It is no secret many people used their home equity, and homes, as their personal ATM machine in what has come to be called the “boom” years. And why not some would ask. After all prices were escalating and the loans were flowing.
There are, as we have learned, many reasons underlying the answer to the why not question. If I was an economist and had to give an answer in economicese, I’d say something like, “the home ATM phenomenon allowed consumption in the early years of the decade to far exceed what it would have been normally.” If I wasn’t an economist, I’d say something like, “sooner or later you’re gonna have to pay the piper.”
In other words, some of the people participating in the never ending ATM spin will lose their homes, some will lose their retirement plans and some will lose both. After all, one can only run up one’s credit card so many times before the spinning ATM starts spinning the other way.
We All Knew That
Of course we all understood that little law of economics. However, some of us didn’t want to believe it would turn before we made our bundle. Oops!
Regardless of how one structured their retirement plan or children’s college education plan or any financial plan for that matter, it now becomes abundantly clear a personalized reconsideration is mandatory.
I would suppose we still want money during our retirement, we still want our children to get an education and we still want what we want. Nothing has changed in that regard, right?
But how do we do it at this point in time? Let me welcome back that fancy word consumption and boldly state we have to rethink its basis. Not actually rethink but return to its original basis.
Consumption going forward, the stuff we still want, will have to be based on wages and salaries. You know, that darned thing that brings in the money to support what we call a life style.
This then would necessarily say that the growth of consumption, if it grows at all, will have to be based on the increase in these same wages and salaries. Asset appreciation, if it happens, will be a side bar at best. This is according to me and my thought theology.
Please note I am not saying it is impossible to make money in this real estate market nor am I saying no appreciable asset market exists. Of course you can still make a pile of money today. You simply have to position yourself accordingly. Unfortunately for most of us, we shot our wad in the “boom” years.
No Mortgage Houses
I came across an interesting figure – can’t remember where – stating 31% of all houses in the country have no mortgages at all outstanding on them. If that is true, these people may just be in the right place at the right time given the low interest rates. These folks may be able to become the newly minted ATM machine.
The downside to these houses may be they are smaller and as such are worth less than the average house. How much less is anyone’s guess. But being worth less may not be as detrimental as it sounds. Think about it. If a house is worth $150,000 and you can get a loan for $75,000, you may be in a great position to pick up 2 REOs.
In my area, I know you can find homes going for under 30K each at the auctions. Finding the tenants is a bit of a problem but it may not be that way in your area. Something to think about isn’t it?
I am not suggesting anyone use this as a course of action but it sure gets the entrepreneur juices flowing. If you can double or triple your net worth with the stroke of a pen, well, I’ll let you complete the thought.
Photo Credit: Jeff Wilcox