increase more than inflation in the late 90s. There was/is an explosion of new information technology and application of it that increase productivity and enables new capability. Businesses are investing heavily in it. Demand was outstripping supply to the point that outsourcing became more popular. The opposite is happening with many jobs.
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Old 08-25-2007, 09:07 AM   #78
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I agree. It is an economics issue (supply/demand) for the factors of production or service... one of which is Labor. For example IT jobs seemed to increase more than inflation in the late 90s. There was/is an explosion of new information technology and application of it that increase productivity and enables new capability. Businesses are investing heavily in it. Demand was outstripping supply to the point that outsourcing became more popular. The opposite is happening with many jobs.
In a societal, broad economic sense I can certainly see what you are saying. A beginner at my present job earns about the same wages as I did years ago, after adjusting for inflation.

But on a personal, individual level I have to say that increases in my gross salary at my present job have nearly tripled the inflation rate, due to cost of living raises, promotions, and cash merit awards. My value to the organization has increased as my experience at the job increases.

So, it seems to me that for similar reasons "Joe6Pack & Jason Winecooler" would individually experience considerably more than a 10% total rise in real inflation-adjusted wages over the next ten years due to advancement on the job, even if wages only keep pace with inflation, right? :confused:
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Old 08-25-2007, 12:01 PM   #79
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You're quite right W2R that some j*bs offer the opportunity to stairstep or ratchet up in salary by personal initiative, more responsibility, hard work and luck. A few get to be boss. (this is more likely for Jason than Joe).

However, you're still not keeping up with inflation unless the higher position salary itself has grown by more than the CPI and taxes than that same position paid the previous year.

Even at that, I submit that, more often than not, there are only a few levels available for most to rise through.

A glass-is-half-empty thinker would say that the added work and grief negate the increased income.

And congratulations on your personal success too, W2R.
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Old 08-25-2007, 02:19 PM   #80
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You're quite right W2R that some j*bs offer the opportunity to stairstep or ratchet up in salary by personal initiative, more responsibility, hard work and luck. A few get to be boss. (this is more likely for Jason than Joe).

However, you're still not keeping up with inflation unless the higher position salary itself has grown by more than the CPI and taxes than that same position paid the previous year.

Even at that, I submit that, more often than not, there are only a few levels available for most to rise through.

A glass-is-half-empty thinker would say that the added work and grief negate the increased income.

And congratulations on your personal success too, W2R.
Thanks, Barbarus. It seemed like it took way, way too long for me to advance compared with my ambitions and efforts. But maybe that was more due to my impatience than anything. Now, I have accepted that this is as high as I will go before ER in 2-3 years. I am done with the struggling to advance, as I have reached the top level that conceivably could be available to me as a scientist in my organization. Further advancement would entail dealing with more politics (in both senses of the word, both office and conventional politics) than I would consent to encounter.

You are so right about the added work and grief. I experienced a tremendous amount of inner angst for years as to why I wasn't advancing as fast as I had envisioned (though now that I am here, who cares how long it took? I'm here).

Salaries for both my initial (lower) position and my present (higher) position have grown at about the same rate as inflation.

Although many jobs do not provide much opportunity for advancement, I think most people are able to increase their salaries relative to inflation during their lifetimes if they continue in the same line of work for a decade or more. Even in retail sales, one can become manager and so on, and I think there are levels such as apprentice, journeyman, and so on to move through in the skilled trades.
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