Thoughts on contingency and what could happen…
Before we moved we used to live in a middle class neighborhood. Okay, so everything is considered middle class these days, so to be more accurate, this was considered a blue collar neighborhood in one of the highest income mid-sized towns in the US. Home prices ranges from upper 400s when we moved in to mid-lower 300s when we moved out.
On a first glance we often wondered where all these people got their money from. The cars where literally lined with trucks, SUVs and cars. When we walked the puppy in the evening, we could see the massive glow from the big tubes people where worshipping in their living rooms. Some people had boats, mostly small speed boats or trolling boats parked in the drive way. Walking past their mostly open garages, we noted that they were packed with stuff which explained the need to park the car on the street.
Now it was easy to get the impression that our neighbors where making way more than us. After all, we only have one car, no boat, our TV did not light up the room, and our garage was lined with clotheslines.
Statistically though, I realized we were all making the same. The obvious conclusion, thus, was that our neighbors where mostly living it up. So while the surface showed nice cars and big toys, the underlying reality must have been a case of depleted or nonexistent savings and a life time spent working. We often talked about that.
When the real estate tide started going out, the big toys had sales signs plastered on them and the houses started having “bank-owned” signposts going up in front of them. What we had seen now became readily apparent for everybody to look at. So it may be “embarrassing” to drive a compact car(*), but I imagine that is nothing to the embarrassment of having a foreclosure sign going up in your front yard and having a lock put on your front door.
(*) Unless of course gas prices are up in which case the underlying accusation is that it is unfair that SUV owners pay $100+ to fill up the tank.
So, when you are looking at a 22 year old driving a $35000 sports car, what do you see? If you’re looking at an early-30 couple who just bought a $400k home, what do you see? Financing makes it almost impossible to tell, but statistically, you’re seeing someone with a significant debt/asset ratio.
Looking at someone it is impossible to see their cash flow or their financial leverage directly, yet indirectly, it is not hard to get a good idea of their financial situation, how often they worry about having sufficient money, their degree of “struggling” if you want, how close they are to long-term bankruptcy (the point where they begin to carry a balance on their credit cards).
Once you start seeing through the appearances that people are keeping up by using finance, it is hard to remain impressed.