Does your Home Price factor into your portfolio risk?

[Shabby]

Here in Seattle our house prices have been rising quickly for a few years. Since my house is paid off, I see this as part of my overall investment portfolio. Frankly, it is about 50% of my total investment portfolio.

Now being 1-2 years away from retirement, many would suggest a 60/40 (Stock/bond) type portfolio. But, knowing that there is a huge real estate investment out there, causes me to think I need to up the bond percentage on the portfolio to make up for the huge risk in my home.

Hope this makes sense....

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.

 

[RockyMtn]

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.

 

[Blue Collar Guy]

I have to second the above posters view. You got ta live some where. If you think you would downsize, there is a tab in firecalc where you could say add 500k to your portfolio at some future date, and Put the other 500k from your home sale into a new abode. I dont do this, as at the age of 50 i saved enough pennies to buy my first house. Im in reverse downsize. If anything, im gonna buy a joint in Florida to minimize my state taxes. Ill maintain the 2 homes. So thats more negative cash flow from the portfolio.

 

[REWahoo]

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

Does your Home Price factor into your portfolio risk?

Nope.

 

[RunningBum]

Not my portfolio risk or AA, per se, but it's in the back of my mind when I think about my overall state. I've got much more house than I need. I could easily live in a smaller, less expensive home, and I figure at some point I'll probably downsize. I don't actually figure it in any VPW or SWR rate calculation, but I do consider that I've got some buffer in that I'll probably be adding to my stash when I move.


I wouldn't worry about that much risk in Seattle, with the disclaimer that I don't know the market. If prices there drop, they'll probably drop elsewhere if you needed to move. I'm a little more at risk in a resort area, since most houses are second/weekend/vacation homes, and those don't do well in a bad economy. I'm not counting on as much appreciation as if I were in a desirable city.

 

[audreyh1]

No, I don't consider my house in my portfolio risk because I don't figure it as part of my AA and ignore it in my net worth, especially because it is a small part. I don't worry about the value.

 

[jimbee]

I do not consider my house to be part of my investment assets.
I do consider my house to be part of my net worth.

 

[movingrightalong]

I do not consider my house to be part of my investment assets.
I do consider my house to be part of my net worth.

+1. It should count in your net worth since someday you might cash out and do something with the proceeds, but it's not part of your investment portfolio until it provides a source of income. If you were to airBnB a portion of it, I could see maybe getting creative and considering that portion of it to be part of your portfolio

 

[W2R]

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.

 

[nash031]

I don't consider my house to be an investment vehicle. It's a place to live that has residual value and factors into my net worth, but a place to live will always be some kind of expense. Just depends on how much.

 

[daylatedollarshort]

I am probably more conservative in my AA because we could rent out our house or sell, downsize and invest the difference if we needed more retirement income, which was actually our original plan anyway.

 

[gerntz]

Not at all. Here in flyover, home prices are a blip on the future wealth plan. Prices are pretty stable & low that let invest in real things like gold.

 

[Koolau]

I'm in the "a house is a house" camp. Stocks and bonds are investments. Thinking of your house as an investment means you would be willing to trade it for something else which you believe will have a better return. If you do that, where would you live. Still we all have to play it the way we see it so YMMV.

 

[RobbieB]

A paid off house is very nice (if you like it and it's the right size) and it is part of your net worth. You can sell it, you can reverse mortgage it and most important you can live in it.

And cheap too. I could rent my house for $1500 / mo but I own it so it's $2000 / yr property tax.

 

[Alex The Great]

Home price can be in portfolio risk, if you consider to sell it at some time in future. I own a home in San Francisco Bay Area, which I will likely sell when finally retire. Because a large part of my savings actually in this home. I know, it is not good because it does not generate any income. And it cost me around $1K per month just in property tax. But as long as I work it is OK: I have to live somewhere and rent is also expensive in Bay Area. After the retirement, situation will change. Yes I consider it as a risk, because prices may drop. Although I do not expect them to drop significantly at my place, unless there is an earthquake or tsunami or other unfortunate event.

 

[FI_RElater]

I do not consider my house to be part of my investment assets.
I do consider my house to be part of my net worth.

BINGO ?


(Still trying to see how people rebalance out of their house... sorta like people trying to rebalance their SS value....
It's a place to live, and SS is an income stream.
Unless you both plan on selling immediately and have a contract in hand, it should have no bearing on your allocations.

 

[GoodWishes]

Originally Posted by jimbee
I do not consider my house to be part of my investment assets.
I do consider my house to be part of my net worth.

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

 

[Fedup]

No house in portfolio accounting but I think you have it backward. Since your house is paid off, it should be considered as a bond, like you can rent it out or sale it, so you need to have more stocks in your liquid asset, not reduce it.

 

[brucethebroker]

More confusion on wealth vs. income. Unless your home produces wealth (partially rented out, or is sold) it does not produce income. Therefore, it is an asset, and part of your wealth (net worth), but not part of your income (portfolio/asset allocation), IMHO.

Rental/income producing properties, are both.

 

[IMATERP]

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.

I'm 56, eight to nine months before RE, and love this allocation. It goes well with a paid off house and a modest state pension.

Michael

 

[joeea]

Since my house is paid off, I see this as part of my overall investment portfolio. Frankly, it is about 50% of my total investment portfolio.

Housing is an expense, not part of your investment portfolio (IMHO). And being paid off or not has nothing to do with it.

You have placed a value on it today, based on what you think you might be able to sell it for today.

Yet, I assume you aren't actually selling it today.

In reality, you have no idea what it will be worth when/if the time comes to sell it. And if you do sell, you likely haven't figured out what it will cost to purchase/rent the place where you end up living. We only have to look back a few years to see what kind of trouble could arise assuming that home prices will rise (or stay steady).

When determining how to handle your investment portfolio, don't include your house (or your car, or your golf clubs, etc).

 

[CRLLS]

I also consider my House in my net worth but not my investible assets.

Thinking about this a bit further, isn't net worth simply assets minus liabilities? What about our other things of value? A car or two, boats, planes furniture etc or a classic car?.... I think of net worth as what would my heirs get if I were to "check out". In some locals, there are personal property tax. At least there, they think they are assets.

On the other hand, couldn't a house could be considered a source of income in the case of a reverse mortgage? Yeah, the liability would be ever increasing at the same time and that would have to be counted in the calculations.

I don't go into such minutia in my finances, but this thread has me thinking.

 

[athena53]

I factor the equity in my house into my net worth calculation but it's only about 5% of my net worth. I'm being conservative and not trying to re-value the house every year; I'm another one in flyover country where real estate prices have been relatively stagnant.

Back when I was living in NNJ it might have made more sense; in 1997 I put down $100K on a $350K house (source was the sale of the marital home after a divorce) and sold it 6 years later for $550K and moved to a LCOL area so most of the proceeds were invested. That added a nice amount to my net worth, but at that point the equity had been realized.

 

[Dawg52]

My house is not part of my overall AA. I do include my vacation condo in the allocation but it doesn't change much when backing it out.

 

[Danmar]

I do not consider my house to be part of my investment assets.
I do consider my house to be part of my net worth.

Likewise. My personal use real estate represents about 20% of my net worth. I don't include it in my AA. Certainly have to budget for the expense to maintain it though. Include it in my net worth, but that's really only for comparison (ie self bragging) and estate purposes. At some point, will very likely downsize and then I will reinvest or give away the proceeds of sale.