Does your Home Price factor into your portfolio risk?

[foxfirev5]

If I can't sell it on any given day between 9:30 and 4 I don't count it.

 

[USGrant1962]

Investment portfolio = savings, CDs, bonds, stocks, rentals
Net worth = investment portfolio + home

My view is similar. I've been noodling on net worth and some of the other threads discussing pension, SS, homes etc. in AA and SWR. My view, using NW terms I made up, is:

• Portfolio = savings, CDs, bonds, stocks, rentals
• Current Net Worth = Portfolio + home(s)
• Gross Net Worth = Current Net Worth + likely inheritance(s) + SS NPV + Pension NPV

Portfolio - this is where ER cash flow comes from, so this is what I use for SWR planning. IMO, net worth can inform your risk tolerance when deciding on your AA, but for reasons discussed here it is not helpful to include it directly in your AA.

Current Net Worth - provides a margin of safety in addition to SWR (belt and suspenders). So for example, when I run FIRECalc if "lowest portfolio balance" is negative, but still smaller than my home value, I'm still ~100%. In addition, a home is a hedge against two frequent concerns for ER - inflation and LTC. If I'm 90+ and need to go into LTC I can sell the house to fund a number of years of care.

Gross Net Worth - provides a big number that increases comfort in the ER decision. Not really used for anything except informing my risk tolerance. I include NPV of pension here for completeness, though I don't have one. Annuities fit somewhere in this scheme too, but I don't have any of those either.

Both net worth numbers inform my AA, SWR, and general ER trigger point.

So in my case with >$600K in home(s), a higher end SS benefit, a possible inheritance, and a 40 year retirement, I'm comfortable pulling the ER trigger with an AA at the higher end of the spectrum (~68:32) and a 4.0% WR.

YMMV

 

[haha]

In my opinion, this is not religion. Different people will see these questions differently, and "right" or "wrong" will only rarely apply to whatever is decided. If what someone is trying to do is decide whether to give himself a gold star, who cares? But home value is definitely meaningful in many practical ways like when you try to re-finance or take out a Heloc.

If I were living with $2mm invested assets in a $2mm tract house in Bay Area, I think I would definitely want a larger int term fixed allocation than if I had the same invested assets, but lived in a cheaper home in a cheaper place. For sure, if that $2mm tract house has a fat mortgage, one has to realize that the asset value can go down big time, but that note is fixed.

Sometimes I think it is valid to imagine one's reactions under various financial stresses. I know that If I had a big mortgage and a home value that has recently ballooned and a large stock allocation and stocks fell 35-60% as they sometimes do. I would not feel very clever. In fact, I would feel downright stupid. And for most of us, feeling stupid is not a pleasant emotion.

Ha

 

[bradaz2488]

Like others I do not count my house as part of my AA and I do not even consider it an investment. Our house was paid for when we ER'ed because I did not want ant debt in retirement. IMO only rental property should be counted as an investment. I do run scenarios for downsizing or even renting to generate cash if needed in the future.

 

[mrfeh]

There used to be a lot of million dollar homes out here in Phoenix. Now they are mostly $500k homes. Plus, you gotta live somewhere right? The only way I would consider my home as part of my investment portfolio is if I sold it and had a cashiers check in my pocket.

+1

I do not consider our house (paid off) as part of our portfolio.

 

[Bestwifeever]

No, even though it is completely paid off, because I plan to live here until I croak. I don't plan to sell. My dream home is where I live, not an investment. I consider it to be a purchase that I paid for using the proceeds from my investments.

My AA is 45:55 and that is a ratio that I feel comfortable with while living in my paid off home in retirement at age 69.

While writing this, I am wondering what I would do with my portfolio if I awakened tomorrow only to find, much to my shock, that I had a giant mortgage to pay every month. Part of my retirement preparation was to make sure I didn't (since I am one of those horribly despicable pay-off-the-mortgage people and that's super important to me). I didn't feel I could even retire with a mortgage. I wonder if I would have purchased an annuity to help with it, thus changing my AA towards more fixed income in retirement. But no. Probably I would have just kept working until I could pay it off.

This to the max. Without a mortgage, our SS and smallish pension should always cover our basic needs and our conservative nest egg generates more than enough for the fun or emergency stuff. I know I don't have the mindset, confidence, or ability to cash out the equity to invest in equities that would cover the mortgage, and DH would just throw up his hands if he had to deal with it.

I get why people carry a mortgage from a strategic standpoint. I'm reading that the ultimate strategic move in many areas is to rent rather than own and invest the difference between rent and house payments, taxes, insurance, and maintenance, but probably not going to do that either.

We don't adjust our nest egg AA to reflect the house but if we did I would put it under real estate

 

[jebmke]

+1

I do not consider our house (paid off) as part of our portfolio.

Same here. It is on my asset list for estate purposes; nothing else.

 

[daylatedollarshort]

Basically with a million dollar house and a million of investments, the 60/40 split seems very risky if I look at the $2M investment overall.

We also live in an area with high housing prices. Pensions and SS cover our basic expenses with a house that is kind of big for the two of us and a mortgage, so we don't feel the need to take on a lot of risk with our investments, since if we downsized our expenses would decrease a fair bit. We use a matching strategy like this:

https://www.bogleheads.org/wiki/Matching_strategy

We're not big risk takers so if we wanted more retirement income we'd downsize and rent or sell the money pit house we have now or up the hobby income. We invest more for capital preservation and a small real return for fun money. If we check out with a net worth of what we have now we're good with that.

In 2008 our house went down in value but many of the surrounding suburbs went down even more so we would have still come out okay financially if we had downsized during a housing bust.

 

[haha]

In 2008 our house went down in value but many of the surrounding suburbs went down even more so we would have still come out okay financially if we had downsized during a housing bust.

I believe that is typical. Blue chip areas may rocket less in % terms during upswings, but tend to lose less in downturns. My neighborhood is I think near the final stages of a 10 year gentrification. OTOH, my girlfriend lives in a blue chip building and neighborhood. My place has gone up much more percentage-wise than hers during the RE recovery here, but should things reverse, mine will likely go down faster. Likewise, compared to more outlying areas my neighborhood is also blue chip, and has not gone up in % terms as much as cheaper areas with less stable prospects. My area also has a probably permanent positive change in its favor. It is now perceived as safe, whereas 20-25 years ago it was pretty much a no-go. And even 10 years ago it was downgraded for safety and reputation relative to neighborhoods a short walk away.

What really works in all seasons in RE is exclusivity. Lake or ocean front. Attractive safe area with easy access to CBD. Excellent schools Etc! As long if it is perceived as safe, a home that allows a short all weather walk to a big, commercially diverse business and office area will be much more expensive than a residence that will require Uber or bus to reach work. And these in turn will usually sell better than somewhere from which you must drive.

Ha

 

[Cobra9777]

We plan to downsize at some point, so a portion of our primary home value is included in future retirement planning, but not necessarily in current AA or the portfolio until we get to that point. I do sometimes "think about it" (the downsize portion) as part of my real estate allocation, which has caused me to hold off on further REIT investments. So yes, it has influenced my thinking about AA to some degree. And of course, the whole thing is included in net worth.

 

[Shabby]

We plan to downsize at some point, so a portion of our primary home value is included in future retirement planning.

I think I should have mentioned in my original post that I have a similar situation. I bought my home for $600k and now it is $900k+. It's paid off and I would definitely be willing to sell it and buy a $500k home to live in during retirement. So yes, it is an investment. If I were 70 and lived in a house I would never sell, then no, not an investment, just net worth.

I am constantly chasing the "number" I need to retire early. If downsizing my home could be a large contributor to that, it is an investment (so far an amazing one too). But, it has risk. If the RE market tanks and this drops to $600k, I lose $300k that could have contributed to my number.

So, yes, there is no way I would add any more RE investment risk, but also it makes me bond heavy too. Isn't that a normal thought process??

 

[NW-Bound]

My 2 homes add up to 1/4 of my net worth.

If I were in CA, they would amount to a lot more, but then I would have only one home if it were so expensive.

 

[daylatedollarshort]

I think I should have mentioned in my original post that I have a similar situation. I bought my home for $600k and now it is $900k+. It's paid off and I would definitely be willing to sell it and buy a $500k home to live in during retirement. So yes, it is an investment. If I were 70 and lived in a house I would never sell, then no, not an investment, just net worth.

I am constantly chasing the "number" I need to retire early. If downsizing my home could be a large contributor to that, it is an investment (so far an amazing one too). But, it has risk. If the RE market tanks and this drops to $600k, I lose $300k that could have contributed to my number.

So, yes, there is no way I would add any more RE investment risk, but also it makes me bond heavy too. Isn't that a normal thought process??

I would look at how much your home kept its value in 2008 and the differential between the value your home lost and property price drops where you would likely move to. If your home lost $300K in 2008 but homes you might want to live lost $500K then even in a real estate downturn you might come out ahead.

 

[Shabby]

If your home lost $300K in 2008 but homes you might want to live lost $500K then even in a real estate downturn you might come out ahead.

That is an incredibly good point!