IS HOME OWNERSHIP WEALTH ?


A wealthy individual may be described as one who may travel from now until death having whatever is wanted without having to put forth any personal effort for compensation. Retirees with a sufficient stream of currently unearned income may consider themselves wealthy. Those of any age with a large inheritance are also in this group. And any who earn more in one year than others earn in a lifetime definitely belong in this class of individuals. Whatever the source all financially independent individuals have one thing in common: ownership of assets which will indefinitely produce a stream of income that will pay for whatever they may need.

Material wealth is the equivalent of ownership: the more wealthy you are, the more you own.

Deeds of trust and other evidences of ownership often give the illusion of material wealth when no wealth actually exists.

Here is an example:

A house purchased for $600,000 with ten percent down and the assumption of mortgage debt in the amount of $540,000 and an obligation to pay back that principal and interest at 4.5% in the amount of $444,996 and property taxes at 1.25% in the amount of $225,000 over the thirty year term of the mortgage. On the day of purchase the buyer is tempted to say that he or she owns a house worth $600,000.

In fact, the buyer has taken on the responsibility to pay over thirty years $1,209,996 for an asset that is currently priced at $600,000. In addition, he or she has currently paid $60,000 in cash for the opportunity to take on all of those obligations. This is not wealth. This is debt - a long term liability pure and simple without any guarantee that the price of the purchased asset will remain stable or increase or someday collapse due to lack of future buyers.

If that same $60,000 downpayment had instead been placed in an investment account paying 4.5% per year, after thirty years the account balance would then be $230,861. If the amount that would have been saved each month to pay for annual property taxes had also been deposited into that account the balance after thirty years would be $705,478. That is an ownership position that may produce significant income in the future.

To be in the same position by owning and selling a house after thirty years the sales price would have to include the following:

All obligations paid……… $ 1,209,996
Plus amount not saved………. 705,478

Selling Price………..………. $ 1,915,474

If sold at that price, after thirty years the price appreciation of the house would appear to be 219% - an average of about 7.3% per year. However, that gross return is before taking into account the sales commission and capital gains taxes associated with the sale.

At 6% the sales commission is $114,298.

For United States tax purposes (under 2015 law):

The net sales price is now $1,801,176. The capital gain on the sale is $1,201,176 before allowing for a single or marital capital gains exclusion amount.

The taxable capital gain is:

For a single taxpayer………….…..…… $951,176
For married taxpayers filing jointly…. $701,176

For a capital gain taxed at the highest Federal marginal tax rate the tax bill will be:

For a single taxpayer…………………. $376,665
For the married tax payers….………. $277,665

Therefore the net cash to the seller after the Federal tax payment will be:

For a single taxpayer….…. $1,424,511
For married taxpayers…….$1,523,511

Who says: "It doesn't pay to be married" ?

Problems do exist:

What will the demand be for homes that cost almost Two Million dollars in thirty years?

If you and your neighbors now have average household employment compensation of $120,000 to $180,000 annually and may afford to buy a home priced at $600,000, what do you expect employment compensation to be in thirty years?

Do you expect households thirty years from now to have employment compensation of $360,000 to $540,000 each year?

That would mean weekly - not monthly - individual compensation between $6,924 and $10,384 for a single worker household, between $3,462 and $5,192 for a two worker household.

Do you think that is likely to happen for the typical middle-class American worker in the next three decades?

Given that many members of the United States Congress currently say that a minimum wage of $7.75 per hour is too high, one may wonder how high compensation is likely to go for the vast majority of Americans between now and the year 2045.