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As somebody who has a mortgage and is considering moving, I think about housing prices a lot. The conventional wisdom seems to be that high home prices are a good thing for homeowners, but I can't entirely figure out why that's true in the general case.
If your home is "worth" 10x your purchase price, you can only use that by selling it or using it as collateral for debt.
If you're selling it, you're either moving into a new purchased property or a rental. If you're moving into a new property, it's likely just as inflated as your current home unless you're engaging in geographic abitrage by moving from Martha's Vineyard to Monkey's Eyebrow, Kentucky. If you're moving into a rental - well, any rational landlord is going to set rates at the absolute highest point the market can handle, and that's informed by home prices. If every housing market in the country took a 50% pounding, I'd likely be better off in terms of relocating than I am now.
I can understand the collateral for debt argument, but I don't know how common that is, as I am a peasant who avoids debt whenever I can. Maybe somebody else here can fill in the gaps on this one.
Given all that, what exactly am I missing here? Why are high home valuations for homeowners considered to be such an unalloyed good?
In a world where most buyers are downpayment-limited (which was the case when the conventional wisdom became conventional), your current home going up by x and your dream home going up by 2x still makes the move-up more affordable (because your available downpayment went up by x but the required downpayment with an 80% mortgage only went up by 2x/5). In a world where most buyers are income-limited (which is the world we are mostly in today) it makes the move-up less affordable (because the additional borrowing needed goes up by x).
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For most people, wealth is only useful for retirement. The model is: you save and invest and develop wealth so that eventually you can stop working and live off that wealth until you die.
Two common ways to do that now are down-sizing from a large home where you raised a family to a smaller home/condo/retirement community (what my parents did) or a reverse mortgage if you don't have kids to pass assets on to. In both cases an inflated housing market gives you more cash.
I would guess it's rare to use leverage on your home to enter the capitalist class, but that's also a possibility. For instance, my first home has risen in value >$100K and I can potentially access that equity to help fund my new business.
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Leverage. Suppose you bought your house for $100,000 and still owe $70,000 on your mortgage. If it's still worth $100,000, you have $30,000 in equity. If it's worth $1,000,000 you don't have $300,000 but rather $970,000 in equity. Even if all the other houses have gone up as much, you've won.
Right, but that equity is only useful if you're going to sell it, or you need to borrow money and can afford to make the payments. If I were to buy a $100,000 house tomorrow, and I make the kind of money for which the loan is comfortably affordable but not so much that I could comforably afford a house worth much more than that, being able to borrow $900,000 isn't much of an advantage. Maybe if circumstances change such that I need to borrow money and I can get a better interest rate on a HELOC than I would on a personal loan, but even then the origination fees combined with the fact that the bank now has a lien on your house makes it a questionable decision unless the circumstances call for it.
Yes! If you had to sell your house at the original price, you would get 30k back. If you had to sell it at the new price, you would get 930k back.
If you did this to move into a house that was twice as cheap as your first one, you would be 20k in debt in the first case and would have 430k left in the second. That's a massive cash injection for an empty nester.
Incidentally, this is one of the reasons why houses have been growing bigger and bigger in the US. If it's your biggest and safest and most appreciating investment, it makes sense to buy not the smallest house you need, but the biggest house you can afford.
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It's not very liquid but it is wealth and it is useful. If the 10X increase is straight inflation, you've gained $67,000 in the same currency as you bought the house in.
Yes, I agree. I was in that situation when my business took a big hit due to Corona. Fortunately my house had gone up a lot in value so I was able to have fat HELOC based on the difference between the mortgage balance and the potential sale price.
Of course this is all semantics -- how to define the word "wealth" -- but I think it's most appropriate to think of home equity as wealth which is not very liquid but still wealth, as you put it.
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You need a place to live. If your house goes up in value, and you are living in it, your imputed rent goes up, and you are using the more valuable house to pay for the more expensive imputed rent, which leaves you with no gain. If you sell it, you'd have to find some similar place to live and that place's cost also went up. So you don't gain unless you are an investor and you aren't using the house to live in.
What you say is correct if
1) There's no mortgage and either
2a) The increase is entirely inflation or
2b) You can only use housing wealth for housing.
Since 2b isn't true, you can make use of wealth from your primary residence. Suppose housing doubled in value compared to general inflation since I bought my house for $400,000. I move from my house to a house costing 3/4 as much (formerly $300,000, now $600,000). The 1/4 I get out is twice that ($200,000 rather than $100,000) if housing remained the same.
Yes, and if you take into account empty nesters, it's not that atypical for older people to move from a house sized for a family with 2+ kids to a smaller house, to a condo or an apartment that requires less upkeep work and, as a result of the downsizing you mentionned, frees up money for retirement.
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If you move to a cheaper house, the cheaper house is less valuable, and also has less imputed rent. You are essentially "making money" by reducing your expenses, even though your budget doesn't have line items "reduction in imputed rent" and "equivalent reduction in the ability of house to pay the imputed rent".
The point is that the real money I obtain by doing that goes up with the real value of the house. If the house value stays the same, then by pulling 1/4 of the value of the house out I obtain $100,000. If the house value doubles, I obtain $200,000. This is a clear win, and demonstrates I'm made wealthier by real housing values going up.
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I think the geographic arbitrage you mention is pretty common. My mother and step-father were, at one point, considering moving to a pretty rural area of Kentucky since they could get a lot of land quite cheap. Additionally there's a size/quality arbitrage that occurs. When you're younger, have kids and a growing family, you probably want a larger house than when you're older and retired. So even if you stay in the same geographic area there's an arbitrage to a relatively less desirable house that may be better suited to your needs.
My impression is many homeowners also perceive their house and its equity as a retirement investment. In many (most?) places around the country your home is likely to be the most valuable asset you own. Even if one doesn't intend to cash out that asset themselves, it is something very valuable to leave to one's progeny. Either in the form of cash from a sale or as a place to live.
Agreed, I live in a suburb in the Northeastern US and it's pretty common for people to sell; move to places like Georgia or the Carolinas; and end up with a much nicer house (fully paid off); and a bunch of extra money to boot.
Even among people who don't end up doing it, just knowing that it's a potential option provides peace of mind and a safety net for taking financial risks such as quitting one's job and starting a business; taking an early retirement plan that's 90% likely to succeed, etc.
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If I was in DINK couple, or an irresponsible parent, a reverse mortgage would be very tempting; after all, if I don't have anyone I want to leave my wealth to, what do I care if the bank takes it after I die?
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