Me? A Millionaire?Reprinted from the Boston Globe, October 12, 2003
By Wendy Davis
This article can be used with Land and Freedom Economics Lessons 2 and 3, on Fcators of Production, Self-interest and Competition. When Karoline Peralta purchased her South End house in 1995, getting rich off real estate -- at least on paper -- was the furthest thing from her mind. Yet, thanks to the ongoing real estate boom, Peralta's home has tripled in value to more than $1 million in just eight years. "I never thought I'd live in a million-dollar house. I grew up in the projects in Lawrence, so this is a big deal to me," said Peralta, 39. While such soaring housing values can be a financial boon, the trick is finding a way to cash in on the value, which is often impossible unless the owner is relocating to a less expensive area or downsizing. And while Peralta is hardly complaining about her home's appreciation, she has also become somewhat trapped in her expensive house, unable to trade up, since any place they would want to live in has also become costlier. "If I sell it, I can't stay in that neighborhood," said Peralta. "I wouldn't have the same quality of life." Other newly minted millionaires share her concern. "If they sell, where are they going to go?" asked realtor Thomas O'Connor of Prudential Prime Properties in Jamaica Plain. "Unfortunately," added Coldwell Banker realtor Greg Jackson, homeowners can't trade up unless they "move far away enough so that the housing market is cheap." The average price of a single-family home in Greater Boston has doubled in just five years, from $251,961 in 1997 to $498,180 in 2002, according to the Massachusetts Association of Realtors. In some gentrifying neighborhoods, prices have increased at even faster rates. But income for many people hasn't increased nearly as fast as their property values. Although owners can always sell their house and put their equity toward a new property, they still need enough money coming in to make the new mortgage payments and often it's not enough to keep up with real estate inflation. South End resident Dr. Michael Scott, 62, who moved into his house from Newton in 1989, says he is having a hard time finding a new one he likes, even though his home has nearly tripled in value in the last 14 years. The house he purchased for $380,000, is now worth $1.2 million, he says, based on a recent refinancing. But he is looking to move because his current four-story house does not have an elevator -- a feature Scott, a neurosurgeon, and his wife want now that they are approaching retirement. The one place Scott found in the South End that is comparable in size and has an elevator is a condominium that costs $2 million -- far more than he will realize from selling his current home. Of course, homeowners don't have to sell to take advantage of the increase in property values. Peralta has refinanced several times and she and her husband now owe $750,000 on their home -- significantly more than they paid for it. They used the money for home improvements, including adding a home office and a nursery for their 10-month-old. They also bought additional real estate in the South End, the Fenway, and New Hampshire, transforming themselves into landlords. Even property owners who aren't paper millionaires have been able to take advantage of inflating home prices. Coldwell Banker realtor Alex Halsey purchased a home in Roxbury in 1999 for $100,000 that is now worth twice what he paid. Halsey refinanced and used the proceeds to become a landlord by investing in a triple-decker in Dorchester. Simply knowing that their home is worth a lot of money is comforting to many. South End resident Adrienne Kimball says she has no intention of moving from the South End brownstone that she and her husband, the publisher of Cooks Illustrated magazine, purchased in 1991 for $330,000. "It's increased, at least six to seven times what we bought it for -- and we'll never see that," says Kimball. But, she adds, the appreciation "gives us that little extra confidence." However, for some homeowners, especially those on fixed incomes, the increase in value is a mixed blessing since it also usually comes with an increase in taxes. Residential property is taxed at $11.29 for every $1,000 of fair market value, with Boston owners who live in their houses able to deduct up to $988. The average tax bill for a single-family owner-occupied home increased this year to $1,430, up from $1,270 last year. Residents age 65 and over are also sometimes eligible for reductions based on economic hardship. "Values are accelerating so far that it is becoming difficult for people to meet their property tax," says Paul Walkowski, legislative aide to city councilor James Kelly. "People somehow manage to come up with it, but it's a hardship. It's absolutely a hardship." Questions for Discussion
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