Reduced to Ash
I saw an article today on my Wall Street Journal app about the devastation that’s happening in California titled – “Their wealth was in their homes. Their homes are now ash”. I think that there is a tie-in between last week’s discussion on biases and how math and money can work out in this situation on one of the biggest assets of your life.
Biases are sometimes created because you always thought something worked a certain way, but it doesn’t. Let’s take a look at 2 completely identical houses. They’re right by each other and each is worth $500,000. Let’s make it interesting - they happen to be owned by twin brothers. They always buy the same things. Married gals with the same first name and the same number of children. They have the exact same $500,000 house, but there is a difference.
Brother One Brother Two
Cost - $500,000 Cost $500,000
Paid - $500,000 Paid - $100,000 down
Loan - $0 Loan - $400,000
Brother One purchased his house with cash and has no loan. Brother Two put 20% down, ($100,000) and took out a $400,000 loan. A fire sweeps through the neighborhood and the only thing that remains are the charred foundations.
Who is at the most risk?
Brother One had all of his equity in his house, which is now gone. Let’s say that Brother Two has the remaining $400,000 sitting in a CD at the bank earning interest. Both of their homes are burnt to ash.
Whose problem is this?
With Brother One, the bank is not at risk because he paid for his house with cash. He’s the only one with a problem. With Brother Two, the bank has a loan out against the property that no longer exists. The brother and the bank have a problem.
What about the insurance companies?
They’re on the hook for both houses, but between the two brothers, who is sweating more? Brother One had all of his money in his house. Brother Two is sitting on $400,000 in the bank. He only has $100,000 at risk with his house. They both have to wait for the insurance companies to process their claims, but when you have entire neighborhoods that have disappeared, the insurance company may be dealing with hundreds of claims. Which brother will be feeling the pressure if the insurance company takes their time?
Who has access to money?
Brother One no longer has a $500,000 house and now he’s waiting for the insurance company to process his claim. Imagine if Brother One wanted to access the equity that was in his house to find somewhere to live, the bank would require documents and an appraisal. An appraisal on what? There is no house to appraise. He has no access to his money. Brother Two only had $100,000 towards his home loan. He has access to his remaining $400,000 and could possibly buy a home elsewhere while this situation plays out over months and months.
Weigh the Risks
This could be a reason for a person to not want to pay off their biggest asset too quickly. Especially if the interest rate is reasonable. If there is a fire, tornado, or flood, do you want your home and all of your money at risk at the same time? You could be at a greater risk by having all of your cash in your home than someone who has just a small amount of equity in their home. We’re not saying whether you should or shouldn’t pay off your house quickly. It’s just one of those biases that a person needs to explore and weigh the risks of both options.
If you like thinking outside of the box and exploring the possibilities and the risks, then perhaps it’s time to schedule your Financialoscopy®.
Picciotto, R., Friedman, N., & Frosch, D. (2025). Their Wealth Is in Their Homes. Their Homes Are Now Ash. The Wall Street Journal.
