When 100% Profit Stinks

For most people, their biggest financial asset is their human capital, because most of the money they will ever get comes from their salaries. Their financial future depends on their ability to get raises and promotions.

The next most important asset is retirement savings, which are usually tied to employment and may include company stock. After that? The house.

So what happens to workers who seek to increase their biggest asset and get transfers, or who receive great job offers in different towns, or those workers who find that their jobs are no more?

If they live in places with diverse economies and mobile populations, they may make out very well on the sale of their house, even after paying a 6% commission to the real estate agent and spending money on up-to-date floor pillows and Pillsbury cinnamon rolls to entice open-house visitors.

But if they are relocated to West Virginia or Nebraska, or put out of work in Detroit or Canton, Ohio, then they face a stern test of their financial mettle and a major real-estate decision.

Of course, owning residential real estate is a pillar of a personal financial plan. It allows people to capitalize their lifetime cost of housing, gives them some income-tax subsidies and offers them the freedom to live with walls painted any color imaginable. And over the long run, real estate tends to appreciate.

Between 1980 and the first quarter of 2007, the average house in the U.S. appreciated 309.75%, an average of about 5.3% per year, according to the Office of Federal Housing Enterprise Oversight, part of the Department of Housing and Urban Development.

By contrast, the average annual inflation rate measured by the consumer price index was 3.4% for the same period. But the numbers vary widely from place to place. Homeowners in 23 states didn't, on average, beat inflation.

The average house in Oklahoma or Texas doubled in price between 1980 and 2007, and that sounds pretty good -- until you consider that inflation increased even more.

With inflation of 3.4% during the period, the average annual appreciation of a house in Oklahoma -- 2.7% -- means that homeowners in that state lost ground. They paid for the privilage of staying there with reduced purchasing power.

Appreciation
State	Percentage Price Appreciation Since 1980
Oklahoma	104.37
Texas	121.63
West Virginia	133.53
Kansas	145.09
Louisiana	145.80
Source: OFHEO

This underscores the dangers facing homeowners who have too much net worth tied up in their homes. When Enron went under, many employees both lost their jobs and their retirement savings because they had put their 401(k) funds into company stock.

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