More of the Same... House Equity losses cause retirement delays

[mathjak107]

you would think the prices dropped on the new home they were planning on buying as well offsetting much of the decline. especially if going to those desirable areas like florida,arizona and nevada

 

[chinaco]

you would think the prices dropped on the new home they were planning on buying as well offsetting much of the decline. especially if going to those desirable areas like florida,arizona and nevada

I suspect if one is spending more (upsizing or moving to a more expensive area)... that may be the case. But downsizing is probably not.


Still... even with the downsizing ... it is what it is. I would not put life on hold too long or forgo plans unless it was no longer reasonable to do it financially.


Another comparison that is a little off, but shows the effect. Compare the value of the house (which deflated) against general inflation. If the money spent just compounded at the rate of inflation... there was a noticeable loss!

I did a back of the napkin analysis comparing the cost of our house + the increase in value today against the cost of the house (with general inflation applied) plus the money we spent on upkeep and maint plus property tax and insurance.

I was pleased to see (albeit probably not exactly accurate).... that there was no way I could have rented our home or a similar one for the value difference.... While that may not make the loss in value better. It sure beats coming to the conclusion... I could have rented the same house and saved $10k a year.

Fortunately our house did not lose enough value to be lower than what we paid for it. We are still in positive territory. A few years ago, I was thinking we will downsize and walk away from the deal with a fair amount of cash... and we still will cash out some money (but probably a little less than if we sold the house back in 2006).

But... I am looking at the upside. Whatever we cash out will not have taxes due. Plus our ongoing expenses (for the new place) will be lower. Since the house will probably be worth less (smaller size and less property) our property taxes and property insurance will reduce. Plus less cost to heat, cool, maintain, etc.


I am too busy counting my other blessing to dwell on it too much!

 

[Midpack]

While the value of my home has fallen some, the cost of other homes in other locations have fallen as well, so I will come out about even. Even when my home was at it's peak appraised price, buying another home would also have been higher, so largely a wash. Fortunately I never expected my home to serve as an investment, it's a place to live.

OTOH those buying their first home are getting in at a Greta time, prices and low interest. I bought our first home in the late 70's when interest rates were nearly 20%, and ARM's were the only viable option.

 

[Walt34]

While the value of my home has fallen some, the cost of other homes in other locations have fallen as well, so I will come out about even. Even when my home was at it's peak appraised price, buying another home would also have been higher, so largely a wash. Fortunately I never expected my home to serve as an investment, it's a place to live.

That's the way we see it too. While the cash value of our house purchase in 2001 has fallen from what we paid, the house is paid for and if/when we decide to move we can still "trade" this one for another of similar relative value.

A neighbor two doors up just sold his for a $147k loss but he bought near the peak. If we sold now we'd probably have to eat about $20-$30k. Not good, but not catastrophic either.

 

[FIRE'd@51]

While the value of my home has fallen some, the cost of other homes in other locations have fallen as well, so I will come out about even. Even when my home was at it's peak appraised price, buying another home would also have been higher, so largely a wash.

However, if you are moving to a cheaper area for retirement, this works against you, as the $ lost on the current home are bigger than those gained on the (presumably) cheaper home you are planning to buy.

 

[Midpack]

However, if you are moving to a cheaper area for retirement, this works against you, as the $ lost on the current home are bigger than those gained on the (presumably) cheaper home you are planning to buy.

True enough, which is why I also stated we "never expected our home to serve as an investment, it's a place to live." Those who did, (sadly) may have gambled and lost...

And again, if you watch the 'House Hunter' et al genre on HGTV, people are still banking on homes as investments apart from a place to live. Risky at the very least given the bubble we just experienced...

 

[MichaelB]

I was in a monitored Schwab focus group in '05 that was used to develop new products. Every time they attempted to discuss macro-US economic conditions a bitter argument broke out that went like this

- The US savings rate is falling or negative and that will have very bad consequences, vs
- The US savings rate is actually rising because it does not reflect home equity value increases, and these are as good as money in the bank.

Everyone referenced famous economists and loads of data, neither side was able to reconcile and every time the threads would end in name calling. What still surprises me is the degree of dependency some families still have on their home equity and the unrealistic attitudes they have regarding how easy it will be to access when needed.

 

[rescueme]

What still surprises me is the degree of dependency some families still have on their home equity and the unrealistic attitudes they have regarding how easy it will be to access when needed.

The problem is that most folks use a "need" (e.g. a home) to pay for a "want" (the latest toy - whatever it may be).

There are those that will never understand the difference, IMHO...

Even though our current (retirement) home is worth 50% more (per current comps) than what we built it for back in '94, we never considered to "cash out" for any reason.

Since during the run-up (when it was comp'ed at 100% more current value vs. build) we never considered to use it for anything other than a need - for a place to live. Now with the loss of the "housing fluff", we're still ahead.

I guess long term housing is a bit like long term investing (and I'm talking about 20+ years for long-term). You tend to come out ahead.

 

[sheehs1]

True enough, which is why I also stated we "never expected our home to serve as an investment, it's a place to live." Those who did, may have gambled and lost...

Same here. Bought ours in 1993...so while assessment and value have dropped from the high, we are actually "still" ahead of what we paid for it back then. We are now looking at a 2nd home....not as an investment...but to add to our quality of life. Hope if we finalize that it doesn't blow up in our faces (we can opt out until August 26th). If we buy it we will be buying it at 48% off the high tax value set around 2007 and 30% below the list price which had been heavily discounted to begin with.....so it is close to the tax assessment of 1998. That said, it needs some work...so it's likely to end up around the tax assessment of 2002/2003.

 

[youbet]

True enough, which is why I also stated we "never expected our home to serve as an investment, it's a place to live." Those who did, (sadly) may have gambled and lost...

Actually, an emphasis on any investment, real estate, equities, interest bearing vehicles, etc., bears risk. I think we all understand that lack of diversification may enhance total portfolio returns but also exposes the investor to potentially greater volatility.

Many folks made out big time by buying a lot of house on a highly leveraged basis before the run-up and cleverly getting out at the right time. Ditto for any other investment. But sometimes timing is hard.......

We'll see who gets bitten next time.

 

[Midpack]

Many folks made out big time by buying a lot of house on a highly leveraged basis before the run-up and cleverly getting out at the right time. Ditto for any other investment. But sometimes timing is hard.......

We'll see who gets bitten next time.

Your point on diversification is well taken. The distinction in the case of a primary residence is it's a necessity for most of us, most other investments are not. While there are some who scored by getting out at the right time and not buying back in, I expect they are very rare. Most made a killing on the last transaction before the bubble burst, but most bought another house and eventually took a paper loss if not worse. Only those with the savvy to sell before the bubble burst and then rented a primary residence or the houses were purely investments with the proceeds going to other than real estate really made money. Somehow I doubt there were many people that savvy, though undoubtedly some...Pascal's wager.

 

[fritz]

Your point on diversification is well taken. The distinction in the case of a primary residence is it's a necessity for most of us, most other investments are not. While there are some who scored by getting out at the right time and not buying back in, I expect they are very rare. Most made a killing on the last transaction before the bubble burst, but most bought another house and eventually took a paper loss if not worse. Only those with the savvy to sell before the bubble burst and then rented a primary residence or the houses were purely investments with the proceeds going to other than real estate really made money. Somehow I doubt there were many people that savvy, though undoubtedly some...Pascal's wager.

While I agree there are a lot of aberrations to common sense housing investments, especially on infomercial channels like HGTV (realtor TV), I do believe that one should always treat any residence as an investment. This is truer now, with the current severe drop in prices than when everything you touched (bought) turned to gold less than 5~6 years ago. I've bought and sold more than the normal for primary and secondary residences, and always looked at the purchases as if I were only purchasing for resale. I've not lost any value (even in California's big drop in the early 90's), and have lived in some unique settings in some incredible areas of the country. I have never invested in real estate for purely investment scenarios (i.e. rentals). Not that I never saw enough opportunity, but that there are a lot of precautions (legal), and I opted for the stock market which has served me well..

 

[youbet]

Your point on diversification is well taken. The distinction in the case of a primary residence is it's a necessity for most of us, most other investments are not. While there are some who scored by getting out at the right time and not buying back in, I expect they are very rare. Most made a killing on the last transaction before the bubble burst, but most bought another house and eventually took a paper loss if not worse. Only those with the savvy to sell before the bubble burst and then rented a primary residence or the houses were purely investments with the proceeds going to other than real estate really made money. Somehow I doubt there were many people that savvy, though undoubtedly some...Pascal's wager.

To your point regarding a primary residence being a necessity, it really isn't , at least not as an "investment." You can rent. You can buy only as much house as you frugally need. Or you can put a substantial portion of your income into a big and/or fancy place because you get both much satisfaction from such surroundings and because you think it will be a good "investment."

These are all valid options and I've seen them all work for different individuals at different times. Everyone has to decide how much resource they want to tie up in housing and this depends on how important your home is to you and how you think it will perform as an "investment."

Folks who were both aggressive with their housing allocation percentage and assumed it would yield a handsome positive return have been burned recently but have done OK in the past. But you can say this for most asset classes.

Here on the FIRE board, we like to beat our chests when things work out for us. In my case, DW and I are not folks who appreciate a big/fancy house so ours is relatively modest - a typical mid-sized home in the Chicago suburbs representing a small % of our FIRE portfolio value. But I'm not crowing about that low commitment to housing being a wise decision. It's just our way of life and it works for us.

I think what the author and article OP brought to our attention is saying is that this time around, folks who chose to concentrate their resources in their personal residence(s) are currently not doing well from an investment point of view and that is negatively impacting their ability to retire. Over the decades, the opposite has sometimes been true with folks finding their home to have not only been a roof over head, but also by far their best investment. I've gone with a more diversified approach, that's all.

 

[MichaelB]

Aside from bubbles, housing is a real money maker for a homebuyer when it is purchased with a large (80%+) long term (>20 years) low fixed rate mortgage and then then there is a long period of significant inflation and deductible interest. This characterizes the 70's and 80's and is one reason so many feel it is such a good investment.

The number of mortgages with negative or little equity is far greater than the number of new units sold during the period of peak pricing. The savings rate was still negative until late '09, so that means the MEW's cash was not saved and very few people came out ahead. If they viewed their homes as investments and intended to partially fund retirement, they did the exact opposite of what they should have done and in fact spent their retirement funds instead of saving them.

 

[youbet]

If they viewed their homes as investments and intended to partially fund retirement, they did the exact opposite of what they should have done and in fact spent their retirement funds instead of saving them.

Of course you could do this with the profits from any investment. Lots of folks assumed the go-go days of stock market would go on forever (count on 10%/yr!) and spent much of their gains. Borrowing and spending from an appreciated 401k is a good example of this.

I'm not disagreeing with you. Just adding that the type of performance (bubble and burst) and the management of profit (withdraw and spend) we recently saw in personal residences has occurred in other asset classes as well. I'm just a bit surprised people are so amazed by this particular case......

 

[MichaelB]

Of course you could do this with the profits from any investment. Lots of folks assumed the go-go days of stock market would go on forever (count on 10%/yr!) and spent much of their gains. Borrowing and spending from an appreciated 401k is a good example of this.

I'm not disagreeing with you. Just adding that the type of performance (bubble and burst) and the management of profit (withdraw and spend) we recently saw in personal residences has occurred in other asset classes as well. I'm just a bit surprised people are so amazed by this particular case......

We agree on both counts.

 

[devans0]

I have a house for sale currently. Midpack called it when she said that her selling and buying was a wash sale. It is what I hope to do.

I am watching for how the sub-segments of the housing market will change. There is a big cohort of early-year baby boomers hitting the downsize-and-simplify phase of retirement. Mid and late boomers will enter these markets soon. I expect the retirement cottages and condos to sell at market premiums relatively speaking, with a big premium on the houses that are built for an aging independent lifestyle.

 

[youbet]

I expect the retirement cottages and condos to sell at market premiums relatively speaking, with a big premium on the houses that are built for an aging independent lifestyle.

While there may be some financially successful select areas and developments aimed at retiring boomers, I seriously doubt that senior housing will perform at a level I'd describe as "big premium." At least not in the near term. People can only pay "big premium" prices if they can afford "big premium" prices.

 

[devans0]

OK, my big premium is what others call a small premium.

The one point I was looking at is that the housing drop works for different people differently. The early boomers made their move BEFORE the drop. Mid boomers will experience the volatility at its extreme, and late boomers will be late for the party.

 

[Beryl]

I am reminded by this thread...what some financial brokers/planners were touting....and that is ...."You should take your equity out of your house and put it in the stock market". My own financial guy had this conversation with me. I said...No. Wonder how many said yes.

Can totally relate.

This time last year, I sold my Boulder house 2 years after buying a less expensive (but slightly larger) house. The bank and realtors didn't understand why I didn't purchase a more expensive home since my other house was worth so much, had so much equity, and I was still young and working at a good Megacorp job. Lots of people would have been tempted to 'move up' in my situation but we aren't 'lots of people', are we?

1. I didn't NEED a more expensive house.
2. Home values were not guaranteed
3. I wanted to FIRE from Megacorp
4. I wanted to pay off my new house with the proceeds and wanted more cash for FIRE.

My Boulder home sold after 10 days on the market. (I wasn't greedy but I sold for over twice my purchase price 18 years before.) My current mortgage was paid off the same day. Debt-free! I FIREd 6 months later and still wear the 'silly grin'.

 

[Midpack]

Aside from bubbles, housing is a real money maker for a homebuyer when it is purchased with a large (80%+) long term (>20 years) low fixed rate mortgage and then then there is a long period of significant inflation and deductible interest.

To you and others with this POV, I suspect the number of "investors" who are money ahead on their primary residences in the last decade are very scarce, way more people got burned and hundreds of thousands are still going to.

As you know, the housing bubble was people over-leveraging themselves into homes with the support even encouragement of politicians, mortage firms and banks/Wall St. They believed real estate could only go up, hence you got to live in a great house and make a ton of money "investing" at the same time. They were all so sure they even spent the "equity" via HELOCs.

Didn't work out at all for millions, despite the very few who played it to their advantage.

I am trying to separate the investment aspect from home ownership itself. Do any of you think that more homeowners benefitted from the housing crash than otherwise? Sure hasn't read that way in the media over the past several years.

Again, if you own a home and expect to continue to own your home, buying and selling are largely a wash unless you move from Manhattan to Little Rock or the like. How many people in California got trapped trying to do just that...

 

[Moemg]

.

I am trying to separate the investment aspect from home ownership itself. Do any of you think that more homeowners benefitted from the housing crash than otherwise? Sure hasn't read that way in the media over the past several years.

..

I know of several young couples who got rid of their houses in short sales ,rented for a year and bought a similar house at a bargain price . I don't agree with the ethics of it but it doesn't bother them.

 

[ziggy29]

Do any of you think that more homeowners benefitted from the housing crash than otherwise? Sure hasn't read that way in the media over the past several years.

Maybe not the crash, but the bubble for sure, at least in my case. The reason we own our home free and clear without a mortgage is because we bought a house in San Jose in 1997 and sold it in 2003 for almost double what we paid for it. That tax-free profit is what enabled us to pay cash for this house, no mortgage needed.

So yes, even I get lucky once in a while.

 

[MichaelB]

To you and others with this POV, I suspect the number of "investors" who are money ahead on their primary residences in the last decade are very scarce, way more people got burned and hundreds of thousands are still going to.

As you know, the housing bubble was people over-leveraging themselves into homes with the support even encouragement of politicians, mortage firms and banks/Wall St. They believed real estate could only go up, hence you got to live in a great house and make a ton of money "investing" at the same time. They were all so sure they even spent the "equity" via HELOCs.

Didn't work out at all for millions, despite the very few who played it to their advantage.

I am trying to separate the investment aspect from home ownership itself. Do any of you think that more homeowners benefitted from the housing crash than otherwise? Sure hasn't read that way in the media over the past several years.

Again, if you own a home and expect to continue to own your home, buying and selling are largely a wash unless you move from Manhattan to Little Rock or the like. How many people in California got trapped trying to do just that...

To clarify, my POV is that owning a residence is an investment. Given that, I don't think any current homeowner has or will benefit from the housing crash. It is a net loss on homeowners, taxpayers and the country.

Residential housing prices have declined to near or perhaps below long term trend, so new buyers will benefit from a lower price.

 

[Midpack]

Maybe not the crash, but the bubble for sure, at least in my case. The reason we own our home free and clear without a mortgage is because we bought a house in San Jose in 1997 and sold it in 2003 for almost double what we paid for it. That tax-free profit is what enabled us to pay cash for this house, no mortgage needed.

So yes, even I get lucky once in a while.

I give up...

Do any of you think that more homeowners benefitted from the housing crash than otherwise?