The Rules Have Changed......

For about 15 years, homeowners have experienced real estate as an appreciating asset. It's value went up every year. And, more importantly, there were plenty of buyers around willing to pay the increased price when a homeowner wanted to sell. For homeowners, it seemed like a sure thing. Many homeowners saw their increasing home values as a fund for their child's college, to help fund retirement, fund a consumptive lifestyle, or worst case to support a surviving spouse in case of premature death.

But the rules have changed. Anyone who has bought a home in the last couple years probably owes more than the home is currently worth. In fact, in many of the previously "hot markets", like the one I live in, prices have fallen so much that many people who have bought in the last 5 years may owe more than their homes are worth.

Real estate values will come back. We don't know how long it will take: it's an illiquid asset. Historically it's been artificial to use personal real estate as a bank or savings mechanism to replace investments. But, the unprecedented rise in real estate prices has been very seductive: just buy a bigger, more expensive, more prestigious home and you will have more money. What seemed like a perpetual rise in real estate prices rewarded consumption, sometimes conspicuous consumption. Everyone could look at what we're worth just by driving by. The seemingly ceaseless rise in real estate prices promoted the idea we were being economically responsible by consuming. Some people even extended this idea to second homes and vacation homes.

Well, the last couple years have been painful. The rules have changed. We see real estate in more realistic terms: a long term, and illiquid, asset. Personal real estate--our homes for instance--have taken on more of their original meaning--a place to live, to build a family, to feel secure in. The rules have changed, in that we see that to be secure, we have to pay attention to earning "new" money. The rules have changed, in that our economic future is tied to the ability to earn and save, not consume.

Insuring our family's income stream is more important than ever. Many families may not have sufficient equity in their homes to replace one of the wage earner's income. So life insurance carries with it fresh importance.

And, we've been reintroduced to the idea that to grow assets, we need to take money "off the top"--meaning before we spend it on other things-- for savings and investment. Many people have been soured by the huge declines in their mutual funds in the past couple years. So for these people, annuities--which shelter growth from taxes, plus carry a guaranteed return--are looking not only like very responsible investments, but also very attractive ones as well.