Late start we had about 9 inches of snow and I had to shovel my way to the dish to clean it off for the interweb to work.
Robert Shiller was on the Connie Mack show this weekend and he said that he thinks people have too much of their net worth tied up in their homes. It also came up that the equity extraction of the last few years has been excessive.
The context of the discussion was home as investment. Other people will tell you that your home is not an investment, I lean more in this direction but like most topics the real answer is probably in the middle.
If someone buys a house with intention of being on to another house in a few years, I'd say that probably is an investment and so a market event that prevents the price from going up (the outcome doesn't have to be a decline it could just not go up) does hurt here.
If someone has been in the same home for ten years, has no plans of leaving and is not over mortgaged I'd say that this is likely not an investment and so a flat or down market probably does not impact this situation.
We plan to grow old in our cabin and the Hilo house is also a very long term proposition. I am sure there is no way we could get what we paid for it five months ago but it is not an issue. We bought the house to enhance our lifestyle.
Contrast that extreme to the people of the various flipping shows we all watch on the weekends. These people feel the market's fluctuation more than anyone--100% investment.
For planning purposes I offer no science just my notion of common sense. If you have equity in your home in the future, that is you are retired but not heavily mortgaged, then the equity can be utilized if you need it. I am thinking the most likely need would have something to do with care and or treatment for a health related matter but whatever. If you are lucky you would have all that equity and never need to tap it.
The numbers do favor having a mortgage, I concede that, but having access to all that equity, even if it is 15% less than it was 12 months ago is very comforting.
This discussion would not be complete (maybe it's not complete anyway) without addressing the current price decline. I am not in the down 20% camp but regardless of whether that is right or not, the real estate market is not permanently broken. There will be some value in your home and chances are that value will go up over time even if it does not go up at the rate you would like or as soon as you would like.
Hats off to the Giants for beating the Patriots. I think the key was the Giants defense prevented the Patriots from being the Patriots except for the drive that made it 14-10. I had an uneasy feeling about this game from a couple of weeks ago. It seemed like the Patriots have not played up to the standard they set for themselves a few months ago, maybe it was just me. I did think the Pats would win as they have won many games far from their best but they lost. Congrats again to the G-men.
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17 comments:
I still like not having a mortgage and getting the standard deduction as opposed to the deducting a mortgage. I view the lack of debt as ballast in my assets to weather a storm. It lets me be more aggressive with my portfolio and not worry about paying the bills.
As far as the price decline in housing I think the fact that it is happening at all is indicative of a significant financial hit for 10's of millions of Americans. Even if it is only a 15% drop it is so broadly felt it will have a lot of significance.
i enjoyed your comments yesterday and today, and
hope that you weather the snowfall well.
Regarding owning a home, Brinker calls it"emotional
capital" or something like that. It gives people a sense of emotional security.... it is definitely an investment in that one makes or loses money at the time of a sale. I am in the camp that believes that
one should never pay off a mortgage as long as rates are in the 4-6% range not including the tax deduction.
Since one should average significantly more with that equity money in the market. Leveraging, if you will.
Do you think that the dollar will rally as some are predicting, or that with the decreasing rates, investors will look elsewhere for govt. securities?
It would seem that gold well may be the ultimate
currency/security given increasing supply and decreasing demand, and the weakening dollar.
Thanks,
Scoot
"Robert Shiller was on the Connie Mack show this weekend and he said that he thinks people have too much of their net worth tied up in their homes. It also came up that the equity extraction of the last few years has been excessive."
He's right about extraction. Our society is credit mad and the HELOC became the biggest "credit card" Americans have ever seen and this mess was predictable based on how people borrowed on the cards.
He's wrong about having "too much" of their net-worth tied up in their homes. First, if he believes that than he's contradicting himself. It means that people who have owned a long time have made a lot of money making it a great investment.
On the other hand, he can't complain about all the 100% loans because those people have none of their net-worth tied up.
The reason why your home is a great investment is because it's leveraged and has a long-term record of ever increasing prices. And, is somewhat tax sheltered. The mortgage payment is your substitute rent payment.
It's like any investment: it requires some discipline.
Personally, I have never held the goal of paying off my mortgage early nor have I ever had a 30-year fixed loan in 20 years.....
"This is likely to be a painful economic downturn – not because of massive job and output losses, but because of losses in the value of things that people count as their assets (primarily housing, non-agency mortgage debt, and equities). Foreigners provided a large portion of the capital that fueled the runup in asset prices, so they will undoubtedly bear a good portion of the subsequent losses through dollar depreciation and writeoffs in the value of their U.S. financial assets."
Hussman was very interesting to read this week.
If you are significantly leveraged on any investment it is easy for that investment to go to zero or a loss position. A lot of people are rather leveraged on houses and face either losses or walking away.
OT: (when you get a moment, might you once again address the ags? i know you sold a portion of monsanto back in early jan. now it looks like it's back on the rise, as is potash. dba is about to make new highs, maybe. meanwhile, moo is just mooing around. what's next do you think?)
When the spouse of a successful person gets a divorce s/he gets 50% of the net worth because s/he provided the environment that allowed the successful spouse to make the money.
Your paid off home, even if not considered an investment, is certainly an asset that can provide you with the environment essential to success.
I've never met a person who regretted paying off their home because they could've invested the money in the stock market.
In fact, other than few brief years in the 90's i have not met a person who did not regret putting their money in the stock market :)
Here's the problem I always have when I read a statement like: "too much net worth is tied up im your home."
So what?
Can someone tell me what the percentage is SUPPOSED to be? I've been socking money away in 401ks and Roth IRAs, but my wife and I aren't stupid. We both had good houses in good neighborhoods. we sold 'em and consolidated that profit into 1 house when we got married. And now, 'cause we're relatively intelligent, the house happens to be a pretty significant portion of our net worth. Not that I count it each year when I total up my investments.
Yeah, I know. The original statement is applicable as a problem to a lot of people. It just bugs me when used as a general statement.
If someone buys a house with intention of being on to another house in a few years, I'd say that probably is an investment and so a market event that prevents the price from going up (the outcome doesn't have to be a decline it could just not go up) does hurt here.
If someone has been in the same home for ten years, has no plans of leaving and is not over mortgaged I'd say that this is likely not an investment and so a flat or down market probably does not impact this situation.
I might substitute your use of the word investment with "speculation. In this context, "investing" (10 years, not over-leveraged) in a house is no different than equities. The expected returns might be different, but provided you did not pay some exorbitant price (P/E, E/P, P/S, etc. for equities, maybe P/annual rental income for a house), you have probably made a sound "investment."
If, however, you dabble in the realm of speculation - compressing the time frame for ROI - then all bets are off.
Roy: Speculation in buying a house? How did the media fool people into thinking real estate was complicated? It's not.
Investors, bankers and even homeowners don't use the word. Investing in real estate is indeed "investing", especially buying houses.
Roger:
Read this article on Iceland. Thought you may find it interesting.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/03/cniceland103.xml&page=2
Sam
http://www.telegraph.co.uk/money/
main.jhtml?xml=/
money/2008/02/03/cniceland103.xml&page=2
Sorry for posting twice, but the link did not post completely.
"Roy: Speculation in buying a house? How did the media fool people into thinking real estate was complicated? It's not."
How complicated are tulip bulbs??????
Most people are idiots.
Which group do you fit into?
Thanks for the heads up on Shiller (and Ellis). The video was interesting. Shiller keeps using the Depression comparison. Did so on Bloomberg, did so on WealthTracks. He isn't predicting dramatic failures; he is drawing our attention to the possibilities. For a guy that has developed an index, studied the asset aspect of housing, this is serious.
The generational context is what Shiller was speaking to (i think): Being overly liberal, the average 55 - 65 year old couple has less than $200k in financial assets. Their $300k ranch home makes up 60% of their net worth. It is illiquid from a fungible standpoint, it is illiquid from a location standpoint, there has been a net reduction in market participants due to credit stringency, there are replacement costs that have to be addressed (reverse mortgages could be a huge REIT opportunity). Having too much of their net worth in housing is a result of their spending plan, not their investment plan. They did not have an investment plan; they may not have had the luxury.
Currently, our equity would be 12 - 15% of our portfolio. If we considered it to be an investment, we don't. Our home, at retirement, using 4% appreciation per year over 20 years and paying off the mortgage, could be easily be 25 - 30% of our wealth (considering our financial assets on an after tax basis). This would be a significant proportion of our assets should a correction hit this asset class.
It would be a far greater proportion if we behaved as did our contemporaries, considered it as an asset: Not only would we spend more of our current income (Wealth effect), we would save less (losing the compounding); and, we would 'project' an 8 - 10% rate of appreciation (allowing us to save even less).
The “Up and to the Right” school of home ownership has suffered a severe set-back. The stock market now seems to be going through the same re-set.
I have never considered my personal residence an investment. It is a lifestyle choice (rent versus buy). You have to live somewhere. That is not an investment, imo. It is a domicile necessity. I do count it in my net worth, but only for notational wealth accuracy.
One personal quirk. Owning scores of properties and taking advantage of the many wonderful tax benefits they provide,I do own our personal residence free and clear. It feels great having a home with no debt.
T
Roy: Speculation in buying a house? How did the media fool people into thinking real estate was complicated? It's not.
Game shows? lol
Investors, bankers and even homeowners don't use the word.
They do like to dabble, though, eh?
Investing in real estate is indeed "investing", especially buying houses.
Buying is easy. It is the selling part that separates the investors from the speculators. Real estate can be a great investment. The woman we bought our home from has 19 properties around Silicone Valley - she is proof!
The money is made when buying (right). My exit strategy: Death...
We have three properties, and last year moved into a new home (ranch)where we plan to be until health makes it impossible. We also have a home south to spend the winter, which we rent (when possible). The third is a paid off small fishing cabin.
I was hesitent to take out a new mortgage at our age, but with a credit score in the 800's they didn't have any problem loaning us money. We had a substantial down payment and were able to sell our almost paid off condo, even i the down market.
We do not consider our property to be part of our net worth, never have. However the new property will certainly appreciate better than the condo... My hubby says it is our "long term care insurance".. and the small difference in mortage payment is certainly about the same as taking out insurance would be. It was bought with the thought of disability and wheel chairs.. perfect for growing old in.
We use and enjoy our properties.
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