HOW MUCH IS YOUR HOUSE REALLY WORTH?

by | Jun 5, 2005 | Detroit Free Press | 0 comments

Everyone I know is getting rich.

They are not actually making money. No one is raising their salary. But everyone I know is getting rich — as long as they own a home.

Their kitchen is earning big bucks. Their deck is raking it in. Their driveway should be renamed “Easy Street.”

Once upon a time, prospectors cried, “There’s gold in them thar hills!” Today, there’s gold in them thar living rooms and master suites.

In a rise that has experts befuddled and banks overjoyed, people keep buying houses in America, even though the price of those houses goes up and up. That, it seems, is part of the appeal. You buy now; you sell soon. You get more money with each new sale, and you upgrade with each new buy.

How many times in the last few years have you heard a friend say, “We bought our place for (fill in a price) and in six months it’s worth (fill in a price)!”

It’s the new American mantra. You want to start a cocktail party conversation? Just utter the words, “Did you hear what so-and-so got for his house? …”

Remember the stock market

The problem is, like any hot air balloon, when too many people jump in the basket, it soon comes crashing down. No one wants to hear this. Despite a stock market collapse a few years ago that mimicked this very behavior, people insist they are safe with a home. It is not a stock. It is not some piece of paper. There is no Kenneth Lay from Enron doing dastardly things with your walk-in closet.

Americans think if you can see it or touch it, then value is ensured. A house can’t go belly-up like a company, right?

Wrong. What home owners fail to accept — or simply don’t want to — is that a house is worth only what someone actually will pay for it. Not what a neighbor got. Not what a statistic shows. What someone will shell out of his or her pocket.

You know, “real” money?

That’s a downer. People would rather pull up charts that show a 40% increase in home prices last year in California’s Orange County. Forty percent! You buy a place for $100,000, you can get $140,000 a year later! (This assumes you are not on a hillside in Laguna Beach, Calif., where houses last week collapsed in mud slides. Those places, I imagine, will be worth only 20 percent more than last year.)

Remember the Fed chief’s analysis

Have you seen those commercials claiming you can go on vacation thanks to your living room, or buy a new car thanks to your den? They are part of this same silly cycle that says since your house is, on paper, worth more now, you can borrow against that and buy everything you want.

But once you own the car or the boat, you are on the hook for that money. If the value of your house drops enough, your collateral against the loan is gone.

That is the Judgment Day no one wants to know about. Warning signs are everywhere. Mortgage rates are staying low while other interest rates are inching higher. Even Federal

Reserve Chairman Alan Greenspan has called interest rate behavior “a conundrum.”

And if he’s confused, I’m scared.

At some point, everyone else will be, too. There are only so many buyers with only so much money. It’s not like jobs or businesses are in a boom mode, is it?

Once the big, expensive house has to lower its price to sell, the ones behind it will get frightened. People will dump real estate the way they did stocks, and many will be left holding the bag. Remember, buying doesn’t make you rich, selling does. And selling requires customers. Always has.

So the next time someone says, “We bought our place six months ago and today it’s worth (fill in price),” ask this question: “Really? Do you have a check in that amount?”

Because if they don’t, it’s still a risk. The risk is gravity; what goes up comes down. And gravity, I’m afraid, is every bit as real as a breakfast nook.

Contact MITCH ALBOM at 313-223-4581 or albom@freepress.com

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Mitch Albom writes about running an orphanage in impoverished Port-au-Prince, Haiti, his kids, their hardships, laughs and challenges, and the life lessons he’s learned there every day.

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