This is a fascinating thread. In figuring how much to spend on a home, some people judge how much they could afford to lose on selling it (versus the purchase price), assuming they just had to kiss goodbye to that money forever. Then they assume that this maximum tolerable loss is some conservative % of the price, and that gives the maximum affordable price.
For example, let’s suppose I think I could handle losing as much as $100,000 on my home purchase (ignoring for a moment the maintenance costs and property taxes and mortgage interest etc). I then assume that the maximum loss on a house is 30%. That means I can afford a house up to $333K.
Others assume that houses go up forever, with any setback being temporary. So there is no real net cost, except for those monthly expenses. They then just calculate the most they can afford to spend on a monthly basis, and translate that into a purchase price. They don’t set aside any serious amount for the possibility of a capital loss. They are so confident that they can time the market, or that the market is so strong over long periods, that they don’t budget for a possible significant capital loss.
I’d say that the latter psychology is what has slowly taken root since WW2, and is now thoroughly embedded in the minds of 90% of Americans. Which RE buyer doesn’t believe either that:
1. RE goes up forever, and it’s just the poor dumb OTHER guy who may have to sell in a temporary future dip in prices
or
2. RE may go up and down, but they can time the market better than the poor OTHER guy who pays more than they will ultimately sell it for.
That, plus all the financial shenanigans politicians had to engage in to sustain this blind belief beyond its due-by date, is what has us in this fix now. I hope Piggs start to assume that if they “pay” $1 million for a home, they may end up actually paying some decent fraction of that $1 million (in spite of us all being market timing geniuses), maybe as much as $200-400K, and they really think through whether they would be comfortable with that. If not, then think about a lower price.
