A front-page story in The Wall Street Journal (10/16/19) underscored the importance of ownership in the building of financial wealth. Titled “When a Six-Figure Salary Still Can’t Buy a Home,” the report detailed a growing number of high-income families who out of necessity rent versus buy. How does this story play into current political debates on the income and wealth gap in America?
Understand the role of “ownership” in the quest for wealth building and financial independence. In my college undergraduate major at Georgetown University’s School of Foreign Service, a required course was “Development of Civilization,” taught by a legendary history teacher, Carroll Quigley. His book, Evolution of Civilizations, published in 1961 and still in print, provided a comprehensive and perceptive review of the factors leading to the rise and fall of civilizations. My roommate and I reduced the point to one of simplicity. Throughout most of history there were largely only two kinds of people divided into two classes─the royal class which owned and controlled most of the land and means of production and the workers and serfs, often exploited, who owned little to nothing. America was born out of rebellion as people saw an opportunity to work and to own and build regardless of class or royal lineage. The ability to work, save, acquire tangible assets and grow equity, is a hallmark of American success. Many settlers in the nascent United States were Europeans who could emigrate, work and buy land, and grow equity as a farmer versus toiling in the fields for a lifetime, accumulating little.
That’s not to suggest that one cannot merely work and save by putting money in a bank or other savings institution. But the real key to wealth accumulation is “ownership, not ‘loanership.’” For the average American, a significant component of wealth is equity in a home. Houses are effective wealth builders because in growing areas with increasing populations home prices tend generally to outpace inflation and rise. The leverage factor is important. One can borrow a portion of the purchase price (mortgage), amplifying prices when prices are rising.
Leverage (debt) always has a downside when prices are falling, as we saw when housing prices peaked in early 2006 and began to decline in 2006, 2007, and 2008, reaching new lows in 2012. The resulting credit crisis as the housing bubble burst took down the stock market and was a significant cause of the deep 2007-2008 recession. Prior to that, everyone, including bond raters, underwriters, and salespersons, assumed that housing prices only went up. Au contraire! The law of gravity never has been repealed. What goes up can come down. In looking at any investment, or in divining cyclical trends, be wary of excess debt and leverage.
The Journal focused on a desirable suburb of Denver with good schools and homes in demand. Even with a household income of $100,000, well above the U.S. median household income of $63,179 (2018 data), families burdened with debt cannot afford down payments. Credit card debt is at new highs. Add car payments and student loan debt and many young families can’t swing ownership. There’s a boom in houses being built strictly for rent.
Ownership of tangible assets likely to grow in value in excess of inflation are central to wealth building. Stocks representing ownership of a thriving and growing enterprise and real estate are key elements of the wealth equation. With any real estate investment, prudent due diligence involves the understanding of any leverage in place and the ability to service that debt. Real estate tends to go through supply/demand cycles and excess debt has sunk many a developer and investor.
A 2017 Fidelity Investments survey found that 88% of millionaires are self-made. Only 12% inherited significant money, comprising at least 10% of their wealth. The largest percentage of millionaires are business owners. Given the age wave, a tsunami of aging baby boomer entrepreneurs are wrestling with transition realities, how to grow, sustain, monetize, and pass on the wealth they’ve created. The average age of millionaires in the U.S. is 61. Self-made achievement of wealth takes time, sacrifice, and patience.
A significant number of millionaires achieved wealth through paid work, largely as skilled professionals or managers. College students who do not wish to accept the entrepreneurial risks and sacrifices that go along with business ownership, must carefully consider career choices and costs of living in the locations of their preference if personal and family financial independence is important.
True wealth goes beyond money into issues of character, fidelity, generosity, and selflessness, recognizing that God’s definition of net worth is far difference than the one tracked by your accountant. Money can destroy as well as build up. What is your end game?
By Lewis J. Walker, CFP®