The thinking goes like this: buy a starter house, fix it up, leverage the improvements and appreciation that have increased your equity stake, sell it, and then sew the proceeds into buying a bigger and better house; repeat those same steps with your new house to secure your next upgrade; repeat until sometime in your mid-thirties to late-forties at the oldest, buy your dream house with terms that insure it will be paid off no later than the day you retire, thus eliminating and in essence “fixing” one of the biggest variable expenses at retirement age, when odds are your income will go down or be eroded by cost of living adjustments.
Even as America got mobile and people cris-crossed the country with moves, the above scenario worked because of a persistent and unrelenting appreciation of home values. A transitional lifestyle might create a few lateral side trails, but the assumed destination has been the same: a home owned free and clear to live in — or to sell in order to pay cash for a downsized home (while pocketing the proceeds) or in a more desired retirement location.
Something quietly shifted in the equation that is a direct corollary to the boom in the use of consumer credit as a way of life. Home prices continued to rise well beyond the inflation rate, thus increasing equity, which is another way of saying, “wealth.” But rather than letting the home nest egg grow, we turned this windfall into a new revenue stream for living expenses, usually by refinancing an entire mortgage with debt added in or by taking a second mortgage(s) to pay off credit debt rather than to do home improvements, another traditional way to increase equity.
It’s been said that retirement should not mean no more work — idleness is bad for your health — but rather it should lead to the ability to do whatever work you want, ranging from volunteerism to a second career.
A few of the potential impacts on our future in light of the subprime crisis and ensuing loss of home values include:
* we may have to work more years full or part-time than we planned because part
of our retirement package has been damaged;* it’s tougher to move — unless a company is guaranteeing the sell of your home (and a lot of companies have been forced to eliminate this program) — and watch your home sit on the market; even if there are great deals where we want to move, most of us can’t afford to buy without first selling;
* with less “wealth” we don’t have as much credit available to spend on those goods and services outside our normal income stream — which will hurt the easy-credit-fueled economy;
* you might not be able to move where you want to at retirement age — not all regions are equally impacted by the subprime crisis in relation to home values; there’s a reason small “ghost towns” in areas of the country that have experienced
population loss for decades are filling back up — cheap mortgages.
Will home values bounce back? I believe the answer is yes. But I think it’s going to take a few years. There seems to be too much inventory with so many people insisting on building new homes. But new house starts are finally going to slow down, which will be one more stressor on an already stressed economy, but which is required to tighten the housing supply and raise prices. How can I be so sure? Simple. If it costs $130 per square foot to build a new home and it costs $90 per square foot to buy an existing home less than 10 years old, home buyers are going to figure ways to freshen up and personalize the existing inventory. The per square foot cost gap is at its highest ever on a national aggregate.
As someone who has benefited tremendously from the appreciation model — and then taken an “equity beating” during a recent move (that included building a new home) — I am realistic but optimistic that owning a home still needs to be a key strategy in securing your best financial future. Obviously, our future, financial and otherwise, is not just up to us, but I’ll throw out a couple modest suggestions:
1. Get on a schedule to pay off your house before retirement. If you aren’t familiar with the simple little secret of making double principal payments, which will allow you to cut your 30-year mortgage in half, visit any reputable financial website to learn how — it’s not nearly as daunting as it sounds. If you’ve elected one of the dreaded interest-only loans, put a principal payment into your monthly automatic payment schedule and start paying down — yesterday.
2. Don’t treat appreciation as a revenue stream but rather a long term investment — retirement. Second mortgages and refinancing as an ongoing strategy to eliminate debt needs to be eliminated.
3. Don’t put your eggs in one basket — your retirement nest egg should be a diversified program with IRAs, 401ks, Social Security, personal savings and investments, company retirement plans, ideas for post-retirement income, AND a home that is paid for!
Nice synopsis Mark. It comes down ultimately to eliminating debt and diversifying equity. All principles straight from God’s Word. Debt is often seemingly “smart” but in truth one should put their blinders on and believe God’s word over man’s wisdom.
In the end though it will all perish. That doesnt excuse us from being wise with what we have been given and good stewards.
On another note – Mark, I would like to share a link with you that I think will impact you from a friend of mine named Paul Washer, founder of Heartcry Missionary Organization. I send this more for you to share should you feel inspired to do so with your kids and others. Listen and measure.
http://www.heartcrymissionary.com/resources/sermons/paul_washer#examine_yourself
My best to you all.
Notorious1 — Not sure I agree that all debt is bad; we simply wouldn’t be able to buy homes and a few other major purchases that are important to quality of life. Consumer debt for everyday living expenses? Bad! Agree.
Your commnet on being good stewards is right on. I’m afraid we’ve been chasing a frenetic spending pace that has made stewardship a forgotten and much needed concept.
Thanks for sharing the link.
I couldnt agree with your debt statement anymore from a worldly perspective. My reference is to God’s standard on debt as given in His word. Which we choose to walk by is a choice as as you know, as are the consequences.
Is it debt, when one borrows a mortgage that can reasonably be repaid by the sale of said property plus one’s other assets? That is where it gets fuzzy for me. When one borrows clearly in excess of one’s net worth that is where it is easy to draw the line.
As an example, I decide to do a home improvement worth X amount. I have 5X worth of stock and real estate holdings which are not in a liquid state. I therefore borrow X dollars in a line of credit to pay for my home addition. I then cash in X amount of stock to pay off my loan. I borrowed, yet my net position was one of equity not debt.
This is where many draw the line, when one is clearly in a position of positive equity. Having said that, the one who follows the letter to the “t” of Biblical teaching on debt is never at the risk of shifts in asset valuation, interest rates, etc which could turn one from a marginal net equity position into one of being in a state of net debt. Gray areas are where man falls the hardest.
These gray areas are also a source of family strife, worry and grief. This can snowball into marital problems and the break of the family, leading one to ponder what would have happened had we followed Gods law to the “t” and lived in that smaller less desirable house?
Nice post.
I’ve got a few thoughts to add.
First, my story. I was an urban missionary, living hand-to-mouth in the early 1990’s when I bought my first two family in a “soft-second” mortgage program. I had a negative networth from student loans and no prospects for improving my income.
Fastforward 15 years. I own a very nice 4 bedroom home in Connecticut (the wealthiest state in the union) free and clear.
How did I do it? Simple but bold moves in an appreciating real estate market. I bought, I sold, I leveraged, I had 18 tenants and property in 3 states then I sold everything, paid an enourmous tax bill, and bought my home with cash in 2004.
From 2004 – 2007 I was a Realtor. You’ve heard of the “Realtor to the Stars”? I was the “Realtor to the Millionarie Next Door.”
During that time I was helping smart real estate investors unload their over-priced stuff to folks who didn’t have a clue. I sold millions of dollars in real estate during those years. We all saw this coming. Today the smart money is waiting for the bargains. They’ll be back.
The issue here is “understanding the times” (there’s a biblical concept). Biblical prohibitions about debt are good — but unless we’re going to eliminate a financial instrument that knowledgeable people looking to put capital to work without complete exposure (generally the debt is secured with an asset) then we had better learn to live with debt, and use it wisely. Sex is dangerous too and monks abstain. Should we become debt-monks?
It really has more to do with self-control, courage, and an ability to read a situation dispassionately than anything else. The millionaries I know don’t drive fancy cars, live in big houses, or vacation in exotic places. They’re usually modest, often religious, and always very savvy.
Mortimus