Let’s See - Two Plus Three Is More Than One Plus One?

The New York Times has a rather breathless story splashed across the front of its House & Home section today with the news that lots of people are “trapped” by the housing bubble — the notorious rise in home values that has seen many properties double in price in just five years, at least in hot markets like New York City, northern California and portions of Florida.

Who are these trapped people — would-be homebuyers, perhaps, who find themselves chasing an ever-more-distant first home in an area where real estate values rise faster than family incomes?

Nope, the Times’ sympathies lie with a different group — homeowners who discover their own paper gain in the housing market still won’t buy much if they want to upgrade to a bigger property.

The logic is self-evident: If your $100,000 home, which you bought with a $20,000 down payment and an $80,000 mortgage loan, is now worth $200,000, then your $20,000 cash investment has turned into $120,000, if you cash out. You’ve increased your nest egg six-fold! The catch: The house that you lust after, which used to cost $250,000, now costs $500,000. So even if you put the whole $120,000 up front, if you buy that property, you’re stuck with a new $380,000 mortgage, instead of your old $80,000 mortgage — and with monthly payments that will rise nearly five-fold from your current obligations. Net result: Your house may have appreciated $100,000, but, if you have your eye on anything bigger or better, you’re farther behind than ever.

We’re not quibbling with the facts; as we said, they’re self-evident. If my $1 poker chip is now worth $2, and your $2 poker chip is now worth $5, I’m not gaining on you, I’m watching your tail lights grow more distant.

Why this should come as stunning news to anyone with four fingers and a thumb, much less a pocket calculator, escapes us — as does why a story about it should take up the better part of a Times section front.

Steve Lovelady

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Steve Lovelady was editor of CJR Daily.