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House rich?
Old 08-05-2014, 04:11 PM   #1
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House rich?

So our plan has always been to retire with a paid off mortgage. The idea was that we'd always have a roof over our head and a handy nest egg to fall back on.

We are on track to be mortgage free in two years, right when we retire. We're planning to move "home" and expect that we can sell the current residence and find something comparable when we move.

Here's the thing. I've been thinking that tying up a sizable portion of our wealth in a home may not be the best use of our money. I mean, if we rented we'd expect to pay $1,200-$1,500 a month in rent, so why not go into retirement with a mortgage, say a 30 year fixed and understand we probably won't ever pay off the mortgage.

Not that I care about that part; I'm hoping my last check in life bounces and it's made out to the government.

Anyway, what's the pro and con of going into retirement with no mortgage VS tying up so much wealth in a roof?
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Old 08-05-2014, 04:46 PM   #2
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Anyway, what's the pro and con of going into retirement with no mortgage VS tying up so much wealth in a roof?
Reduced expenses for all time and the peace of mind in knowing that no matter what happens to the market, you always have a place to live?
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Old 08-05-2014, 04:50 PM   #3
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This is an age-old debate on here. One thing to consider with the rent/mortgage scenario is if the additional cash flow required for that will change your tax situation dramatically. Especially in regards to LTCG and the ACA and potential subsidies. Also, if you are in the middle net worth area (say $1m-3m), consider health and age for you vs. SO. If one of you is likely to need extended nursing home type care before the other dies, that could easily leave the other spouse essentially broke. In some states, wealth tied up in primary home equity for the community spouse may be protected from Medicaid.
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Old 08-05-2014, 04:55 PM   #4
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"Middle" net worth....ego deflating fast....

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Also, if you are in the middle net worth area (say $1m-3m)
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Old 08-05-2014, 05:00 PM   #5
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Anyway, what's the pro and con of going into retirement with no mortgage VS tying up so much wealth in a roof?
What percentage of your NW is in house?

So much wealth....sounds to me like more then 20%.
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Old 08-05-2014, 05:11 PM   #6
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How about downsizing?
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Old 08-05-2014, 06:26 PM   #7
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"Middle" net worth....ego deflating fast....
I meant middle in comparison to those on here. I pulled $1-3m as middle as a pure guess, but apparently I guessed well: Poll:What's your number?

Middle here has got to be top 5% versus the general public's average. Probably even higher versus the general public's median.
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Old 08-05-2014, 06:42 PM   #8
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Robert Shiller says homes are not a great investment:

Trish Regan: "Then why buy a home? People trap their savings in a home. They're running an opportunity cost of not having that money liquid to earn a better return in the market. Why do it?"


Robert Shiller: "Absolutely! Housing traditionally is not viewed as a great investment. It takes maintenance, it depreciates, it goes out of style. All of those are problems. And there's technical progress in housing. So, new ones are better...
"So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000's. And I don't expect it to come back. Not with the same force. So people might just decide, "Yeah, I'll diversify my portfolio. I'll live in a rental." That is a very sensible thing for many people to do.
"If you think investing in housing is such a great idea, why not invest in cars? Buy a car, mothball it, and sell it in 20 years. Obviously not a good idea because people won't want our cars. It's the same with our houses. So, they're not really an investment vehicle."
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Old 08-05-2014, 07:15 PM   #9
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Robert Shiller says homes are not a great investment:


Robert Shiller: "If you think investing in housing is such a great idea, why not invest in cars? Buy a car, mothball it, and sell it in 20 years. Obviously not a good idea because people won't want our cars. It's the same with our houses. So, they're not really an investment vehicle."
I wonder if Shiller's ideas here are formed by a) living in New Haven and b) looking at national data that pool declining areas of the country with strong areas.

I read one interview where he admitted to owning his home, so what's with that? Also, not much bad is going to happen to the westernmost edge of our continent, Ensenada through Vancouver, save a huge earthquake. An 8+. Should that come, look out. Otherwise our weather is too good, the outdoor and city amenities too great for there to be much risk given reasonable care in choosing a home and timing the purchase. For every LMYMer looking for cheap, there are going to be plenty others willing to pay for their desired way of life. A giant flaw in Shiller's comparison to cars is that of course the house may depreciate, but a lot in many close in high quality neighborhoods is going to pretty steadily appreciate

I think there is a good argument for renting in many unconstrained markets, or renting if the person or family wants to remain mobile. But during the entire 40+ years that I have lived here or in California many neighborhoods have done as well or better than very broad stock indexes. Houses that cost $35,000 to in SF or Berkeley in the early 70s may be
$6-8 million now.

Ha
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Old 08-05-2014, 07:32 PM   #10
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I wonder if Shiller's ideas here are formed by a) living in New Haven and b) looking at national data that pool declining areas of the country with strong areas.

I read one interview where he admitted to owning his home, so what's with that? Also, not much bad is going to happen to the westernmost edge of our continent, Ensenada through Vancouver, save a huge earthquake. An 8+. Should that come, look out. Otherwise our weather is too good, the outdoor and city amenities too great for there to be much risk given reasonable care in choosing a home and timing the purchase. For every LMYMer looking for cheap, there are going to be plenty others willing to pay for their desired way of life. A giant flaw in Shiller's comparison to cars is that of course the house may depreciate, but a lot in many close in high quality neighborhoods is going to pretty steadily appreciate

I think there is a good argument for renting in many unconstrained markets, or renting if the person or family wants to remain mobile. But during the entire 40+ years that I have lived here or in California many neighborhoods have done as well or better than very broad indexes. Houses that cost $35,000 to in SF or Berkeley in the early 70s may be
$6-8 million now.

Ha
He says in other articles that personal residences in general tend to keep up with inflation but because of taxes, insurance, upkeep etc. they tend not to be a great investment. Maybe he owns a home because he enjoys it as a consumer item, but that does not mean he thinks it is a great investment.

Some homes in SF and Berkeley may have been great investments but most SF and Berkeley homes are not worth $6-8 million. Median home prices there are more like $800K - $1M. People who bought in the Bay Area ten years ago are just recently seeing prices revert back to their peaks, which would still be lower prices in inflation adjusted dollars.
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Old 08-05-2014, 07:43 PM   #11
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He says in other articles that personal residences in general tend to keep up with inflation but because of taxes, insurance, upkeep etc. they tend not to be a great investment. Maybe he owns a home because he enjoys it as a consumer item, but that does not mean he thinks it is a great investment.

Some homes in SF and Berkeley may have been great investments but most SF and Berkeley homes are not worth $6-8 million. Median home prices there are more like $800K - $1M. People who bought in the Bay Area ten years ago are just recently seeing prices revert back to their peaks, which would still be lower prices in inflation adjusted dollars.
Bay Area does not equal San Francisco or Berkeley. And if there are any houses in San Francisco nice neighborhoods for $1 mm they are being occupied by Fido, not his owners. Take a look at Presidio Heights, or Pacific heights. Check out the $6000 to $8000 monthly rent in some of the new apartment buildings along Market Street in the NE quadrant..

I have no horse in this race. I prefer being a renter, and from 2006 to fall of 2011, I was. But anyone who wanted to stay in my neighborhood and had the money to buy was foolish not to buy then.
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Old 08-05-2014, 08:01 PM   #12
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Depending on where you live- housing costs can be controlled/fixed if you own. (CA has prop 13). Rent tends to go up, even when the housing market goes down. (At least that was true here in San Diego during the housing crash. At best rents stayed the same, I had friends getting rent increases on their rental condos.)

But - rent can be a lot cheaper than owning, especially in expensive areas. My street has 2 houses for sale for close to a million. A rental single family home (same model) just rented for $3k/month. So it's cheaper to rent than to buy. The owner of the rental bought years ago - so he's making money - but the rent is disconnected from the current purchase price.
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Old 08-05-2014, 08:30 PM   #13
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If you are paying rent or a mortgage when retired, then you will need to create cash flow to pay that bill. If that requires you to withdraw from a 401(k) or IRA, then that will add to your adjusted gross income which could put you in a higher tax bracket or make you lose tax credits or increase your long-term capital gains taxes or give you a bigger tax hit on your Roth conversions or a bigger tax hit on SS benefits or ….

So if you can live the lifestyle you want in the place you want yet with a lower adjusted gross income, then your taxes will be lower, too, and possibly way, way lower.

As they say, "Run the numbers …."
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Old 08-05-2014, 08:37 PM   #14
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Bay Area does not equal San Francisco or Berkeley. And if there are any houses in San Francisco nice neighborhoods for $1 mm they are being occupied by Fido, not his owners. Take a look at Presidio Heights, or Pacific heights. Check out the $6000 to $8000 monthly rent in some of the new apartment buildings along Market Street in the NE quadrant..
Pacific Heights, San Francisco average and median listing prices - Trulia.com

Median Pacific Heights home prices are just getting back to their former peak prices from 2007 - 2008 according to the chart from Trulia.
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Old 08-05-2014, 08:46 PM   #15
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If you are paying rent or a mortgage when retired, then you will need to create cash flow to pay that bill. If that requires you to withdraw from a 401(k) or IRA, then that will add to your adjusted gross income which could put you in a higher tax bracket or make you lose tax credits or increase your long-term capital gains taxes or give you a bigger tax hit on your Roth conversions or a bigger tax hit on SS benefits or .

So if you can live the lifestyle you want in the place you want yet with a lower adjusted gross income, then your taxes will be lower, too, and possibly way, way lower.

As they say, "Run the numbers ."
Then again if you don't have money in a house you might have more after tax money to draw down instead of a 401K, lowering your tax bill and keeping your O-MAGI low for Roth conversions and ACA subsidies.

I agree with you on running the numbers. There are a lot of moving parts that are often unique to the individual household. The optimal type of housing for us may be different up to age 64 to age 65 when we go on Medicare to when we are older and more likely to need nursing home care.

From an asset protection point of view home ownership can be a plus or a minus depending on the state you live in.
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Old 08-05-2014, 09:48 PM   #16
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Pacific Heights, San Francisco average and median listing prices - Trulia.com

Median Pacific Heights home prices are just getting back to their former peak prices from 2007 - 2008 according to the chart from Trulia.
I generally prefer real time, real life examples from raw data.


Real Estate Search | Redfin
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Old 08-05-2014, 11:07 PM   #17
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I generally prefer real time, real life examples from raw data.


Real Estate Search | Redfin
I didn't see any trend information on the Redfin link. If prices have surpassed the peak in some of the trendier areas they may be due for another crash.

But you can do what you want house-wise. I actually own a house now, too, but we have run the numbers and downsizing or renting might make a lot of financial sense for us.
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Old 08-05-2014, 11:25 PM   #18
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.... But anyone who wanted to stay in my neighborhood and had the money to buy was foolish not to buy then.
It is like actively managed mutual funds. If you were lucky enough to pick the right one 20 years ago, you'd be better off than the indexes.

But what about the people who did not? How do you predict what will happen to a city in 20 years? Is past performance an indicator of future performance in real estate? Just like in the stock market, there are those who predict correctly or just get lucky to ride a wave.

Having said all that, I believe that we should expect to pay for a roof above our head. Whether we pay in rent or pay in lost opportunity in capital tied to the house, we should "expect" to pay. If the property appreciates more than the historical, inflation matching, norm, thank our lucky stars.
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Old 08-05-2014, 11:39 PM   #19
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It is like actively managed mutual funds. If you were lucky enough to pick the right one 20 years ago, you'd be better off than the indexes.

But what about the people who did not? How do you predict what will happen to a city in 20 years?
I put my reasoning in my first post to this thread. It isn't the only way to look at it, but it is my way. I have never been too impressed by the idea that it is impossible to figure anything out. I don't think it is. Population in this country has been moving west since the beginning, and south since reasonably priced air conditioning became available.

Now maybe everyone will start heading to Camden or Philadelphia, but that would not be a bet I would make. In any case, how terrible is that a home might only appreciate with inflation? Not much else will reliably do that, and if you own the home no income tax will be due on the money that you pull out of other investments to pay rent.

In North America, people like to be in the SW corner of their country. This explains Southern California, and it explains Vancouver, BC.

Ha
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Old 08-05-2014, 11:41 PM   #20
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Bay Area does not equal San Francisco or Berkeley. And if there are any houses in San Francisco nice neighborhoods for $1 mm they are being occupied by Fido, not his owners. Take a look at Presidio Heights, or Pacific heights. Check out the $6000 to $8000 monthly rent in some of the new apartment buildings along Market Street in the NE quadrant..

I have no horse in this race. I prefer being a renter, and from 2006 to fall of 2011, I was. But anyone who wanted to stay in my neighborhood and had the money to buy was foolish not to buy then.
The problem is hindsight is always 20/20. One wouldn't know if it was a good "investment" at time of purchase until years, even decades down the road.
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