This bubble has inconvenienced many, and here is an example of an individual who, despite (perhaps because of?) sound insight into the market, made the decision to not let the bubble inconvenience them any longer. Essentially they are saying that they are wealthy enough (inheritance ‘backstop’) to be able to take the risk of their new house dropping greatly in market value. That risk is, by their calculations, less significant than the inconvenience of not moving into their current ideal accommodation. -vreaa
“My wife and I currently own a very nice high end condo and are at a stage of life where condo life isn’t necessarily appealing anymore. So, we locked in a stupid low rate and “kept our eyes out” for a place. Well, within a month, we found a great house in a great area (our prime target area), and while I KNOW this place is extremely expensive and likely at the top of the market, we bought it.
Why would someone, like me, do this, when my instincts tell me that we’re at the top of the market, with the lowest interest rates on record, affordability a major issue, and nowhere to go but down?
Frankly, because of what I mentioned – we are at the stage of life where we don’t want to live in condo anymore. I’ve looked at house rental listings, and none were as nice as this place. Plus, my extensive (believe me, extensive) economic analysis showed me that for every 1% rise in interest rates (which has already occurred), at this approximate price point, we would require a an approximate 10% reduction in the market in order to have the same payment (remember, we are long in the market with our current place, so the market decline hurts us on the sell side too). I think a 1.7% rate rise (not unreasonable, at all) to ~ 5.4% would mean we’d have to see a 20% market reduction.
My dad passed away last year, my mom’s in a big house by herself on the island – she’s making noises about downsizing etc. or even moving. So, she’s offered to “advance” us some of my inheritance (only child) to help out. That helped us make this difficult decision as well, as we have a bit of a backstop there.
At the end of the day, we can afford the payments on this place, although, it will be a bit of an adjustment for us. We have some economic backstop. I think the market could easily correct up to 20%, but maybe not by much more than that. To not buy now, we would have to bank on a 20% or greater drop in the market.
I am somewhat bearish on the market, but not in the same way as a lot of people here are. I do think that a 20%-30% correction is a very real possibility (or even a probability), but I also think that anything greater than this, on a long-term protacted basis, is unlikely. There is something that none of us have been able to figure out or quantify that keeps the market buoyant. I personally think it’s a combination of foreign ownership and generational wealth transfer (baby boomers are relatively affluent and like to help their kids – akin to my situation). I also think that the bottom fell out, you’ll see other governmental “stimuli” (such as playing with bank rates) to readjust the markets.
So - anyway – that’s what we decided to go, for good or for bad. I’ve considered the impact that an interest rate of 9% would have in 5 years time, in which case, we’ll likely be selling. But the way I see it, I’ll cross that bridge when I come to it. There are lots of other variables at play, that are difficult or impossible to predict – general economic conditions, personal job situation, a further “inheritance”, higher inflation or hyperinflation, a catastrophic illness such as cancer, a global nuclear winter if some quack dictator does something unpredictable, etc. So, we’ll roll with the punches.
I hope you all take this as it’s intended to be posted – not as a “you are all wrong” sort of thing – more of an explanation from someone who, quite frankly, agrees with you, but given the time and place that we are in, decided that we’d still buy in this market. Am I greater (greatest) fool? A number of you will say yes. But, at least I’m an informed “fool”.
Wish us luck, we may need it!”
“Maybe I achieve full bonus at my work each of the next 5 years and reduce the mortgage significantly during that time. Maybe my options net me $500K. Maybe I get promoted at work into a significant raise. All of these scenarios are just as likely as an interest rate rise to 9%. If so, no, we won’t be selling, and we’ll continue to be extremely happy in the house. Also, it’s my principal residence, not an investment – if I’m under water, I don’t really care as long as I can still afford the payments.
One thing I think “us” bears (remember I am a bear) forget is that if rates rise significantly, the economy is going to be humming. Majorly humming. In which case, I can guarantee that my profession will afford me a much higher income, esp. with 5 years more experience.”