Are you getting richer because of your house? Is your home the best investment you've ever made? Is your house the only place where you make money from your investments?
You should be getting warning signs in the form of red flags. The housing market keeps going up. Many people think that they "have made x dollars from their house." Is that right? Is this possible? Will they ever get to see or use their newfound wealth?
That is true. Even in 2004, people were saying that 2004 was the year when housing prices went up the most in the last 25 years, and that the OFHEO price increase was 13.4%. Prices were in the double digits and seemed like they could keep going up forever. From 1997 to 2006, prices went up more than any other time in history.
What caused this seemingly never-ending rise in home prices? Low interest rates" was the answer in three words. China seems to have wanted to keep the number of jobs high for political and economic reasons. To keep a lot of people working, the price of Chinese goods at Wal-Mart or anywhere else had to stay low. This would be done if the Chinese currency stayed low in comparison to the U.S. dollar or if the U.S. dollar stayed high in comparison to the Chinese currency. It's crazy that in our small, interconnected world, decisions made by someone or a group of people in China can have such a big effect on your and my economic futures.
So, China bought a lot of U.S. treasury bills to send money back into the country. The Chinese currency stayed low, and the American dollar stayed high. You could get cheap goods made in China at Walmart or Target. And both interest rates and mortgage rates were at all-time lows.
Because of this, you can now buy a house, make improvements to your house, or buy a much bigger and more expensive house than you could before. Your banker or mortgage lender was more than happy to lend you the money for the mortgage. After all, the loan or mortgage was backed by good old-fashioned real estate.
The market for homes shot up. People who could never have bought a house, condo, or piece of land can now do so. There were so many new and extra buyers entering the real estate market that not only did the demand for homes and other types of real estate go up, but there were bidding wars for properties and sales, the supply of houses and other types of real estate went down, and housing prices went through the roof. You may have heard of people who put up a "for sale by owner" sign on their home in the morning and sold it for a crazy amount of money by the end of the day.
Along with this, a lot of people were building homes and selling them for very high prices. Mortgage lenders and banks helped the process along by selling and marketing low-cost mortgages called "subprime" mortgages. These mortgages had lower rates at first, but after the introductory period, the rates went back to normal.
Prices kept going up, up, and up, which was the key to everything. No end was in sight. Not only that, but people were afraid that they wouldn't be able to get in if they didn't get in now. This made the boom even bigger. The same house went from, say, $200,000 a few years ago to $400,000 to $500,000 in one year. I was told that if I didn't buy it now, it could be worth $600,000 or $750,000 next year if I didn't. I'll get equity and be in the game if I join now. If I don't go, my family and I might never be able to own a home.
So, it made sense. Also, it seemed like the family's investments could only make money if they increased the value of their home. Other traditional investments, like the stock market or retirement plans, didn't seem to help people "make money."
So, let's get back to the main question. How do people make money? Can you ever use this money to do something fun or buy something else? At coffee, Mr. Brown might say, "I sold my house for $ 250,000." It's true that money you make from selling your home is treated differently and better than other money you make, but how did Brown come out ahead? He will buy another piece of real estate in the same market. "You have to live somewhere," as the saying goes. If your house sold for a good amount of money, it meant that it was nice and in a nice area. It's not likely that you'll move to a much less desirable and safer neighbourhood where houses are much cheaper. You may have to give up some things, but you won't move to a slum after living in luxury. So, it looks like this is not an easy-to-cash-out profit. Even if you or your wife decide that it's time to sell the house because you can get a good price and "We can live in an apartment." So what?" you might find out in a year that living in an apartment isn't all it's cracked up to be. It wasn't by chance that you worked hard and saved money to buy a house and move out of that noisy, small, crowded apartment. So, after being reminded of your lesson, you find out that moving out of your house and into an apartment for a year will cost you a lot.
All of this brings us back to the question we started with. Are you getting richer because of your house?
