A tale of two families

This is the seventh in a series of classic columns (edited for space) by Joel Belz. This column appeared in the Oct. 22, 2011, issue of WORLD.

Here’s a brief story about personal finance—and maybe macroeconomics as well—that I first heard about 40 years ago. I wish I had heard it 50 years ago. I hope a few 20-somethings are listening to me now.

It’s the simple story of two young couples—let’s call them the Smiths and the Browns—who were eager to buy their first homes.

For the purposes of this account, we’ll assume that the Smiths and the Browns are virtually equal in almost everything they bring to this big purchase. Their incomes and savings are the same. Both have two young children. Their creditworthiness is the same. Their overall economic circumstances are very similar.

We’ll also assume that both the Smiths and the Browns can afford a down payment of $20,000.

What’s also the same is both families’ desire to buy almost identical homes. They’re both attracted to recently constructed, three-bedroom, two-bath homes on spacious lots. Naturally, they really prefer marble countertops in the kitchen (where they both have their eyes on a dishwasher) and in the bathrooms. In the neighborhood where they’d both like to live, the price tag on such houses is about $200,000.

The Smiths have very much fallen in love with the house of their dreams. They’ve even made a list of all the things they’re willing to give up so that they can afford the regular mortgage payment—which will be about $1,200 monthly for the next 30 years. With a big gulp, they sign on the dotted line.

The Browns, meanwhile, are gulping in a different way. Across town, they’ve found another house that, while by no means a nightmare, is neither what you’d call a dream. The neighborhood’s a little scruffy. Just two bedrooms, and another that might work for a third. Only one bath. Formica instead of marble, and there’s a big burnt circle right next to the kitchen sink where someone set an overly hot pan. No dishwasher.

What’s got the Browns dreaming, though, is the prospect that in just eight years, with the same $1,200 monthly payment the Smiths are making, they can own this $100,000 house outright. No debt at all. And then, just eight years from now, other things being equal, they can take their $100,000 asset and make a 50 percent down payment on a $200,000 house like the one they’re saying “no” to now. At that point, they can repeat the eight-year process. Sixteen years from right now, the Browns will own the $200,000 house, with no debt and no further payments. Remarkably, they will have to wait only eight years longer than the Smiths to enjoy such comforts and such dreams.

The Smiths, meanwhile, after 16 years, still owe about $150,000 on their $200,000 house, which by now they will think of as a little old and run-down. They’d like to remodel, but can’t even think about it because of those $1,200 monthly payments they still face for another 14 years!

The story of the Smiths, of whom there are many, and the Browns, of whom there are way too few, is one I first heard from my business professor friend Richard Chewning—but only after I was already committed to my first 30-year mortgage. I wish I had heard with more clarity a few years earlier. If I had heard it, and if I had listened, I would now be a wealthier man. If I had heard and taught that story more faithfully, my family would be more financially secure. My little part of God’s kingdom—my local church, the schools I support, and the outreach agencies I back—would all have more resources to work with.

The story of the Smiths and the Browns is not just about housing. It’s about every dollar any of us ever spends. And it’s a story rooted in the deep Biblical truth about the riches to be reaped when we faithfully defer our desires.