Asset vs. Liability

"One believed, 'Our home is our largest investment and our greatest asset." The other believed, 'My house is a liability, and if your house is your largest investment, you're in trouble.' " page 15
"Rich Dad Poor Dad"
by Robert T. Kiyosaki

I listen to a lot of investment shows on the radio. Last weekend I heard a guy talking about this on his show. It may have been Steve Davis with Lifestyles Unlimited. The talk show host was explaining the difference between assets and liabilities.

Assets put money into your bank account.

Liabilities take money away from your bank account.

So he asked the question, "Does your house put money in your pocket every month or does it take money from your pocket every month? It takes it away, doesn't it? So your house is a liability, it's not an asset."

And as most of us know now, that is what helped get us into our countries current financial situation. Too many people thought that their house was a great way to get rich quick. Buy as big a house as you can with a low interest only loan with a balloon payment, a low introductory adjustable rate mortgage, or some other hybrid loan, and sell a year or two later when the price had appreciated before the balloon payment came due.

Then the top of the roller coaster was reached and home prices started on the downward slide. Now too many people are upside down on their loans, owing more than the current value of the property. They can't refinance to avoid the balloon. The people with the adjustable mortgages can't refinance to get a better rate. Very few, if any can sell just to break even, much less make a profit as they hoped.

A home is just a place to live. It was never intended to be an investment, though it often turns out that way when you sell after living in the property for years. Common wisdom states that a property doubles in value every ten years.

Let me say that again, properties, on average, double in value every ten years.

That's it. We, as a nation, should have known that we were in trouble when speculators started buying properties in hopes of selling them in a few months to make a profit. And for some, that worked out well. But now, just as with the Savings and Loan fiasco of the 1980s, too many speculators just walked away from properties that they couldn't sell. They let the banks take the properties back and they wrote a loss in their balance sheet.

While regular people just trying to get ahead got the shaft.

I say that last statement because, yes, some people jumped on the speculation band wagon and got burned, but many people just bought a house they could afford. Now with the financial shake out, most businesses are cutting jobs, downsizing, right sizing, going out of business. Too many people that had no aspirations of making a killing in the market, but just wanted a nice place to live are losing those houses because they can't afford the payment any more because they don't have a job because too many loans went bad.

Banks have to borrow money to lend money. I know, that sounds crazy, but it's true. Banks borrow money from the government and other banks to lend to consumers. But with so many bad loans on their books, they can't borrow any more money. So they can't lend money. If businesses can't borrow money to run their business, they have to cut back or close their doors. Which leads to unemployment, which leads to people that were laid off missing their payments, which leads to foreclosure, which leads to more loans going bad.

It's one huge Catch 22.

Um, I was rambling, as I so often do. What was my point? Oh, yeah. Your house is a liability not an asset. Sure, you get a break on your taxes for the interest paid. And there is appreciation when you eventually sell. But think about all the other expenses involved with owning that house, mainly repairs. The air conditioner/heater needs to be replaced, the water heater needs to be replaced, broken windows, roof, painting, siding, plumbing, electrical, the list goes on and on.

Live in your house, don't use it to increase your wealth.