<p>momtravels,
Thats the point. Its quite possible they had paid off their first house in full, sold it for $850K or so and put that money into the new home. They probably made a nice profit on their first home, just as you did on your condo and first home. All reasonable ways to invest and watch $$ grow… in a “normal” economy. They also probably figured that if they needed cash they could take out a HELOC to pull some cash out. Who expects their home to drop by half in value?</p>
<p>In fact, its possible they sold their first home for close to $1M, but by the time they paid realtor fees, closing costs or whatever, had the balance applied to the new home. So, buying a new home for 35% more than their previous home’s value isn’t a huge bump up.</p>
<p>It seems to me that this notion of borrowing against your home as a source of college funds is a phenomenon of the past 10 years or so. I certainly don’t think it is something that occurred in the middle-class before the current period. To imply that it is a long-time financial norm is just not correct. </p>
<p>It also strikes me as a bad idea. One of the most prudent things most of us in the middle-class can do is to pay our mortgage off by the time we retire.</p>
<p>Even if nobody knew exactly when the bubble would burst (or deflate), it wasn’t hard to see that things couldn’t continue the way they were going.</p>
JHU may have made a deeper calculation about this whole affair. Mr. former 550K could very well become a Mr. 250K next year and may quite handsomely show his gratitude to JHU for its help during his hour of need. So the $10 or $20K they are presumably giving could be viewed as an investment - like someone who saw citicorp trading for pennies and decided to throw some money at it because he felt it was likely to rebound smartly.</p>
<p>delamer,
Not sure if our post was in response to mine, but I’ll bite. As one who does not believe in loans, I totally agree-- bad idea to take a loan out against one’s house. Bad bad bad. But many people take lines of credit against their homes forall sorts of of reasons (remodeling a home, large purchase, education, etc etc) and take the interest off their taxes. Again, I would never personally do it, even with the low interest rates available, but people do it. And I have no clue if the people in this story were planning to-- jsut saying they could if they had a lot of equity in their home, as they thought they did (or would) when they purchased.</p>
<p>Sure there are market bubbles, and corrections and all that, but doubtful anyone “expects their home value to drop by half”. If people expected that, no one would ever purchase a house.</p>
<p>The thing that caught my eye was your use of the term “normal economy.” You may have not meant it quite that way, but I thought you were saying that it was “normal” for people to finance their expenses through a HELOC. I was trying to point out that this was actually a new practice, to the best of my knowledge.</p>
<p>I’ll grant you that no one “expects their home value to drop by half.” But that doesn’t mean they can afford to ignore the possibility that it might. Or that there weren’t clear signs that housing prices were out of whack a couple years ago.</p>
<p>Some people buy their homes as a place to live. Not as a piggy bank,
ATM, dolphin or investment.</p>
<p>It happened in NH in the late 80s/early 90s. I’m sure that there
were huge losses in home values in Texas during the oil bust. People
buy stocks all the time well knowing that they can get a 50% haircut.</p>
<p>Didn’t we learn the lessons of Enron? Their employees had all of their
money tied up in the company. Stock options, employee stock, 401K, job
and bonus. They evaporated in under a year. Anyone familiar with the
tech crash saw stocks lose 90% of their value. Big companies with lots
of employees.</p>
<p>I spent some time studying crashes in detail. Yes, even Isaac Newton
wasn’t immune to the madness of crowds - but at least he knew that
what he was doing was so stupid.</p>
<p>The current economy is part of the normal economy. There are secular
bull markets like from 1982 to 2000 and then secular bear markets. The
problem is that we get trained from secular markets to believe that
markets head in one particular direction all the time.</p>
<p>I suggest the study of long waves - K Waves. Waves that span multiple
generations.</p>
<p>Understand your response to the phrase “normal” economy, delamer. Was intending to speak in generalities, when its not unreasonable to anticipate that investments will increase in value. After all, thats why any of us make investments rather than to stick our $$ in the mattress. The stock market, over the long haul, goes up, and housing usually does as well, despite these episodic drops. </p>
<p>I also think that the GE capital family did not sink all of its money in their house. I expect they had diversified investments-- as mentioned earlier, that included the stock market, retirement $, corporate matched savings plans, stock options, 529 plans, etc. The article never said that they were house poor.</p>
<p>Buy gold at $250 in 2001 when the Bank of England was giving it away. Keep it in your mattress for nine years. Nice quadrupling. Sure beat the indexes by a mile.</p>
<p>Whatever. Buy and sell at the right times and investments do just fine. You pick your investment, we’ll pick ours. The GE guy picked real estate at the wrong time. So did a lot of other people. Metals are very VERY volatile. Not my cuppa tea. As I said-- whatever.</p>
<p>What I take exception with is your term: normal economy. A lot of people fell for
that but it happens generationally which makes it important to study long waves
to understand seasons of the economy and investments. I would say that gold
was a lot less volatile than C, LEH, AIG, etc in the last few years. A lot safer too.
The Federal Reserve can’t print it though it tries mightily.</p>
<p>This is a discussion by the wealthy about the wealthy, IMO.
I define wealthy as those who have a net worth, or can imagine having a net worth, approaching $1 million. For those folks, college is an expensive purchase, at least if your offspring or your egos aren’t content with State U.
At the elites the coin of the realm is your kids’ potential, as determined my the institution. The financing is on the college, if they see your kids’ potential, and feel they strengthen their class. A unique American combination of capitalism and socialism that works for many.
I can’t imagine saving up a quarter million for college, or needing to do so. That’s what happens when you are rich. Not my problem.</p>
<p>Bceagle-
I addressed my intent in using the term “normal” many posts ago. Most of us are quite familiar with the upswings and downturns of the market. Can we move on?</p>