Plus 5 charts to illustrate the cost-of-living squeeze, the average down payment across homebuyer segments & the annual salary that would buy happiness for all.
Very interesting discussion about money and happiness here. I would like to mention the decreasing marginal utility that we get for every extra dollar we earn after a certain threshold. If you make $10,000 per year, earning $10,000 extra will probably change your life. But if you make $150,000, making $10,000 extra per year won't make that much of a difference.
It's also interesting to point out that we hardly make absolute judgements — we always compare ourselves to others. It's been shown that if you make, for example, $70,000, and your friends make $60,000, you'd be significantly happier than if you made $80,000 while your friends make $90,000.
You brought a superb point with the "comparison" phenomena. You are completely right. We can't just look at it one-dimensionally, which this survey has done, but more so, taking the 2nd dimension of comparison. To your point, I think if you are making $60K and your friend makes $80K, you would be happier if you were making above $80K. The question is if you are making $1M every year and your friend makes $2M every year, would you still feel that you need to make more than him/her to be happy?
The happiness depends on expectations. The amount that my friends & family make is a big factor that goes into expectations. But, it's modulated by other things.
Two brothers, equally bright and (traditionally) ambitious, attend ivy college, MBA from top school. Twenty years later one is CEO of a huge company, the other is COO of a smaller one. High probability that the "lesser" brother thinks he's not met his own expectations. It likely his expectations would have been lower, and that he'd have been happier, if the other brother had also been COO of a smaller company.
Contrast to one brother deciding to go to art school, knowing that he probably would not do so well financially, but understanding that he'd like to be creative, even if it meant earning mostly via commercial art (ads, brochures). His expectations would be different, his CEO brother would figure less in impacting his own expectations.
That variance in annual salary to get to happiness between generations is incredible. Millennials obviously the outlier. I’d wager there’s a student debt story embedded in there somewhere
Quite possible. I also wonder how the phenomenon of a massive wealth transfer that will happen between the boomers and millennials in this decade will re-shape their perception on their financial health and expectations.
Reading your post, I think a hard landing is unavoidable. The example of a grocery bill completely aligns with my recent trip through Florida. I couldn't believe my eyes while I was doing grocery shopping.
It's so sad to see where cheap money has brought us. While the majority didn't benefit from the printing press, they now have to pay the additional bill through inflation😥
Unfortunately, that is the harsh reality in the US (and in Canada).
And this phenomena is likely to continue with the projected level of fiscal spending in the coming decade. True, there could be productivity surges of degrees unknown yet by AI.
I used to live in San Francisco until 2019 and when I went back there this year to visit, my jaw literally dropped when it came to prices of food at restaurants. Things like wine, which was super cheap in San Francisco ($5 for a glass) is now at $10-$13 a glass.
It is similar to when I go back to Istanbul and every time prices have doubled. The only difference is this is happening to a reserve currency, which is terrifying.
You are right. Costs without income provide no perspective. Please note that my Friday 5 editions are supposed to quick, bite size content without deeper analysis. If you want to understand the big picture, you can check out my macro deep dive posts below:
I enjoyed reading this article. You're super insightful about the real estate market. The conditions are frustrating for sellers and buyers. And the time horizon begs the question where is the stabilization?
Thank you for your kind words and I am glad you enjoyed the post. Unfortunately, the mismatch between supply and demand can continue for quite some time, imo. On one hand, if mortgage rates decline because of a slowdown, it may usher in demand back into the market, unless labor market weakens considerably. Plus, there is so much "pent-up" demand in the housing market, that we may not be looking at a sizable correction in home prices any time soon. On the other hand, should we see a recession, home prices will decline, but it will come at a cost of severe unemployment. Unfortunately, it will be mostly private equity and corporation who will scoop up the property at lower prices at that time. The only thing that we can control that will put us in a better spot would be to increase our incomes.
After decades as an investment real estate broker and consultant for developers, I've never seen a market so complex and tangled. The indicators are unpredictable and often unreadable to gauge future performance. I'm witnessing the client's investment goals sidelined and their growing exasperation. Many sellers and buyers keep asking how much longer we should wait to transact. Your observations carry sway. I think your crystal ball is a keeper, Amrita. :)
100% yes! 2008-9 was fueled by loose lending practices and those actively participating. Anyone with a beating heart could get a loan. At least investors could cash flow a property unlike now. The money is out there but not being put to work in many locales. I've really enjoyed our exchange. Wishing you a lovely weekend.
As always, I really enjoy your posts. As someone in the insurance industry, its very obvious to me why insurance rates are skyrocketing. The cost of materials are labor is rising, sure, but the real action is on the legal side.
Defending lawsuits is expensive and anecdotally, we have seen jury verdicts become downright "vindictive" since the pandemic. Juries, for whatever reason, have tossed out reason and are awarding huge sums of money to plaintiffs. After a few nuclear verdicts, insurers have become risk adverse, paying large sums to (often) undeserving plaintiffs, just to avoid the risk. Plaintiff's and their attorneys are catching on, filing lawsuits for anything and everything, expecting they will receive a quick payout, feeding the cycle, filtering into your premiums, and the cost of just about everything.
That is a very unique insight. It makes complete sense, the way you have described it. Also makes sense now that I know you work in the insurance industry. Is there any particular reason why there has been a shift in jury verdict favoring plaintiffs?
On a separate note, is there any relationship between rate of increase in insurance costs relative to the boom/bust cycle? In other words, would you see insurance costs rise just before a recession?
I think that is a reasonable prediction. The only variable to this is the level of government spending that is continuing to create real economy money and the pace is only going to increase. So, it all comes down to how the different forces balance each other out. Plus, next year is an election year. There is never been a recession during an election year in the US, so this might be a first.
To re-visit a concern that I made here a few weeks back- a great amount of existing single family homes are in the hands of private equity behemoths ever since the sub- prime debacle and subsequent tsunami of foreclosures. Decent properties are usually rented for top dollar or maybe trickled into the market keeping sale prices artificially high. As a long time renter and eventual part owner I can attest to the essential need for hands-on maintenance performed without delay - just imagine the collateral damage from a broken pipe. Can you imagine these hedge fund types dealing with property maintenance on all of their holdings? I’ll wager that much of the inventory being held from the market are “fixer-uppers” that won’t get listed until “renovated” (buyers beware!) If I wasn’t already collecting Social Security I would seriously consider property management/ restoration. Skilled “fixits” could name their price. I’d guess most “hedges” wouldn’t even know how to hold a wrench much less use it🫤
I'm really surprised by that chart on home down payments as a % of purchase price. With prices going up and prevailing news of financial hardship, I would've guessed that figure is trending lower.
I was partially surprised too and honestly a little confused initially. There are 2 things at play here. 1) The less you shell out in down payment, the more your insurance costs will get, so perhaps financing the down payment through savings and financial assets is a better option and outweighs higher insurance payments. 2) The people who are well-off are heavily skewing the data, as they are placing higher down payments in a market where supply is tight to outbid the rest.
Thanks for this wonderful deep dive Amrita. I’m curious on the dividend ETFs - given many hold them for the long term do you think it’s a “fair” assessment to evaluate performance within the span of a year?
You have a fair point, the performance is just based on the year so far, which a lot of asset managers base their performance on. However, if the intention is to generate "income" and reduce volatility in your portfolio, dividend ETFs like the ones I mentioned could very well be relevant. But even for a longer period of time, say from 2000 or 2008 or 2015 or post pandemic, SP500 has consistently outperformed, so dividend ETFs should mostly serve the purpose of a portfolio diversifier, than being overweight. Again, it is individual preference at the end of the day.
I think the reason the U.S.A. slips into recession are just as much on the consumer credit side and from cracks in our banking system. When you don't buy because of credit or savings limits, your economy will slide into recession. There are also a myriad of world conflicts that could spill into the mess as 2024 presses on. We will soon see though.
Fully agree, I think the risks are considerably mounting, but in the interim period, as long as bond yields are stable and falling and earnings don't decline, my guess is markets will rejoice and make a final run for it.
My comment on happiness. While money resolves many financial challenges and provide comfort, it's not the sole determinant of happiness. True happiness is an internal sources like personal fulfillment, relationships, and self-awareness.
Just seeing your comment now, since I have restacked on top of your restack, I am not going to add anything here. Kind of feel that substack should have a functionality where by if I comment/reply on your restack, it should reflect back in this section too.
Very interesting discussion about money and happiness here. I would like to mention the decreasing marginal utility that we get for every extra dollar we earn after a certain threshold. If you make $10,000 per year, earning $10,000 extra will probably change your life. But if you make $150,000, making $10,000 extra per year won't make that much of a difference.
It's also interesting to point out that we hardly make absolute judgements — we always compare ourselves to others. It's been shown that if you make, for example, $70,000, and your friends make $60,000, you'd be significantly happier than if you made $80,000 while your friends make $90,000.
You brought a superb point with the "comparison" phenomena. You are completely right. We can't just look at it one-dimensionally, which this survey has done, but more so, taking the 2nd dimension of comparison. To your point, I think if you are making $60K and your friend makes $80K, you would be happier if you were making above $80K. The question is if you are making $1M every year and your friend makes $2M every year, would you still feel that you need to make more than him/her to be happy?
The happiness depends on expectations. The amount that my friends & family make is a big factor that goes into expectations. But, it's modulated by other things.
Two brothers, equally bright and (traditionally) ambitious, attend ivy college, MBA from top school. Twenty years later one is CEO of a huge company, the other is COO of a smaller one. High probability that the "lesser" brother thinks he's not met his own expectations. It likely his expectations would have been lower, and that he'd have been happier, if the other brother had also been COO of a smaller company.
Contrast to one brother deciding to go to art school, knowing that he probably would not do so well financially, but understanding that he'd like to be creative, even if it meant earning mostly via commercial art (ads, brochures). His expectations would be different, his CEO brother would figure less in impacting his own expectations.
You have illustrated it beautifully and quite accurately. Thank you.
That variance in annual salary to get to happiness between generations is incredible. Millennials obviously the outlier. I’d wager there’s a student debt story embedded in there somewhere
Quite possible. I also wonder how the phenomenon of a massive wealth transfer that will happen between the boomers and millennials in this decade will re-shape their perception on their financial health and expectations.
Great point
Reading your post, I think a hard landing is unavoidable. The example of a grocery bill completely aligns with my recent trip through Florida. I couldn't believe my eyes while I was doing grocery shopping.
It's so sad to see where cheap money has brought us. While the majority didn't benefit from the printing press, they now have to pay the additional bill through inflation😥
Unfortunately, that is the harsh reality in the US (and in Canada).
And this phenomena is likely to continue with the projected level of fiscal spending in the coming decade. True, there could be productivity surges of degrees unknown yet by AI.
I used to live in San Francisco until 2019 and when I went back there this year to visit, my jaw literally dropped when it came to prices of food at restaurants. Things like wine, which was super cheap in San Francisco ($5 for a glass) is now at $10-$13 a glass.
It is similar to when I go back to Istanbul and every time prices have doubled. The only difference is this is happening to a reserve currency, which is terrifying.
Kinda silly to talk about costs w/o talking about income, too.
https://jabberwocking.com/cbs-news-dishes-dumb-republican-propaganda/
You are right. Costs without income provide no perspective. Please note that my Friday 5 editions are supposed to quick, bite size content without deeper analysis. If you want to understand the big picture, you can check out my macro deep dive posts below:
Part 1: https://amritaroy.substack.com/p/the-us-labor-market-is-resilient
Part 2: https://amritaroy.substack.com/p/the-us-labor-market-is-resilient-674
Thanks! This is good too: https://www.noahpinion.blog/p/vibes-vs-data
I enjoyed reading this article. You're super insightful about the real estate market. The conditions are frustrating for sellers and buyers. And the time horizon begs the question where is the stabilization?
Thank you for your kind words and I am glad you enjoyed the post. Unfortunately, the mismatch between supply and demand can continue for quite some time, imo. On one hand, if mortgage rates decline because of a slowdown, it may usher in demand back into the market, unless labor market weakens considerably. Plus, there is so much "pent-up" demand in the housing market, that we may not be looking at a sizable correction in home prices any time soon. On the other hand, should we see a recession, home prices will decline, but it will come at a cost of severe unemployment. Unfortunately, it will be mostly private equity and corporation who will scoop up the property at lower prices at that time. The only thing that we can control that will put us in a better spot would be to increase our incomes.
After decades as an investment real estate broker and consultant for developers, I've never seen a market so complex and tangled. The indicators are unpredictable and often unreadable to gauge future performance. I'm witnessing the client's investment goals sidelined and their growing exasperation. Many sellers and buyers keep asking how much longer we should wait to transact. Your observations carry sway. I think your crystal ball is a keeper, Amrita. :)
Which city/state do you operate out of? Do you think the current real estate market conditions are more complex than it was in 2008/2009?
100% yes! 2008-9 was fueled by loose lending practices and those actively participating. Anyone with a beating heart could get a loan. At least investors could cash flow a property unlike now. The money is out there but not being put to work in many locales. I've really enjoyed our exchange. Wishing you a lovely weekend.
Likewise, thanks for sharing your insight.
As always, I really enjoy your posts. As someone in the insurance industry, its very obvious to me why insurance rates are skyrocketing. The cost of materials are labor is rising, sure, but the real action is on the legal side.
Defending lawsuits is expensive and anecdotally, we have seen jury verdicts become downright "vindictive" since the pandemic. Juries, for whatever reason, have tossed out reason and are awarding huge sums of money to plaintiffs. After a few nuclear verdicts, insurers have become risk adverse, paying large sums to (often) undeserving plaintiffs, just to avoid the risk. Plaintiff's and their attorneys are catching on, filing lawsuits for anything and everything, expecting they will receive a quick payout, feeding the cycle, filtering into your premiums, and the cost of just about everything.
That is a very unique insight. It makes complete sense, the way you have described it. Also makes sense now that I know you work in the insurance industry. Is there any particular reason why there has been a shift in jury verdict favoring plaintiffs?
On a separate note, is there any relationship between rate of increase in insurance costs relative to the boom/bust cycle? In other words, would you see insurance costs rise just before a recession?
You can see the trend on Google, in Oct 2021, the number of people searching for "injury lawyers" suddenly quadrupled: https://trends.google.com/trends/explore?date=all&geo=US&q=injury%20lawyer&hl=en
Why this is, I am not sure, but the premium rates we are seeing now reflect, in part, this surge in lawsuits filed then.
As for your second question, not sure if there is any correlation.
The trend data in google is incredibly fascinating. Thanks for sharing this.
I think the charts in your post suggest Recession by 2024
I think that is a reasonable prediction. The only variable to this is the level of government spending that is continuing to create real economy money and the pace is only going to increase. So, it all comes down to how the different forces balance each other out. Plus, next year is an election year. There is never been a recession during an election year in the US, so this might be a first.
Kinda off topic but which software do you use for the data visualization? (I assume the source in each plot is for the data and not the graph itself)
Datawrapper is my go-to.
The Cumulative Effect of Inflation, that you articulate, is vastly underappreciated....
Thanks for your work....
You are welcome, glad you enjoyed it.
Nice work, Amrita.
Thank you very much. Glad you enjoyed it.
To re-visit a concern that I made here a few weeks back- a great amount of existing single family homes are in the hands of private equity behemoths ever since the sub- prime debacle and subsequent tsunami of foreclosures. Decent properties are usually rented for top dollar or maybe trickled into the market keeping sale prices artificially high. As a long time renter and eventual part owner I can attest to the essential need for hands-on maintenance performed without delay - just imagine the collateral damage from a broken pipe. Can you imagine these hedge fund types dealing with property maintenance on all of their holdings? I’ll wager that much of the inventory being held from the market are “fixer-uppers” that won’t get listed until “renovated” (buyers beware!) If I wasn’t already collecting Social Security I would seriously consider property management/ restoration. Skilled “fixits” could name their price. I’d guess most “hedges” wouldn’t even know how to hold a wrench much less use it🫤
Fantastic insight, thank you.
Great stuff Amrita!
I'm really surprised by that chart on home down payments as a % of purchase price. With prices going up and prevailing news of financial hardship, I would've guessed that figure is trending lower.
I was partially surprised too and honestly a little confused initially. There are 2 things at play here. 1) The less you shell out in down payment, the more your insurance costs will get, so perhaps financing the down payment through savings and financial assets is a better option and outweighs higher insurance payments. 2) The people who are well-off are heavily skewing the data, as they are placing higher down payments in a market where supply is tight to outbid the rest.
Nice article, one comment. Prices since 2020 have increased 21% meaning real savings have fallen for all but the top quintile.
Absolutely right. This translates to the lower income groups tapping into credit card debt at a much faster rate than any other income groups.
Thanks for this wonderful deep dive Amrita. I’m curious on the dividend ETFs - given many hold them for the long term do you think it’s a “fair” assessment to evaluate performance within the span of a year?
You have a fair point, the performance is just based on the year so far, which a lot of asset managers base their performance on. However, if the intention is to generate "income" and reduce volatility in your portfolio, dividend ETFs like the ones I mentioned could very well be relevant. But even for a longer period of time, say from 2000 or 2008 or 2015 or post pandemic, SP500 has consistently outperformed, so dividend ETFs should mostly serve the purpose of a portfolio diversifier, than being overweight. Again, it is individual preference at the end of the day.
Got it, very interesting, thank you.
Another excellent edition of Friday5; I learn more about the financial world from this than anything on MSM. Thanks for all you do!
Thank you so much for your note and restacking my post earlier today. So glad you find my writing useful.
I think the reason the U.S.A. slips into recession are just as much on the consumer credit side and from cracks in our banking system. When you don't buy because of credit or savings limits, your economy will slide into recession. There are also a myriad of world conflicts that could spill into the mess as 2024 presses on. We will soon see though.
Fully agree, I think the risks are considerably mounting, but in the interim period, as long as bond yields are stable and falling and earnings don't decline, my guess is markets will rejoice and make a final run for it.
My comment on happiness. While money resolves many financial challenges and provide comfort, it's not the sole determinant of happiness. True happiness is an internal sources like personal fulfillment, relationships, and self-awareness.
Just seeing your comment now, since I have restacked on top of your restack, I am not going to add anything here. Kind of feel that substack should have a functionality where by if I comment/reply on your restack, it should reflect back in this section too.
Would make sense.