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LOL, so you’ll turn your primary into an asset and then create a new expense in one of the most expensive rental markets around…

good example of why they don’t count primary residence.

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You need a place to live. Where you primarily live is your primary.

You’re not really going to sell a million dollar place in NYC and go move into a shack in Vietnam to live on $500 a month are you?

Odds are you’re going to go buy another million dollar place somewhere else.

You could buy something less expensive, but again, that’s back to the major life change.

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[quote=spdrun]That’s frankly absurd — you could as well say “if you need to spend the cash, you really don’t have it.” An asset is an asset, and BTW, I look at my primary as an investment — I can go off to another corner of the world and keep it rented at a profit. (Finding decent tenant for anything in a halfway decent area of NYC is child’s play.)[/quote]

You then need a new primary.

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If you need to use it you don’t really have the money.

If you want to use it, that’s your choice.

That’s why they don’t count it. If you need to count it, you don’t really have enough money for whatever you’re counting it for.

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[quote=SK in CV][quote=no_such_reality]
Not major but those little expenses add up and more importantly drive you to realize income which then adds an additional tax expense.[/quote]

Unless I’m missing something in what you’re describing here, borrowing money doesn’t normally create any income or additional income tax expense.[/quote]

The borrowing doesn’t. The paying it back requires income. Unless you’re in the 1% or on a government pension, managing your realized income is a critical component of retirement. Most struggle to have enough income, a small percentage struggle to manage their taxable income and even smaller percentage worry about maximizing their returns, income be damned.

Say you need $10,000 for insurance, you need another $10,000 for food and utilities and $8,000 for travel and another $12K for cars and what not spending.

You can get by on $40K. The health plans will give you a subsidy backing out $8000 of that expense. Your taxes will be $2200 on the Fed form before credits.

Add the loan repayment, and you’ve bumped your costs $15-$20K a year. Your taxes jump another $2500 a year, your tax credit drops another $2500 ($5000 net swing on taxes) Run over $65K in income and you completely lose the insurance credit.

Similarly, the tax burden on $40K realized income in CA is about $290, on $60K it’s $1000, on $80K it’s $2200.

Granted, I think most of us would rather be in the crapping money out of our investment spending $150K a year, but that’s not going to happen for 98% of us.

sp, yes equity has options, but housing is illiquid for a good reason, that’s why a lot of wealth managers don’t count primary. Consuming your primary is the ultimate wealth destruction.

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Yea, not a true sunk cost, but I couldn’t think of a better term. It’s a rock and a hard place. You have to live some place. If you’ve paid off your place, then your expenses are lower, probably about 1% a year of the house value. If you move, you introduce more expenses and unless you move someplace out of area, the entire value of what you have will largely be used to replace the living expenses.

Traditionally, housing has run about inflation plus one percent in our metro-areas. Essentially, live in it, maintain it and break even on exit (with maintenance running about 1% a year). That’s a much better deal than rent.

sp, it is an asset, but it’s like a poison pill you can tap it if you really need to, but any tapping introduces real expenses. If you tap you’re paid off $600K home for a $300K new loan, you just pulled $300K out to do something, you’ve also saddled yourself with a monthly cash flow hit of $1400, nothing major but that’s in today’s low rate environment. A few years ago that would be $1800 a month unless you’re doing the loan juggle or an IO but that all has transaction cost.

Not major but those little expenses add up and more importantly drive you to realize income which then adds an additional tax expense.

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Maybe down in SD, up in OC, a beach sh*thole is $2000/month and anything nice is pushing three.

Shoveler, how many of those boomers will consume their house in retirement? For today’s generation of home buyers to replicate what happened, those $800K homes in Irvine will need to be ten million in 30 years. Maybe Cali will keep growing that way.

Personally, I think the boomers have simply benefited by the pig in python effect coupled with a happy timing of a real estate bubble currently being redriven by historically low interest rates. The next 30 years will be interesting as the boomers become net sellers.

There’s a reason most wealth managers look at assets outside of a primary residence. It’s in what you cited, they won’t sell, or more maybe, can’t sell. Can’t sell without massively changing their life, relocating usually out of the area. In effect, their house is a sunk cost.

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[quote=CA renter]
And no, I’m not at all a fan of DC pension plans. IMHO, DB pension plans can absolutely work, but you have to keep everything in-house (no privatization!!!!), and use extremely conservative assumptions for both expenditures and returns. If that means that employees have to pay more/get less, so be it; but I want that to be decided only after the system is allowed to cleanse and heal itself…which will require a period of rather painful deflation, a shrinking wealth/income gap, and a more efficient/productive (and egalitarian, IMO) reallocation of resources.[/quote]

None of which will really occur. I’m not a fan of DB’s for one simple reason, a promise to pay someone starting in 30 years for the 30+ years after that is inherently fraught with risk and abuse. In a DC, your commitment is fulfilled in that year’s pay. It has a side benefit of eliminating the need for employees to ‘stick it out’ to get their max benefit payout.

It would take more money to do a DC. If I need to pay 1000 people $100K a year, I need a much smaller pile than if I need to plan to pay myself $100K a year.

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You could, but they’re not.

They’re financing and it’s common to see BMW 5’s sitting on the driveway, or a Tahoe. Even the popular mini-vans runs $40K for the popular model levels. Pick any prevalent SUV and they’re running $45K.

Sure, there’s plenty of affordable Accords too, but there’s a lot of $40-$50K cars and they’re financed.

Take the car payment, add in the sales tax which is all their down payment will cover, take the license tab bill on a new car every 3 or 4 years, and take the insurance and it’s easy to run $1000+/month on a financed car before gas and maintenance.

Could you do it cheaper? Hell yes, many aren’t. Hence my point.

You’re thinking like a guy with cash on hand. They’re thinking monthly payments.

Working class stiffs. They live and their consumption is driven by what they can make payments on monthly.

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[quote=spdrun]If you’re really making $500k/yr, you’re probably bringing home $300k/yr after taxes. That makes you able to afford at least one $100k down payment on a property per annum, say at 50% down. If each one makes $10k/yr, you’ll have a $100k/yr income in ten years. At that point you’d be using it to increase the pace of buying or start slowing down and stepping off the treadmill.
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Not many people maintain $500K a year for 10 years running.

For Irvine, most are in the $150K to $250K with a decreasing set of outliers to $350K and an even smaller set above that range of income. By and large, it’s the $150K to $250K crew buying and living in the $800K to $1.2M homes.

So they making $250K, bringing home $175K and they’ve got $60K in PITI, another $30K/yr in cars and car insurance, $10K a year on dining and food, they’re spending another $20K a year on montessori/preschool/childcare, and smoking $5-$10K on gas to run to two jobs. you stuff some money in their 401Ks, take a vacation and add the cable bill and they’ve got a little cash left.

At $500K, you should be able to fatten your bank account, again 99%+ aren’t making that.

[quote=The-Shoveler]In the case of Irvin I think you have two things going on.

1) There are a lot of people with old house wealth (they originally bought in OC way back in the 80’s & 90’s)

2) Dual income families (each earning 6 figures), no way close to the national average (or even OC average, top 5-10 %).[/quote]

Yes, they’re dual incomes and they lose one of those incomes and they’re upside down.

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Because the reality is 99% of Irvine is tapped out at $300K of household income.

And yes, you win a cupie-doll, 99% of Americans are just glorified working stiffs. Especially the hot-shot wall street guys thinking they’re making $500K+ a year. Their years are number, their income is fickle.

I know plenty of people that did just as you said, they bought the rental properties, they were holding the bag when the music stopped in the last bubble.

Now, for your buy a well maintained condo. Okay, you do, how many do you need to own when you’re blowing through $200K+ a year in living expenses?

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Working stiff doesn’t matter if they make $30,000 or $300,000 or $500,000 or even a million dollars. They’re working stiffs.

They can’t stop working, if they stopped their primary work they couldn’t maintain their lifestyle.

They may be a self-employed dentist that actually does love it, but they still need to show up everyday. They may work for someone else. Even most of the people running their own business are still just working stiffs.

Working stiff, if they step off the treadmill, they’re broke in a decade.

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[quote=spdrun]^^^

Question is: are they old-money working-class professionals, where the homes have been in the family free and clear for 50 years?[/quote]

They aren’t monied families. A few of the Indian and Chinese ones are back in their ancestral country, but by and large, Irvine, MV and most of OC is just working class stiffs with white collars.

Their money is living with them and passing with them.

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[quote=kev374]The wealthier end of the spectrum is not buying $500,000 homes as these homes are in ghettos like Buena Park and Anaheim. The wealthier households buy in Irvine and Tustin Ranch which have average home prices close to a million dollars.

We are talking about half a million median in solidly blue collar neighborhoods like Buena Park and Orange. Especially Orange, not sure what is going on there because the demographics there are all Blue collar yet homes are way north of half million.[/quote]

No, Irvine is middle class. Shady canyon in Irvine is neuvo money and most are posers. People with real money, buy on little Lido island, Pelican hill Lemon heights.

That’s a solidly California distortion, people living in million dollar homes are really working class professionals. Financially well off, but most are not wealthy.

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