The home of Sweaty Spice, the 'other' Spice Girl

My brother expects to be able to cash out and retire in the next 18 months. He has gone so far as to tell his boss at work to not grant him RSU’s this year, and instead to maximize his cash equivalents (RSU’s vest over 4 years).

Of course, his calculations were based on a few factors that migth no longer be valid assumptions:

  • That the Stock Market would continue to grow at 12 - 18% per year
  • That his primary home (a high end townhouse in a tony San Diego neighborhood would continue to appreciate at double digits per year

The last 6 months have pretty much put both those assumptions in the failed column.

First, the stock market has been on a different planet where the market fundamentals made no sense. Just looking at a few of the high flying stocks like Google, Facebook, and Tesla were enough to make you wonder if everyone had lost their fucking minds. Google continues to do well, because they are dominant in the advertising space, but Facebook (sorry, Meta) has been hammered by the increased privacy and tracking blocking on Apple devices (that caused them to warn that their profit would drop $10 BILLION dollars.)

And Tesla? Yeah, they make a good EV, and are profitable (albeit mostly due to their ability to sell emission offsets to the other automobile manufacturers) but their stock? Even at $752 a share (what it closed at today) it is wildly over valued.

This is to say that the stock market was behaving irrationally, and that was largely due to the extended stretch of the Fed holding interest rates at near 0%. Their ZIRP (zero interest rate policy) combined with the Quantitative Easing drove the people who make money on money to ever sketchier investments to chase any sort of return.

That is why the Stock Market has been irrational. It is also why Crypto had been on a tear. In November 2021, Bitcoin, the granddaddy of the crypto currencies was valued at $68K per coin. Now it is fluctuating at about $20K (and that is probably maintained as a floor because some incredibly wealthy people are staking it there).

So, my brother’s belief that the stock market’s recent performance was reliable enough to plan a retirement by age 54 seems squiffy at best.

The Fed has been consistently increasing interest rates, that has taken the wind out of the stock market, and has caused the interest rates on the 30 year fixed rate mortgage to soar.

Mortgage Rates
Mortgage Rates

Considering that about 5 months ago, you could easily find a mortgage closer to 2.7% APR, this is massive, and it leads to the second factor in my brother’s doomed attempt to retire next year.

Low interest rates make it more affordable for people to buy houses for higher prices. We see this in the Bay Area where my 1,410 sqft home is worth $1.25M. Seriously, if I put it on the market tomorrow, I could easily sell it for that. But, I live in silicon valley, and the south San Jose area is a bargain for tech workers who want something that is commutable 2 days a week, and they can get to SF or the Peninsula in a reasonable amount of time.

My brother though lived in San Diego. It is a gorgeous, brand new (built 3 years ago) townhouse, up on a bluff, with a great view. But the interest rates now at nearly 6% will curtail the stratospheric price growth. While San Diego is not inexpensive by any measure, it does follow normal economic rules.

And since today’s jobs numbers showed strong job growth, and unemployment constant at 3.6% (aka about as near to full employment that we get to in the US), that will increase pressure on the Fed to raise rates a full 75 basis points (or 0.75%) in their meeting next week.

That will immediately cause mortgage rates to rise, credit card rates to rise, and my savings account to pay an almost interesting amount of interest.

Of course, they are taking this action to combat the roughly 8% annual inflation rate.

So, that will likely lead to more stock market drops, an increase in mortgage rates that will further cool the appreciation of real estate valuations, and make it far less likely that my bro will be able to retire early.

Other factors

There is one more complication my brother fails to account for. He likes to spend money.

A $40 bottle of wine most days.

$80 bottles of Mezcal

European motorcycles ($$$ maintenance)

and other retail therapy items.

Face it, unless he had FU money (and he doesn’t) he will not be able to retire.

Oh, and the clincher? He wants to buy a rustic house on 10+ acres in eastern Washington state. And he wants to build a workshop, and stuff it full of woodworking tools.

Oh, he also wants a world class demonstration kitchen. And he will remodel the whole house to get that 1,000 sqft kitchen with Wolf ranges, Subzero refrigerators, and the whole shebang.

Yeah, he lives in a fantasy land.

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