What is Your House Worth? The astounding real estate boom has made millions of homeowners richer than they ever imagined. Now what?
By Marion Asnes

(MONEY Magazine) – This spring I received an e-mail from a friend with the heading "Are We Millionaires Yet?" She had just heard that one of our neighbors had placed his home on the market for $839,000, which we agreed was a shocking sum. Yet within weeks we learned that a bidding war might erupt. If he got his asking price--a good possibility considering the dearth of homes for sale in our conveniently located suburb--it would mean that my house, purchased just six years ago, had doubled in value. My friend was jubilant. Her home, a roomy center-hall colonial, might fetch close to a million dollars. My 2,000-square-foot ranch (with no basement) could be worth more than $600,000. Just thinking about that sent me over the moon--until I recalled that I'd felt the same way when Corning stock topped $300 a share. Apprehension began to gnaw at my euphoria.

In houses across the country, homeowners are thrilling to the news that their net worth has taken a great leap forward for the simple reason that they purchased the roof over their heads. Our homes might not be our castles, but they are our treasure troves, cash machines and, for a majority of Americans, our single largest asset. As such, their mushrooming value is a balm to the wounds (both monetary and psychic) we sustained when the tech-stock bubble burst four years ago.

What's more, cheap mortgage money is seducing homeowners to trade up, either by plunking down a deposit on a lavish new home or by renovating and expanding the old one. Refinancing rates are the subject du jour at cocktail parties. Any household extravagance, from a restaurant-style stove to a heated pool, can be justified as "an investment."

No longer confident that our stock portfolios will fund a prosperous retirement, many of us have transferred our hopes to housing, and with good reason. As prices rise, we figure we can tap our expanding equity to renovate, retire, educate our children or eliminate credit-card debt. Mortgage interest is tax deductible, and when we finally sell, much of the profit will be tax-free. "Housing is clearly the last good deal you get from the federal government," says Thomas Z. Lys, professor of real estate management at Northwestern University's Kellogg School of Management.

In the meantime, you get to live and raise a family in the home and community of your choice. Is there a more satisfying way to build wealth?

High-rate anxiety

But nagging questions remain. Is this frenzy sustainable, or is the housing boom yet another speculative bubble? What will happen when interest rates start climbing from their current 45-year low?

The hottest markets--California, Florida and metropolitan New York--face the greatest risks. The median price for a Manhattan apartment is $625,000 today, an amazing 21% hike over a year ago, according to Douglas Elliman Real Estate. Most of the U.S. has seen less extreme gains, with home prices nationwide rising 8% on average last year, according to the consulting firm Case Shiller Weiss. And even that number masks substantial local variations. "In well over half the country, real estate appreciated in the 2%-to-5% range last year," says Van Davis, president and CEO of realtor Century 21. (In the tables that begin on page 70, you can see what's ahead for 100 major markets.)

Still, all homeowners--and prospective homeowners--find themselves grappling with new challenges right now. Are you feeling flush with your newfound home equity but unsure about tapping it? Are you eager to move somewhere bigger but wary about the huge numbers involved? Rest assured. Whatever your state of mind, you're not alone.

FEELING FLUSH. When my husband and I bought our house, I was convinced that we were paying too much. But I swallowed hard and signed the papers; I liked the house, the town, the schools, the easy commute to work. And boy, I don't have to worry about the price I paid anymore. I now have all this equity to tap, if I wish, for a major expense. The real estate market has made it possible for me to seriously consider sending my kids to a private college. My address has pushed me to a position on the socioeconomic ladder that my paycheck alone couldn't buy. In fact, my house is filling the role that stocks played in the 1990s: It's the sure-bet asset that guarantees I can retire well without unduly denying myself--or my children--right now. If, like me, you're just watching the value of your house appreciate, take pleasure in the fact that for once, you're building wealth by doing absolutely nothing. Hope the feeling lasts. And to be safe, keep up retirement and college saving.

LIVING LARGE. Some people are acting as rich as they feel and tapping equity for everything from summer camp for the kids to Jacuzzis in every bathroom. In their minds, home equity is a gusher of wealth that will never run dry. If this sounds familiar, it's time to take a step back. You are especially vulnerable to rising interest rates' double whammy: The value of your home may dip or stagnate at the same time that the carrying costs on your credit line or adjustable-rate mortgage spike. Not only could you develop cash-flow problems, you may end up owing more than you own. As with tech stocks and stock options, paper profits are truly valued only when cashed in. If you're drawing down equity, make sure you can afford the cost with room to spare. (For more on smart borrowing strategies, see "How to Unlock the Value of Your Home" on page 76.)

ITCHING TO CASH OUT. Some homeowners are wondering if now's the time to cash in on their home gains, to take money off the table and downsize. As long as the house has been your primary residence for at least two of the previous five years, up to $250,000 in profits is exempt from taxes (or $500,000 for a couple)--a nice way to plump up your retirement portfolio.

Just bear in mind that people who plan to downsize often end up buying digs as expensive as their old homes. The amenities people crave as they approach retirement, such as easy access to golf courses and beaches, can make a condo for two as costly as a rambling family house.

Some may be tempted to take the riskiest route to profit: Sell a house now, rent until prices fall, and hope to rebuy cheap. This strategy is not for the fainthearted. If you mistime your move, you could end up priced out of the neighborhood of your choice.

CRAVING MORE. Trading up has never been a more difficult step to take. Yes, the house you're selling is high-priced, but the one you want to buy may be even more so. Keep a cold eye on the gap between the two. And consider transaction costs. "You've got the broker's commission, closing costs, moving costs," says Northwestern's Lys. "It's easily 10% of your price, and that doesn't count the hassle factor."

Would you do better if you stayed put and renovated? Many homeowners have made that calculation in recent years. Just be sure your house doesn't become too rich for your neighborhood. (See "Renovations That Pay" on page 109.)

ON THE OUTSIDE. But what if you're still on the sidelines--a renter looking to buy? Are today's prices a signal that renting is wise--or that by getting in now you'd be getting in at the top? The answer comes down to carrying costs. Buying high is okay as long as your mortgage payment is affordable enough for you to hang on until prices come back. Americans live in their houses an average of six years, plenty of time to recover from most dips. And in the meantime, you get a great place to live.