Did you ever watch “The Butterfly Effect”?
I’m not sure I would recommend it. The Ashton Kutcher hit from 2004 was a bit disturbing at times. But sometimes I enjoy a good cerebral thriller that really makes you think.
In the movie, Ashton Kutcher’s character can change certain things in his past. But each change that he makes has a ripple effect and causes other areas of his life (or his friends’ lives) to change.
The title “The Butterfly Effect” is a reference to a way of thought called chaos theory.
This theory basically explains that small changes in one area of the universe (like the flap of a butterfly’s wing) can cause huge ripple effects in other areas.
I’m thinking about “The Butterfly Effect” this week as we look more closely at the housing market and ask the question of whether we’re in a bubble or not.
Because in today’s market, the surge in home prices is having a ripple effect on several other areas of the economy.
And this creates new opportunities outside of the housing market that come as a direct result of the surge in home prices.
So today, our discussion of the housing market will expand into other areas of opportunity that are connected to this “bubble” in home prices.
Tapping Into a Home’s Hidden Wealth
As home prices continue to soar, homeowners are quickly realizing that they’re accumulating a lot of hidden wealth.
Consider a homeowner who put a $40,000 down payment on a $200,000 home a few years ago.
That homeowner would have taken out a $160,000 mortgage and has been making regular payments on that mortgage for years.
Let’s be conservative and say they’ve been able to pay the principal balance down to $155,000.
The value of most homes in the U.S. has increased substantially over this time. It’s not unusual for a home like this to have increased by 50% to a value of $300,000.
With this new value, a homeowner has now grown their equity in the home from $40,000 to equity that is now worth $145,000.
That’s more than $100,000 in wealth created just from owning a home!
At this point with interest rates still low, many homeowners are tapping into this wealth by refinancing their mortgage or taking out an additional home equity line of credit (or HELOC).
By doing this, homeowners can continue to enjoy the homes they live in while having access to the additional wealth their homes have created.
Now, refinancing a mortgage or borrowing more against the value of a home is frowned on by many. The idea of “using your home as a piggy bank” is often seen as irresponsible or risky.
But in some cases, this kind of transaction makes a lot of sense.
By borrowing against the value of a home, consumers can get much better rates than if they used credit cards or personal loans to finance a big purchase.
And since a home often represents one of the biggest investments a family will make, diversifying by taking some of the equity out of a home and putting it into different investments can be a wise decision.
This idea of tapping into the equity in your home is something you should think carefully about before accessing the cash.
But as investors, we need to realize that many homeowners across the country are taking advantage of surging home values and tapping into this source of wealth.
Homeowners will naturally spend this money on large purchases.
And if you invest in the companies that benefit from these purchases, you’ll be able to grow your wealth from this overall trend.
Where Will the Home Equity Cash Be Spent?
Typically, when cash is pulled out of a home through refinancing or a HELOC, the money is spent for larger purchases.
Here at Rich Retirement Letter, we’ve already pointed out a surge in demand for new cars.
And with shares of the two primary U.S. automakers trading at prices that give investors deep value (and potential for very lucrative income payments), we’re excited about the wealth these stocks will create.
Soaring housing prices simply make it easier for homeowners to pull some cash out and buy a shiny new electric SUV.
At the same time, memorable family vacations are also an area where spending will pick up.
These vacations will look different depending on the economic status of different families. For affluent households, we will likely see more international travel as soon as coronavirus travel restrictions are lifted.
And more budget-conscious families (like mine) may spring for a day trip to a local theme park or spend a couple of days in a hotel or condo by the beach.
In all cases, surging home prices will help make these trips more affordable for homeowners.
And that makes a great case for investing in travel stocks like American Airlines (AAL), lodging stocks like Marriott (MAR) and Hilton Worldwide (HLT), and even theme parks like Six Flags Entertainment (SIX) and SeaWorld Entertainment (SEAS). (Remember, SEAS is also the parent company of Busch Gardens.)
So while auto manufacturers and travel companies may seem disconnected from the housing market, the ripple effects from the overall economy are helping to boost many other areas of opportunity.