I keep seeing that real wages have held steady or have fallen in the last few years – yet people are living better than ever. What’s going on? Where is this money coming from (when not from Asia, anyway)?
Sonoma Housing Bubble
“A decade ago, I remember my mother telling me that after nearly 20 years of residing in their home, which my father had designed and built for about $75,000, my parents had a mortgage of over $500,000.”
“What happened?” I asked my mother disapprovingly.
She waved my concerns aside. “This house is a bank,” she said. “We’ll never pay it off.”
“After that, I could never think about our lives in quite the same light. My parents were self-made. They were from poor, working-class families with five and eight siblings, and had put themselves through college, worked hard, and never got a dime from any parent or grandparent, dead or alive.”
“But suddenly I realized that their college educations and hard work might not have been enough to cover certain … luxuries.”
“Lynn Ruth Miller, who bought her Pacifica home for $97,000 in 1985, is living on the equity from her house and investing part of that money to get earned income.”
“I could not survive if I didn’t do that because my fixed income is $720-plus a month,” she wrote. “Because of the rise in property values I am living very comfortably and could not possibly pay my bills otherwise.”
“Some even factor the monthly payments of the equity line into the equation. My mortgage broker, Michael Simmons, once had a client who took out a $500,000 equity line to pay for her elderly mother’s home care and the monthly payments of the equity line itself.”
“Geoff Caldwell of San Francisco, used an equity line to avoid expensive dormitory fees, by buying a house for his daughter to live in during college.”
Edward Malouf of Novato funded a condo for his son. “We paid all cash for it, and our son made every payment, as agreed,” he explained. “Because of this, we allowed him to keep the appreciation when he sold the condo, so he could buy a larger, three-bedroom one.”
“Equity lines and second mortgages haven’t always played such an integral role in American life. In the old days, taking out a second mortgage or an equity line had a certain stigma attached.
“It meant you were the sort of person who couldn’t pay your bills — that you were living above your means,” Simmons explained. But over the past 20 years, he’s seen things change.”
Indeed, treating the home as a bank has grown naturally out of a sea change in our attitudes about debt. Once, credit cards also carried a stigma; now they are ubiquitous in all classes of society. As more and more people began to pay exorbitant credit card interest rates, equity lines — with their relatively low interest rates — suddenly looked downright practical.
“Say you have a house that’s worth $1.3 million. Is it a reasonable expectation that you’ll ever pay it off? Probably not. The most people hope for is that someday they’ll sell it for a profit or leave it to the kids, who might have to sell it but will maybe make a little money.”
Ten years ago I was horrified by my parent’s use of our family home as a source of cash, but now I see things differently. Would it have been better to have paid off the house and lived mortgage free? Maybe. But going that route would surely have meant curtailing their choices earlier — never giving their kids college tuition, or working extremely long hours, or having to get corporate jobs instead of working for themselves.