The Money Pit and The Decline of Enhanced Millionaires

Posted on October 6th, 2009

Apparently, my interview with Dave Ramsey on September 30th hit a cord when I mentioned that only a minority of people who own/occupy homes valued at $1M or more are millionaires. In my latest book, Stop Acting Rich, I use the term millionaire to refer to those households with net investments of $1M or more. This is not the traditional way of expressing a household's level of wealth.  For many years, I defined wealth in terms of the current value of all of one's household assets minus all of its liabilities. But things have changed. I now refer to this measure (assets less liabilities) as augmented net worth or embellished net worth. Why the change? Embellished net worth includes, for example, the equity in one's home. Home values exploded between 1997 and 2007. As a result, so did the population of enhanced millionaires. At the peak of the residential real estate market, the percent of American households had an augmented net worth of $1M or more due to real estate appreciation? The answer is that more than twice the percentage of those with investments of $1M or more (8 percent versus 3.5 percent) did- but now they don't. 

Looking back, many of these enhanced millionaires once thought that they were truly wealthy. And why not? They used the La-Z-Boy approach to accumulating wealth. While merely lying back in their recliners, they watched TV and the value of their homes skyrocket in value. And those who continued to take out equity loans to buy rapidly depreciating assets are now facing a harsh reality. Today many homes that were worth $1M or more two years ago are now appraised at their 2000 value.

In the year 2000, there were only 446,000 owner/occupied homes that had a market value of $1M or more.  By 2006, there were nearly 1.6 million homes in this category. Or an increase of about a 3 1/2 times in six years. Only 8 percent of this increase can be accounted for by new construction. All the rest came from so-called appreciation. 

But now we know that a great deal of this appreciation was not reality. Even in normal times, homeowners tend to overestimate the appreciation of their homes. They merely look at the original purchase price versus the current market value. But what about all the costly repairs, maintenance, taxes, and improvements? I've highlighted an excellent discussion of this topic provided by Jonathan Clements in his Wall Street Journal article "Forget the Mansion: Why Buying Bigger Doesn't Guarantee a Rich Retirement," August 23, 2006, p. D1 in Stop Acting Rich, pp. 46-47.

Category: Books and Publications
Tags: Stop Acting Rich, Dave Ramsey, Wall Street Journal, real estate, American households, millionaire, net worth,