Last week while I was in the middle of crunching numbers from the IRS estate data, my phone rang. Jerry, a friend of a friend, immediately began sharing his concerns about his “real estate situation.” Jerry is a computer programmer, and his wife is a part-time dental technician. The couple’s annual adjusted gross income is about $100,000. They have three children.
Just prior to the meltdown in the real estate market, the couple purchased a new home in a newly developed subdivision for $495,000. Within the last year, three brand new homes similar to Jerry’s in the same subdivision were sold for $300,000 each as foreclosures. Ouch! says Jerry. His dream of reselling his home “in a few years at a substantial profit” has vanished. But his mortgage balance of over $300,000 has not. All I could do was to tell Jerry not to panic. And I honestly believe that things will improve, especially since Jerry’s home is located within a public school district that has a national reputation.
Other than the profit motive, why did Jerry and his wife trade up from a $280,000 home to one priced at $495,000? Here are his three reasons. First, a mortgage broker told them they could afford to make the payments. I commented on such advice in The Millionaire Next Door as the equivalent of asking a fox to count the number of hens in your chicken coop. Second, the people in the neighborhood seemed to be similar to Jerry and his wife in terms of demographics and socioeconomic characteristics. Third and most important, the couple’s $100,000 income was more than they had ever earned in any year during their first 20 years of marriage. Now, at the six figure level, they viewed themselves as “rich.” And, according to Jerry’s logic, rich people don’t live in $280,000 homes/neighborhoods.
Attention, Jerry. Rich, wealthy, affluent- no matter. It is all about net worth. Again and again, I have stated “income is not net worth, not wealth; wealth is not income.” And this couple’s net worth is less than $150,000. While Jerry was telling me his story I looked over the numbers I had just tabulated from the IRS 2007 [the latest data available] estate data for those decedents with an estate valued at $3.5 million or more. The median market value of a decedent’s home was $469,021. That is less than 10% of their median net worth. And on average these decedents had nearly 2 1/2 times more of their wealth invested in investment real estate than in their own personal homes. What if Jerry had known this beforehand? Would he still have bought a home priced higher than the value of the typical millionaire decedent? It would depend on whether Jerry wanted to act rich or actually be rich some day.
I consider myself fairly immune to the ads and the hype.
However, as I read your book “Stop Acting Rich …” I noticed that I still had a bunch of unexamined biases. I still thought I had bought too little house in not quite the right neighborhood. I still was thinking that a Mercedes/BMW SUV would have been a better overall value than my Honda SUV (how could they sell if it was not?!). I was thinking I should probably get at least one “really nice” suite. Ugh. Luckily I’m too frugal and cheap, but the pull is there.
It is just amazing how insidious the ads are and how I begin to unconsciously believe what they say (the media does not help in their way of reporting “the facts”). I now find most of the ads in the Wall Street Journal as humorous – now that I’ve seen through my conditioning.
Keep crunching the numbers. This provides real news and insight, something that mainstream financial journalism does not.
Wow! After making in excess of $140,000 last year, I’m so glad we have a paid for $155,000 house ($135,000 in 1998). When I start looking at everything extra we pay for (retirement for my wife and me and 2 college funds for my 8 and 6 year old kids), I can’t imagine having a mortgage payment, much less a car payment, as so many people have! I love these stories, Dr. Stanley. They continue to reaffirm that what we’ve been doing the last 13 years is right!
And I’m with the last poster. I’d love for the mainstream media to get a hold of these numbers and start pushing people to start living well within their means, and not just being able to afford the payments!
Timing, what a difference it makes. I am so thankful that we moved after the meltdown and not
before, in 2009. We would have been in the same boat.
Like Jerry, we lived in a $280,000 home prior to the meltdown. Due to a lateral job move,
We moved from Florida to another state. We decided to upgrade and bought a home probably similar
in value to Jerry’s but after it had dropped 25% plus in price.
We bought our current home prior to reading Stop Acting Rich and realize now we were in the perfectly
priced home before. If we should move again I believe we will downsize again.
We moved to Florida in 2003 and downsized when everybody else was upsizing. Hopefully being
a contrarian will work in our favor again. We bought when most people were scared to buy,
the developer in our subdivision lost the land to foreclosure and then
the bank owning the lots went into receivorship just as we were preparing to close. It
was scary.
I just hope we are not Acting Rich with out current home but we did limit our mortgage to less than
twice our income. Also, our home in Florida has dropped another $50,000 since we sold it – that would
have been hard to swallow.