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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: David Jones who wrote (5790)	10/2/2002 7:02:26 PM
From: Wyätt Gwyön	Read Replies (2) \| Respond to of 306849

If I remove all equity I hold. All I have left ... adds up to two four fiddy. hmmm, i'm not sure how i would write that numerically, but i guess you mean it's not enough to retire on. which gets to my point about net worth being separate from home equity. take the median American. somebody who paid cash for a house 30 yrs ago costing whatever the 1972 median value was (say 25K) and now has a house worth whatever the median value is today (say 162K). on paper they are up about 550%. but has their net worth increased? i would say no. after all, they are simply living in the same house that they owned 30 yrs ago. only the paper value has increased. meanwhile, they live in a house that is 30 years older, so will have higher repair costs. probably if anything, their "worth" as it pertains to their home has decreased due to higher expected mainenance and repair costs. how can they be up 550% and yet not up at all? because if they sell their median house, all they can do is buy another median house (meanwhile suffering a 7% loss due to title and commission costs on the sale, not to mention moving costs). (this discussion obviously excludes the elderly who may be contemplating, e.g., a reverse mortgage; i.e., the discussion of "net worth" pertains to the amount of assets required to cover expenses in perpetuity, which is basically anything over 15 years for planning purposes.) the only way they can improve their net worth, via their gain in house value, is if they sell their median house and move into something cheaper. like say a half-median house costing 81K. presumably it is half the price for a reason (maybe a crummier house, maybe a cheaper part of the country or city...) that is a lifestyle choice. unless they make it, their financial net worth hasn't improved. so when you talk about having tripled your net worth due to home value appreciation, i would only believe you if you are saying you will sell your appreciated house, buy a cheaper one, and keep excess proceeds as part of your liquid net worth. if that is the case, then you are certainly the exception to the rule, and i would consider you quite lucky... this is not to say that there are no exceptions, wherein a person could improve their net worth due to home value appreciation. but what does this entail? consider an example... maybe a person lives in an expensive part of the country, perhaps they can do this. maybe a person lives in a million-dollar starter home in San Francisco, with a 100K mortgage. if the person has no other assets or debts, then i consider his or her net worth to be minus 100K (due to mortgage debt). upon selling the house for 1 million, maybe he or she can take the 930K sales proceeds (after commissions and title costs), move to Texas and buy a nicer house for 230K, pay off his or her 100K mortgage, and have 600K left over. i would call that 600K the person's new (and vastly improved) net worth. however, this by necessity involves a considerable lifestyle change that many may not want to make. and in any case, for the country as a whole, obviously only a minority live in really expensive houses from which they can "trade down" to another region of the country (even if they are so inclined). in aggregate, the median person has a house of median value, and cannot improve his or her "net worth" lot simply by trading to another median house. therefore, the median person, who is supposedly feeling flush due to a rising median home value, is fooling him/herself with the idea that such home inflation has improved their net worth at all.