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You wrote, Joel, while generally I agree with you about asset transfer on the paying down of a house, that mindset can also get folks in trouble. While my house has not gone down in value, it has increased only about the equivalent of 1% a year for the 6 years we've lived here--less than $10,000. AND we've put over $20,000 of work into it (broken sewer line, new furnace, moved water heater so it was legal, lead paint abatement, new windows).

Yes, in high markets and maybe with a different house, this would be an appreciating asset. But so far, our house is costing us more money than it's going up in value!

I'm not sure I follow you reasoning.

Worrying only about cash-flow when people think about their finances is exactly what gets them into homes they can just make the payments on. It's also why some people wind up getting upside down on their mortgages and mistakenly believe they can rely on a rising market to bail them out. If you want a stable future, you must get beyond cash-flow issues and look at building wealth instead.

As a practical matter, you must consider the purchase of any asset separately from the debt you used to finance it. If you buy a house, but your finances won't let you sell it if the market tanks, you've probably bought too much house.

For instance if you pay $300,000 for a house today and you need to move next year, but the market in your area is volatile and it has taken a 25% drop ($75,000) in value that you can't afford, then perhaps you bought too much house. When you buy an asset you have to be prepared to loose money on it. Assuming an "appreciating asset" will always go up in value is just plain foolishness. How much you should be prepared to loose depends on a reasonable risk assessment. In the case of real estate, it should be based on historical home prices in your area.

As for whether or not you can afford the loss, that depends on how much you have in assets and how far the loss might set you back on your plans for the future. In other words, it's partly subjective. However if your house is heavily leveraged and you don't at least have substantial reserves in the bank, the odds that you really can't afford your house is much greater...

Anyway, this is how I apply my old college lessons in (business) managerial accounting and risk assessment to personal property, such as a home...

- Joel
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