Here’s an excellent article Songbae sent me; it’s probably illegal to post it in full, but maybe you’ll read it fast before anybody shuts my site down.<\/p>\n
Why Your Home Isn’t the Investment You Think It Is — Too many people rely on their home as their primary savings strategy; That’s a mistake
\nBy David Crook
\n12 March 2007
\nThe Wall Street Journal
\nR1
\nEnglish
\n(Copyright (c) 2007, Dow Jones & Company, Inc.)<\/p>\n
PLANNING YOUR retirement? Don’t bet the house on it.<\/p>\n
Your home means a lot of things to you, most of them good. Your home
\ngives comfort and protection to you and your family, and it could well
\nembody all your material hopes and dreams.<\/p>\n
But houses have become much more than just places to live. Your home is
\nprobably your biggest asset, and the price you could ask for it today is
\nalmost certainly much higher than what you paid for it back whenever.<\/p>\n
As a result, houses have become substitute credit cards, as profligate
\nowners borrow their equity to finance everything from cars to vacations.
\nAmong thriftier owners, the equity they have built up in the family home
\nhas become a vital part of retirement planning — a “fourth leg” of the
\nnow-unstable “company pension\/personal savings\/Social Security” stool
\nthat was long the model for a financially secure old age.<\/p>\n
Unfortunately for both groups, however, houses are not very good
\ninvestments. For the grasshoppers, there’s nothing quite as stupid as
\npaying off your 2002 trip to Orlando in 2032, when you finally settle up
\nyour refinanced “cash out” 30-year mortgage. And for the ants, economic
\nstudies have demonstrated over and over that houses (1) cost more than
\nmost people make when they sell and (2) rarely match the long-term
\nreturns of stocks or other investments.<\/p>\n
And that’s doubly true today, with much of the U.S. well into a
\nreal-estate recession. It’s unlikely that homeowners in once-booming
\nareas will see a return of skyrocketing prices anytime soon.<\/p>\n
“Real-estate investments suffer serious and sometimes prolonged
\ndownturns,” writes economist W. Van Harlow in a new study of home equity
\nand retirement from the Fidelity Research Institute in Boston. “A
\nreal-estate ‘bust’ could be quite damaging to an investor nearing
\nretirement who relied too heavily on home equity.”<\/p>\n
It may be late for a lot of homeowners to read this, but here it goes
\nanyway: It’s risky and bad planning to have too much of your net worth
\nin your principal residence. No prudent stock-market player would put
\n60% or 70% of a portfolio in just one stock, but millions will hold that
\nmuch or more of their total net worth in just one house.<\/p>\n
Food for thought:<\/p>\n
— If you bought a house in Los Angeles in 1990, just as the real-estate
\nmarket turned downward, you would have had to wait a decade for your
\nhome’s value to return to what you paid.<\/p>\n
— If you bought in Rochester, N.Y., in 1980, you would have seen only a
\nmediocre 4% annual growth for the next 25 years.<\/p>\n
— If you bought in Dallas in 1986, as the oil boom went bust, your home
\nwouldn’t have appreciated at all before 1998.<\/p>\n
So with all that in mind, here’s a question-and-answer rundown of some
\nfinancial issues of home owning.<\/p>\n
Q: My home is my largest asset. Why shouldn’t I rely on it to provide my
\nnest egg?<\/p>\n
A: Because a house can be an inefficient means of investing, and it
\ncosts far more to buy and operate than you think. Homeowners can easily
\nend up paying more to live in their houses than the supposed “profit”
\nthey make when they sell them.<\/p>\n
When most homeowners figure their returns, they don’t do much more than
\nsubtract the price they paid from the price they received. Then they
\ncome up with a really big return because they paid only a 10% or 20%
\ndown payment. So they figure they made a huge “profit.”<\/p>\n
But they didn’t. That’s because the costs of owning a home — buying it
\nwith a long-term mortgage and then paying taxes on it, insuring it,
\nrepairing it, renovating it — sap most of what most homeowners think
\nthey make in price appreciation.<\/p>\n
Houses are nice financially because there are not many other things you
\nbuy that actually go up in value, and not many things can put a
\nsix-figure check in your pocket when you sell them. But don’t delude
\nyourself: You’ve already spent most of that check, and you are likely to
\nspend the rest in just a few days when you buy a new home.<\/p>\n
Think of your sale proceeds another way: not as a true profit, but as a
\nhuge rebate. Some of the thousands of dollars that you paid into the
\nhouse over the years are being returned to you — sometimes with a
\nbonus, often without.<\/p>\n
Q: But it’s certainly better to buy a house than to pay rent.<\/p>\n
A: That depends on when you buy, and how long you own. Buy at the wrong
\ntime — like during the kind of buying frenzy that much of the country
\nhas just experienced — and you could well end up wishing you had rented
\ninstead.<\/p>\n
Boom market or bust, home buying has so many extra costs — from upfront
\n“points” paid to a lender to title insurance and appraisal fees — that
\nover the first five to seven years, a renter who invests the equivalent
\nof a down payment in stocks could easily do better overall than a house
\nbuyer. Compounding that problem: Most homeowners move within seven
\nyears.<\/p>\n
As the ownership timeline stretches out to 15, 20 or 30 years, however,
\nthe buyer will almost certainly do better than the renter, especially
\ngiven the tax benefits of paying mortgage interest over traditional rent
\nand the big rebate when the owner finally sells.<\/p>\n
But the typical buy vs. rent argument clouds the more important point: A
\nhouse is an inefficient way of building wealth.<\/p>\n
Q: But I have to live somewhere! And I have to pay something for a place
\nto live. Certainly it’s better to pay “deductible” mortgage interest
\nthan rent.<\/p>\n
A: Buying a house with a long-term mortgage is just another form of
\nrenting.<\/p>\n
Mortgage interest is rent that you pay to your lender for the use of its
\nmoney rather than to a landlord for the use of his house. Yes, the
\ngovernment picks up a portion of that with the tax deduction, but most
\nof your monthly payment neither builds equity nor is deductible. It just
\ngoes down the same black hole that sucks up any other renter’s money.
\nAnd it takes 20 years before a typical borrower pays more principal each
\nmonth than interest.<\/p>\n
“I have to pay something” is a rationale that home buyers use for going
\ndeeply in debt and paying tens or hundreds of thousands of dollars in
\ninterest to buy a house that, they mistakenly believe, will make a big
\nprofit for them down the line.<\/p>\n
Q: So how much does a house really cost?<\/p>\n
A: You can easily end up spending three times the purchase price of a
\nhouse. Today’s buyer of a typical $300,000 single-family home who takes
\nout a 30-year loan will end up paying the price of the house again just
\nin interest. Add 30 years of property taxes, homeowner’s insurance,
\nregular maintenance and a couple of big-ticket repairs or improvements,
\nand the total cost of buying the home could easily top out at well over
\n$1 million.<\/p>\n
Q: Yes, but the house will be worth much, much more.<\/p>\n
A: Maybe, maybe not. Whether you come out ahead depends on where and
\nwhen you buy. Even cash buyers might be surprised to see that they can’t
\nbe assured of making a profit.<\/p>\n
“The Costs of Home Ownership” table is a simplified rundown on a typical
\nsingle-family home — a house that was bought for $50,000 in 1977 —
\nbased on national appreciation rates as reported by the Office of
\nFederal Housing Enterprise Oversight (OFHEO). Included are modest
\nestimates of other home-owning costs (not adjusted for inflation). To
\nkeep things simple, there are no transaction costs, no additional
\nborrowing to finance improvements and no refinancing costs, all of which
\nwould drive the expenses even higher. It’s not a pretty picture.<\/p>\n
Q: Those numbers don’t seem realistic for where I live. You can’t buy a
\nhouse here for that kind of money.<\/p>\n
A: To be sure, not everyone did so badly as the national average.
\nOFHEO’s Home Price Index calculator puts the average 30-year
\nappreciation for a house in the ever-pricey San Francisco metropolitan
\narea at 1,125%, compared with the national average of just 481% (
\nhttp:\/\/www.ofheo.gov\/HPI.asp ). So if you bought that $50,000 house in
\nSan Francisco in 1977, it would be worth about $613,000 today and,
\nassuming much the same costs of ownership, you’d make a true profit of
\n$219,000.<\/p>\n
You would have done well in other coastal metro regions, too. The
\ncomparable house would be worth about $593,000 in Los Angeles (up
\n1,085%), $549,000 in New York (998%) and $432,000 in Washington (763%).<\/p>\n
But some other big cities didn’t fare as well. You’d be in the red in
\nChicago, where home values rose 463% and the house would be worth
\n$282,000. Your house would be valued at only about $176,000 (252%) in
\nDallas and just $147,000 in Houston (193%).<\/p>\n
Q: But even if I had bought in Texas, I’d still essentially break even.
\nBuying let me live “rent free” for 30 years.<\/p>\n
A: Living “rent free” is moving in with your parents or your wealthy
\nlover in Tuscany. You didn’t live rent free. You had some of your rent
\nmoney subsidized and then some more rebated.<\/p>\n
Yes, you are sitting on a lot of home value, but you’ve spent a lot —
\nprobably more than the house is worth — getting what you have. And you almost certainly lost some investing opportunities along the way while you were spending your money buying the house.<\/p>\n
And that’s assuming everything breaks your way. If you don’t sell at the
\ntop of the market, you could see stagnant or falling values for a while.
\nThere have been real-estate bubbles before. In San Francisco, where it
\nlooks like prices may have hit their high mark in the third quarter of
\n2006, home values peaked in early 1990 before falling for the next eight
\nyears. Houston saw a modest surge in the ’80s, followed by an equally
\nmodest decline and then two decades of grindingly slow appreciation.<\/p>\n
Q: That’s still money that I wouldn’t see otherwise. Even getting just
\nsome of my money back is better than getting none.<\/p>\n
A: But there’s another kicker. You haven’t gotten any money back yet.
\nAll you have is a house that’s 30 years older than when you moved in. In
\norder to realize your windfall, you’ll have to borrow against it or sell
\nit.<\/p>\n
If you borrow against a house you’ve paid off, then you will start
\nmortgage payments all over again.<\/p>\n
If you sell it, what are you going to do with that big check in your
\npocket after you’ve walked around for a couple of hours feeling richer
\nthan you’ve ever been? You’ll probably spend most of it in just a day or
\nso buying another house.<\/p>\n
Q: So I’ll downsize, find a smaller, cheaper house, buy it and then
\ninvest the rest of the money.<\/p>\n
A: Prices tend to rise or fall across an entire market. So if you want
\nto stay in the same metropolitan region and save a big chunk of your
\nrebated nest egg, you should be prepared to go significantly downscale
\n— move to a much less desirable neighborhood.<\/p>\n
Consider a hypothetical Washington-area couple who bought their home for
\n$55,000 in 1977. (You can see a complete rundown on the house at
\nWSJ.com\/Reports.) With improvements and market appreciation they appear
\nto have done quite well. If they sell their house today, they could
\nexpect to get something in the neighborhood of $860,000. And they would
\nwalk out of the closing meeting with a rebate check of about $550,000,
\nof which about $175,000 would be profit.<\/p>\n
But they’re facing a tough market where the median price of a condo is
\ntwo-thirds the cost of a single-family home. They don’t have enough
\nmoney to make the most obvious move down — from their house to a
\ncomparable apartment that would cost around $575,000.<\/p>\n
Q: Then I’ll move to someplace cheaper, like Houston.<\/p>\n
A: You still face borrowing or spending all or most of your cash on your
\nnew house — and you will still have maintenance, property taxes,
\ninsurance and other “I have to pay something” costs.<\/p>\n
If our Washington couple chooses to leave and move to a cheaper housing
\nmarket, they will still have costs greater than they think. Popular
\nretirement communities are usually cheaper than big metropolitan areas,
\nbut they are not so cheap that sale proceeds will plant them on a
\ncountry-club fairway and pay for the lifestyle that goes with it.<\/p>\n
According to Coldwell Banker’s often-cited home-comparison calculator, a
\nhouse comparable to the place in Washington would cost $439,000 in Fort
\nMyers, Fla., or $407,000 in Orlando. The couple would do a little better
\nmoving to Tucson, Ariz., where the comparable house costs $281,000 —
\nleaving the sellers with less than half of their rebate windfall.<\/p>\n
So yes, cashing out in Washington — or San Francisco or New York —
\nwill give you enough money to buy a nice place on a golf course
\nsomewhere in the Sun Belt. And you might have $200,000 or $300,000 left
\nover.<\/p>\n
Q: So what can I do if I’ve planned too much of my retirement around my
\ninvestment in my home?<\/p>\n
A: If you already own your home, you can still rein in your expenses,
\nand diversify your investments. Unfortunately, there’s not a lot you can
\ndo about reducing many of the costs of home owning, such as property
\ntaxes or replacing a roof.<\/p>\n
But you do have control over two of the biggest home-owning costs:
\ninterest and renovations. Both are big money losers. Even with the tax
\ndeduction, most of your mortgage interest is still just wasted rent
\nmoney. So accelerating your principal payment will result in huge
\nsavings down the line. Add $300 a month to the payment on a 6.25%,
\n$300,000 loan, and you’ll save 10 years of payments and $83,000 of
\nafter-tax money — enough to put a kid through a public university.<\/p>\n
Few, if any, renovations make a profit. A new kitchen or family room
\nmight raise the resale value of a house, but rarely as much as they cost
\nto build. And if the homeowner borrows the money, the renovation work
\ncould end up costing two or three times what the contractor charged.<\/p>\n
If you don’t already own your own home, do the math. Don’t buy if you
\nthink you’ll be moving in just a few years. Don’t buy a house that’s too
\nbig for your needs or so expensive that you will strain to pay for it
\nsimply because “it’s a good investment.” It’s not.<\/p>\n
—<\/p>\n
Mr. Crook is editor of The Wall Street Journal Sunday and author of “The Wall Street Journal Complete Real-Estate Investing Guidebook.” He can be reached at david.crook@wsj.com.<\/p>\n","protected":false},"excerpt":{"rendered":"
Here’s an excellent article Songbae sent me; it’s probably illegal to post it in full, but maybe you’ll read it fast before anybody shuts my site down. Why Your Home Isn’t the Investment You Think It Is — Too many … Continue reading