The Hummer Dilemma

by Tom Dixon

Hopefully, now that we have passed through the dark time of not knowing what the financial future holds for us, it is time to consider how things can be better in the future. It seems to me that not too many years ago the belief was that if you have more, spend more and live in a bigger house you will be happier. Maybe it is now time to re-think what all this “more” has created.

My guess is that this came about because we were not content with what we had and thought more would be better. In terms of houses, this was financially possible but had a hidden trap. If you could buy a home for $100,000 with a down payment of $10,000 and a loan of $90,000 and the price of the home increased by only 10% then it would have a value of $110,000. With a $90,000 mortgage you had made $20,000, a 100% return on your $10,000 investment. If you can keep refinancing your home loan at 90% of its value will continue to double your money. Why not? The why not or risk is that if the value of your home declines then your equity is wiped out. Yes it was fun while it lasted but eventually more homes and condos were built than there were people able to afford to purchase without fraud or even to live in them. Prices declined and equity was wiped out.

The second problem became the cost for mortgage payments, upkeep, insurance, and real estate taxes. As long as values were going up it made sense. But when home prices stopped rising couples with no children began to question their need for 8,000 SF 6 bedroom 6 bath home with real estate tax bills of $4,000 to $6,000 per month. An excessive home is like a Hummer, yes to looks cool and seemed like a good idea, but do we really need to live in a monster home and drive around in such a massive vehicle.

How did all this happen? The combination of a belief that good times will continue, incomes will rise, home prices will never decline and more and more and bigger and bigger are better. This is not to say that there may be reasons for big homes and big cars, but just because we can borrow money to buy them is not a good reason.

So how do we overcome the “Hummer Dilemma”? A realization that perhaps the answer is in these quotes :

“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.” -Will Smith

“Wealth consists not in having great possessions but in having few wants.” -Epicurus

Or this great truism my wife Linda gave us when we moved to our new office. “The best things in life are not things”.