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By Jeremy Office Special to The Pineapple There has been a significant paradigm shift on how we perceive our home. No longer do we view our home as only a place to live and build a family. We now view it as source of a speculative investment. On Maslow’s hierarchy of needs, the second most important need is “Safety”. Under Safety, falls safety of property. As a species we are the only ones that speculate on our need of safety, and that is what a lot of us are doing now when we decide to purchase a home. We are speculating that the price of homes will continue to go up and that we can use the wealth built up in our home to leverage our future. This is where we have had a major change in the dynamic of being a homeowner. To determine why the concept of owning a home has changed over the past 50 years, we thought that we should examine the wealth effect rising home prices have created and the psychological effects it has on owners. The wealth effect, some might argue, is a byproduct of quantitative easing. As the stock market reaches record highs and household wealth returns to pre-recession levels, this creates a sense of wealth that improves consumer confidence and their willingness to spend. Contributing to rising home prices has been low interest rates and lack of supply. Couple this with cash on the sidelines and interest rates rising, you have a perfect storm for home appreciation which we have seen as home prices increased twelve percent year over year as of June 2013. But, this has also caught the attention of institutional money managers and has lured them back into the real estate market. These professional investors and “flippers” have exacerbated the rise in home prices. As cash buyers bid on the same property, this creates a premium on properties, skewing comparable sales data, making it very difficult for the average person to be competitive when purchasing a property without paying cash. As home prices increased, we have also seen an increase in size. The McMansion era of big homes and big cars, hoping these investments would lead to even bigger investment returns can be correlated to the rise in home prices. There are now more than a dozen homes in the U.S. listed or quietly on the market for $100MM or more (that is ONE HUNDRED MILLION!). In the 1950’s the average home size was about 1000sq ft. In 2009, they reached their peak at around 2700sq ft. Counterintuitive, while the average size of homes has more than doubled since the 1950’s, the number of people in the household have been shrinking. Also shrinking is the housing inventory. We are currently at levels we have not seen in twelve years. Due to the lack of inventory and basic supply and demand economics, this has also driven home prices higher. The average number of days on the market fell to 37 in June, compared to 41 in May and 74 back in February. The biggest headwind facing home prices is the rising of interest rates. If rates begin to rise too quickly we believe that it will create a negative drag on the economy and could potentially stall the housing recovery. As homes become less affordable due to higher rates, we believe this could put downward pressure on home prices in the future. Sellers will either have to come down in price or buyers will have to come up with a larger down payment to maintain the level of mortgage payment they would have had with a lower interest rate. With unemployment at 7.5% and real income declining, we believe the latest rise in home prices could be outpacing fundamentals. Yet, the housing recovery has provided substantial support to the U.S. economic growth. In the first quarter of 2013, housing contributed more than half of the growth in real GDP. The trickle down effects from a recovering housing sector will not only benefit the housing industry, but the broader economy as well. We believe housing will continue to be a driving force and support growth in the U.S. even as rates begin to rise because on a relative basis rates are still at historical lows. To avoid another real estate bubble, we need to reassess our traditional values. Twelve percent year over year appreciation in home prices is not sustainable and should not be expected moving forward. We should not be overleveraging our home equity. We saw the problems that we got ourselves into before the collapse of the housing bubble. We must remember that greed got us there and hope that fear will keep us from returning. A strong housing market is good for our economy, but speculating on an essential need is not. Jeremy Office, Ph.D, CFP, CIMA, MBA is Principal at Maclendon Wealth Management in Delray Beach and specializes in portfolio construction, strategic asset and liability man- agement, and long term planning relating to financial matters as well as real estate, income tax, insurance and estate planning. www.maclendon.com855.MAC.WEALTH