Too Many Eggs: On account of extraordinary appreciation, many people have been tempted to put all their eggs in that basket. The question is whether appreciation has been too extraordinary? In other words, can it really continue at this pace? Historic low interest rates and supply shortage may have pushed prices up significantly, but how long can 10-15 percent appreciation continue when wages increase by only 2 percent?
If history is any guide, good chance appreciation will return to its traditional position of floating about two points above the inflation rate. That may protect the buying power of capital but it’s no bonanza of money to finance retirement.
Ensurance Policy: Better if appreciation goes back to being icing on the cake. Better yet if people also get an “ensurance” policy, a real retirement account. For most Millennials and Gen Z, reallocating their careers, leaving the last 15 years for saving and investment accounts may be the only way they can build that account
The real estate industry will hate this idea. Perpetual mortgage payments are the oil that greases the wheels of the entire industry. The bigger and longer the mortgage, the more money and commissions to be made. Appreciation is the golden calf that entices people to borrow to the max. The industry will not endorse the notion of paying off the mortgage by age 50-55.
Conventional wisdom, which looks to the past, won’t like it either. It hasn’t put 2+2 together and doesn’t realize their old axioms won’t hold up in the New Normal. Borrow-dear, repay- cheap,” for example, won’t be cheap in the long run without secure jobs, steady pay raises, and guaranteed pensions. Same for other axioms such as “needing the tax deduction, “idle equity” in the house, “keep a low interest rate” and others that used to work in the Old Normal. Conventional wisdom will indeed look poorly on the Nest Egg Strategy.
In fact, all of the King’s Horses and all of the King’s Men have been silent on how Millennials and Gen Z can provide for retirement the absence of secure jobs and steady pay raises, company pensions in the New Normal. Accordingly, they can’t be trusted when it comes to the veracity of the Nest Egg Strategy. You’ll simply have to trust your own judgement.
Cash is King: Soft-equity in the form of appreciation may look good on paper, but it can’t be spent at the grocery store. A retirement account, on the other hand, can not only be spent on living expenses, but you can also calculate exactly how much it can fund every month in retirement. Indeed, money in the bank is the best ensurance policy.
Eat Your Cake: Actually, it’s not a choice of either money in the bank or appreciation. People can pay off the mortgage by age 50-55 and still enjoy the same appreciation as those who are leveraged to the hilt. That’s because the dollar amount of appreciation is a function of the real estate market in your neighborhood. Appreciation will be exactly the same whether you owe 90 percent on the mortgage or you own the house outright. In other words, you can have your cake and eat it too. Everything is gained and nothing is lost.
In its proper Place: Without question, appreciation is a good thing but not as good as money in the bank. It’s good for preserving the capital value of money in the house but not good as a source of funds to bank on retirement. Luxury trips in retirement and spoiling the grandchildren is an excellent use of appreciation. In summary, put appreciation in it’s proper place, have money in the bank, and you won’t need to bite your bottom lip for years on end!
An analogy with the Natural World: Transforming mortgage payment into investment capital is like transforming a caterpillar into a butterfly. Appreciation just lets it fly that much higher.
