Roger Marolt: Roger This
The Aspen Times
Aspen, CO, Colorado
The national housing market is showing signs of life. That’s good news for Aspen since our perch on the tip is only as secure as the strength of the real estate pyramid’s base, as we now know. Granted, the sign is only a gasp of breath, but it’s better than being cold in the dirt, so to speak.
We should try to contain our excitement, though. I don’t think this patient is going to get up and run a marathon. Why the pessimism? The answer might surprise you: It’s education, education, education. Yes, education is going to keep the real estate market down.
Have I ever been wrong? Don’t answer that. But consider these three things before you call the asylum:
First, the cost of education has, for many families, become the largest expense they will undertake in their lifetimes, both in the amount spent and in its importance. Remember what expense has traditionally been in that position? That’s right, the home.
Thanks to college costs increasing at roughly twice the rate of inflation for the past three decades, the cost of a four-year degree at many state universities is approaching $100,000 – if you are fortunate enough to get out in four years. It takes longer than that for nearly half of all college students. The cost of the four-year degree in many private universities is double that, at least. Start talking about paying college tuition in the average family with 1.9 children, and you can forget talking about anything else for a while.
Where does all that money come from to pay for college? I don’t care if you borrow it or take it out of savings; it comes out of your plans for the future. Look at it like this: If you didn’t have to spend all that money on college, you could buy a nice boat (naw, not my style) or trade up into your dream home or buy a Kona condo (OK, now I get it). Remember, education is the priority now. You just woke up from your dream, homie.
And it doesn’t matter if you are the student or parent. Either way, the tuition load hits you at an inopportune time. For the parent it comes at just about the time you start paying attention to the retirement-account statements and trying to forget about a retirement cottage on the lake. For the student, it comes at right about the time bankers are paying attention to the graduate’s credit report in anticipation of a first home purchase.
The outstanding national balance of student loans is estimated to be around a trillion dollars. For the first time in history it is larger than credit-card debt and car loans. Considering the average U.S. home value is about $230,000 and an assumed 80 percent loan on value, this amount represents almost 5.5 million houses we didn’t buy with that debt. And there is a limit to how much debt we can sustain, right? A vacation home or college for the kids? Choose one only, please.
The second point: As education has become the national priority, people have learned through the process of paying its astronomical price that often home equity is a deal killer when it comes to getting financial aid. If you have any of it, most private schools expect you to use it to pay the education freight. You spend 20 years paying off your first mortgage so that when the kids get to college, you can take out another and start over.
So if building up equity in your home isn’t the answer, what is? Surprisingly, it’s renting. Instead of building up equity in your home for the colleges to take, many savvy people are now renting at a lower cost than servicing a mortgage and loading up their retirement accounts with the savings, where colleges aren’t looking for it. That’s right – colleges don’t expect you to spend retirement savings on tuition. This can increase your chances of getting financial aid significantly. Further, in most cases you can take early distributions from your retirement accounts to pay for college without incurring the IRS’s wrathful penalty. And, it’s far more liquid than home equity.
And this leads perfectly into the third way education will keep the housing market subdued. Educated people are putting pencils to paper on the previously unquestioned wisdom that owning your home is the key to prosperity. It just isn’t so in a great number of cases. It all makes sense when property is appreciating at 10 percent a year, as we got used to over the past 20 years. That’s plenty of equity to cover the cost of maintenance, insurance and repairs. The problem is that historically real estate has appreciated at a rate that just keeps up with inflation. That’s the norm!
I suppose you could say that the less educated we were, the more sense real estate made – not an original idea.
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