I have a few friends (and some money management clients) who live in houses that would sell for less than a million in the Bay Area and having spent a lot of time visiting them, I have to say, I love their neighborhoods. The schools are good too. Still, coming from a place where prices are far more realistic (but on their way to getting just as unrealistic), I do agree that house prices in the Bay Area are too high for what you get. I have yet to convince even one of my friends there to move somewhere else, even ones who are painfully aware of what they could afford somewhere else for a lot less.
If people are only saving 2%, their homes apparently are their only investments.
You have to examine how the government determines the national "savings rate". Once you do that you'll understand why it's not accurate on the micro scale. I can tell you that there is enormous variation in savings rates even between people with similar incomes and family size. Oddly enough, people with an extremely low savings rate can sometimes wind up with a considerably higher net worth than those with a higher savings rate because of one choice investment that worked out fabulously for them, like a closely held business.
I wouldn't have any money management clients if I only took renters, all my savers (investors) are home owners and since I don't manage their houses, they do have investments other than their houses (which they bought with savings). I would also add that homeowners are far more likely than renters to also have other investments even if their house winds up, during times like this, to be the largest asset they own.
BTW to understand how a non-saver can jump ahead of a saver you have to go back to an old example I was taught way back when that I've never forgotten.
A person has an idea for a business. They convince someone to lend 300k. From that 300k the entrepreneur buys the equipment, hires the employees to make the product. The very first year, this new company makes 100k profit after all is said and done.
Now at the end of the year, the balance sheet shows 100k in the bank, 300k loan (only paid interest on the loan) but our wholly owned business is now worth 1 million plus 100k minus the 300k liability plus the plant equipment (300k) minus first year depreciation (-100k). Our non-saver has a net worth of around a million. Why? You say, this person only has 100k and he owes 300k! The reason is because they have successfully created an entity which can return 100k in profit and an investment vehicle of similar risk that would return 100k per year is being priced at 1 million. Don't laugh, chances are at one time you've already invested in a company with a 10 PE with that kind of debt to equity.
Now imagine if this same guy had tried to save his way to a million? It's a given, just about anyone can save a million given enough time, a positive enough difference between income and expenses and a positive rate of return in a vehicle that minimizes tax consequences. I've known people who never made more than 30k income in any given year who have a million dollar portfolio of investments using the TVM to their advantage (instead of against them as most debtors do). |
