Your Home is Not an Asset
Most Americans have the vast majority of their
wealth -- if they have any wealth at all -- tied up in their homes. Real estate
prices in America have steadily increased since WW2, so Americans have come to
look upon their home as an "investment."
It's
not.
Yes, home prices have gone up for
a long time, but there's no law of nature that says it must be so. You home
only has value if you sell it. If you don't -- or can't -- then it's a
liability. It's something you consume to make your life
better.
There's nothing wrong with
living in a great house, if you can afford it. But your house expenses aren't
investments. They don't necessarily return
profits.
I worry when people take out
extra mortgages on their homes as the theoretical sale price increases. Does
anybody actually own their own homes any more?
Admittedly, the bizarre American
practice of governmental subsidy on home debt -- the mortgage interest deduction
-- does encourage us all to go as deeply in debt as possible. Free money! I
understand why it's in the best interest of society to have a substantial number
of people living in homes they own, instead of renting. It gives a neighborhood
stability, and a stake in the long term success of the community. I just don't
understand why it punishes those who pay off their
debt.
If house prices drop 20% -- and
yes, that is possible -- an awful lot of Americans will suddenly have negative
equity in their homes. They would actually have to pay money to sell them.
That's not good. If combined with the economic downturn that necessarily
accompanies the price drop -- meaning that lots of folks don't have jobs -- the
expenses of their "investment" are going to eat the underemployed homeowner
alive.
Buy a house you can afford. The
only profit it makes is the rent you no longer have to pay minus the expenses
associated with ownership, which include taxes, insurance, and
maintenance.
I paid $1900 a month in
rent in Silicon Valley before we bought Three Meadows. (Well, more like $1200
once one subtracts the roommate rents.) Now I pay about, um, $3000 per year in
taxes and insurance. I lost the earning ability of the $155,000 purchase price,
too. At 6% interest, that would be about $10,000 per year. Maintenance would
normally be expected to be about $2000 per year, but things aren't in good
shape, so it's more like $10,000 per year, at least for a while. And the guest
cottage generates about $3000 per year in rent. So the house costs $23,000 per
year, while the old rental cost $14,000 per year. So I pay a lot more than I
used to, effectively. For me, it's worth it. Three Meadows is a source of
pleasure I am willing to pay an extra $9,000 per year to have. Note that I never
plan to sell, so the theoretical increase in property value doesn't affect me.
It's mostly a source of increased tax
expense.
I think most families buying
homes don't do their math this way. They try to buy the most expensive house
they can pay for, on the assumption that in 5 years they'll be able to sell it
for a larger profit than a more modest house. They go a million dollars in debt
for a house that would rent for only $2000 a month. That's a really bad return
on equity.
Be careful out
there.
Filed Wed - July 6, 2005, 11:03 AM in
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