I Feel Like I Hit The Lottery

An article such as Housing Envy: Soaring Prices Create Divide, from last Friday's Washington Post, reminds us once again just how distorted our economy has become over the last five or ten years. First stocks, now real estate.

There are now gross distortions in the way many ordinary people feel about their lives today - in this case, the real estate haves and have-nots. This is due in large part to the monetary policies and banking regulation (or lack thereof), in place during this time. These policies have, most recently, enabled a nationwide and global real estate boom that has been the foundation of what policymakers have been calling an economic recovery.

By most accounts, greater Washington D.C. is not too far behind California, Miami and a number of other hot real estate markets in the country - median home prices are currently in the $300K - $400K range, having more than doubled in the last five years. In an insightful look into the lives of some of the area residents, we find that all this home equity built up in recent years, all these new found riches that have been meted out in certain parts of the country to the roughly two-thirds of the populace who are homeowners - all this "wealth", is having some unanticipated side effects in the work place.

In the first example, the story of two otherwise equal thirty-something hospital co-workers is detailed. Both hold second jobs to help make ends meet, but one purchased a townhouse a few years ago while the other rents an apartment:

It's true Dressendorfer has more savings than Call, who has spent most of her savings fixing up her townhouse, making it home. But, as Call says, "there's no way she could've saved as much as I've made on my townhouse," which she said has appreciated in value by approximately $150,000.

The homeowner is up $150K while the renter looks on wondering what could have been. It is curious that the equity rich Ms. Call still feels the need to work that second job - thirty-something? already house-rich? 2005? - shouldn't she be out looking for investment property or studying for her real estate license exam, rather than toiling as a nursing aide in her free time?

And the doctors are getting concerned:

Michael Stadter, a clinical psychologist and organizational consultant in Arlington, said that in hard-charging cities such as Washington, known for its high-achieving careerists, people traditionally have been very much defined by their jobs. But suddenly, housing has become a new identity marker.

So, housing wealth is now competing with career achievement as a way for individuals to measure themselves against others. What does that say about the world we live in? Housing wealth, being as it is, based very much on timing, where most homebuyers concede they "just got lucky".

For example, consider the case of a fictional family whose bread-winner was transferred from Los Angeles to Washington D.C. fifteen years ago. New to the area and uncertain of their future, the L.A. transplants rented for five years, while sitting on hundreds of thousands of dollars in gains from the sale of their California property. Having unwittingly timed the West Coast top perfectly in 1990, they also unwittingly timed the bottom of another real estate market by purchasing a home in Washington D.C. in 1995. The large down payment, made possible from the prior sale, enabled the purchase of a much larger home than they could have otherwise afforded, which now, ten years later, has more than doubled in value.

A family with a net worth of over a million dollars just from making one decision on their own. That just doesn't sound fair - just by being lucky, you get rich? But, that's how it seems to work today.

House-rich Mike O'Malley explains what it's like living, every day, with his home equity:

Mike O'Malley, a manager in the intelligence community in Chantilly, said he is reluctant to tell his employees, especially the young ones, about the house he bought in Ashburn in 1997 for $215,000. His home recently was appraised for $570,000.

"We're getting kids who come in and ask how far should I live and what's a good commute. I'm happy to advise them, but I feel like I hit the lottery with that house," he said.

Stories such as these have to make you wonder about the conversations taking place around the water coolers in the Federal Reserve building or on Capitol Hill. Conversations among junior economists or mid-level staffers who are either house-rich homeowners or renters.

Do policymakers have any idea what is going on in the lives of ordinary people, as a result of their decisions? Shouldn't they, every once in a while, take a stroll down to the mailroom water cooler to see what people are talking about?