If we've all gotten so rich off skyrocketing
home equity, how come we don't live like we're rich?
As a homeowner over the past several years,
you've probably made a nice chunk of change in the form
of equity in your home. In many markets, homes that
sold for $100,000 a half-dozen years ago are now worth
anywhere from $175,000 to $300,000. In some markets
"If you have owned a home over the last five years,
in some ways you've been a big winner," says Nicolas
Retsinas, director of the Joint Center for Housing Studies
at Harvard University. "Over the last several years
it's like having a second job without ever having to
Last year, home values appreciated about
12 percent overall nationwide, according to statistics
from Neala Richardson, the principal economist with
Freddie Mac. On average, appreciation usually runs between
2 percent and 3 percent, according to the Office of
Federal Housing Enterprise Oversight, or 5 percent to
6 percent, according to Freddie Mac.
The problem is, that money only exists
Traditionally, the only way to get your
hands on it is to sell your home, refinance the mortgage
or borrow against it. Or you could just enjoy knowing
that you made a wise purchase.
It's also a double-edged sword. The value
of the house you bought might have skyrocketed. But
so has the price you'd pay if you wanted to turn around
and buy the same house again today. Net sum gain: nada.
"We call it 'stealth equity,' where you're living
in a home for a while, the market's taken off and you've
ridden the tide up," says real estate broker Sid
Davis, author of "A Survival Guide for Selling
"It kind of sneaks up on you,"
Davis says, "It's phantom wealth. It's on paper."
But having $250,000 in equity isn't like having $250,000
in the bank.
The value is real enough, but you also
have to be really careful with it, says Eric Tyson,
author of "Mind Over Money: Your Path to Wealth
"You don't want to go overboard
spending money because you have wealth on paper. That's
where people get in trouble."
All the same, "it's part of your
net worth," he says. "If you don't tap it
or use it during your lifetime it will go to your heirs."
And if property values decline?
"It might not be worth as much as
it is today," he says. "But real estate values
are pretty solid."
Just keep your new-found wealth in perspective,
says William Poorvu, professor emeritus at Harvard Business
School and co-author of "The Real Estate Game."
"Don't think that because your house
price has gone up that you can change your lifestyle
dramatically," says Poorvu. He likens it to those
who got wealthy on paper during the tech boom.