# Houses and Stocks are Going Up – Who Cares?

## By Mr. Money Mustache

## Wed, 09 May 2012 12:00:53 +0000

Well, there it goes again. The business cycle, that is.

I moved to the United States at the peak of the 1999 dot-com boom. At the time, high-tech companies were engaging in bidding wars over candidates, and home buyers in Colorado were racing to put in above-asking-price bids on any livable home that came to market.

By 2002, those same workers were being dumped back out of their cozy offices, and houses around here were sitting on the market by the dozen, the prices slowly falling while the sellers grimly looked out the front windows at the quiet streets.

In 2006, home prices were on fire again, companies were hiring, and the future was bright. Until 2008, when everything crashed so heartily that banks couldn’t even keep up with the avalanche of foreclosed mortgages that fell upon them.

And now here we are in 2012, and I’ve noticed that houses in my area have started getting snapped up again, at increasingly healthy prices, as the number of just-arrived-Subarus and Audis sporting California, New York, and Massachusetts license plates has rebounded to match the growth in high-salary jobs around here.

Every time a real estate transaction takes place anywhere in my area, I get an email with all the pictures and details, thanks to an automated system that Mrs. M. set up for me using her special Real Estate Agent powers.

In recent years, I’ve received plenty of “just listed” notices, but a much smaller number of “sold” ones. But in recent months, that has changed dramatically. Even some of the silliest homes, the ones where I said “Yeah, good luck selling that little shack at THAT price”, have been selling in short order.

At first, I dismissed the sales as flukes. Then I dismissed the growing trend as a localized or short-term one. But today I read the yearly statistical summary of my city’s real-estate market and saw that the same thing is happening citywide. The number of home sales is up about 30% over last year at this time, even while the amount of inventory is about 20% lower. This adds up to a very different feeling for sellers – offers come quickly, discounts are minimal, and new listings are naturally trying for higher prices after seeing the recent sales.

Similarly, the stock market has been on a bit of a tear since last summer, rising by about 13.6% since I pointed out the sale that they were having on them back in August (see the graph at the top of this article). The US stock indices as a whole are close to their all-time record levels. Those fancy net worth graphs in our Mint account are looking better than ever, because the higher stock prices make your retirement savings accounts look rosier.

Are we excited about these new developments? Have they made us richer?

In quite a departure from my attitude on these things when I was younger, I would say “No.”

Let’s look at the house first. When you own and live in a house, and the market value goes up, you suddenly have a higher net worth. Hooray! But your cost of living (i.e., the price of houses) has also risen by exactly the same amount. D’OH! So while you can gloat to any new arrivals to your neighborhood that you got your house cheaper than they did, your situation remains the same. The mortgage payments, the size of your kitchen, the bathroom tiles. All the same.

Now in the bad old days of the early 2000s, Mr. Money Mustache wasn’t around to teach the people of this reality. So when house prices went up, people started extracting value from them in the form of huge lines of credit. These credit lines were then spent on absolutely comical things like vacations, cars, or general lifestyle inflation. At that point, the credit victims had the same kitchen size, the same bathroom tiles, the same back yard. But suddenly, a higher mortgage balance reflecting the fact that their cost of living had gone up – while the free equity that came with the neighborhood appreciation was not there to balance it! Even when borrowing home equity to renovate the house itself, these people were simply increasing their cost of living rather than building wealth.

So when is it GOOD that your house goes up in value? Only if you’re planning to do one of these things while the value is still elevated:

- sell the house and move to a rental instead
- sell it and move to a less costly house in the same area
- sell it and move to a different real estate market (another city or country, which hopefully has not had the same elevation in prices)

You can also substitute “convert it to a rental house if rental rates have risen along with prices” instead of “sell it” in either of the last two cases.

That’s it. Other than those situations, you don’t care if your house price goes up. And you also don’t care if it goes DOWN, even if you need to move, since other houses you might move to are also similarly discounted. (Unless you’re stuck beneath an underwater mortgage – that can definitely put a damper on moving).

Some think of home price appreciation as a way to leapfrog to a bigger house. “Hey! I put no money down, but now I have $100,000 in equity! Let’s use that as a downpayment on a $500,000 house!” . Those people would have been better off if the house prices had NOT appreciated, because in that case the bigger house would only cost $400k.

As for the downpayment: If you can’t easily save up the 20% of a home’s price, you can’t afford that house yet. A house shouldn’t be more than 2-3 times your salary. Even at a 50% savings rate, you’ve got your downpayment in about a year. If those numbers and ratios sound crazy to you, go back to the earlier MMM posts and start chopping expenses, or just buy a much smaller house!

Even for landlords, house price appreciation isn’t so great. They’ve got a greater net worth, but the great deals have dried up from the market. Houses are now too expensive to make profitable rentals. The landlord still has his cashflow, but he should now consider if he would rather sell off the appreciated houses and invest elsewhere. Only if he does this, and ends up with a more valuable investment, does he come out ahead.

Ok, maybe house price appreciation isn’t so great after all. But what about stocks? Everybody loves a rising stock market, right? I mean, daily movements in the stock market are all the financial news media ever talks about!

I used to watch my stock and retirement portfolio values like a hawk. Sure, I was a dim-witted hawk in retrospect, but at least my vision was sharp. At the end of a day with a huge stock rally, I’d bike home from work feeling very rich, eager to update my spreadsheets. After a crash, I’d feel poor and fret a little bit. You still read this on financial blogs to this day.. “My portfolio took a HUGE HIT today — OUCH!!”

Nowadays, I go months between noticing the value of the stock indices. Because I stopped caring about the price of the companies I own slices of. Now I only care about the earnings.

As true investors know, the point of owning anything is the stream of value that it provides to you over time. Farmland is useful because it produces crops. A personal residence is valuable because it provides a place to live – also known as ‘imputed rent’. Rental properties are valuable because they provide rent checks every month. And shares in companies are valuable because they pay you a stream of dividends – as well as reinvesting some of their earnings in exchange for higher dividends in the future.

So the shares we own are only valuable because of the portion of company earnings they bring us. These earnings are unaffected by stock market swings, and only temporarily affected by economic cycles like booms and busts. The only thing that really matters is the overall productivity of the people who do the work for us – the employees of our companies. If the people continue to produce value, our companies will continue to produce earnings over the long run, and we as the owners will do fine. What we want as owners, is therefore to be able to get more of those shares at the lowest price possible.

That’s a nice gross oversimplification of a very complicated subject, but it works for me. Unless you’re a day-trader in stocks, long-term earnings are the only thing that will affect your lifetime income from owning productive assets.

So rather than worrying about price fluctuations, I try to learn more about multi-decade trends in our society itself. I try to place my political votes not for who will try to bandage short-term issues like gas price spikes, but who will provide social stability, minimize depletion of the natural resources that serve as the basis for our productivity, and provide the lowest level of inefficiency-causing cronyism and corruption in the capitalist system over the long term.

And if the price of my own house rises too much, I’ll sell it and get a nice place on the beach in Mexico instead.