WSJ: Why Your Home Is Not the Investment You Think It Is

[samclem]

Our house is brick, was built in 1959. I was surprised to find insulation in the walls (yippee!). The attci had only 6" of blown in fiberglass, but I added 14" of blown-in cellulose and bought new vinyl windows to replace the leaky single-pane aluminum frame original windows. The place is tight now and cheap to heat. So, an older house can till me made energy efficient at a fairly reasonable price, at least in some cases.

Next project--the basement.

[Billy]

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We've been in my house about 3 1/2 years now. Here's a quick, off-the-top-of-my-head, rundown of the expenses I've incurred... I'm sure that I've missed a few minor things here and there, so figure maybe $31000 tops. For 3 1/2 years. So yeah, once you include that big garage I had built, I'm coming in at around $8850 per year!

One thing I have noticed in this discussion is that no one considers the time they have put in as part of any cost. Or the mental focus it takes to work the problems out, or the gas it has taken to drive to the hardware store to pick up the item or standing in line to pay for it, or the traffic one wades through to get to and from... All the Saturdays spent working on the house or in the garden, etc. Or even the hours at a job it takes to pay for the maintenance/updates required to keep the house.. (See Cost of Working http://www.retireearlylifestyle.com/cost_of_working.htm )

Trouble is, I have a hard time with this 'home as an investment' idea partly because I'm on both sides of the fence about it. I come from a construction/building family business and I was raised with this "having a home is the America Dream" for generations - all the way from Great-Grandpa who came here from Europe to start the business. OTOH, I am literally the only one in the family who has taken a different route with the housing issue (see Worry-Free Housing http://retireearlylifestyle.com/a_a_communities.htm )

I think it simply comes down to a lifestyle choice. Many decisions -- when it comes to owning a home -- are based in emotion and then some try to justify it one way or the other. It hasn't been easy for me to deal with the critical judgments of my Martha Stewart girlfriends, or to ever try and keep up with them. They identify with their homes so very much. (which room are you?)

In the end, I would honestly say, I miss the whole 'white picket fence' idea, but I wanted my freedom more... Each has to choose...

I don't think the home is an investment unless one has been lucky to live in an area that is coveted. It can be a 'forced savings plan' for some...

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Bet you gain ALL of this one back on re-sale!

When you can resell it. Some friends of ours were going to sell their home after they traveled a bit in their retirement. After 6 months of traveling, the housing boom started to drop precipitously. Meanwhile they bought another place 10 hours driving time up the coast so that they could 'size down' when their first house sold - which it never did. Now a year later they own two... and pay for the maintenance, taxes, etc. of both.

But to talk with them, they have no regrets. So again, I think it's simply that lifestyle choice.

Akaisha
Author, The Adventurer's Guide to Early Retirement

[kcowan]

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Originally Posted by Billy It hasn't been easy for me to deal with the critical judgments of my Martha Stewart girlfriends, or to ever try and keep up with them. They identify with their homes so very much.

Yes we have some friends that consider our choice to be "second class" yet we make the rental our home, investing in things to make it better just like when we owned.

My homeowner friends consider the trips to Home Depot part of their weekend hobby. When we had the 5000sqft with pool on the acreage, I used to joke about my second job. Not a hobby for me! One day a week all year with 2 days for a period in the spring and fall.

The good news is that all this emotion about ownership works for those of us who go against the herd...

[BarbaraAnne]

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Originally Posted by kcowan Yes we have some friends that consider our choice to be "second class" yet we make the rental our home, investing in things to make it better just like when we owned. My homeowner friends consider the trips to Home Depot part of their weekend hobby. When we had the 5000sqft with pool on the acreage, I used to joke about my second job. Not a hobby for me! One day a week all year with 2 days for a period in the spring and fall. The good news is that all this emotion about ownership works for those of us who go against the herd...

kcowan, like your friends, we live at the Home Depot on weekends. We actually dread it since we've been homeowners for 30 years and frankly it's too much work! I would instead relish a lifestyle like yours with a beautiful penthouse and breathtaking views and absolute freedom.

I think you and your wife have the "Good Life" as do Akaisha and Billy!

[tryan]

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Many decisions -- when it comes to owning a home -- are based in emotion and then some try to justify it one way or the other.

We can all agree to respect each others "decision" ... to each his own.

The only "emotion" comes when the likes of Fidelity spread balatant mis-information with the hidden message: "Forget your home, give your money to US."

[Billy]

Kcowan:

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Yes we have some friends that consider our choice to be "second class" yet we make the rental our home, investing in things to make it better just like when we owned.

We were judged quite harshly back in the early 90's just after we retired... We were at the 'top of our game' so to speak - beautiful home, outstanding careers. Many people thought we had fallen from grace and on to hard times. We instantly became 'uncool.' But then, after a few years of maintaining early retirement, we somehow got back into favor and were sought out for answers and insight as to how we did it.

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The good news is that all this emotion about ownership works for those of us who go against the herd...

Right. To each their own...


BarbaraAnne:

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kcowan, like your friends, we live at the Home Depot on weekends. We actually dread it since we've been homeowners for 30 years and frankly it's too much work! I would instead relish a lifestyle like yours with a beautiful penthouse and breathtaking views and absolute freedom. I think you and your wife have the "Good Life" as do Akaisha and Billy!

Thanks, BarbaraAnne. It's really important to be happy -- however that works out for you. We enjoy the freedom and unencumbrance. However, as you know, everything has its price.

Tryan:

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The only "emotion" comes when the likes of Fidelity spread balatant mis-information with the hidden message: "Forget your home, give your money to US."

Well, Tryan, no one can 'make' you do something. If you buy a home you are the one who buys it. And if you are happy with it, that's superb. If you sell your home, then you are the one who sells it. And if you are happy with that, excellent.

As with anything, one must do the research and figure out what works for them and why. And just forget the rest. Unless of course, you're not happy with your decision...

Be well,
Akaisha
Author, The Adventurer's Guide to Early Retirement

[tryan]

I am in the "buyer beware camp", personal responsibility, yada yada ...

But the implosion of the sub-prime lending industry has proven how slick - and damaging- these people can be. SOMEBODY has to sound the alarm.

[Billy]

I understand, Tryan... and I agree that there are slick people in the world and in every category. Politics, religion, education, business, relationships, ...

Where does one start?

Thank God we live in a country where we can express our opinions and aren't thrown in jail after they break our legs and then don't set them (like I read in the paper on our way to China... ugh!)

Self education and self respect are our defenses for not being taken. And still, sometimes it happens.

Be well,
Akaisha
Author, The Adventurer's Guide to Early Retirement

[cute fuzzy bunny]

Hmmm...since i've made roughly 1/3 of my net worth from my primary residences appreciation over the years, I'm having a tough time with this "home is not an investment" line of thought.

Granted it can be a suckhole if you buy the wrong house or have to pay full price to someone else to do all the work for you. But in renting/traveling/ you're paying for it one way or the other (your landlord/hotelier doesnt do the work for free, it comes out in your rent) or you're getting what you pay for.

[kcowan]

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Originally Posted by Cute Fuzzy Bunny Hmmm...since i've made roughly 1/3 of my net worth from my primary residences appreciation over the years, I'm having a tough time with this "home is not an investment" line of thought.

Maybe it would be better to think of a house as a depreciating asset sitting on land which is a good (tax-sheltered) investment.

My Dad's house, now my brother's, is 62yo sitting on a 25ft lot that is worth $430k and it is a teardown...

[FIRE'd@51]

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Originally Posted by kcowan Maybe it would be better to think of a house as a depreciating asset sitting on land which is a good (tax-sheltered) investment.

This is the way I have always thought of it. It also explains why the three most important things in a real estate investment are "location, location, and location".

[ESRBob]

CFB,
You've been doing home investing the 'right' way, though, imho. Something akin to Value Investing in Real Estate-- buying places with potential at bargain prices, pouring a ton of work into them, and selling them into rising markets. Those are realized gains, clearly investments, and good ones.

But what happens when you decide to stop moving? While you live there, you consume the 'income stream' of that investment. Once you've made the capital improvements, there might or might not be any additional capital gain.

That's the position I'm in now -- we did the big buildout, and our house has appreciated over the last 10 years in rising markets, but we don't get any rent for it, we just live in it, and we're not moving. Since prices appear to have peaked, this investment can be expected to do very poorly in the coming years -- no income stream and either no or negative asset appreciation. If it were an investment I'd sell it, but as it is our home, we're staying.

Maybe because of our desire to stay here in the face of clear economic costs, it's just easier to pretend it isn't an investment so I don't feel like a bad investor?

[wabmester]

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Originally Posted by ESRBob If it were an investment I'd sell it, but as it is our home, we're staying.

Yep, it sucks to own a fast-appreciating home that you plan to stay in forever. The only impacts you feel from the appreciation are higher property taxes and more expensive contractors. I expect that the property tax burden for our place may someday drive us out. Something's wrong with this picture.

[Gone4Good]

In most cases a primary residence is quite different then a financial investment. Unlike a true financial investment, your primary residence can not be monetized to finance other needs . . . it is already dedicated to covering your implied housing cost. The fact that your house appreciates (or depreciates) in value is of little practical relevance if the housing market in general has appreciated (or depreciated) by a like amount. Because you have to live somewhere, the gains (or losses) realized on your property must be reinvested into a like property if one wants to maintain their standard of living. Viewed this way, an investment in a primary residence most closely resembles a hedge against housing costs. Only when erroneously viewed in isolation (as is typically done), or in select other cases, does a primary residence perform the function of a financial investment.

[FIRE'd@51]

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Originally Posted by 3 Yrs to Go Unlike a true financial investment, your primary residence can not be monetized to finance other needs

Actually, it can be monetized through borrowing against the appreciated value (e.g. a home equity loan) in the same way you can monetize an unrealized gain in a margined security. In fact, one could argue that a home equity loan is superior to a margin loan since your house is not subject to any maintenance margin requirements.

[wabmester]

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Originally Posted by FIRE'd@51 Actually, it can be monetized through borrowing against the appreciated value (e.g. a home equity loan) in the same way you can monetize an unrealized gain in a margined security. In fact, one could argue that a home equity loan is superior to a margin loan since your house is not subject to any maintenance margin requirements.

Oh, no. This thread has morphed into the pay-off-your-mortgage debate!

[brewer12345]

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Originally Posted by wab Oh, no. This thread has morphed into the pay-off-your-mortgage debate!

Don't they all? Its sort of like the forum's version of gravity.

[samclem]

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Originally Posted by brewer12345 Don't they all? Its sort of like the forum's version of gravity.

Or increasing entropy. It's the forum's version of the Second Law of Thermodynamics. We've reached absolute zero when the thread turns to discussions of Bill Clinton or the war in Iraq.

[cute fuzzy bunny]

Yeah, the "home is not a financial instrument" thing certainly is a very mighty hairball.

Considering its plausibly our largest investment/sinkhole/place to put some of your money, I'd think one would want to consider it as part of their financial picture.

It supposedly cant be monetized, yet a minority very ardently arb theirs, issuing a bond to some bank and paying them interest while trying to invest the proceeds. Some rent them in part or in whole, others use them to sway their tax implications in one way or another. Et cetera...

Bobs points are well taken, but the approach is voluntary. I'm always fully aware of my homes values and quite regularly consider my options, both for reasonable and unreasonable times. I maintain and upgrade fairly continuously, so i'm avoiding some elements of depreciation, and I only buy properties in appreciating areas.

That whole pain in the butt of moving is a bit of a limiter, but then again, $3-4k lets someone else do it for you. Barely a 1% tariff.

[kcowan]

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Originally Posted by Cute Fuzzy Bunny That whole pain in the butt of moving is a bit of a limiter, but then again, $3-4k lets someone else do it for you. Barely a 1% tariff.

Also there is the 6% tariff on both ends for a couple of realtors. Unless, of course, the home owners are into DIY but then that would be not a straight apples comparison, would it?