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Old 06-13-2012, 07:18 AM   #21
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I think we are all saying the same thing and agree with the majority of this board that what matters is expenses and the cash flow coming in. Thus we look at what the portfolio can safely generate to meet those expenses (whether they include rent, property tax, whatever). We don't include the equity in our homes in these calculations unless we intend to sell and then we figure in the net added expenses of renting. Regardless of all that, the financial definition of net work remains assets - liabilities and thus includes home equity.
+1

That said, although home equity is not part of my retirement plan (other assets will meet my cash flow needs), one of the back up plans is to downsize or take out a reverse mortgage (should they ever become available here) - at the end of the day the value of most homes will fund a good few years of living expenses if when the impact of rent is taken into account.
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Old 06-13-2012, 07:23 AM   #22
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Childless couples earned more than couples with kids. That helps explain why their net worth is higher, and has nothing to do with the cost of raising kids (unless we're looking at opportunity cost)
Right. But of course, we do consider the "opportunity cost" of the lost earning potential of an at-home parent.

Why wouldn't you?

That's probably the single most expensive element of having a child for a formerly-dual-income household.
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Old 06-13-2012, 09:31 AM   #23
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+1

That said, although home equity is not part of my retirement plan (other assets will meet my cash flow needs), one of the back up plans is to downsize or take out a reverse mortgage (should they ever become available here) - at the end of the day the value of most homes will fund a good few years of living expenses if when the impact of rent is taken into account.
So far I haven't considered my house as a back up plan because after the hurricane here, I have come to regard houses as a little more ephemeral than previously and maybe not reliable enough for a Plan B for me (YMMV).

Presently I am thinking on and off about buying a more expensive home, but if I do then it seems unrealistic for me to regard it as anything more than just a consumer purchase, like a car. Pretty big consumer venture, though, and that is one reason I haven't really gotten going on the househunting process.

Well, that plus the fact that I really love my present home despite its most definite flaws. Looking online, I haven't found one that inspires me to move, at any price. But if I do find such a house, will I look into it? I don't know. To me, a home is just a place to live and the purchase price is money out the window.
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Old 06-13-2012, 09:37 AM   #24
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To me, a home is just a place to live and the purchase price is money out the window.
+1

It's like buying anything else. If it has some value after "you are done with it"? Great.

Sure, we have a home but we don't look at it as anything else than a place to live, at this time in our lives.

But a primary home as an "investment" or having any alternate value to support our "lifestyle"? I don't think so.

Even if we follow through with our tentative plans to move, it will just be a transfer of asset from one home to another - nothing more.
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Old 06-13-2012, 12:15 PM   #25
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+1

It's like buying anything else. If it has some value after "you are done with it"? Great.

Sure, we have a home but we don't look at it as anything else than a place to live, at this time in our lives.

But a primary home as an "investment" or having any alternate value to support our "lifestyle"? I don't think so.
Yes....but....

Take the person who has $1,000,000 and owns a home worth $250,000 with no mortgage.

Take the person who has $1,000,000 and owns a home worth $250,000 with a mortgage of $200,000.

Take the person who has $1,000,000 and rents.

The first person has more money available for non-housing costs than the others. Person 1 if retired can either withdraw less money from the portfolio or can withdraw the same amount as Person 2 or 3 but can take the money that Person 2 or 3 would spend on housing and spend on other things.

So to assert that the fact that Person 1 has a paid for house shouldn't be considered as an asset is basically ignoring that fact. In reality the person who has the paid for house does have more assets and is better off than the person with the same amount of money who doesn't have a paid for house.

We can debate whether someone with $1,000,000 and a $250,000 paid for house is better off than a person with $1,200,000 and a $250,000 house with a $200,000 mortgage but that isn't the situation I'm addressing.
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Old 06-13-2012, 12:37 PM   #26
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"Imputed Rent": Being the value in terms of money or hypothetical income receivable for something one has or owns that would yield real income if one wished (as a house one owns and uses but might rent).
Homeowners note: There have been efforts in the past to treat "imputed rent" as taxable income in the US. It might happen again. So, say you own a home worth $250K, it would rent for $1500 per month. You're the homeowner and therefore receive this rent (as income--though it's something you "pay" to yourself since you live in the house--you don't actually transfer money, but it would be the same to the IRS). No, though you're also the "renter" you don't get to deduct that amount from your income, since renters don't get that break.
Previous attempts didn't get far, but I expect the folks in DC will be reaching a lot farther for income sources in the years ahead.

"Imputed Rent"--hear it and be afraid.
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Old 06-13-2012, 02:03 PM   #27
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Homeowners note: There have been efforts in the past to treat "imputed rent" as taxable income in the US. It might happen again.
Yeah, they started imputing income to me for my free parking space two blocks from the White House. I was outraged -- there they go again taking from the producers.
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Old 06-13-2012, 02:20 PM   #28
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So to assert that the fact that Person 1 has a paid for house shouldn't be considered as an asset is basically ignoring that fact.
I never said it was not an asset.

Like W2R said it's just a place to live. Sure, assuming it has some residual value after we're gone, its value will be passed on to the living (or charity) as part of our estate, and that fact alone makes it a terminal asset.

We just don't look at it as a "financial tool" that affects our current retirement in any way, since we don't plan to downsize, sell, take a loan against its current value, or any other financial reason. We may move to other digs in the future and the value of our current home will just be passed to the new place if/when we make the move.

Heck, even if we still had a mortgage on it, it really would not affect our retirement at all from a financial viewpoint. We would live in the same manner as we do today. The reason we paid it off early (after five years of a 30-year note) was that DW did not want to go into retirement and/or have the hassles of a payment assuming I die first. She also had this thing about going into retirement debt-free, regardless the value of our overall assets vs. liabilities, being even more conserative than me.

We don't have to look at it as imputed rent or any other financial manner to justify its ownership as a lot of folks perfer to do and I know we are lucky to see it in that manner.

To us, it's a place to "hang our hat"...
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Old 06-13-2012, 02:27 PM   #29
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Yeah, they started imputing income to me for my free parking space two blocks from the White House. I was outraged -- there they go again taking from the producers.
Don't you get valet parking when you have lunch with the prez?
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Old 06-13-2012, 05:12 PM   #30
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In the banking business assets, such as real estate, are referred to as non-earning assets. They are on the balance sheet at amortized cost but don't result in revenue. I think of my personal use real estate this way as well as our cars and other personal effects. It plays no role in my retirement planning, even though we have 4 pretty expensive places. Hopefully, it will be up to my heir to decide what do do with them. The expenses associated with this real estate is significant- maybe 25% of our total spend.
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Old 06-13-2012, 06:20 PM   #31
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Imputed rent income sounds scary but I just can't see this being applied in the US anytime soon. I sounds close to the "3rd rail" topic of the mortgage deduction. Either of these would potentially kill housing prices.
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Old 06-13-2012, 07:44 PM   #32
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I'm still having some trouble digging into the details, but from what I've found so far, 3/4ths of this reported drop in net worth is due to housing. It's pretty well known that home "values" were substantially overstated in 2007 after years of runup before the bubble burst. So was that 2007 net worth real to begin with? Maybe the 2010 net worth stats are more realistic, and 2007 never really was.

I am not suggesting all is well, or that middle class incomes haven't taken a big hit, it's clear they have. But the recent report may be distorting the extent of the decline in net worth, for whatever "reason."
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Old 06-13-2012, 09:19 PM   #33
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I really have problems with that because when you look at finances you have to look at income and expenses.

Imagine Person 1 with, say, $1,000,000 in assets but doesn't own a home. That persons expenses per year include rent.

Person 2 with, say, $700,000 in assets owns a home worth $300,000 that is paid for. That persons expenses per year are less than Person's 1 and Person 2 pays no rent.

It seems to me that the paid for house worth $300,000 effectively does generate an income stream equal to what it would cost for living expenses if there was not a paid for home (ie either rent or mortgage costs).

I get why some people don't mind having a mortgage and that's fine. But, I've always had difficulty with the idea that a paid for house has no income value since the fact you don't have to pay rent or a mortgage means that you need less income for everything else.
What you say is clear enough, and certainly valid as far as it goes. The problem comes when people get themselves "house poor". I don't mean that they paid too much, and thus have no equity, but only that their housing costs a lot relative to pure shelter utility. While we all do need a place to live, it really doesn't have to be a 3500 sq ft house. Often, changing an outright owned big suburban house for a more centrally located 2 bedroom rented apartment will accomplish a reduction in funds needed to support living. Often, the upkeep and taxes and insurance on a house are larger than rent on an adequate but more modest dwelling. For example, in addition to direct housing costs, one might get rid of a pickup or suv needed to maintain the house. Or dispose of an extra car, by moving close to or onto a bus line. Gasoline and car maintenance costs can go down.

Several threads on the board illustrate this. For some this might be a downward move in standard of living while others may find it liberating and a large net gain in life satisfaction. In any case, when people are worried about sustainablility, survival under pressure is the issue.

I am living in an unmortgaged one bedroom condo, only somewhat larger than the one bedroom apartment that I formerly lived in. In spite of not paying any rent or mortgage, and having quite minimal upkeep costs, it is only somewhat cheaper than renting. And since it is essentially the same neighborhood, none of the ancillary savings mentioned above come into play.

Owning will pay off if the Bernake Bomb ever detonates, but not really under current conditions, at least in my area.

Ha
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Old 06-13-2012, 09:33 PM   #34
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Like W2R said it's just a place to live. Sure, assuming it has some residual value after we're gone, its value will be passed on to the living (or charity) as part of our estate, and that fact alone makes it a terminal asset.
I'm afraid that I will have to disagree slightly here.

While our home is not an asset that we regard as a means of financing our retirement, we have to recognise that things can happen and that the home is a store of value that can be tapped in an emergency. Put differently:

Plan A: live off our investments (not including the home)
Plan B: cut a few luxuries
Plan C: send the wife back to work
Plan D: ask kids for money
Plan E: sell house
Plan F: auction kidney and other surplus body parts
Plan Z: return to work
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Old 06-14-2012, 07:08 AM   #35
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I'm still having some trouble digging into the details, but from what I've found so far, 3/4ths of this reported drop in net worth is due to housing. It's pretty well known that home "values" were substantially overstated in 2007 after years of runup before the bubble burst. So was that 2007 net worth real to begin with? Maybe the 2010 net worth stats are more realistic, and 2007 never really was.

I am not suggesting all is well, or that middle class incomes haven't taken a big hit, it's clear they have. But the recent report may be distorting the extent of the decline in net worth, for whatever "reason."
I think it is fair to say that people who owned a home for many years saw a paper increase in net worth that corrected when the bubble burst. But many people dumped their hard earned real money into real estate during the bubble frenzy. They saw a very real loss when the burst turned them upside down.
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Old 06-14-2012, 08:15 AM   #36
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Which is also against the usual theory that when figuring your net worth, to leave out your home value. (I never did quite understand why that it is - it seems to me that if you have a $250,000 home with no mortgage, you have a $250,000 higher net worth than if you had a $250,000 mortgage)
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Old 06-14-2012, 08:25 AM   #37
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Often, the upkeep and taxes and insurance on a house are larger than rent on an adequate but more modest dwelling. For example, in addition to direct housing costs, one might get rid of a pickup or suv needed to maintain the house. Or dispose of an extra car, by moving close to or onto a bus line. Gasoline and car maintenance costs can go down.
+1

People often forget the ongoing expenses of owning a home.
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Old 06-14-2012, 08:30 AM   #38
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From Felix Salmon's blog yesterday, this Chart of the day: Median net worth, 1962-2010 | Felix Salmon

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According to these numbers, the median family net worth in 2010, $77,300, is lower than it was in 1989, when it was $79,600. And it might well even be lower than in 1983, when, according to a different methodology, it was $88,000.
The 1962 and 1983 numbers can be compared to each other but not directly to the rest, because the methodology changed. But the fact is that they’re just as likely to be too low as they are to be too high. And as a general guide to household net worth, I think it’s fair to say that the median US household is no richer now than it was 30 years ago.



I'm anxious to get into the Fed report and see the detail. In the late 80's DB pensions were more important that retirement savings, and if the 30 year comparison includes IRA and 401(k) savings for 2010 the decline may be understated. One obvious take-away is the relative importance of socially funded retirement programs such as Social Security and Medicare.
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Old 06-14-2012, 08:39 AM   #39
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My head hurts.

(I now include our house in our net worth but in the same category as "cars" and "furniture" and "computers and other electronics that used to be worth something").
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Old 06-14-2012, 08:42 AM   #40
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I didn't notice any statement in the article regarding inflation correction. If they didn't correct for inflation, then the situation at present is even worse than presented.

But then, I'm half asleep still... maybe I just didn't see the relevant statement about the methodology.
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