The Buck Fifty Rule

Some years ago, when we were in the habit of taking occasional weekend vacations down to Washington, or up to Boston, or over to Philadelphia, my partner and I formulated a rule based on what we found out about hotel prices. We didn't really come up with a name for it, but a good one would be The Buck Fifty Rule.

It goes like this. Most hotels will give you about the same kind of service for about the same charge. A dollars worth of cost buys a pretty standard dollars worth of value. Sometimes a little less, sometimes a little more. Fifty percent more -- another fifty cents on every dollar -- will get you about fifty cents more value. Sometimes a little less, sometimes a little more. If you went up another fifty cents, though, you wouldn't get another fifty cents or so increase in value. You'd get something in the neighborhood of forty cents worth. And if you went still another fifty cents, you'd be lucky to get twenty five cents worth of value.

We never drove that to the limit, but within the range that we could afford to spend, it seemed consistant. It could be that the additional high-end dollars were buying value that we were simply not geared to accept as value at all, or at least, not worth spending money on, but our take was that whatever the reason, we would not push it. We'd edge up another fifty percent when the occasion called for it, and even another hundred percent on rare, very special occasions, but that was about it. No mas, no matter what you got in return.

We found that this rule of thumb was applicable in a number of different areas -- in the cost of the meal at the neighborhood restaurant versus an expensive one, in the cost of a new car -- and now we find, in the cost of houses. Because we've started thinking about building a house to use as a retirement home, and from the looks of things, the Buck Fifty rule lives there, too.

In looking at the current assessed value of our home, we find that it is worth about half of the cost of a new town home in one of the developments going up near us. These are not elegant, ten foot ceiling, granite-everywhere town homes; they're just nice, small, common-wall houses. And ours is, by our standards, a big house -- nine rooms, three baths, attached two car garage, elegantly redesigned kitchen. We thought that if we wanted to get an equivilently nice, smaller home, that we could essentially take the money out of this house, buy the new one, and have a fair amount of money left over. Not so. Rather, we'd have to take all of the value of this house -- and then some. So, for each of the dollars we spent, we'd get a dollars worth... ninety cents worth...seventy five... and all the way down. That last dollar would buy us hardly anything.

This is not an end of the world observation. In fact, thinking about the levels of cost involved, its pretty close to what we like to call a Problem of the Idle Rich. Most people could not afford to have this problem. They simply don't have anywhere near the discretionary cash to do it. And that leads me to another point. Since people are doing it, where's that money coming from, and would it be fair to say that they aren't so much buying a house as paying a large rental each month? In other words, is the bulk of the house's value (I hesitate to say its worth) really not with the 'homeowner', but with the bank? Yet the bank can't really do anything with it, as it could with cash. It can sell the value of the mortgage, and if things got desperate for the owners, it could foreclose, but barring those two fairly major actions, thats it. The value of the house would just sit there, not really giving value, until someone, at the end of a long line of pseudo-renters, finally got to the point where the current value of the house dropped down to the point where they could really buy it. And only then would the value of the house be trackable as worth to the owner.

Could the Buck Fifty Rule be a fundamental and previously unstated rule of economics?

Hmmm.....