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Housing Has Been a Productive Wealth Generator

Are you better than you were a year ago? At something? Your house is... it took a masters class in wealth creation (or maybe it was helped by low rates and lower inventory). In a prior post I shared that the average house in the US made more money than the median US worker in 2021, over $60k. CoreLogic provided some goodies around recent housing trends by state (Fig 1). Did you know that if you lived anywhere in the United States, your house is probably worth more than it was a year ago?

Fig 1.

Everyone is concerned about housing prices going down. Why? You only lose money if it goes down and you sell it. If you don't sell it then the only thing you really lose is lending capacity. If you house is worth $500,000 and you owe $300,000, you have $200,000 in equity - that $200,000 is likely you maximum borrowing capacity if you could borrow 100% (unlikely). If the house loses value to $400,000, you still owe $300,000, but you only have $100,000 in equity. You haven't lost money, but you have lost $100,000, (or 50%) of your borrowing capacity. Unless you plan to sell a drop in housing value isn't a big deal.

That said, the impact of a gain or loss isn't always intuitive, as recovery requires an exponential return. (Fig 2.) - If you lose 30% on your stock portfolio, you have to make 43% returns to get back to breakeven. If you lose 50% you have to make 100% to get back to breakeven. This works in both directions or any investment, including housing. If you gain 25% (as the average house did in 2021), then a 20% drop puts you back at breakeven.

Example: You buy a house at the beginning of 2021 for $400,000 and it goes up 25%, at the end of the year it is worth $500,000. ($400,000 X .25% = $100,000 gain). Now you have a $500,000 house so you have a net worth increase of $100,000 on paper it's not real until you sell the house. Your house in 2022 goes down in value by 20%. ($500,000 X .20% = $100,000 loss). You are now back to where you started at $400,000. Don't fret, it is just math. The likelihood of a 20% drop is pretty small, and if you've owned real estate for the last several years you should be a nice equity cushion. The good news, if you are sitting on the sidelines waiting to buy, this may be your opportunity to pounce in the coming years.

Fig 2.

One real benefit of all this appreciation is the equity build up has left most homeowners with a very low LTV. (Fig 3.) This provides a lot of stability - a home owner is going to work very hard not to miss a $2,000 mortgage payment if they have $250,000 of equity in the house.

Fig 3.

TIP: Always be l'earning' as these small financial capabilities compound over time just like interest. Hopefully these posts compound your confidence over time, if they do please share this feed with others and we'll all share the wealth.

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