Is Your Home An Investment?

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 that probably is an investment. 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. 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 that 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.

Comments

[Malkiel:]

I'm surprised that even some of you finance guys are having problems with the e=mc/2 part of the equation: money and land are both assets, just in different forms, which can be converted into each other. While it was true that 30 or more years ago the market wasn't set up to allow homeowners to tap into equity easily, making a home not seem like an investment, the easy access to equity today makes a home one of the very best investments--provided that all the usual investing priniciples are followed, like not overpaying for the size/type/location/con... of the house. The proper way to handle the home as investment is to tap into the equity and put the excess in investments with higher rates of return than the outlay for the mortgage interest (or refinance to a better mortgage interest rate to make that possible). Leveraging the home value for this purpose rather than for fungible consumer purchases gives the homeowner a much higher rate of return because the profit from the invested equity can be compounded.

Your home is an investment in all events--a poorly handled investment in the hands of those who don't know how to use it or paid too much for it, a good investment in the hands of the trained investor, but in all events an investment, no matter how much emotional invective is hurled against the concept of the cherished home as asset rather than personal object...

2008 Feb 06 12:36 PM