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As I See It

Real estate’s not bad, but I don’t mind the cash either

We all knew it would end and it’s about to happen. The real estate boom of the past few years is drawing to a conclusion.

I know, I know.

The Realtors are saying it isn’t so, that the current real estate boom has lots of life left in it. Perhaps I’m sounding the death knell a little prematurely, but it’s gonna happen in the reasonably near future.

Why?

Higher interest rates are slowing things down and, as rates continue to rise, activity will continue to slow even more. Eventually the market will return to more sustainable levels. A lot of folks have bought houses that stretched them financially to the limit in hopes that continuing escalating prices would bale them out. I hope they’re right, but I’ve got my doubts.

Getting tight

The folks who financed with adjustable rate mortgages are getting scared. And, well they should. As the rates rise so will their monthly payment. In fact, as the payments go up and up, many adjustable rate borrowers couldn’t qualify to buy their homes under current rates. It’s going to be tight, tight, tight for them to pay the ever-increasing monthly note.

Several months ago I was entertaining myself watching the local real estate show on cable. You know the one. There are brief, streaming ads showing pictures of homes, starting with moderately priced houses and moving up through the severely immoderately priced mansions.

I was fascinated when they crossed through the $1-million price range and kept going. Just to pay the interest on a million bucks at 5% interest would cost $50,000 a year. With any kind of principal reduction at all, you’re looking at $7,000 a month or more. Then add real estate taxes and insurance. Clearly, folks who buy mansions are not making monthly payments or their jobs pay more than mine does.

Are homes good investments? Without doubt, good real estate has always proven to be a good investment. Day in and day out it’s hard to beat. I read recently that home prices across the country have increased by an average of 30% over the past five years. And that breathtaking escalation happened while the stock market was trying to get back up to its 2000 level.

One big bite

So, if your home is a good investment, shouldn’t you buy the biggest and best you can afford? That’s a matter of opinion. Obviously, lots of folks would answer yes. Bite off the biggest piece you can chew. The dollar appreciation on a big house will certainly be more than on a smaller one just because 5% of a big number is more than the same percentage of a smaller number.

Others believe that buying a house that is smaller and less expensive than the maximum price you can afford is smart. This strategy, to which I subscribe, results in having some cash in the bank, eating out whenever you like and plenty left for deer hunting leases. It also provides funds for retirement to supplement Social Security. Mighty, mighty tasty to my way of thinking.

Hate cash, do you…

Years ago, during Jimmy Carter’s presidency, one of my clients worried that he was stuck with lots of cash which, at that time, was yielding less than the rate of inflation. He asked me to help him unload his cash and rid himself of the scourge of excess liquidity. At the time, tax shelter deals were the rage and offered an opportunity to empty one’s bank account with hopes of wealth and tax deductions. These deals rarely created any wealth but did solve the “cash problem” and provided topics for small talk on the martini circuit.

It was while working on that engagement that I realized that I liked cash, regardless of the inflation rate. I still like cash. I like stocks and bonds, too. I can turn them into cash whenever I like. Real estate is good too; however, I can’t turn it into cash as easily as with the others. However, I can live in my house while it’s appreciating and build wealth while avoiding rent. And, that’s what I do.

What will I do at retirement? Well, I plan to stay in my house as long as Debra and I can amble around and keep the place going. Due to my lifelong love of cash coupled with my willingness to defer gratification, at least sometimes, I should have enough funds to retire without selling the home place.

And about those Baby Boomers…

No so with many in my age group. I fear that lots of Baby Boomers have debted themselves to the hilt and are going to have to liquidate some stuff in order to quit working, if in fact, they’re ever able to retire. Signing a 30-year mortgage note at age 60 is really, really stupid. It’s going to be hard to eat those big houses for supper.

What can be done at this late date for folks my age? We need a whole new way of thinking about accumulating wealth. Mentally, we need to separate wealth into stuff that generates cash income and stuff that doesn’t. The ticket to retirement is to accumulate more of the former and less of the latter.

An added benefit of accumulating less “stuff” is eliminating the need for renting storage space for the stuff we got that we’ll never use but can’t stand to do without. To my way of thinking, it’s better to have a smaller house and a bigger safe deposit box.

Thought for the Moment

A good name is to be chosen rather than great riches, and favor is better than silver or gold. — Proverbs 22:1

Joe D. Jones, CPA (retired), is publisher of the Mississippi Business Journal. Contact him at cpajones@msbusiness.com.

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