Thursday, June 09, 2005
Your Home Is Not An Investment
Assets feed you. Liabilities bleed you. That's the simplest and truest test of whether your money is growing (as an asset) or just being consumed (as a liability).
Think of what your house really is: wood, pipes, electrical wires, shingles, concrete. Are these items becoming more valuable the longer you own them and the more you use them? Would you pay more for a used car than you would for a new car? Does a 40 year old house have more intrinsic worth than a 1 year old house?
Housing prices over time go up (generally) because they reflect the growth in wages of workers and inflation. Also, prices can go up in areas that are considered more desirable than others to live in i.e. "I'd rather live in San Francisco, CA than Minot, ND. " When house prices increase more than inflation and wages can justify it probably represents a speculative bubble. And that is exactly what is happening today in many areas of the country (Washington D.C. being one of them).
The error in thinking made by most homeowners when determining the profit on their house when they sell it, is the failure to calculate the true costs of ownership. Consider our home in Sugarhouse. We bought it for $65,000 and sold it 16 years later for $190,000. It appears we made $125,000 giving us a 6.5% return on our investment. However, if I consider the costs of upkeep, repairs, taxes, time, etc. we probably just came out even. Perhaps we could conclude that we got the money back that we had put into it all those years (and that's a good thing). But, of course Lynne insisted we go buy another house. And we bought one in Park City. I was pushing for a yurt in Minot, ND.
The growth in your home value does not constitute increasing personal wealth! It's just a very expensive and time consuming purchase. Don't be fooled.
However, your house and it's appreciation can be used to finance the purchase of real assets and investments and I am a big advocate of this. I believe it's the only real hope for most middle Americans to generate any kind of personal wealth.
The equity in your house has a 0% return. Always! And it's of no value sitting in the walls of your living room. When you need money for college, retirement, long term care or medicine, nobody cares that you have "equity". They just want the money.
Regularly separating the equity from the house (borrowing it out and getting a tax deduction) and putting it into an account that can grow now gives you an asset (a side fund). Your house is not an investment but it has the ability to create and fund an investment. Thus, you can have your cake and eat it. too. Just don't gamble it (stock market) or spend it on consummables.
If you established this kind of account, you could eliminate other drains on your wealth. What if you viewed this account as your personal bank? You could borrow from yourself to buy a car, go on vacation or do renovation work on your house. Then just pay yourself back (with interest). It takes no more discipline or money than you already have. You simply become the beneficiary of your spending rather than some financial institution. And you gain more financial control over your life.
Larry may benefit from the purchase of a condo in DC, if he lives in it long enough, can sell it for as much as he pays for it (all expenses included). On the other hand if he can rent for less and saved the difference in some other growth asset, he may do even better and with less stress and responsibility.
Americans are encouraged to view their house as a wealth asset, but it's really just another purchase. It may give us pleasure and make us feel more secure, but that doeen't change it's nature. Charley
Think of what your house really is: wood, pipes, electrical wires, shingles, concrete. Are these items becoming more valuable the longer you own them and the more you use them? Would you pay more for a used car than you would for a new car? Does a 40 year old house have more intrinsic worth than a 1 year old house?
Housing prices over time go up (generally) because they reflect the growth in wages of workers and inflation. Also, prices can go up in areas that are considered more desirable than others to live in i.e. "I'd rather live in San Francisco, CA than Minot, ND. " When house prices increase more than inflation and wages can justify it probably represents a speculative bubble. And that is exactly what is happening today in many areas of the country (Washington D.C. being one of them).
The error in thinking made by most homeowners when determining the profit on their house when they sell it, is the failure to calculate the true costs of ownership. Consider our home in Sugarhouse. We bought it for $65,000 and sold it 16 years later for $190,000. It appears we made $125,000 giving us a 6.5% return on our investment. However, if I consider the costs of upkeep, repairs, taxes, time, etc. we probably just came out even. Perhaps we could conclude that we got the money back that we had put into it all those years (and that's a good thing). But, of course Lynne insisted we go buy another house. And we bought one in Park City. I was pushing for a yurt in Minot, ND.
The growth in your home value does not constitute increasing personal wealth! It's just a very expensive and time consuming purchase. Don't be fooled.
However, your house and it's appreciation can be used to finance the purchase of real assets and investments and I am a big advocate of this. I believe it's the only real hope for most middle Americans to generate any kind of personal wealth.
The equity in your house has a 0% return. Always! And it's of no value sitting in the walls of your living room. When you need money for college, retirement, long term care or medicine, nobody cares that you have "equity". They just want the money.
Regularly separating the equity from the house (borrowing it out and getting a tax deduction) and putting it into an account that can grow now gives you an asset (a side fund). Your house is not an investment but it has the ability to create and fund an investment. Thus, you can have your cake and eat it. too. Just don't gamble it (stock market) or spend it on consummables.
If you established this kind of account, you could eliminate other drains on your wealth. What if you viewed this account as your personal bank? You could borrow from yourself to buy a car, go on vacation or do renovation work on your house. Then just pay yourself back (with interest). It takes no more discipline or money than you already have. You simply become the beneficiary of your spending rather than some financial institution. And you gain more financial control over your life.
Larry may benefit from the purchase of a condo in DC, if he lives in it long enough, can sell it for as much as he pays for it (all expenses included). On the other hand if he can rent for less and saved the difference in some other growth asset, he may do even better and with less stress and responsibility.
Americans are encouraged to view their house as a wealth asset, but it's really just another purchase. It may give us pleasure and make us feel more secure, but that doeen't change it's nature. Charley
// posted by Anonymous @ 6:48 AM 
