Advice....Should I look at home equity this way?

[cute fuzzy bunny]

You're right, nobody should consider this awful option and time is better spent trying to force awkward comparisons between home equity and a bond which aren't even relevant to the points being made.

 

[Gone4Good]

You're right, nobody should consider this awful option and time is better spent trying to force awkward comparisons between home equity and a bond which aren't even relevant to the points being made.

We'll perhaps the confusion is that you made a categorical statement like:

The whole 800k acts exactly like a "bond" with regards to your investing decisions, IMO.

When you really meant something else.

I'll remind you the original question was:

My point in explaining this is, should I take that $450K asset "equivalent" today and treat it as a "bond" portion of my asset allocation? The whole $800K? None?

Not whether he should, or should not, carry a mortgage. Given the original question and your categorical response, I think all of my comments are right on point.

 

[streamjp]

I'm having trouble understanding this discussion - if one mortgage is "good", why not have 2 or 5 or 10 of them?

 

[laurence]

Well, the proponents of keeping a mortgage would certainly not advocate multiple mortgages and the costs associated with that. But in theory, if you have good credit, you can refinance your house at 5-6% and pull out all the equity and invest in things that return a greater rate over the long term. There has been hundreds of posts in the past on this issue, but the preliminary consensus derived from the hundred years war is there may be an advantage to this in the accumulation phase, and many still prefer this even in the FIRE stage, but there have been strong arguments opposing it in the distribution phase due to portfolio survivability, volatility etc.

One mistake many people make, though, is to say, "I'm not going to pay off the house, I can make more in the market!" then they diversify their portfolio to include conservative but poorly performing investment vehicles like T-bills at rates below their mortgage rate. If you are going to play the arbitrage game, you better have your portfolio in higher risk/ higher return investments to beat the spread. But some people are uncomfortable with that. In addition, some are pointing out that going above 80% equities doesn't improve portfolio performance while still increasing risk, but then, if you put that 20% in "safe" investments that return less than your mortgage rate, what has a man profited? Wab has smartly noted that you can arbitrage a 5% mortgage with, say a CD ladder running a 6% average and if rates fall, change strategy as CD's come to term, safe and beating the spread, but perhaps not by enough depending on your value of time and portfolio size (yay, I made 20 bucks!). So there has been a lot of back and forth on this that can really be summed up by saying, "do the math, figure out what you are comfortable with, pays your money, takes your chances".

 

[cute fuzzy bunny]

3yrs -

The problem is that you focused on this:

"acts exactly like a "bond""

Instead of this:

"with regards to your investing decisions, IMO."

And then appeared to not read any of my further explanations. I can shoot huge gaping holes in everything you said, but thats unproductive and the point is for people to read and understand all the factors and implications. Unfortunately we moved to the point where it was more interesting to shout opinions past each other than to try to comprehend the matter at hand and locate valuable advice and information in it.

What I do think is important is making sure everybody gets a lot of good ideas and things to think about, rather than making blanket "nobody should do this/look at this in this way" comments. I look at it the way I described, I've run all the numbers, and while it may be unconventional, I think its more survivable and more conservative, while coincidentally offering a better chance of long term gains. I think its worthwhile for others to make the same evaluation.

Sorry, but I feel that you missed my primary points and spent all your time focusing on the stuff that I repeatedly agreed did not matter.

 

[sgeeeee]

. . . I have a specific question for the triad of power here ( CFB, WAB and Sgeee): is there consensus that having a 6% mortgage while having significant money in a 4% fixed return asset (say, a bond, or CDs or whatever) does not make sense? I think where most lurkers can gain value is by understanding where they are shooting themselves in the foot with their asset allocation vs. mortgage decisions.

Not if you are an asset allocator (risk balance is primary task). You don't decide to sell all of your poor performers from year to year. You balance your risk through your allocations and keep that constant through rebalancing. This is why I keep pointing out that a house has different risks than a bond has difference risks than a mortgage. For a specific house and individual, the risk difference can be significant or trivial. That's why you need to look at overall portfolio for what it really is and balance all the risks.

If your a market timer (buy low sell high) then you might.

 

[Gone4Good]

I can shoot huge gaping holes in everything you said.

Have at it then.

Where we agree is that home equity provides financial flexibility (as does a larger portfolio). But I think the trade off between a larger portfolio and higher expenses and a smaller portfolio and lower expenses is mostly situation dependent (and probably indistinguishable in an efficient housing market).

I do, however, believe that categorizing home equity as a "bond equivalent" is misleading and deserves to be challenged.

 

[sgeeeee]

I'm having trouble understanding this discussion - if one mortgage is "good", why not have 2 or 5 or 10 of them?

If one stock is good, why not just buy all stocks? If one bond is good, why not just buy all bonds?

A mortgage is "good" if it helps you with your long term risk-reward goals. Two mortgages may not be so good.

 

[cute fuzzy bunny]

Have at it then.

Theres no reason to. Nothing you said had anything to do with what I was talking about. You got stuck on making focused technical comparisons between the characteristics of a bond and home equity. Wasnt my point, and I even ceded that it wasnt.

I do, however, believe that categorizing home equity as a "bond equivalent" is misleading and deserves to be challenged.

See, same problem even after I spell it out. I did not say home equity is a bond equivalent. I said it could perform a similar function from an investors perspective.

Even though you're probably not even reading this, I dont need the vaunted "bond income", nor do I need to liquidate the house, or do any of the stuff you're implying.

Its friggin simple:

Pay off the mortgage

80/20 portfolio

1-3 years spending in decent cash equivalents like cd ladders

High long term returns

Pay your bills from dividends and the income from the 20%

Dip into cash if you need to, when you need to (I havent as of yet)

In poor market conditions, move up 2 steps, rinse and repeat.

If things get really crappy, get a part time job or cut spending.

I suspect your average 60/40 guy with a mortgage goes back to work somewhere in the course of the last 3 steps or defaults on his loan. I wont ever have to.

No need for 40% bonds, no need for income, no need to liquidate the house, none of the malarky you're determined to focus on.

By having the high home equity and low associated monthly spending, I DONT NEED BOND INCOME. By having fairly nominal monthly spending costs covered by dividends and interest, I ALSO DONT CARE ABOUT VOLATILITY.

Since bonds are usually kept in a portfolio for income and to lower volatility...by having high home equity and no mortgage, I dont need them.

THATS the only rough tie-in between the two.

But I'll staple some friggin coupons to the side of the house if it'll make you happy.

 

[Gone4Good]

Its friggin simple:

I guess when you make a whole host of unfounded assumptions, sure.

You keep arguing about person A who has a mortgage and person B who doesn't. That was never the question.

You also assume that person A with a mortgage has a 60/40 equity split while person B has an 80/20 . . . there is no reason for that to be true.

You fail to account for the fact that person A (who may also rent) has a larger portfolio equal in size to the home equity.

You fail to account for the fact that the mortgage payments do not increase with inflation. Better to be a borrower than a lender in the 70s.

You now assume that you "can pay your bills from dividends and income on the 20%". Even if you can manage 6% on your cash, a 80/20 split leaves you earning just ~2.6% - far below what most people anticipate needing to cover their bills.

You are also now talking about an 80/20 portfolio instead of:

In that scenario, the role of bonds is limited or non-existant. You simply dont need them, but are obviously most welcome to continue to hold some as a diversifier.

Or to really confuse:

By having the high home equity and low associated monthly spending, I DONT NEED BOND INCOME. By having fairly nominal monthly spending costs covered by dividends and interest, I ALSO DONT CARE ABOUT VOLATILITY.

So in the same breath I both DON'T NEED BOND INCOME but have my "costs covered by dividends and interest"

But then I guess if you keep changing your argument you can always counter:

Nothing you said had anything to do with what I was talking about.

 

[Gone4Good]

1 final stipulation:

An 80/20 equity/fixed income portfolio has a higher survivability than a 60/40 portfolio, according to FIRECalc.

If one starts from the erroneous assumption that a mortgage, or rent, somehow prohibits an 80/20 portfolio or requires a 60/40 portfolio, then based on that erroneous assumption home equity results in higher portfolio survivability according to FIRECalc.

What, pray-tell, would be the difference in portfolio survivability between a renter and a homeowner in a highly efficient property and rental market (all else being equal)? The expected survivability should be virtually identical as long as the property and rental markets are priced efficiently.

 

[kcowan]

But we know that rental is more efficient than purchase. Ongoing costs are cheaper for the same dwelling class. So the purchase market has a built-in bias for the emotion of owning one's home. This inflates the value and therefore produces less buffer in case the SWR turns out to be too high.

 

[Gone4Good]

But we know that rental is more efficient than purchase. Ongoing costs are cheaper for the same dwelling class. So the purchase market has a built-in bias for the emotion of owning one's home. This inflates the value and therefore produces less buffer in case the SWR turns out to be too high.

Agree. As I said to CFB, I think it is situation dependent, though. In theory, a house price should set at the discounted value of its expected equivalent rent, net of maintenance costs (rental prices should set at the reverse of that). So, in theory, people should be economically indifferent. In practice, though, that isn't true for a variety of reasons - one of which is the home ownership bias you mention. But I don't think the economics always favor one vs. the other. Rents can be slow to adjust downward even when a glut of capacity pushes ownership prices below their equivalent rents.

I wouldn't want to argue that it is always better to rent, or always better to own. But I do feel comfortable arguing that it shouldn't matter while recognizing that local markets may create "arbitrage" opportunities.

 

[rs0460a]

I think it is situation dependent, though.

Ok - in my case, I/DW own our home (no mortgage) and have no desire to move, downsize, reverse mortgage, or execute any other "scheme" to extract $$$ (no dependents - it will go to charity after we're gone).

We have our 25x (of course, more than that, when adding in SS) put away for retirement; we will retire in the next few months (age 59)...

What do you say?

- Ron

 

[Gone4Good]

What do you say?

I say "you're sitting pretty."

Enjoy your retirement.

 

[cute fuzzy bunny]

I guess when you make a whole host of unfounded assumptions, sure.

Hmm...you know I was hoping this was over, but jeez louise...I covered practically everything you brought up, almost nothing you mention is factual in the scenario I laid out. You just arent reading this stuff, you just want a diatribe.

So having said that, I regret ceding the irrelevant points to get to the meat of the matter.

The OP asked "should I consider home equity as the bond in my asset allocation"

The answer is ABSOLUTELY.

You hold bonds for 'sleep at night' factor emotionally, income and low volatility financially.

100% home equity solves all of those problems.

My sleep at night factor in having full home equity far surpasses the emotional benefit of owning a bunch of bonds. And you cant live in a bond.

I avoid a lot of spending need, reducing my need for income, reducing my need for reduced volatility, and can mortgage, heloc, reverse mortgage, rent part, rent all, or charge people to pitch pup tents in the back yard. In that manner, once we stop confusing the HOME with the PROPERTIES FINANCIAL CHARACTERISTICS, we see that it is a stable source of capital value, can produce income, and is a volatility reducer.

So its function is exactly the same as a bond as part of a full financial plan.

As far as every other comment you made, I addressed those already, so you'll have to scroll back and read those.

Its my opinion that you're more interested in an argument than being open minded and exploring different ways to structure ones financial scenario.

While I enjoy a good argument, this isn't one of those. Its a lot more fun to dispute valid points than to discuss something with someone who has their fingers in their ears while mumbling 'la la la la la' and periodically yells "does not!". :