Article - Don't view a house as an investment

[Keim]

This is interesting. I don't know if I have heard anyone on this forum say they include their home equity in their portfolio value for purposes of firecalc or other financial calculators.

How does this work? Do you plan on liquidating your house or reverse mortgaging it as part of your financial planning, or is it basically another safety net in your planning?

I guess in a way the consensus here is overly conservative in that we don't typically include the potential for a reverse mortgage in our planning. I know I always have that choice, but it would be more of a last resort I guess.

Safety net. I figure it will be for sale when I'm on my way into the old folks home. To be clear, I also run Firecalc without it. I have a relatively inexpensive home ($180-200k), so it doesn't have a huge impact.

If you want your full picture money is parked in your house, and your home value does appreciate.

 

[Andre1969]

If ya'll wanna see a poster child for the housing bubble and burst, in the DC area at least, check this baby out:

12010 LILIUM Ln, GLENN DALE, MD 20769 | MLS# PG7136253

This house isn't too far away from where I live. Purchased for $297K back in late 2001. Went on the market about a year ago, asking $549K, and now down to a short sale of $340K. One of my friends was able to look up the loan info on it, and it turns out the original owner financed $288K, but then took out two home equity loans totaling $56K. And then, in 2007, did a refinance for...drumroll please...$447K!

I hope they got something to show for that $159K. Sadly, if they had just taken out a conventional 30 year mortgage and never took out any equity, they'd probably have it paid down to around $250-260K by now, so they'd actually have around $80-90K in equity, rather than selling it at a ~$100K loss.

So yeah, a home can be an investment. Sometimes, a bad one, depending on timing, location, choices you make, etc.
http://www.redfin.com/MD/Glenn-Dale/12010-Lilium-Ln-20769/home/10914251

 

[FUEGO]

Safety net. I figure it will be for sale when I'm on my way into the old folks home. To be clear, I also run Firecalc without it. I have a relatively inexpensive home ($180-200k), so it doesn't have a huge impact.

If you want your full picture money is parked in your house, and your home value does appreciate.

Thanks for the clarification. My home is similarly priced and will probably represent a small portion of my total net worth at FIRE. But it would be enough to fund 5-10 years of expenses if I really needed to liquidate it or reverse mortgage it.

I guess I have never really modeled withdrawals including the house equity. I figured it would be there in the 5% of FIREcalc scenarios that result in failure. Of course I'm pretty conservative about SS assumptions, figuring I might get around 25-50% of what I am promised today.

 

[JOHNNIE36]

We have been married 38 years and have owned 10 different homes in that length of time. Never lost money on any of them and have actually made enough over those years to pay cash for our current residence. I know that doesn't work out for everyone, but consider this example. Let's say our house is worth $250k. If we had the money invested and earned 5% per year, it would generate $12500 income or $1042 per month. I couldn't rent this house for that monthly amount so I figure I'm ahead of the game by owning it outright even considering taxes and maintenance. So, my investment in this house is the same as it generating enough to cover the rent. I think owning a house is a great investment. Anyone disagree?

 

[rescueme]

This is interesting. I don't know if I have heard anyone on this forum say they include their home equity in their portfolio value for purposes of firecalc or other financial calculators.

I don't use its value in any forecast software (e.g. FIRECalc, RIP, FE, etc.) but I do have it as a line item within Yodlee (picks up the current value from Zillo) to give me an overall estate gross net worth, along with the percentage of the value of my home in relationship to all of our assets which I use to do a rough calculation on future estate taxes, both federal and state.

Since the proceeds of our estate is to be used for the future care of our (disabled) son, I'm interested in any current estate tax law changes, and how it will impact his possible care (yes I know, I/DW should pass before the end of this year ). That's the reason why I keep a rough "guessitmate" of our current estate value.

I don't include any personal property (e.g. cars, furniture, etc.) within that calculation since I figure those items will go for pennies on the dollar when we pass, and not affect our final taxes as much.

Of course, we don't look at our home as an investment. It's the place I/DW go to sleep at night. When we no longer have use for it, it will be sold and the proceeds used for the benefit of our son, or depending on current tax law, to pay the state/federal government their "pound of flesh".

 

[BigNick]

Let's say our house is worth $250k. If we had the money invested and earned 5% per year, it would generate $12500 income or $1042 per month. I couldn't rent this house for that monthly amount so I figure I'm ahead of the game by owning it outright even considering taxes and maintenance. So, my investment in this house is the same as it generating enough to cover the rent. I think owning a house is a great investment. Anyone disagree?

You only have to plug some slightly different numbers into that to come up with the opposite effect. We pay 1500 a month to rent a house which would probably sell for 400K. If we put 400K into a tax-free IRA of some kind with a reasonable growth rate of 7%, that's 2200 a month. (That was one reason, although not the main one, why we sold our paid-off home in 2007 and rented. The main reason was logistics, not prescience about the house market, which in any case didn't collapse round here.)

I'm fairly certain that the win/lose line between buying and renting is essentially a question of what you do with the difference between rent and a mortgage payment.

There is another way that I don't like to think of a house as an investment, especially for retirement, and that's flexibility. Some people over 70-75 may be prepared to sell their home and move downscale, but not many. So while the capital in your home might be OK for paying for the surviving spouse's nursing home costs (while the heirs weep) because it can be sold after s/he moves out, it's not especially accessible in real-world scenarios for retired people who want to boost their income, or put a chunk of cash in the grandchildren's college funds.

I would guess that an analysis of the "portfolio" of many - most? - US retirees would show that a very large number of people are 85% exposed to the "US residential property" asset class. Doesn't sound like balance to me.

 

[tryan]

it's not especially accessible in real-world scenarios for retired people who want to boost their income, or put a chunk of cash in the grandchildren's college funds.

... unless they get a reverse mortgage.

 

[ronin]

Personal use asset. It's on the balance sheet and is part of my net worth, but not an investment asset.

 

[Hamlet]

Yes. I bought my house in 2005. I didn't purchase it because I wanted to invest in an illiquid, undiversified asset at an all-time high price.

I bought it because I wanted a garden, and a basement to raise tropical fish, and a place to live with the woman who would later become my wife.

The house is currently worth about $50k less than I have put into it.

I don't think of that as a bad investment. I think of it as consumption, like buying a fancy car or eating out for dinner a lot.

I would expect that in 5-10 years, some of that $50k may come back in appreciation, but even if it doesn't, it will look a lot better as consumption when spread over 15 years rather than five.

Personal use asset. It's on the balance sheet and is part of my net worth, but not an investment asset.

 

[clifp]

In the last week or so, we've seen (I've even posted one) NY Times articles talking about how individuals are pulling money of the stocks, how bonds are riskier than we think, and now how housing is permanently gone as an investment.

Now if I worked for the NY Times, knowing that my company is in danger of bankruptcy and the internet has obsoleted my core business, I might be as pessimistic as the folks are.

The fact remains that they aren't making any more land, and there is a limited supply of land in places that people find desirable to live. (This is true even in places like Cleveland, or Dallas and of course in islands NYC, Honolulu or the SF Bay Area). The population of the US is increasing, and the average household size is decreasing, thus increasing demand for housing. So if supply is restricted and demand is rising what happens to price?

Will prices go up in the next 5 years, some place yes, some places probably not. Will there ever be house bubble like we saw in the last decade? As I told my niece recently, probably not in my lifetime almost certainly in hers.

 

[REWahoo]

So if supply is restricted and demand is rising what happens to price?

Aren't you leaving something out of the equation? I hear rent, not buy is the new way forward.

Maybe the McMansion of the future will be the McPartment.

 

[rescueme]

Maybe the McMansion of the future will be the McPartment.

Or maybe not. I'll just keep my place in the country

 

[Keim]

Aren't you leaving something out of the equation? I hear rent, not buy is the new way forward.

I've heard that. I don't get it. Don't the renters rent from someone that owns the house? And didn't the owner plan to make a profit?

 

[calmloki]

*evil Bender laugh* Renting - it's the only way to go! Home ownership is too onerous, you can't come out ahead owning property, paying someone for the privilege of living in their place is the smartest option as landlords exist just to lose money. Bwaahaha.

 

[mews]

Yes, I've heard about the Camloki Charitable Foundation - You are soooo nice to not make any money for all that work !

ta,
mew

 

[Birdie Num Nums]

The population of the US is increasing, and the average household size is decreasing, thus increasing demand for housing. So if supply is restricted and demand is rising what happens to price?

 

[Joshua]

My parents made very little money when I was growing up, but what little they did get, they used to buy their house and the few acres around it. Now that the economy in their area is as bad as it is, I bet they're glad they did! A house you own outright can be a good safety net in your later years if you suddenly find yourself in a financial boggle. Maybe that's not something that folks on here will take seriously, since I bet most of the forum readers have a better "safety net" financially speaking than your average person, but it's a consideration.

Also... Because I grew up knowing that they owned their own home, I was taught that it was just normal to be able to do more or less what you pleased with your house. Feel like knocking out a wall? Go to it. Want to put up an addition? No problem! Plant a tree? Make a garden? Dig a really deep hole in the driveway for no darn good reason? (Maybe I was too bored as a child... ) Go for it!

A result of that upbringing is that I now feel constrained living in rentals. It's like someone is always looking over my shoulder. I know that I'm only borrowing what I use. If something is damaged, I worry about the cost of fixing it, but I worry more about what the landlord is going to say! That feeling of unease will probably not go away until I purchase my own house. Besides, I want to build my own place anyway. I want to take my own two hands and erect a castle from bare earth. I think it is part of the heritage of being human to want to exert yourself over the elements and carve out a personal refuge. There are things I want in a house that are not commonly available, things that are personal to me and my lifestyle. Because of that, I have no choice but to eventually own my own land and house if I want to fulfull my dreams and goals.

I definitely won't consider it an investment in the sense of something that will ever earn me a monetary return, however. It will be an "investment" in my quality of life.

Josh

 

[haha]

The fact remains that they aren't making any more land, and there is a limited supply of land in places that people find desirable to live. (This is true even in places like Cleveland, or Dallas and of course in islands NYC, Honolulu or the SF Bay Area).

I basically agree with you, but even core area of cities like like San Francisco and Seattle while they may be limited in land, have an almost limitless housing potential thanks to building up rather than out. Much of Seattle is really bad, functionally obsolete and deteriorating former worker housing from 100 years ago, and even worse places in the near suburbs. Within 50 years I would think that will be mostly gone and replaced with highrises in the city core, and narrow vertical townhomes in nearby surrounding areas.

IMO it really doesn't matter, because Weimar style inflation will soon be delivered by our beloved Mutt and Jeff at the Fed and Treasury, and we will all be rich once more.

Ha

 

[CuppaJoe]

...Within 50 years I would think that will be mostly gone and replaced with highrises in the city core, and narrow vertical townhomes in nearby surrounding areas....

So true, South of the Slot, maybe but not in my neighborhood.

 

[Escort Rider]

Isn't the crux of this matter not so much whether a house is an investment as whether we think of it as an investment. Let me make a case for not thinking of it as one. A paid-off sustainable house is a wonderful thing in retirement (think: pre-paid place to live) because it protects against future rampant inflation if you rent, and it protects against reductions in retirement cash income (i.e., not much outlay to continue living there: property taxes and some upkeep). Yes, I know, inflation will probably not be a problem for the next couple of years, but with the massive government spending it could well resurface as one later. Note I used the word sustainable. A McMansion would probably cost too much in taxes and upkeep to provide the protections I spoke about. A paid-off trailer on your own paid-off lot might be heaven compared to a trophy home which causes stress to go through the roof every time the monthly mortgage payment is coming due.

 

[haha]

This is a scary plot. And it's not like Japan had a large inventory of buildable land. Home prices headed south anyway.

Ha

 

[traineeinvestor]

This is a scary plot. And it's not like Japan had a large inventory of buildable land. Home prices headed south anyway.

Ha

Very scary.

Is there an overlay of the demographics for each country over these time periods?

 

[clifp]

Very scary.

Is there an overlay of the demographics for each country over these time periods?

Not exactly the same time frame but the chart makes it clear the difference between US, Japan, and China. Japan and Australia population is flat the US is growing.


For some reason I can't get the Flash based graph to work but you can click on the link

Google - public data

 

[tryan]

Well ... the graph data (top line) ends at 2005. Prices have tanked anywhere from 30-50% in my hood. So in 2010 the line is hovering ~150? Not sure what the units are .... but in just 5 years it would appear most of the damage has already been done.

 

[Birdie Num Nums]

Well ... the graph data (top line) ends at 2005. Prices have tanked anywhere from 30-50% in my hood. So in 2010 the line is hovering ~150? Not sure what the units are .... but in just 5 years it would appear most of the damage has already been done.

I saw this updated The Economist graph over on the "How to Survive a Zombie Economy" thread:

I suspect the recent uptick in US prices is due to that $8k credit that just expired, and that the graph line will turn down once again.