Houses and Stocks are Going Up – Who Cares?

Well, there it goes again. The business cycle, that is.

I moved to the United States at the peak of the 1999 dot-com boom. At the time, high-tech companies were engaging in bidding wars over candidates, and home buyers in Colorado were racing to put in above-asking-price bids on any livable home that came to market.

By 2002, those same workers were being dumped back out of their cozy offices, and houses around here were sitting on the market by the dozen, the prices slowly falling while the sellers grimly looked out the front windows at the quiet streets.

In 2006, home prices were on fire again, companies were hiring, and the future was bright. Until 2008, when everything crashed so heartily that banks couldn’t even keep up with the avalanche of foreclosed mortgages that fell upon them.

And now here we are in 2012, and I’ve noticed that houses in my area have started getting snapped up again, at increasingly healthy prices, as the number of just-arrived-Subarus and Audis sporting California, New York, and Massachusetts license plates has rebounded to match the growth in high-salary jobs around here.

Every time a real estate transaction takes place anywhere in my area, I get an email with all the pictures and details, thanks to an automated system that Mrs. M. set up for me using her special Real Estate Agent powers.

In recent years, I’ve received plenty of “just listed” notices, but a much smaller number of “sold” ones. But in recent months, that has changed dramatically. Even some of the silliest homes, the ones where I said “Yeah, good luck selling that little shack at THAT price”, have been selling in short order.

At first, I dismissed the sales as flukes. Then I dismissed the growing trend as a localized or short-term one. But today I read the yearly statistical summary of my city’s real-estate market and saw that the same thing is happening citywide. The number of home sales is up about 30% over last year at this time, even while the amount of inventory is about 20% lower. This adds up to a very different feeling for sellers – offers come quickly, discounts are minimal, and new listings are naturally trying for higher prices after seeing the recent sales.

Similarly, the stock market has been on a bit of a tear since last summer, rising by about 13.6% since I pointed out the sale that they were having on them back in August (see the graph at the top of this article). The US stock indices as a whole are close to their all-time record levels. Those fancy net worth graphs in our Mint account are looking better than ever, because the higher stock prices make your retirement savings accounts look rosier.

Are we excited about these new developments? Have they made us richer?

In quite a departure from my attitude on these things when I was younger, I would say “No.”

Let’s look at the house first. When you own and live in a house, and the market value goes up, you suddenly have a higher net worth. Hooray! But your cost of living (i.e., the price of houses) has also risen by exactly the same amount. D’OH! So while you can gloat to any new arrivals to your neighborhood that you got your house cheaper than they did, your situation remains the same. The mortgage payments, the size of your kitchen, the bathroom tiles. All the same.

Now in the bad old days of the early 2000s, Mr. Money Mustache wasn’t around to teach the people of this reality. So when house prices went up, people started extracting value from them in the form of huge lines of credit. These credit lines were then spent on absolutely comical things like vacations, cars, or general lifestyle inflation. At that point, the credit victims had the same kitchen size,  the same bathroom tiles, the same back yard. But suddenly, a higher mortgage balance reflecting the fact that their cost of living had gone up – while the free equity that came with the neighborhood appreciation was not there to balance it! Even when borrowing home equity to renovate the house itself, these people were simply increasing their cost of living rather than building wealth.

So when is it GOOD that your house goes up in value? Only if you’re planning to do one of these things while the value is still elevated:

  • sell the house and move to a rental instead
  • sell it and move to a less costly house in the same area
  • sell it and move to a different real estate market (another city or country, which hopefully has not had the same elevation in prices)

You can also substitute “convert it to a rental house if rental rates have risen along with prices” instead of “sell it” in either of the last two cases.

That’s  it. Other than those situations, you don’t care if your house price goes up. And you also don’t care if it goes DOWN, even if you need to move, since other houses you might move to are also similarly discounted. (Unless you’re stuck beneath an underwater mortgage – that can definitely put a damper on moving).

Some think of home price appreciation as a way to leapfrog to a bigger house. “Hey! I put no money down, but now I have $100,000 in equity! Let’s use that as a downpayment on a $500,000 house!” . Those people would have been better off if the house prices had NOT appreciated, because in that case the bigger house would only cost $400k.

As for the downpayment: If you can’t easily save up the 20% of a home’s price, you can’t afford that house yet. A house shouldn’t be more than 2-3 times your salary. Even at a 50% savings rate, you’ve got your downpayment in about a year. If those numbers and ratios sound crazy to you, go back to the earlier MMM posts and start chopping expenses, or just buy a much smaller house!

Even for landlords, house price appreciation isn’t so great. They’ve got a greater net worth, but the great deals have dried up from the market. Houses are now too expensive to make profitable rentals. The landlord still has his cashflow, but he should now consider if he would rather sell off the appreciated houses and invest elsewhere. Only if he does this, and ends up with a more valuable investment, does he come out ahead.

Ok, maybe house price appreciation isn’t so great after all. But what about stocks? Everybody loves a rising stock market, right? I mean, daily movements in the stock market are all the financial news media ever talks about!

I used to watch my stock and retirement portfolio values like a hawk. Sure, I was a dim-witted hawk in retrospect, but at least my vision was sharp. At the end of a day with a huge stock rally, I’d bike home from work feeling very rich, eager to update my spreadsheets. After a crash, I’d feel poor and fret a little bit. You still read this on financial blogs to this day.. “My portfolio took a HUGE HIT today — OUCH!!”

Nowadays, I go months between noticing the value of the stock indices. Because I stopped caring about the price of the companies I own slices of. Now I only care about the earnings.

As true investors know, the point of owning anything is the stream of value that it provides to you over time. Farmland is useful because it produces crops. A personal residence is valuable because it provides a place to live – also known as ‘imputed rent’. Rental properties are valuable because they provide rent checks every month. And shares in companies are valuable because they pay you a stream of dividends – as well as reinvesting some of their earnings in exchange for higher  dividends in the future.

So the shares we own are only valuable because of the portion of company earnings they bring us. These earnings are unaffected by stock market swings, and only temporarily affected by economic cycles like booms and busts. The only thing that really matters is the overall productivity of the people who do the work for us – the employees of our companies. If the people continue to produce value, our companies will continue to produce earnings over the long run, and we as the owners will do fine. What we want as owners, is therefore to be able to get more of those shares at the lowest price possible.

That’s a nice gross oversimplification of a very complicated subject, but it works for me. Unless you’re a day-trader in stocks, long-term earnings are the only thing that will affect your lifetime income from owning productive assets.

So rather than worrying about price fluctuations, I try to learn more about multi-decade trends in our society itself. I try to place my political votes not for who will try to bandage short-term issues like gas price spikes, but who will provide social stability, minimize depletion of the natural resources that serve as the basis for our productivity, and provide the lowest level of inefficiency-causing cronyism and corruption in the capitalist system over the long term.

And if the price of my own house rises too much, I’ll sell it and get a nice place on the beach in Mexico instead.


  • Joe @ Retire By 40 May 9, 2012, 6:35 am

    I don’t want my house to go up in value because the property tax will start rising again. It does make a difference to someone who is getting ready for a big change like retirement. They can sell the house easier and move to some place cheaper. The same goes for the stock market.
    It finally got through to me that as long as we are relatively young, it’s good for the stock market to be in the dump. We can accumulate more asset and the valuation will come back in line eventually. For older folks who needs to draw on the nest egg, it’s a chance to sell and reallocate to less volatile investments.

    • Mr. Money Mustache May 9, 2012, 7:21 am

      True Joe – retirees can definitely fall into my little bullet list above, of people who can benefit from rising house prices.

      Even I will probably benefit, first because we’ll eventually downsize or buy a fixer-upper, fix it up, and move in to cash out of the current house. Then we’ll surely live somewhere else in the future as well, once the kid is grown.

      Regarding property taxes: most people assume that a higher prices in a town automatically mean higher taxes. But that’s not usually how it works. Every year or two, the city appraises all of the houses, and divides the value against its approved budget. If all the houses happen to go up by the same percentage, and the voters (you) have not approved a higher budget, taxes will not rise on any house, in theory.

      It’s only when your house goes up RELATIVE to other houses, that you see a tax increase due to appreciation. Certain areas also have various limitations on how much they’re allowed to ding you for appreciation that wasn’t your fault. So the newcomers who move in and pay high prices are usually the ones who end up footing the higher tax bill.

      • No Name Guy May 9, 2012, 10:44 am

        In re property taxes:

        MMM, what you say about one’s property tax bill being a percentage of the total property tax bill (I assume) holds true in Colorado. Its also the case in Washington (and no, I am NOT referring to the District of Columbia).

        HOWEVER, in many of the east coast states, their property tax system is based on a fixed mill rate (fixed percentage) so there is a direct correlation between assessed value and the property tax bill. Many states, cities, towns and counties back east are hurting since, like typical politicians, they thought the high tax collections of the boom years would go on forever, so they ramped up “permanent” spending increases to match it (in a typical non-MMM pin headed maneuver).

        IMO the Washington (and presumably Colorado) system is the far superior one vis a vis the east coast system since it provides for a steady tax bill / total collection and eliminates the boom / bust cycle that the east coast states experienced.

        • GayleRN May 9, 2012, 11:41 am

          Years ago in Michigan we used a referendum on the ballot to vote ourselves a permanent tax freeze on homestead properties. My property taxes can only be raised a small percentage in any one year as long as I own the property. I have lived in it long enough to pay it off and it is taxed at long ago levels. The minute I sell it will go to current levels for the new owner. I am so happy when I pay my property tax. I love having a way to bypass the goofy lawmakers.

        • Mr. Money Mustache May 9, 2012, 11:41 am

          Wow, thanks for the clarification. That East coast system sounds RIDICULOUS! Why would a city base its income stream on something that is totally out of its control (property values)!? They’d get a super-unpredictable budget, which is also supremely unfair. The citizens are forced to pay taxes based on something beyond their control. The city’s own spending will fluctuate in the opposite way of what would be helpful (exaggerating booms and inflation, then pounding people down further during recessions).

          You learn something new every day. I continue to be amazed that the US northeast has not completely emptied out by this point, like parts of Detroit did :-)

          • Steve May 9, 2012, 1:49 pm

            Because property values always go up! It’s calculated that way in southeast as well.

          • mikenotspam May 9, 2012, 2:40 pm

            If I may, MMM, just to clarify further, cities and towns try to ensure themselves a steady flow of cash by doing one of two things:

            1. Property values go up. Collect more tax naturally.
            2. Property values go down. Jack up rate, collect more tax anyway.

            That’s how it’s typically done here in New England, at least. Some cities even have crazy rates for investors who don’t live in houses (I imagine this is similar across the country?), such as $15 tax per $1000 of valuation if it’s owner-occupied, and then double it to $30 tax per $1000 of valuation if the owner does not live there.

            • Mr. Money Mustache May 9, 2012, 3:57 pm

              Crazy! Stories like that really brings out the anti-tax activist in me, despite the fact that many accuse me of being a softhearted liberal :-)

              Doubling the property tax rate for investors is effectively just adding a huge tax on renters, since it will decrease the supply of available rental houses and move up the price equilibrium. That’s cool if it is the local government’s goal, i.e. if they hate the idea of people renting rather than buying houses. But it sounds like a strange policy to me.

              I guess where I draw the line at regulation is: at least TRY to regulate only things that have clearly negative consequences: pollution, traffic, commercial fraud, etc. And TRY to keep the regulation out of people’s day-to-day lives like how they run their small businesses or who they want to marry, employ, or rent out their houses to. Much more of a libertarian than I thought I was!

          • Dave May 9, 2012, 3:35 pm

            It isn’t just the East Coast that has such a system. Here in Iowa, it is the same way (with the millage rate). Combine that with a variable roll back of the assessed value and you get a really screwed up system. For example, my area has a roughly 3% millage rate, but residential properties are only taxed at amount 55% of their assessed value, so for a house with a $200k assessed value, the property taxes are roughly $3,300 (200k * 55% * 3%).

          • Oh Yonghao September 4, 2014, 6:41 pm

            Here in Oregon they tried to do something to limit property tax valuations to 3% a year, although that doesn’t affect the actual rate paid. What I see on the tax history for my house is a steady stream of exactly 3% raises in valuation every year. It’s like the time that I had a collections debt when I was young and stupid, by law they can add x% to the top of the bill, and guess what the collections agency did? Luckily(?) the value of the house has risen more than 3% each year on average, but somehow despite the valuation only going up by 3% I see that my taxes have raised by 3.8% this year over last.

    • Walker May 9, 2012, 12:28 pm


      It sounds like reading Andrew Hallam’s book, Millionaire Teacher, had an impact on you. Why would people be happy about paying higher prices for something they’re collecting?

      If you rebalance equities/fixed-income when your asset allocations get too far out of whack, this is taken care of for you! You’ll be buying equities when they are on sale, and moving to bonds/TIPS when your stocks go on a tear.

      The only downside is that this could create a slight drag on overall returns during long bull markets. For me, this is a small price to pay for keeping my risk in check, as well as cashing in on volatile markets like we’ve seen in this past decade.

  • Baughman May 9, 2012, 6:57 am

    As a guy whose career is to think about the stock market, I’ll add a bit to your insightful comments on stocks. The point of owning stocks is to earn profits which will be rightfully returned to shareholders before being squandered by companies on bad projects, gold-plaited toilets, corporate jets, etc. Dividends and share repurchases are basically the only mechanisms companies have to legally return profits to shareholders. However, there are infinite ways of squandering profits. If enough shareholders understood this, I believe that corporate governance would improve, and that shareholders would receive a higher portion of non-squandered profits.

    • Llama May 9, 2012, 9:33 am

      Have you ever pooped into a golden toilet? It’s MAGICAL.

      My uncle had one in his foyer restroom in his last house.

      • Dragline May 10, 2012, 9:01 am

        I am trying to envision a llama pooping in a golden toilet. It sounds like a Salvador Dali painting or something.

        • Carrie December 30, 2016, 12:28 pm

          This comment just made my whole year. This is why i come back and read these comments for fun

    • PK May 9, 2012, 10:33 pm

      I’d go one step further and say that dividends are the only way to return profits to shareholders (unless you count bonus pools given to employees who are also shareholders, but I digress). True, share repurchases reduce the float, but they really serve to make future dividends more valuable since there are less hands in the circle when the dividends finally get paid.

      The other problem with share repurchases? They sometimes accompany huge grants of shares to upper management… to eventually be spent on golden toilets at home.

  • George May 9, 2012, 7:09 am

    Yeah a few years I tried the stock trading game, and it was a huge waste of time. The only real money I made was from the dividends, not trading.

    I noticed that ads for brokerages are always trying to convince the general public to get into stocks, they will always stress they have some new tools on their website that it makes it “easy”. Why would they do this? Because they desperately need to convince the public that somehow they can compete with professionals. The brokerages don’t care if you lose money, all they care about is the number of trades you make because the commission is where they make their money.

    This is why for the last couple years, I have stuck with dollar-cost averaging for any stock investing. Trying to time the market is nearly impossible. You might say, oh look this company XYZ has dropped 5% in the last few days, its a deal. But is it? It may go back up, yet it could also just drop another 10% and look like an even better deal. You never really know where the bottom is until it has already happened.

    You bring up a good point about the rising house prices as well. Even if you own a rental that has shot up in value over the last few years and you decide to sell out. Yes, you make a profit, but then what? For one, you have lost that cash-flow since you no longer have any rental checks coming in.

    Plus, now you have this cash, but all the houses in town are now higher priced. Thus, in this case, you have sold at a price peak, but you also need to find an alternative place to put that money back to work. This could be a different city or alternate asset class that is currently cheap to put that money into. Yet, having a rental in a different city presents lots of challenges for the landlord.

    More and more it seems that every asset class is becoming more correlated with each other, making this buying and selling for capital gains harder and harder to profit from. It seems if stocks are up so is real estate and just about everything else. Conversely, if house prices are down, so are stocks, and just about everything else.

    This why you’re right that the game is about cash-flow, not buying and selling to time the market. It is better to stick with dollar-cost averaging, and rely on a steady stream of passive income (whether it be rental checks or dividends) for your profits.

  • Kar May 9, 2012, 7:20 am

    MMM, are you suggesting you are a dividend income investor? I’m surprised you would be so lackadaisical if you are that type of investor. I know of dividend investors who watch their stocks like hawks to make sure the companies they are investing in aren’t going to cut dividends. I’m getting more interested in this type of investing as well.

    To me it seems that dividend investors are much, much more active than index investors. Index investors can just sit back and just check, once a quarter, their funds.

    Great blog by the way!

    • Mr. Money Mustache May 9, 2012, 7:25 am

      In that case, I’d say I’m an index investor who likes dividends! If I do buy some individual dividend-payers in the future, I’ll probably still be lazy and hold onto them for decades too. Note that REITs are also similar to high-yielding dividend stocks.

  • Fiveoh May 9, 2012, 7:21 am

    Kind of ironic you post this when the stock market has been dropping a lot lately…. I like your point about housing values. Although around here they vary greatly by neighborhood. My neighborhood might stay the same value but the one 2 miles away is popular so it goes up 15% in 2 years. Living in a big city with lots of housing choices, you want your neighborhood to appreciate vs the rest.(or at least keep its value if others are dropping)

    • TomTX September 30, 2012, 6:21 am

      Nope, don’t want my house to appreciate with the rest. I’m not selling anytime soon. All a higher value means to me is higher taxes – roughly 4% of assessed value every year. Relatively high, but we have no income taxes in Texas.

  • Guitarist May 9, 2012, 7:22 am

    I’ve got a few dividend payments coming in (automatically reinvesting) this month. Head on south stock market, head on south.
    I still watch how my portfolio is doing almost daily, but I do not trade. I am just checking the overall trend and thinking about when I should buy. Yes, this is considered market “timing” but I wouldn’t liken it to day trading.
    I just opened my Roth IRA last month. The first week, I was looking good, since the middle of last week it’s taken a turn. I don’t get down about it though. Just anticipating buying more shares at a discount.

  • smedleyb May 9, 2012, 8:18 am

    The United States failed to properly deal with its economic problems when they surfaced in 2007-2008. Rather than adapt proactive policies which remedy the imbalances in the economy, they opted to double down on the insane spending/borrowing strategies which nearly sank the economy in the first place.

    They bought time but did they fix the problem? Methinks not, and I assign a high probability to a massive economic/financial/market meltdown occurring over the next several years. We will witness what Freud referred to as the “return of the repressed,” the process where a critical problem gets buried over only to return with a forceful vengeance much harder to contain the second time around.

    That’s when I plan on backing up the truck and loading up on stocks for the next 20 years. Until then, I’ll maintain my incredibly high levels of cash and wait for my pitch.

    • BC May 9, 2012, 8:38 am

      The above comment makes sense, IF (and that’s a big IF) there is another market crash. This is why timing the market is so difficult. Sure, another crash could happen, but it’s just as likely that the market could take off from here, and the “train will have left the station” (as they say) and you’ll be sitting on the sidelines with your truckloads of cash, kicking yourself for being out of the game and missing all the gains. If you look at things historically, (and objectively, and un-emotionally) the bottom line is that nobody knows what will happen (even the “experts”) and the majority of the time, what does happen is almost never predicted correctly.

      • jlcollinsnh May 9, 2012, 9:21 am

        I’m with BC here. Predicting, i.e. timing, the market is a loser’s game.

        Holding cash carries real and large opportunity costs, plus even modest inflation erodes it’s value over time.

        If you must sit on the sidelines, consider alternatives that will pay you while you wait. Bonds & REITs for example.

    • Wesley May 9, 2012, 8:43 am

      I’m with smedley on this. I think we’re in very similar situations.

      While timing’s always tricky, I think this roller-coaster’s going for a wild ride in the next few years. I intend to laugh at the protesters and profit from the people that get things done.

    • rjack May 9, 2012, 9:07 am

      And here is some graphical evidence that the current market is high and smedleyb is more likely (greater than 50% probability) to be right than wrong:


      • GregK May 10, 2012, 8:22 am

        Just a warning to the wise here — this is not a PE ratio, despite the title. It’s a CAPE ratio, which uses a trailing, inflation-adjusted 10-year average earnings number to calculate the multiple. It’s called cyclical adjustment, but I think it probably puts more emphasis on the Great Recession than just about any other available method of stock valuation.

        Let’s not delude ourselves into thinking there’s ANY measure of value or anything else that gives more than a 50/50 guess as to which direction stocks are going to go.

        I’ll echo MMM’s advice and tell you to read A Random Walk Down Wall Street. There are people who are paid tens of millions of dollars per year to predict market moves, to pick stocks, and to time the market, and they do a shit job of it. I promise, you are not better at it than they are.

        • Coderstache November 20, 2018, 10:25 pm

          Again, re reading all these comments is so telling. In 2011-2014, all the comments are like, stocks are so high oh a crash soon, bail bail emergency. Here we sit in 2018 still not coming down. And this last month we fell a good amount, causing even more articles and doom and gloom. Yes, we know the crash will happen–but it’s obvious no one knows when. If you’re in wealth accumulation, time is on your side, just keep buying. Even better if it crashes now, a sale for future you.

  • jlcollinsnh May 9, 2012, 8:43 am

    damn, Mr. MM. another great post I wish I’d written. Your points on houses would have fit nicely into my recent Real Estate series and those on stocks with my current series on those.

    Clearly you tell the truth when you say you’re not paying attention to the market. It’s aggressively down yet again today. :)

    Oh, and my house never did sell. We’ve pulled it off pending our disappearing into South America later this year.

    You are absolutely right about rising housing prices. Until we’re ready to step off the home owning cycle or downsize, we’d better off if they remained stabile.

    a depressed stock market is an absolute give to those in the wealth building phase of their life.

    • Mr. Money Mustache May 9, 2012, 9:13 am

      Haha.. that is indeed funny that I hadn’t noticed the recent stock market decline (looks like it’s down 4.5% from the absolute peak on May 1st, bringing it all the way back down to… let’s see.. MARCH 2012 levels!! Gasp!!)

      I’ve just had a vague idea that prices were still quite a bit higher than last August when I last made a significant effort to purchase an extra batch beyond the regular dividend reinvestments.

      I like to keep a general idea of prices, because I don’t want to miss out on another 2008-style crash if it happens. (I’d probably try to buy more shares instead of another rental house if I had cash available in such a situation). But for now, passive reinvestment of dividends is good enough for me.

  • riggerjack May 9, 2012, 9:03 am

    “I try to place my political votes not for who will try to bandage short-term issues like gas price spikes, but who will provide social stability, minimize depletion of the natural resources that serve as the basis for our productivity, and provide the lowest level of inefficiency-causing cronyism and corruption in the capitalist system over the long term.”
    I assume that means you vote Libertarian? ;-)

    • Entity325 May 9, 2012, 9:12 am

      no, those are all Democrat buzzwords.

      • Mr. Money Mustache May 9, 2012, 9:26 am

        Haha.. I sort of agree with you both. In theory, libertarians, or even the old idea of Republicans would work best for the goals of business prosperity.

        But in the warped sphere of the US political parties, where the actions don’t align with their stated policy goals and where people pretend there’s no such thing as a finite environment, I see more long-term prosperity in whatever party gets us out of the next few decades with the greatest level of energy efficiency and remaining forests and whatnot.

        I’m not talking namby-pamby income equality or rich-people-bashing or any of that stuff. This is a blog for rich people, after all. But I truly believe that the greatest wealth for everyone – rich people included – will come with thinking about much longer-term things than next quarter’s profits or holding fossil fuel prices down at all costs.

        As soon as you stop thinking about “what will give ME more cash in the next year or two”, and instead think “I am going to be just fine, now what can I do for the rest of the world?”, then your government policy preferences change a little.

        • Kathy P. May 9, 2012, 9:31 am

          I would vote for your type of politicians too. If I could find any.

          • Bill May 9, 2012, 2:03 pm

            No kidding Kathy, no kidding.

            At this point I’ve lost all faith in the parties at the national level to do anything that isn’t geared toward staying in / regaining power in the short term.

            I’m frustrated that economic decisions are made to placate the unsustainable lifestyle most Americans choose to live (in order to gain their votes). I find the idea of paying a higher percentage of taxes from my income to support those who probably could afford their real needs (if they didn’t live stupidly (cable tv, crazy cell phones, credit cards, SUVs, etc)) objectionable.

            Want to improve education, spend money only on defense programs not fashioned in the cold war, and reduce our reliance on non-renewable resources? I’m all for chipping in. Want to give handouts to those whose lifestyle choices outpace their incomes, I’m much less interested. Find me that candidate and I’ll vote for her/him.

      • Kathy P. May 9, 2012, 9:27 am

        Can’t be. MMM is a true fiscal conservative and everybody knows a Democrat is never fiscally conservative. ;-)

        • Mr. Money Mustache May 9, 2012, 9:47 am

          Here’s the weird part – I’m definitely a fiscal conservative. But everything I’ve read about the current president says that he is also quite fiscally conservative as well. Non-stop economic growth and international trade all the way. Hoping technology and free markets will solve mankind’s problems. A few weak attempts at environmental regulations, but nothing compared to what the other rich countries have voted in (still no gasoline tax increases, for example). Everything is weighed towards creating economic growth, something that is taken as a given in the US but is actually a bit of a dirty word in more socialist circles.

          He stocks his advisor panels straight out of the billionaire boardrooms of Wall Street, and the ideological purebred economists from academia.

          The less economically literate (or more politically sneaky) among republicans like to criticize him for deficit spending and the stimulus program – but they don’t realize that that was a course of action dictated by the near-financial-collapse of 2008. It seemed to me that the overwhelming consensus among economists and financial wizards of all stripes (including the Economist magazine itself), agreed that the government’s TARP and deficit spending was an awful thing, but the alternative was even more awful.

          Whether they were right or not remains to be seen in the next ten years – if the banking system can drain out the ridiculous liquidity without causing another great recession or a currency collapse. I DEFINITELY don’t know enough about macroeconomics to say if they were right or not.

          All I’m saying is, there were some very smart people involved in that decision making – smarter than most of us. Yet the criticism is being led by some very dumb people – dumber than us. So far, I place my vote that the smart people will end up being closer to being right. We’ll see.

          • Mr. Frugal Toque May 9, 2012, 12:19 pm

            If it helps, it’s no different back in Canada.
            “Conservative” and “Liberal” don’t actually give an indication of whether or not a governmental budget will be balanced. It even varies by level of government. Meanwhile the judgments made against governments are jaded by the effects of economic wobbles that weren’t caused by the governments in question.
            The only trouble with economists is making sure that they aren’t creating a financial system out of pure self interest. (i.e. “Lower taxes on rich people to zero. It’s good for the economy! Really! And get rid of all stock market regulation, too!”)
            If you can arrange the system so that the wealthy people who decide how to regulate the banks, stock markets and the financial system in general end up paying for the repairs when it all goes to hell, then I don’t have a problem with putting them in charge of the economy.

          • Entity325 May 9, 2012, 9:19 pm

            George W. Bush was a very liberal Republican, especially near the end of his second term.

            Barack Obama ran as a very conservative Democrat. That, combined with the “anyone but Bush” attitude that still pervades today, plus the fact that he was a shoe-in for the minority vote(which makes up the majority of voting Americans), is what got him in, and is probably sufficient to get him a second term.

            I do not see his actual behavior in office as being anything short of sabotage to the US economy. He wants us to become exactly like Europe. Barring that, he wants us to become dependent on Europe.

            For what it’s worth, I think he’s been successful so far. The US dollar is currently about the weakest currency in the world. Fortunately, the United States was founded on getting rich by naught but your own two hands.

            • Tommy May 10, 2012, 12:47 pm

              Those are some pretty serious exaggerations there.

              “Weakest currency in the world.”
              Hyperbole much?

          • Bjorn May 9, 2012, 9:39 pm

            I asked you a politically related question early on in your blog and you never answered it, but I want to try again. Have you ever heard of the small subset of conservatives who think Jimmy Carter was a great Conservative president? The theory goes like this: Jimmy Carter gives a speech while in a sweater saying we have a cultural choice to make- we can keep on wasting, or turn away from a culture of “self-indulgence and consumption” . Americans literally laughed at this, and elected Reagan, who told us that it is “morning in America”, and started us on a consumer spending binge we still haven’t ended. Check it out: http://www.theamericanconservative.com/article/2008/sep/08/00018/

            • Mr. Money Mustache May 9, 2012, 9:53 pm

              Cool! Sorry I didn’t notice your question earlier. I hadn’t heard of that view of Jimmy Carter, but from what I’ve learned about him so far, he was a pretty smart guy with great ideas.

              Whenever you have a leader who is actually intelligent and does a good job – from any political party – it makes sense that he or she will earn the respect of many people clever enough to know a good job when they see it. The real thing that ruins any leader to me is dishonesty – saying you are making policies for one reason, when really the reason is completely different.

              The reasons given for attacking Iraq were a great example. Instead of lying about the reasons (“weapons of mass destruction”), they could have just come out and told us, “We want to take over that country because we believe it would boost our economy through lower oil prices. Also, installing a US-allied government would pressure the rest of the region to topple their own dictators and adopt more US-friendly democracies. We’re following the ideas set out by that Project for a New American Century think tank because Karl Rove likes it”.

              Then we could have said, “all right, let’s decide if those goals are a good idea, if they’re worth the cost, and if we can afford it right now”.

              But when you lie to us, you’re not a good government, regardless of ideology.

          • John May 10, 2012, 1:41 am

            Yes, but they continue to deficit spend. The crisis is over, so to speak, and Obama continues with a budget that boggles the mind and that he could not garner even 1 vote for in the Senate. In fact, the Democrats have not had a Budget for over 3 years.

            Let’s recognize that we have a President who has NEVER had a real job. Never had to meet a budget; Never had to meet a payroll; Never had to work a balance sheet. He is the most inexperienced President in history with regard to Economics.

            He is an Excellent politician. Shit, he beat the crap out of the Clintons, who up to that point I thought were the best politicians ever.

            But we now have a guy that has NO economic experience in a Depression Era recession. When asked why we should raise taxes on the wealthy when lowering them would increase revenues to the Government, he replied “It’s a fairness issue”. Really, this guy has no clue of what it takes to run a business or a Country. He might have done fine in positive economic times, but he is not the right man for the job in these times. He is simply out of his depth. How couldn’t he be, he has absolutely no economic experience or background.

            • Kathy P. May 10, 2012, 4:42 am

              John, President Obama is simply doing what he’s paid to do by his donors. Mittens would do the same. The great illusion in any political campaign is that what they tell us is what they will actually do if elected. It constantly amazes me that so many people really believe the rhetoric when none of it matters other than getting a majority of gullible people to vote for a particular candidate.

              If you go to a website like Open Secrets (.org) and look at the amounts and sources of campaign contributions, you’ll see why Obama behaves as he does.There’s so much corporate and special interest money sloshing around, it’s obscene. It reminds me of the Cold War when the USSR and the US were in a race to acquire the most nukes. After a certain point, more made no difference. Mutually assured destruction had been reached a couple hundred warheads ago.

              Well, what we have in the Presidential race (actually, all political races at the state and federal levels) is mutually assured corruption. So what if Obama’s fund-raising outpaces Mittney’s? Loyalty to the special interests is locked in regardless of the winner. We the voters no longer matter beyond our ability to swallow the lies long enough to make a choice.

              One of the biggest myths of all is the idea that any party can claim the title of “fiscal conservative”. Bush took Clinton’s annual budget surplus (with which the national debt was being paid down) and turned it into a financial black hole. Obama’s made the hole deeper. Republicans are not fiscal conservatives. Neither are Democrats. Why? Because they’re playing with Other People’s Money. Their own personal financial picture brightens with every year in office because they’re privy to insider trading information, but when it comes to the People’s Checkbook they spend like drunken sailors on shore leave.

              Their constituents also spend like drunken sailors on all the crap and all the ways discussed here on the MMM forum and blog. So what we have is a flat broke electorate voting for bozos who claim to be fiscal conservatives but who answer only to their corporate masters once in office.

            • Guitarist May 10, 2012, 7:31 am

              For the record, Clinton never reduced the nation’s debt from one fiscal year to the next.

            • Mr. Money Mustache May 10, 2012, 9:21 am

              Wow! Reading John’s comment is like tuning into Fox News, and Kathy’s is like reading George Orwell’s 1984. I’ve got a better solution for both of you: try a little bit of OPTIMISM!!

              The US political system is really not that bad. Want some evidence? Go and learn a few things about OTHER COUNTRIES. Of course, most people never do this, because they don’t show things like that on the television, but the information is out there waiting for you.

              If our government was really that shitty, and the system really so rigged, would we really have such a free, open, and prosperous country when ranked among the over 200 other nations on Earth? True, we’re not the very best, but we are still pretty fucking high up the scale.

              Visit a national park and talk to the rangers, and notice their peaceful respect for the land. Those are government employees! Visit the atmospheric research center or NASA and talk to the scientists. They’re brilliant, humble and valuable citizens acting out the will of the people – you and I. If you’re really feeling bold, go commit a crime and get yourself arrested. Observe the treatment you get, and the trial and punishment. Then go commit the same crime in Iran and compare the results.

              Learn about Afghanistan and Pakistan, Nigeria and Zimbabwe. Why are these places such a living hell? It’s because their governments are FAR MORE CORRUPT! Even Mexico, blessed with immediate proximity and free trade to the world’s biggest economy, is absolutely crippled and dysfunctional compared to the country sitting just on the other US border: Canada.

              All of these countries have the same species of being living in them. Their intelligence levels are very similar. The biggest difference: the quality of their governments!

              The US government is made up of MOSTLY REASONABLY HONEST, REASONABLY COMPETENT public servants. There are a few assholes and a few power addicts, just as there are in any private company. This is a natural byproduct of the fact that the human race doesn’t function perfectly in large groups (observe the history of tribal and later world wars). But you can get an idea of how well the government functions by looking at their work: the country.

              I give the US, Canada, Europe, and Australia very high marks in good government. They’re near the top of the world.

              So please stop the fucking complaining and conspiracy theories. These guys are not as bad as you think. Read what the most honest among business leaders are saying about the politicians – these people actually have personal relationships with the president and congress. They’re just like you and me.

              I’ve noticed that politics and big business are almost like becoming financially independent and this blog. The majority of the country whines about how the odds are stacked against us and only the already-rich can get ahead because the world is not fair. If you ignore the complaints and conspiracy theories and just get to work, you can get as rich as you want. At this point, everyone will accuse you of lying and make excuses for why your story is not representative of real possibility in the world.

              Similarly you (yes YOU!) can become a corporate CEO, you can have meetings with the president, you can BE the president, or you can work in government to try to help out with public policy. At this point, everyone beneath you will accuse you of being corrupt and being paid off by corporations and other bullshit that is true at the margins but very inaccurate when applied to government as a whole. Even if you’re the best and most honest leader the world has ever known.

              Life works better with optimism. Put that shit on your mirror and repeat it until you are no longer tempted to write shit like this on a post about house and stock prices.

              Update: damn, this shit is so good, I decided to use it as today’s post. Bring on the controversy!!

            • mike May 10, 2012, 6:41 pm

              Ouch. Somebody’s a mister grumpy pants.

      • Entity325 May 10, 2012, 8:28 am

        In case anyone’s wondering, to round things out a bit, Republican buzzwords are “Gun ownership,” “Lower taxes,” and “Domestic oil.” Libertarian buzzwords are “Ron” and “Paul.”

        • John May 13, 2012, 10:38 pm

          Democratic buzzwords: “spread the wealth” “free choice” (only regarding abortion NOT union membership or school choice) and “tax millionaires and billionaires” (okay we really mean any small business making over 250k, we are hoping you won’t notice)

  • Entity325 May 9, 2012, 9:11 am

    Wait, California, New York, and Massachusetts?

    They’re not taking advantage of a bubble, they’re preparing for Election day. Colorado just turned from Red to Blue, and the Democratic strategic engine doesn’t want to risk it turning Red again. Anyone who moves here before the voting deadline gets to vote as a Colorado resident.

    What you and I see as another bubble is just icing on their cakes.

    • Mr. Money Mustache May 9, 2012, 9:31 am

      Huh? You think people are moving here because the Democratic party is sending them in hopes of gaming the electoral college system?

      And here I thought it was the low taxes, the mountains, the high-paying jobs, and the 300 days of annual sunshine, as the new residents have been telling me!

      Shit, these political parties are more sneaky and corrupt than I thought!

      • Entity325 May 9, 2012, 8:47 pm

        Colorado has a lot of perks. It was also a high-profile target during the 2008 campaigns.

        • GregK May 10, 2012, 8:33 am

          Haha wait… really?? You actually think political parties are capable of moving millions of their faithful into a particular state?

  • Dan May 9, 2012, 9:36 am

    Great points. To them, I’ll add that whenever someone comes over to me and mentions their home is “worth” $x or their stock portfolio is worth $y (or when I fall into the trap of calculating my own worth) I actively remind them and myself that the net value of something on paper is totally different than the true value.

    That is, the value of your home is what it provides to you in free rent on a day to day basis today, NOT what Zillow says what it is worth. Until you sell, you have no idea what it’s dollar worth is. Same for our stock portfolios – who cares what it trades at today- if I’m not going to sell anyways for decades?

    • Jeff May 9, 2012, 10:22 am

      Zillow also tells you how much your house will rent for.

    • Original George May 9, 2012, 11:59 am

      “That is, the value of your home is what it provides to you in free rent on a day to day basis today, NOT what Zillow says what it is worth. Until you sell, you have no idea what it’s dollar worth is. Same for our stock portfolios – who cares what it trades at today- if I’m not going to sell anyways for decades?”

      Knowing the value of your home and stock portfolio is extremely useful if you’re leveraging them to increase your income stream. You can buy more rental units or more stock when the homes or portfolios go up.

    • stagleton May 9, 2012, 2:06 pm

      Has someone been reading Reminiscences of a Stock Operator? :-)

  • Jeff May 9, 2012, 10:09 am

    I like to say that I invest realistically and vote idealistically. The people I vote for would fix a lot of problems, but I invest based on the knowledge that they won’t get elected and the problems won’t be solved.

    It seems most people do it the other way around. They vote for who they think will win and invest based on what they hope will happen. Hope doesn’t pay the bills.

  • squeakywheel May 9, 2012, 12:29 pm

    LOVE this blog. Am not much of a comment writer, but just wanted to say thank you MMM for making so much sense.

  • James Meyer May 9, 2012, 1:32 pm

    I have a few friends looking to move from renting to owning their home right now. I keep telling them to wait a few years until the market flips, but they don’t listen, they want their house now.

  • Fu Manchu May 9, 2012, 4:40 pm

    So, MMM…how exactly did you set up this real estate alert thing? Is it some database specific to CO? I have a family member who is a real estate agent, so it might be possible for me to pull it off as well. As I’m moving closer to buying a place I would love to get tapped into the local market even more…!

    • Mr. Money Mustache May 9, 2012, 5:48 pm

      Around here, the real estate agents use an MLS (multiple listing system) access system called IRES.

      This IRES company created a customer frontend called “MySite” where authorized agents can set up logins for their customers. The MySite system then generates emails and sends them out to the customers.

      I’m sure that similar things exist in other states and areas. But the world of real estate is very low-tech and un-coordinated across regions, so you’d have to ask a tech-savvy local agent for the best option for you.

    • Bill May 9, 2012, 7:36 pm

      If you live in Northern Virginia, DC, Maryland, or Southern PA I can set up an auto-email for your area. Our MLS is called MRIS and they have a front end as well… homesdatabase.com I believe.

      I’m sure other MLS providers offer similar features.

  • Caleb May 9, 2012, 6:27 pm

    Hey MMM I was headed down the worst life path until I saw you on the MSN homepage last December and have been reading all of your posts and telling friends about your Dave Ramsey kind of wisdom. I’m graduating from high school in 3 weeks and could use some advice. Should I spend my meager savings of $1,500 on a trip to Hawaii with the family this summer or make the most of it some other way? This fall I am starting at a private university to earn a double major in business marketing and finance, what is the best way to capitalize on free tuition? If I worked only 20 hours/week during my 4 years I could easily graduate debt free and with 20k in savings. Then I plan on earning my MBA for free from the same university. I think I want to be an investment banker or financial analyst upon graduation. Detailed life direction advice would be greatly appreciated!

    -Thanks so much, keep up the great work!!

    • stagleton May 10, 2012, 12:54 am

      Study some kind of engineering (EE or CE), go to a public university, minor in business, rethink IB after getting a summer internship that overpays/overworks you.

      Rethink MBA 6-10 years down the road and decide if it will get you what you want. I think an MBA is a waste of time. Maybe it’s worthwhile if a company pays you to get it and you get a one year MBA in Europe ie. LBS, INSEAD, whatever. It’s just a fancy name people stick on their resume and you buy into a network. The fancier the school, the better.

      DISCLAIMER: my thoughts and opinions

    • Dragline May 10, 2012, 9:31 am

      As long as you can stay out of debt (debt = slavery), you will have lots of choices in life about what you are doing. Stay on the path you are on as long as you enjoy it. Could be two years, could be forever. Only you can decide that. But never be afraid to try new things — you never know where you will ultimately find your calling.

      Start getting in the habit of living on 70% of what you earn. Or less if you can hack it. And go read “The Richest Man in Babylon” if you haven’t already. Timeless advice from 1925. And free on your local internet or a couple bucks for a nicer e-book version.

  • Poor Student May 9, 2012, 6:59 pm

    I am investing now for income I will need in over ten years, so rising stock markets are bad news for myself. I feel selfish for hoping for something which is bad for those who trade stocks, but I deserve a guilty pleasure.

    Unlike the old you I get excited when the prices of my favourite stocks go down. Here in Canada our markets have been in decline contrasting the flying US markets. So I have been in a pretty good mood lately, and the news is that it will only get better for low stock prices.

  • Brian May 9, 2012, 8:20 pm

    Great article.

    I think it helps mentally to concentrate on the number of shares you own, not the total value, and set a goal for number of shares. Then you are hoping the price goes down so you can buy more.

    I like this interview question to Buffet:
    What do you think the market will do next year?
    We don’t try to predict the market, I never know…if I had my choice, I’d rather it would be going down but I can’t control what it does.

  • Rich M. May 9, 2012, 8:59 pm

    Time for Warren Buffet’s cool talk (in ten parts). He asks why one would want stocks to rise while they are buying. Sure it’s been posted many times before. (BTW, part 10 is about Buffet taking about being a net buyer of stock and the most relevant to this topic)


    follow the parts from 1 to 10

    But then, if we are retired, we want them to go up. The problem with retiring early is you need them to go up. If you don’t retire early and keep buying, you want them to be cheap.

    • Mr. Money Mustache May 9, 2012, 9:08 pm

      .. Unless you retire early with enough passive income (dividends, rentals, etc.) that you don’t need to sell the actual shares – then you may end up being a net buyer of stocks for most or even all of your life!

  • Brian May 10, 2012, 4:12 pm

    One situation that might be interesting is if inflation takes off like the 80s at some point. If treasury yields were like the 12-14% for 30 year in the 80s. Then it might make sense to convert your rising stocks over to treasuries to guarantee a high return for a long time.

    • Andi November 24, 2014, 4:35 am

      A late answer: I think that your point is right in general, but that there may be exceptions to the rule:

      As I understand it, every business that is capital intense due to reliance on physical assets will get into trouble in a high inflation scenario. And imo this includes real estate – at least if you cannot substitute rising maintenance costs by increasing rent. Warren Buffett explained this in his article “how inflation swindles the equity investor” (avalailable online for free, just google).

      However, I don’t see that this rule is true for businesses that rely on intellectual property and economic goodwill instead of physical assets.

  • PennySaved May 10, 2012, 11:13 pm

    Ah yes, the 80s. Where I paid 16% interest on a new car loan for my 1984 Toyota Corolla.

  • ErikZ May 25, 2012, 7:22 am

    Much to the irritation of all the real estate web pages I browse, I’m not buying, just looking at places and their sale prices.

    I try to help people at work by pointing out deeply discounted foreclosures, to give them an idea of what’s out there.

    Recently, I found out that ALL of the units in my condo complex have been sold. All of them. I’ve only been here for 6 years, but there’s always been a half dozen to a dozen units on sale.

    The only thing I can think of is a bunch of people are jumping out of the stock market and are buying up properties to rent out.

    • Mr. Money Mustache May 25, 2012, 8:13 am

      Yeah Eric, that could be part of it. I imagine that like any free-market activity, it’s a bunch of interesting stories all mixing together. For example, in my neighborhood I’ve been hearing from investors who are looking for rentals, engineers and scientists who are transferring to the Boulder area for new jobs as the companies here expand. People moving out of rentals and looking to buy because their businesses are doing well. Older parents who are moving to the area to be close to their kids, who just had kids.

      In aggregate, I’d say it’s “the fear generated by the 2008 recession gradually wearing off and causing the housing market to recover a bit”.

  • doosh May 28, 2012, 2:16 pm

    @ rjack May 9, 2012 at 9:07 am -> nice link. Im with you & smedley

    waiting patiently…i disagree with that can’t time the market mantra. If you can time it a little it makes all the difference.

    also…dollar cost averaging was invented by the investment industry.

  • doosh May 28, 2012, 2:26 pm

    @ Mr. Money Mustache May 9, 2012 at 9:47 am #

    “It seemed to me that the overwhelming consensus among economists and financial wizards of all stripes (including the Economist magazine itself), agreed that the government’s TARP and deficit spending was an awful thing, but the alternative was even more awful.”

    >> I think if you put as much effort into understanding the situation in 2008 as you do into other areas of your MMM life, well, you would recant that statement.

  • Graeme July 18, 2012, 11:19 am

    Great points in this article. I completely agree with both points about stocks and houses.

    As for the cost of housing, I DO care because I’m looking to purchase my first home soon. Up here in my neck of the woods (Saskatchewan, Canada) prices went crazy in a short period of time. I’m looking at about $350,000 for a 900 sq. ft. bungalow. Now, I could afford it, but I’m also hoping to NOT overpay. I hear that interest rates in Canada, might be raised soon, so I’m interested in seeing what effects on the housing markets it could have.

    I’m still in the accumulation phase for my down payment, so I’m not going to be doing anything quickly. On the one hand, I would like to see prices drop a bit because the prices seemed to jump irrationally high extremely quickly (read: real estate bubble), but then again, I can’t predict the future. I suppose I’ll have to re-evaluate my situation once I have enough for a down payment. I guess it’s pretty hard to not care about housing prices when you’re looking to buy one :) I would just feel like an idiot if I bought a house at the peak of a bubble and be stuck with a big mortgage if I could have got a house for much less if I waited a bit longer.

  • mysticaltyger September 24, 2013, 12:45 pm

    I LOVE this quote “. I try to place my political votes not for who will try to bandage short-term issues like gas price spikes, but who will provide social stability, minimize depletion of the natural resources that serve as the basis for our productivity, and provide the lowest level of inefficiency-causing cronyism and corruption in the capitalist system over the long term.”

    The hard part is you end up having to choose between 2 different evils. You get to choose the lesser evil between 2 different brands of corruption and inefficiency. I have my preferences but for once it would be nice if I wasn’t holding my nose when voting. The system is so rigged I wonder if voting is even worthwhile.

  • tightarsetralian October 10, 2013, 12:47 am

    I agree with many points in this article, the “house prices are rising we are rich” news articles which are almost daily here in Australia do put the communities worries at ease when really they should read “House prices continue rising, now even more unaffordable for first time home buyers while making home owners feel richer than they actually are”. Your house goes up 50k when you sell it, so does the house you are about to purchase.

    However the comment that you should be buying houses 2 to 3 times your salary is not feasible here in Australia, where the average house price is 7 times the average wage and 9 times in Sydney.
    I guess the solution is to keep saving and wait for crash, keep saving at high aussie salaries and retire to another country or up income to double the average wage in Australia and buy an average priced house.

    • FullyBearded JuniorMustachian December 7, 2019, 12:42 pm

      I also raised my eyebrows at the 2-3 times salary limit for home prices. I would love to hear a clarification from MMM on whether he means 1 person of a household’s salary or if he meant 2-3 time the household income. Because my wife and I are currently house shopping for homes in the 140,000 to 185,000 range which is more than 3 times either of our individual salary, but not quite 2 times our combined household salary.

  • Alan August 10, 2018, 10:46 am

    Do you have a blog about how you budget for the year? I have stock investments and I am wondering when/how would be the best time/way to take the money out. For example, do I sell stocks in one lump sum to last for one year? Or do I sell stocks in increments? This impacts, among other things, fees versus stock growth for that year. Also, when do you sell the stocks? When it is high or low? Or perhaps at certain times of the year?

  • Chris November 7, 2018, 2:43 pm

    Bought my place for $310,000 and it’s supposedly worth $410,000 4 years later. In about 6-8 years it’ll be paid off. It needs updates and some other things, and we’re working on it. Last year we installed 900′ sq of playground space that some day my grandchildren will play on. Next that, we might add a 1/4 basketball court. Not sure.

    The only thing that could make me sell it is a geo arbitrage. I say that because so many people get some gains in their home, and then buy a bigger one across town, or one in the more well-regarded part of our 6-square-mile school district.

    I’d be happy to take my $150,000 to North Carolina and live well, but not to some $550,000 place that’ll cost me over $1,000,000 just in paying off the loan.


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