A Measure of the Bubble

Guest Post by Eric Peters

How do you measure a bubble?

One way may be to use what is styled “inflation” – that is to say, the devaluation of the buying power of the fiat currency we’re forced to use as a medium of exchange – to see how much more you have to spend today for the same thing that used to cost much less, yesterday.

My old house up in Northern Virginia was built in the early ’70s. I bought it in the mid-1990s for about $160k. It’s modest (appx. 1,200 square foot) house built on a slab that was poured on a quarter acre lot in a subdivision of similar houses. These were working and lower middle class houses when they were new – and when I bought my house in the mid-1990s. That same house – and others like it, in the same neighborhood – is now a $600,000 house. When I lived in Northern Virginia – which I did until the early 2000s – $600k would still buy a house twice the size of my old house and (usually) on at least an acre or two of land.

These were the homes of the affluent.

What is my old home, now?

You would need to be very “affluent” to be able to buy it today, certainly. But $600k doesn’t buy what it used to. It’s the same 1,200 square foot house that it was when it was my house. Maybe it has nicer windows now. The neighborhood isn’t any nicer, though. Part of the reason I sold it was just that.

The neighborhood – when I lived there – was still on the outskirts of the traffic-awfulness that characterizes the Northern Virginia suburbs. You could still drive places without most of the drive being sitting in place. That was changing fast by the early 2000s.So also the general character of the area.

What hasn’t changed much is people’s financial wherewithal – in that $600k is still a lot of money, in the sense that few people can afford to spend that much money because not many people earn that much money. You’d need to be earning almost-Fauci money to be in a position to afford a house like my old house, today.

Let alone a larger, nicer house.

I wasn’t affluent in the mid-’90s and yet I was able to buy my old house. In part because it was more feasible for a single young guy to come up with the 10 percent of the purchase price in cash (which was only about $16k) needed to qualify for a mortgage when the purchase price of a home is $160k as opposed to $600k, as it is today.

A person looking to buy my old house today would need to come up with the same 10 percent of the purchase price to secure loan approval, just as I did. But that person would need to come up with about $60,000 in cash rather than the $16k I had to come up with. And even if he could come up with it, he’d end up living in the same house I was living in – only he’d be paying about four times as much for the privilege.

It’s a pretty good rough yardstick for what is styled “inflation,” isn’t it?

As in a swelling of cost relative to actual value.

Sometimes, the two are rough synonyms, as when a thing costs more because there are no more of that thing but there are more people who very much want that thing. This is why a classic car costs more (sometimes, a great deal more) than it did when it was new. They aren’t making any more of them, so demand for the remaining supply results in higher costs.

The classic car is more valuable.

My old house in Northern Virginia? It just costs more. There is nothing about it that justifies a four-fold increase in value. There are many other houses literally just like it (the old neighborhood had three or four basic models of houses that the developer sprinkled throughout the neighborhood) and even more that are similar, in terms of square footage and lot size, etc.

They’re all $600k properties now – and those are the “affordable” ones.

It begs the question . . . Who can afford them?

The DC ‘burbs are home to a locust swarm of federal “workers” – who make a lot of money relative to people who have to earn their living. But even a $100k income doesn’t buy what it used to up there. I know because I was making about a third of that when I lived up there – and I was able to afford a house that is now an unaffordable house unless you are making considerably more than $100k, today.

And even if you are, you aren’t getting any more for your money than I got for a lot less of mine.

It’s a pretty good measure of a bubble, I think. I’m glad I’m not in the neighborhood anymore, too.

Because when this bubble pops, it’s not going to be good for those who bought in – and didn’t get out, in time.

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