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September 12, 2007

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Those numbers are pretty sad....

I look at homes to further diversifying your investment portfolio. If you're 65 and own a house that can sell for 600k, you can either downsize to a cheaper home to free some cash, sell the house and rent (w/ 600k in cash at hand), and/or move somewhere where the cost of living is much less. Obviously, it's important to have a lot in the stock market too.

However, I often wonder how long the US will stay economically strong with all the dummies in office (both Rep. and Dumocrats). Therefore, I guess I rather have a home that's completely paid off than most of my $ in the stock market.

I would guess that the net worth is so low because as people move from home to home they buy bigger (more expensive) but maintain a 30 year mortgage. Then in their 40's and 50's they find they still carry a substantial debt with a long payoff. Non-house wealth? - check our credit card balances today versus 1992.

I rented and invested like mad in the stock market from 1986 to 2002, when I retired, moved to a cheaper state, and made my asset allocation less stock heavy.
My earnings in stock funds WAY outperformed the then CA housing market, and I had money to buy a moderate home in the cheaper state.
I've lived happily on the money I saved and invested and enjoyed the home, as a place to live....

The only time I'd consider your home an investment is if you are renting out part of your home (eg: guest house in the back, renting rooms out, basement apartment, duplex). We do that to protect us against future job loss (and we bought a bigger house than we should have in the first place).

I continue to maintain that owning your home can be an excellent defensive investment for unskilled workers earning low wages, if they can buy only what they need, and at a favorable price.

The goal of such an investment should not be appreciation, but protection against soaring rents, gentrification, and displacement, as well as the ability to enjoy a modest retirement insteadof paying half your Social Security check for rent and having to continue to work.

If you think things are bad now, just wait. I see a very grim future for America's low earners who will be increasingly squeezed by health care, the need to live further from their jobs to find affordable housing, and the increasing cost of their commutes. This squeeze will be unsustainable, and you will see people literally unable to afford to go to work.

It's definitely an investment. It's not risk-free by any stretch, but few investments are. Sometimes it will outperform stocks . . . other times it won't. I do consider it a good diversifier, and so far on my house the returns are huge (though the market has just slowed here considerably). It's also not very liquid (somewhat like retirement accounts pre-retirement) so you have to consider that when determining how much of your total portfolio your house takes up and when, if ever, you plan to cash out of it.

Investment? Yes. Nest egg on its own? Definitely not. If buying is feasible in your area, it can make you some money in addition to what you save and invest in the financial marketplace. But it HAS to be in addition to other smart investments. It has its own risks that have to be considered.

My comment on the average net worth numbers: if you strip out home equity, and 401k balances, it's not surprising that most people have only $50k or so in liquid net worth. My overall worth is close to a million, but $400k of that is home equity, and $500k is retirement (I'm including IRAs along with my 401k in that total, and IRAs are basically non-liquid, although I could pull money out of the Roth). We also have $30k in 529s, also not liquid since it's for the kids' college in the decades to come.
We do have short term, emergency type funds, plus the ususal material assets, but when it comes to overall net worth, I'd prefer to keep building mine in tax deferred devices like the 401k and IRAs.

For most people their house is an investment with a pretty big "margin loan" attached to it. To me that's not a good strategy.

George said it perfectly above...people keep trading up on houses, but their mortgage keeps going up to finance cars, trips, pay off credit cards, etc. They wake up at 50, haven't paid off any of their home and start to freak out. And honestly, how many people want to hassle with "trading down" their McMansion when they retire?

The next 15-20 years could be interesting in this country.

Homes are definitly an investment--not only do they increase in value over time, but that gain is compounded by the leverage you use to purchase the asset.

They aren't a cheap or maintenance free investment, but they are certainly an investment. They may not outperform stocks, but if you consider your actual returns on your downpayment (i.e. the leverage factor), they very often can.

I put $30,000 down on a condo last September, and my house has increased in value at least $6300 since then (4%). That's a 21% return on investment, not including the equity I've built by paying down part of my mortgage since then. I know this is an over-simplified analysis, but I call my condo an investment--and a good one at that. There are few other investments that will increase my net worth by $650+ each month ($533 home appreciation and $$120 mortgage reduction)??

Homes are definitly an investment--not only do they increase in value over time, but that gain is compounded by the leverage you use to purchase the asset.

They aren't a cheap or maintenance free investment, but they are certainly an investment. They may not outperform stocks, but if you consider your actual returns on your downpayment (i.e. the leverage factor), they very often can.

I put $30,000 down on a condo last September, and my house has increased in value at least $6300 since then (4%). That's a 21% return on investment, not including the equity I've built by paying down part of my mortgage since then. I know this is an over-simplified analysis, but I call my condo an investment--and a good one at that. There are few other investments that will increase my net worth by $650+ each month ($533 home appreciation and $$120 mortgage reduction)??

My house is a comfortable place for me to live, period. I can do what I want to do to it as far as improvements go (unlike a rental), but I won't do said improvements with the intent of getting more money for my heirs when I'm gone or more money for me if I decide to sell.

If those home prices are accurate, than it's the worst investment I've ever heard of. $136,260 in 1992 dollars is worth $182,148.16 in 2004 dollars. So basically, $30,000 was lost over a 12 year period. AWESOME. Even ignoring inflation, how is 16,000 over 12 years even close to a decent return? That's almost as bad as a regular savings account, except that there's no compounding involved.

KC,

Because over those 12 years that you "lost" $30,000 due to inflation, you would have had a place to live for 12 years. 30000/12 = $2500 a year or $208/month loss for a place to live. Sure beats rent.

I guess I consider our house an investment, but only in the loosest sense. It's an investment that will (hopefully) allow us to live rent-free 30-40 years from now. The primary reasons for us to buy a home were to avoid ever-increasing rents and being able to make improvements to our residence.

Minimum Wage: you said "This squeeze will be unsustainable, and you will see people literally unable to afford to go to work." I already see it happening. Why do you think the media has been making a big fuss over the increase in 20- and 30-somethings who return to live with their parents? Minimizing their costs for rent and food is the only way they can survive.

I don't mean to be condescending but "leverage" isn't an advantage unless your investment return is higher than your borrowing cost. If you're borrowing money at 5% and your "investment" is only returning 4% you are losing money.

I think the whole, your house is an investment idea has gone way too far. The house certainly should appreciate in value, but your house is not even close to an investment in the stock market or such. I think it is in the loosest terms an investment, but it certainly shouldn't be counted on for retirement money as other investments are.


I look at my home as an investment. Not the only investment, or the best investment, but still an investment. As it stands, my home is adding at least 2k to my net worth every month. And it's doing this with essentially no effort on my part. The best part of it all is that, unlike the money I have in mutual funds, bank accounts, etc., I actually get to use my home now. I like that.

My house in an investment in the sense that I won't have to pay for one when I am retired. Renters won't have that luxury.

I have done almost as well on my house as my investments. It is a good part of a diversified strategy. You need both food and shelter, including the costs of maintaining that shelter. Moving up doesn't make you wealthier if your equity doesn't increase, or, I would argue, if your other assets to cover operating costs haven't increased.

A Home is a Place to House People; not money! Although the value of your house will usually increase over time (in this market that seems like a far off reality) the actual earnings or return on your money sitting in your house (THE EQUITY) is 0%. Most people consider the appreciation of their house to be a function of their Equity. This isnt so. You are far better off to separate the Equity from your home and let it work for you until retirement and let your house appreciate on it's own over the same timeframe... this way you wont have to sell your house to put food on your table or to fund your retirement!!!

I'm glad you're writing about this, but I'm afraid I have to disagree. A house is an investment whether you want it to be or not. After all, most people put huge amounts of money into their house, and it's hard to imagine their doing this just because they hate renting.

And see where "investment" has gotten us now.

The house you live in isn't much of an investment. You pay tons of interest and the long-term growth rate is about 3-3.5% per year. I see it as similar to putting money into a low-yielding savings account, except having a house forces you to save.

Of course, a house can still be an investment. You can buy low and sell high (just like any other investments). Also, your 2nd, 3rd or 4th homes that you rent out are investments, because you're having someone else pay for much of your mortgage.

It is not inflation adjusted, from my understanding?

If you would add that, it would be even more distressing.

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