Housing prices, emotions, futility

[PortlandDiehard]

Hello all. Please bear with me for the following rant.

I'm usually an analytic person. I've tweaked my asset allocation to maximize return vs. risk, saved like crazy for the last 8 years (I'm 32), minimized expenses, etc. Basically done it "the right way".

Here's the rub: it all feels meaningless compared to the meteoric rise in home prices. Money Magazine did an article recently profiling several early retirees "in making", with a short summary of their assets & liabilities. These were people in their 30s for the most part. Almost to a head, their wealth came disproportionately from recent home price appreciation.

I live in Portland, Oregon and did manage to get my "piece" before selling my house last August. Still, it's almost surreal to see this much wealth created "by accident". Pretty common here to see houses that have appreciated $200K (tax free!) in the last few years. How long would it take an average middle class family (income $60K) to save this much after tax money? 15 years? 10 years if they lived like hermits?

It's frustrating to witness the last few years where hard work, saving, and smart investing just didn't matter. It was ALL about how much house you have and where it's located. It's just dwarfed everything else for the majority of people.

Is anyone else looking forward to normalcy?

Thanks for listening - I feel better now...

Jon

[Robert the Red]

It is a little weird, but think of it as a bonus for some people (including you).* Whereas the saving/investing/LBYM part of your wealth increase is much more under your control, and much likelier to be consistent over a (say) 25 year accumulation period.

About 1/4 of our net worth is home equity (prices have about doubled here in the 5 years since we bought), but the other 3/4 comes from about 17 years of LBOM (and the stock market runup of the 1990s). For those who haven't saved much at all, good for them if they at least manage to extract something from the RE runup. And you've got BOTH!

[grumpy]

The home equity run-up probably only matters if you live where home costs are high and plan to move to an area with cheaper housing. Otherwise you are just going to plow that equity back into the next house you buy in an expensive area.

Grumpy

[unclemick]

Yep

I never got the Big benefit from RE - just some. Plunka, plunka DCA from 1966 - 1992. The 90's market was a bonus - after ER.

And every year since 1966 - I always read (in hindsight) about portfolio's that did better than mine.

heh heh heh heh heh

[wabmester]

Yeah, I used to envy people who made easy money.* *Until I became one.*

Working and saving is the tough route.

Real estate can be good.* *It's "real".* *You can live in it.* *You can create an income stream from it.* *And your investment is usually leveraged.* *Buy real estate where demand is strong and supply is low, and you'll probably do well.

But the big money is in executive management with public companies.* *These guys have discovered the magic printing press.* *Nobody seems to care if stock ownership is diluted by issuing new shares.* *It's really amazing.* *They just create these new shares out of nothing, and the stock price rarely reflects the dilution.* *So, they hand out the shares to one another and party on!* * Believe me, it's a lot easier than real estate, starting a business, or saving money!

[tryan]

Quote:

Here's the rub: it all feels meaningless compared to the meteoric rise in home prices.

It'll always be about your $$ making $$ ... working harder than you can ever possibly work.* This time it's housing ... in the 90's it was stocks.* It's the only way to get off the tread mill (having you assets working for you).

Thankfully you learned this early enough to take advantage of it.

[PortlandDiehard]

Thanks for the responses! The young couple that bought my house were pretty leveraged. They'll work their entire lives to pay off the interest on my tax-free profit. Funny the breaks sometimes.

Equity does matter, though. One can always sell and rent in a cheaper area. Rents haven't at all kept up with prices. In some areas you'd have to see awfully strong appreciation just to break even with renting.

I suppose I'm troubled by the essential moral imbalance of the whole thing. I bought my house in 2001, didn't take care of it, wasn't a terribly attentive neighbor, and sold in 2005 for a 56% profit. Good work if you can get it.

A larger problem is that LBYM _seems_ less attractive than in lean times. Wow, if I set aside $200/mo in 10 years I'll have saved as much as the house down the street appreciated last month.

I suppose one must be careful what they wish for, but here's hoping we can change the channel to a different mania.

[tryan]

Quote:

I'm troubled by the essential moral imbalance of the whole thing.

Who ever told you life was fair ... lied.

[PortlandDiehard]

Not to stray into the political, but the current incentives for homeownership (interest deduction, tax-free appreciation) may hurt housing affordability more than help it (at the low end, anyway).

The mortgage interest deduction is useful only to the extent it exceeds the standard deduction ($10K if married).

I find it a tad awkward that my gain was tax-free and made partially possible by the mortgage interest deduction my buyers received.

To offer a pun, we're funding both sides in the war on housing affordability.

Jon

[macdaddy]

There was always one exercise that really made me think about the value of time and money and how fair or unfair life can be...

I think the median income in nice areas is now around 50k. Just to make the calculation easier assume that there is no inflation, so that in 20 years, the median income will still be 50k. If I had 200k cash in an account today, invested to earn 6% per year (which in real terms means 6% after inflation), that investment account would earn more than the median worker would over his or her entire lifetime.

So, the merits of utility, discipline, and hard work aside, of two children born today (A and B)... child A can trundle off to work and work his or her entire life... child B's parents can place 200k in an investment account for them... child B doesn't have to DO ANYTHING their entire life... and the lifetime profits are the same. In fact, tax laws probably favor child B.

If I came from a family of limited or no means, I think I would find it very frustrating that another child whose parents had assets and an investment fund for them... of at least 200k but perhaps up to a million dollars or more (which could just be a vacation house that the child will inherit)... will earn more, PASSIVELY, than i would earn, working my butt off, my entire life.

Fortunately I inherited cash, ambition, and some common sense and discipline all at the same time... but these thoughts always struck me as a clear example of how "unfair" the system can seem.

[lazygood4nothinbum]

i always thought of financial success as a combination of habit, skill and luck. i wasn't very skilled. i didn't have entrepreneurial spirit, i got physics but not accounting, i know when i'm getting screwed but i'm not so shrewd at the deal.

fortunately i did have the right habits. i never spent more than i had, always worked for my money and i always saved as much as i could.

my luck ran both good and bad, both contributing to early retirement. luckily i bought a house at the very bottom of a market that happened to skyrocket during a period of real estate craziness which happened to be at a time when this area was just approaching buildout.

luck doesn't always have to be good for early retirement. in fact, if i didn't have the bad luck to be losing my mom 20 years too soon, i'd still be working. people look at me and say, "you're so lucky." they haven't a clue.

Note that a 56% profit in four years equals an annualized rate of 16%. Figure in the cost of buying the house and selling it, the upkeep, taxes, and interest on the mortgage, and the return isn't that dramatic. The main difference is in the leverage, of course.

Another way to state this complaint is that it seems futile to be frugal and invest when good or bad luck can overwhelm the effects of your more mundane investments. Just like it seems pointless to recycle dryer sheets when a big market move might make you $10,000 in one day. So you just diversify and hope.

[sgeeeee]

Quote:

Originally Posted by TromboneAl . . . Just like it seems pointless to recycle dryer sheets when . . .

Blaspheme

[Enuff2Eat]

Here's the rub: it all feels meaningless compared to the meteoric rise in home prices. Money Magazine did an article recently profiling several early retirees "in making", with a short summary of their assets & liabilities. These were people in their 30s for the most part. Almost to a head, their wealth came disproportionately from recent home price appreciation.

I live in Portland, Oregon and did manage to get my "piece" before selling my house last August. Still, it's almost surreal to see this much wealth created "by accident". Pretty common here to see houses that have appreciated $200K (tax free!) in the last few years. How long would it take an average middle class family (income $60K) to save this much after tax money? 15 years? 10 years if they lived like hermits?


jon, stop your complaning... you sound just like an old man or a girl. would you rather the housing market crash and your house worth half as much as the day you bought it? take your gain and run. cheese, it's tax free. i do admire you for your smart investing, saving and lbym and that takes alot of discipline. To me, it's does NOT matter if real easte, or stocks, or bond or gold or silver or dirt is going up. as long as you, yourself take advantage of it when the opportunity come. GOOD FOR YOU.

be happy.

enuff

[Focu$ed]

Quote:

Originally Posted by PortlandDiehard Money Magazine did an article recently profiling several early retirees "in making", with a short summary of their assets & liabilities.* These were people in their 30s for the most part.* Almost to a head, their wealth came disproportionately from recent home price appreciation.

A few other magazines and websites run those sort of series: Millionaires in the making etc. etc. I have noticed that in most cases the bulk of people's net worth is in real estate gains. I always think to myself that they shouldn't plan on those gains being permanent. Also, as others have said, unless you're selling the home, how does it benefit you?

20% - 30% annual gains can easily become equal size losses, and it would not surprise me to see that happen over the next few years. This boom was built on unnaturally created supply/demand fundamentals. Anyone with a pulse can get a mortage. Applicants barely need a job, they don't need a downpayment, the seller can even over-inflate the price and pay their closing costs, many loans are interest only, etc. If this host of people, many of whom could not afford to buy without these advantages, were not in the market, there would be no wild appreciation. A huge number of home sales are speculative purchases of second homes, anticipating appreciation, or potential properties to be "flipped." When you start seeing television shows about how to flip property, you know the end is near . . . .

If prices drop, this artificial wealth dissipates. Perhaps no harm is done except to one's net worth on paper. But what happens if prices drop, and people have already extracted the supposed gains, via home equity loans and multiple refinances. Now they have no gains and a lot of debt. This scenario concerns me. So, those who have benefited from the housing boom already, good for them, but those who are congratulating themselves on unrealized gains, I think it is a bit too early to celebrate.

[PortlandDiehard]

Lazy,

How true. I dropped out of school at 15 to take care of a sick mom. I will never get an inheritance. I'd much rather have my teen years back than a "housing windfall". Luck can even out if you're positioned to take advantage of opportunity. I agree that success seems easy to those who didn't walk uphill through the snow.

Al,

I agree, people dramatically inflate housing gains by not including relevant expenses. Still, for 4 years I didn't have to pay rent, didn't have any repairs, did "no cost" (negative points) refi a couple times, etc. It felt strange to pick up the fat escrow check.

Mac,

Yes, the math is pretty sobering. I admire your willingness to admit to having received some "help". I don't begrudge those who's parents helped with the down payment, bought them a car, took them to Europe, etc. It's the holier-than-thou, "I'm successful and earned every cent my parents gave me" attitude that's tough to take.

On the other hand, you meet people who are drifting through life waiting for their loaded parents to fade away. I feel strong sympathy for these people - life is for the living.

Enuff,

Point taken. Yes, I'm pretty lucky to stub my toe on the gold housing brick. Just feels strange to drive a beater car and skip meals out when your neighbor pocketed $50K tax free last year by sitting on the sofa. I know it evens out eventually...

[Craig]

Don't worry ... we'll probably all feel better soon when we realize those huge housing profits were really illusory, made to look large by the massive drop in the value of a dollar ...

Just kidding. I think. :

[madeit!]

Do not be too envious of these folks that reap a housing windfall. In most cases their "wealth" will be quickly transfered to car dealers, overpriced vacations, or generally frittered away on expensive useless stuff and they will remain firmly chained to the treadmill with no chance of FIRE.

[tryan]

Quote:

In most cases their "wealth" will be quickly transfered to car dealers, overpriced vacations, or generally frittered away on expensive useless stuff and they will remain firmly chained to the treadmill with no chance of FIRE.

GREAT ! If they keep the economy working ... the economy works for us.

[Lusitan]

Quote:

Originally Posted by macdaddy If I came from a family of limited or no means, I think I would find it very frustrating that another child whose parents had assets and an investment fund for them... of at least 200k but perhaps up to a million dollars or more (which could just be a vacation house that the child will inherit)... will earn more, PASSIVELY, than i would earn, working my butt off, my entire life.

A quote from the character Herman Blume (Bill Murray) addressing the student body of a private school in the movie Rushmore:

"You guys have it real easy. I never had it like this where I grew up. But I send my kids here because the fact is you go to one of the best schools in the country ... Now, for some of you it doesn't matter. You were born rich and you're going to stay rich. But here's my advice to the rest of you: Take dead aim on the rich boys. Get them in the crosshairs, and take them down. Just remember - they can buy anything, but they can't buy backbone. Don't let them forget it."



Don't worry, Mac - there are plenty of people out there gunning for you, economically speaking. Most inherited wealth is fritted away in a couple generations, so it's all a part of the cycle. The trick for all of us is finding happiness in life outside of material wealth.