Indeed, homes are some of the most liquid form of wealth, easily leveraged with loans to buy even more property. And home values are one thing that governments are most likely to protect through drastic policy changes. Sure, you can take out a loan backed by your diamonds, but it won't be on terms as good as that of your home.
Home wealth really is one of the strongest forms of wealth there is, and people trying to pretend it is not have no concept of how lucky they are, or even what wealth really means.
People without this wealth are forced to pay their rent to others, who accept both the rent and then the real estate gains.
Vs. the grim reality:
https://fortune.com/2023/09/03/diamond-demand-falling-lab-gr...
Which is one of the reasons it runs me so wrong when people think their homes are not a of wealth.
The one way to generally extract this gain in wealth is to downgrade (e.g., retire to a quiet place in the boonies), and that’s generally a one-time option and not something everyone wants to do.
This is a remarkable feature of real estate as wealth.
While there are other forms of wealth with more liquidity, housing wealth and real estate really are up near the top of the ones that give a person access to cash.
I note this in that not owning results in being beholden to increasing rents and at a cost disadvantage in buying a future home.
But the property value gains are hard to realize in a meaningful way. Yes, you can potentially leverage your equity into acquiring more homes. But real estate gains have traditionally lagged the stock market. So as you continue this cycle, you increase your leverage dramatically while investing in highly-correlated and slightly underperforming assets.
Meanwhile, little of these gains are able to be used for actual lifestyle improvements until you start unloading these properties.
None of these homeowners would even consider the option of selling their home and renting it from the purchaser, because it is so obviously a bad idea in every way. But their blindness to the alternative is also indicative of just how amazing a form of wealth is.
Super wealthy people are always convincing themselves that they are not wealthy, because they always see others with a higher level of lifestyle. I knew an older man who had built an empire of hotels, but because he wasn't Hilton, he always felt like a failure despite never flying commercial, owning mansions across the world, and being surrounded by servants at his beck and call.
When people have raised their wealth without their lifestyle "changing," yet they can now move nearly anywhere else and have a massive lifestyle improvement in consumption, without the location they were in, they somehow trick themselves into thinking this is not wealth.
The above statement assumes that a home is nothing but a cold investment decision.
A home is a place to live and a neighborhood to grow older in. It is not an "allocation of resources".
People hold on to their home because they like it there, they like the neighbors, their kids like their friends in the area and so on. It is not a financial decision. It's a home. This is often lost in these discussions.
The problem is that enforcing any sort of restrictions would be warped to disproportionately affect the 99% while the 1% would use loopholes to continue doing as they please. So it would probably be more pragmatic to eat the rich and their lackeys before anything else.
This is an assumption, but on average this is true.
If that’s the case, the extra wealth you have for purchasing the new home was simply having a convenient way to store your down payment while saving additional money each month in the form of your principal.
Some people do actually realize a good part of their gains by retiring to the countryside and keeping the lion’s share of their RE gains. But this is something you get to do more or less once, and it’s something generally done in one’s twilight years. Nothing to sneeze at of course, but it again doesn’t really dovetail with the notion of a means to become practically wealthy.
Also, renting out rooms. Also ‘granny flats’, etc.
You pull money out of the HELOC, which does give you access to the equity. You then pay it down similar to a mortgage, at very low rates.
You just cashed out some of the ‘inaccessible’ equity by using it as loan collateral.
You’d still get to live there, and any gains in equity will be 100% yours. But you have cash now, with low payments and low interest to pay it back. If you do sell, proceeds could go right into paying it off.
There are similar ways to setup second mortgages, etc.
Does that take into account the relative ease and long term leveraging in real estate vs. the stock market?
Such rates of returns are simply impossible in the general stock market without getting very lucky.
So multiple that 16x by the typical 4x-5x leveraging, and homes turn out to be really great. And since the transaction fees and the non-existence of index funds in the 1970s made it harder to invest in the stock market at a small scale, and homes were a much better investment.
Add on to that that everybody needs a place to live, and your home acting as an investment vehicle with equivalent performance to the US stock market, and people from the 1970s have had had an amazing deal that younger people have not had access to.
The idea that it’s easy or natural to make money via leveraged housing had ruined many people.
*/5s or even */3s offer an interesting option, depending on terms.
And if you are your own landlord (ie a homeowner) you can pretend your rent is whatever you want, but the market rent is what one should impute as the value of that rent.
1) Historically they have.
2) Most people in the US that haven't purchased very recently are locked in at very low rates. Only 9% of mortgages are over 6%. 61% of outstanding mortages are <4% [0].
3) There are a lot of incentives (and the ability) for governments to ensure home prices continue to increase, although at a rate lower than they are now.
4) We spent over a year with inflation that is double most people's mortgage rates.
5) You have to live somewhere regardless; the alternative is renting. For most of the country, at least until very recently, that was a worse option.
[0] https://apolloacademy.com/the-distribution-of-mortgage-inter...
"Liquid" means fast to sell without giving a deep discount. Homes are far less liquid than listed securities.
100%. Home owners are one of the most selfish voting blocs out there, and will punish politicians for not perpetuating unsustainable policies at the expense of the greater social good. That makes it a very good investment, at least until society completes its transition away from capitalism to a new kind of feudalism.
They absolutely aren't.
Transaction costs are very high (6%), the time required to sell can be months.
Borrowing against a house is not the definition of a "liquid asset". By that same logic a complex equity with no market could still be "liquid" because you could borrow against it.
Real estate is not a liquid asset by the definition of that term. Example:
https://www.investopedia.com/ask/answers/032715/what-items-a...
(Jewelry (as in your diamonds) are not liquid assets either.)
A primary residence is even less liquid for the reasons PP stated. Sure, you can sell it but then what? You still have to live somewhere so you can't use that money for something else, you'd have to buy another home at which point the money is locked up in real estate again. The only time you can extract that wealth into cash is if you can downsize to a much smaller home, or move to a much cheaper area.
So yes, a primary home is real wealth, but it is as far from liquid as any form of wealth can be.
This is true only on first approximation. On second approximation rent prices are positively correlated with property prices. This means that rent_amount / mortgage >>> 1 and if you rent the place out you can essentially get passive income. You are correct that you still need to live somewhere and that is going to come at a cost which will eat up the passive income, but effective rent will still be lower.
Another option is to realize that lower mortgage compared to equivalent rent means that extra cash is freed up towards other things. This can either be extra investments every month, experiences such as traveling the world, or even a lower paying job with a lot less stress.
Also, multiple homes mean multiple maintenance bills, and also the potential for bad tenants wrecking the place. I had a rental property in the past and had to spend multiple thousand dollars staging it for sale because, renters generally DGAF about maintenance, and property managers get lazy and do the bare minimum to get it rented.
Plus “moving to a less desirable area” doesn’t really dovetail with most people’s assumption of “increased personal wealth”. It is sometimes a good option for retiring somewhere cheap, which absolutely reflects a real increase in net worth. But it’s far from liquid worth and requires steep compromises not everyone is a fan of.
If I can be approved for a mortgage or have cash on hand, and have someone agree to sell me a house, and I sign a contract with them to purchase said house on such-and-such a date, and I fulfill my end of the deal and don't default on the contract, then yes, I am entitled to ownership of a single house. Because I bought it fair and square, and it's now legally mine. Just like if I were to stop making payments on said house, the bank would then seize it, and then I wouldn't be entitled to own that house any more, because I defaulted. This is not rocket science.
In a $100k home where you owe $80k the HELOC would be like only $10k - and the rate would be less good.
In the same home where you owe $20k (have $80k equity) you could borrow $50k at a better rate.
There are people doing that. I know of multiple people who have sold their $1m++ houses in the city and moved out to retire on farms. Their property taxes and total cost of living went way down and all of that real estate wealth turned into cash.
Which is one of many reasons we're considering leaving Toronto
Nobody forces you to buy, or sell, a house. And if you feel strongly about the politics of the issues, try to get elected.
So that 200-something-thousand-dollar increase is on a downpayment that may have originally just been 200K or less.
Short-term "stepping up" through a series of properties can be much more wealth-building than, say, renting + investing in stocks. The longer you stay in one place the less advantageous the returns are over just putting the down payment in the market, but then having a concrete asset has its own benefits even then.
Sort of, but in practice not really (particularly when interest rates are higher, like now). The only meaningful way to realize that extra wealth is to sell. But then you’ve got to live somewhere, but everywhere else has (on average) gotten proportionally more expensive too. The only way to really capture that wealth is to downgrade or to go to an area that has underperformed, neither of which are typically appealing options, nor are they generally aligned with our notions of “increased personal wealth”.
What’s really happened is that non-homeowners have effectively gotten effectively poorer since their only options are to pay increasingly-large rents or buy at inflated prices.