A Different Kind of Windfall

In previous centuries, windfalls were unusual. The vast majority of people lived their entire lives without ever experiencing the unmitigated joy resulting from a large sum of money landing squarely in their lap.

A lucky set of lotto numbers, the passing of a distant relative, an unsecured bag falling from an armored truck - the odds of achieving unearned, unexpected riches were long.

In this century, that has changed.

Millions of homeowners have seemingly been the beneficiaries of a windfall in home equity as a result of the recent housing boom. In the bubbliest areas, it is not unusual for ordinary homeowners living in average homes to have built up a half a million dollars in home equity.

[We say "built up" in a derisive sort of way here, as this phrase once connoted hard work in the form of regular payments against principle over many years - this is markedly different than the labor-free form of equity building of today.]

With prodding from lenders at nearly every commercial break, it is exceedingly difficult for homeowners to be unaware of their home equity. With innovative loan products and lightning fast loan approval, it is extraordinarily easy to access.


What do homeowners do with their windfalls?

Home improvements seem to be the most popular choice - remodeling, landscaping, and additions. These are all easy decisions to justify to a windfall beneficiary who perhaps has difficulty accepting good fortune at first.

The good fortune initially appears in a tangible way when checks or bank deposits with five digit numbers are examined - many homeowners stare in disbelief as they come to understand how their home equity has been transformed.

Six digit numbers inspire more awe, but over time, large figures become routine.

With money flowing freely it is easy to lose track of value. Historically, certain improvements have maintained their worth over time - kitchens and bathrooms fare best.

Redoing kitchen cabinets or modestly updating a thirty year old vanity will normally result in a slightly higher sale price, on par with the cost of the improvements, when the home is eventually put up for sale.

Today, many home improvers seem to have forgotten this "value" consideration. With so much money available, and with recent price appreciation projected into the future, there seems to be little concern for lasting value.

Today, it's all about achieving dreams - a dream kitchen, a dream master suite, a dream backyard. The home improvement industry has been revitalized in recent years as more and more companies offer ever luxurious and innovative ways for homeowners to achieve their dreams.

Dreams are usually expensive, but when windfalls are involved, "expensive" is relative.

Should housing prices reverse in a big way, many homeowners will be surprised to find that the resale value of their dream upgrades will not fare well when resold into a buyer's market.

Buyer's markets have a nasty way of compressing the value of upgrades, especially expensive upgrades.

A sixty thousand dollar kitchen upgrade may fetch only a small fraction of that amount in the form of a premium to comparable homes when the home is resold into a market where inventory is high and prices are sliding.

Elaborate landscaping, costing many tens of thousands of dollars, may prove to be a hindrance to the sale of a home, as perhaps the project was just a bit too unique - satisfying to the homeowner, but holding less appeal to buyers when there are many other backyards from which to choose.

This is a cruel reality that few consider when making upgrades today.

Few home improvers give even a passing consideration to the possibility that the dream they are achieving today, through what they believe is a home equity windfall, might be viewed differently in the years to come.

When realizing that over a hundred thousand dollars spent in home improvements may yield only a tiny portion of that amount when circumstance arise causing the home to be unexpectedly sold into an unfriendly market, they may look back at their dream upgrade and see it as a nightmare.

Over the years, the value had faded but the debt remained.

At this time, many people may also realize that the home equity windfall of the early part of this decade was a different kind of windfall, or perhaps, not a windfall at all.

They may come to understand that what they thought was a windfall was simply a clever way to get homeowners to borrow money and spend it.