Solano Real Estate Scene: Wow! Home values increase by $1T in Q1
The Federal Reserve reported that U.S. household net worth grew 3.8% in the first quarter of 2021. This $4 trillion of new wealth was 75% equity growth in our stock portfolios, IRAs and 401(k)s, and 25% attributed to our increased home values.
American home values increased by a whopping $1 trillion, and I expect the second quarter to be even bigger as the country opens and more people are willing to list their homes for sale as pandemic fear subsides.
Household debt grew by 6.5%, which has not been seen since 2006.
Household net worth is simple math, and you do not need to be a CPA, like my brother, to figure it out. Add up all your assets and then subtract all your debts and this will tell you what your net worth is today.
There are only two benefits of being 62 years old. One is grandchildren and another is wisdom accumulated from experience and learning from financial mistakes made when we were young.
Over the past 40 years, I have often heard the government and politicians talk about the family home as an important investment, which I believe can be dangerous if not understood. Yes, homeownership is an important part of a person’s ability to retire securely because of inflation, but a free-and-clear house can only pay off as an investment if you sell the house, take the free capital gain and buy something cheaper.
For example, Ma and Pa Jones buys a home in Fairfield in 1991 for $200,000, gets it paid off in 2021 and then sells it for $700,000, takes this tax-free money and buys a home in Tennessee for $300,000 cash and invests the $400,000 in income-producing assets.
The reason I use the word dangerous is because I used my house in the 1980s as an ATM machine to subsidize my income to support my family and cover my overhead, which was too high for my income when I was young and dumb. Using your equity to improve your home or invest in safe income-producing assets is not a bad thing to do but constantly borrowing against your home – which is often encouraged by the mortgage industry, Wall Street and the government – to pay off all your credit cards or purchase depreciating assets like furniture, cars, clothes and jewelry, is a recipe for a sad retirement where you have no choice but to move to Arkansas for affordability.
Now, I do sell debt and I have done many loans for people to consolidate their debt but when a person converts unsecured bad debt into debt secured against their home, it is critical to make it pay off.
For example, if a person owes $200,000 on their 4% interest rate mortgage at $1,200 per month and owes $100,000 in student loans, auto loans, credit cards and personal loans with payments that total $1,500 per month at an average rate of 10% and their home is worth $500,000, doing a cash out refinance for $300,000 on a 30-year fixed-rate would reduce their monthly outgo from $2,700 per month to below $1,500 per month and save them $1,200 per month.
The key is understanding how important it is to use this savings wisely and not taking this relief lightly and running up the bad debt again. My suggestions are always the same, either apply the $1,200 per month toward your mortgage to get the home paid off 15 years early or maybe better yet, contact a certified financial adviser and invest the $1,200 every month in crypto currency. (Just kidding.)
Most of the time, the person is paying the $2,700 per month promptly prior to the refinance and so my point is, continuing to pay that amount monthly at $1,500 to the mortgage and $1,200 to yourself – and always maximize your IRA and 401(k).
