Living Inside a Financial Asset

(cc photo by Nelson Minar)

(cc photo by Nelson Minar)

I’ve been sporadically engaged in an interminable email list debate that hinges on the phenomenon of a “house rich, cash poor” person. Someone who, for example, draws a middle class salary and used said salary to buy a then-cheap apartment in then-cheap New York City circa 1981, only to find that he now owns a place worth $2 million free and clear. Obviously the psychology and life story of such a person is probably going to be different than someone who’s got $2 million stashed in the bank or whatever. But some folks are maintaining that in some sense the house rich person isn’t “really” rich.

The discussion has taken a lot of avenues, but what I think is most interesting about it is just the kind of fuzzy thinking that occurs as a result of Americans’ habit of essentially living inside their most valuable financial asset. Imagine you came across a person living in Lafayette Park, sleeping underneath a tent made out of 20,000 $100 bills. This guy is trying to tell you that obviously he’s poor—after all, he’s homeless and sleeping in the park! The reality, of course, is that his tent could be traded for a fancy $2 million house, and anyone who can pay cash for a $2 million house is pretty rich. But conversely if you’re living in a $2 million house, you can trade the house for 20,000 $100 bills. Then you can use the bills to construct a tent and go live in the park if you like, but that would just make you the crazy person who thinks he’s poor and homeless even though he can afford to pay cash for a $2 million house.

If this was just about who does and doesn’t subjectively consider themselves to be “rich” it wouldn’t be a problem. But the same psychology that prevents the homeless man from seeing he should trade some of his cash for a place to live leads people to make very bad investment decisions. Almost everyone gets that having 100% of your assets be a $2 million checking account is a bad idea. It’s low yield, it’s mostly uninsured, etc. Similarly if all you own is $2 million worth of Google stock, your whole fortune is being held hostage to events totally outside your control. Tying the vast majority of your assets up in single real estate investment has basically the same problems. Of course the government can’t stop people from making mistakes, but it doesn’t need to be encouraging people to make it, which is what we currently do.