How to Truly Appreciate Real Estate
Times change, but financial truths last forever
About six years ago, I wrote (" Repeat After Me: Your House Is Not An Asset") on an article from The New York Times on real estate entitled, "Real Estate's Gold Rush Seems Gone For Good."
Some interesting statistics and predictions from the article included:
- It could take up to 20 years to recoup the $6 trillion loss in housing values since 2005
- Housing values had dropped over 30 percent since the bubble popped around 2008
- Sales figures for the month proceeding the article, July, were expected to show a drop of 20 percent over last year
- The supply of housing was predicted to rise 12 months—more than twice what's considered normal and healthy
- Despite all that dire news, when surveyed, people felt that housing was going to rise by as much as 10 percent a year over the next decade
That last statistic was frightening to me. Financial ignorance was so high in our country that they still believed that a house was an asset and a sure way to build wealth.
As many found out, the housing market didn’t rise 10 percent per year. It continued to drop for a couple more years after that. Many people were financially ruined.
I’ve written many times before that economies are cyclical…and that people have short memories.
Today, the housing market is picking up. In my home town of Phoenix, Arizona—one of the worst hit housing markets during the Great Recession— home sales are predicted to rise 20 percent in 2016, and home values are expected to grow by 9.5%. People are starting to get housing fever again.
Nationally, things are looking stable again for the housing market. Prices are rising and so is demand. Nothing is crazy—yet.
With any luck, we won’t see another housing bubble like the one we experienced just a few short years ago, but that entirely depends on whether people have learned their lessons.
Traditionally, when housing prices rise, so do home equity loans. People use their house as an ATM, assuming it is an asset that will always rise in value. And they quickly forget that’s not true.
As CoreLogic reports , “…Home equity lending has been increasing steadily in the past couple of years, with HELOC originations doubling from about a $50 billion 12-month cumulative amount right after the recession, to more than $100 billion in the first half of this year. But keep in mind, overall all volumes are still significantly lower than the peak years of 2002-through-2006 when home equity originations were running at $400 billion-plus per year.”
So perhaps, before things get really bad, it’s time to remember, yet again, that your house is not an asset.
Your house is a liability
I'll repeat here: Your house is not an asset. It's a liability. Very simply, an asset is something that puts money in your pocket. A liability is something that takes money out of your pocket.
The common misconception is that a strong housing market generates wealth for the middle class. In reality it doesn’t. It generates debt. People don’t sell their homes to pay for things like college educations and vacations; they borrow against them, growing a liability by taking on more and more bad debt.
How a house can be an asset
As I mentioned earlier, an asset is something that puts money in your pocket.
To me it only matters if a little property appreciates in price. I care only whether it provides cash flow every month. It's the only sure way to build wealth and assure a secure retirement in terms of real estate investing—and it’s the only true way to appreciate real estate as an investment.
The key is to make your money on the buy, not the sell. What I mean by that is that by doing proper due diligence you can find deals that will provide substantial cash flow for years to come. By doing so you don't have to worry about the price of your asset. If it goes up, that's a bonus. If it doesn't, you still have a great property that puts money in your pocket every month.
Your house is not an asset. But a house can be an asset—if it cash flows.