If you own a valuable painting and hang it in your living room so you can enjoy it every day, that does not mean that it is no longer an investment. You would not ignore its value in calculating your net worth.
Whether or not investment in art is wise or foolish is a question that cannot be answered in general terms that apply to everybody. Some people do well in that type of investment and some do not. It would be a mistake to say: "Buy paintings only for the purpose of enjoying them; never consider them as investments." In the same way, some investors in real estate do well, and some do not. The fact that your home you live in every day is also a potentially valuable investment should be looked upon as an opportunity, not something to be dismissed and forgotten.
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No, it shouldn't be dismissed, nor forgotten. As I remarked to Elizabeth, for some a house can be part of a planned downsize. But for many, when planning for the long term, it's tough to be sure you are going to either downsize or move to a less expensive area. Which sort of leads to the double book-keeping, net worth, and net worth sans-maison. I would suggest that when one is planning for income replacement at retirement and seeking to achieve the 20X pre-retirement income level (adjusted for SS of course), that they not plan on the home equity to help out, better that they retire with the 20X+house, than to miscalculate their long terms plans and have a rude awakening approaching the end game.
Joe
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Thanks, Elle. I've been thinking about my insistence that a house is not an investment. Yet, here I am calling it pre-paid shelter. So, in reality, my house is, indeed, an investment. While there is no tangible income, there is no question I am reaping a benefit by having purchased it. Is this benefit quantifiable? Probably, but I'm too interested in filling my retirement hours in other ways.
Elizabeth Richardson
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In applications for credit cards and various loans, a frequently asked question is: "Do you own your home, or rent?" Maybe the companies believe that ordinary folks who rent are more savvy and more responsible, have taken that advice, and are better credit risks. Somehow I doubt it! I suspect the lenders see home ownership as an indication of greater financial health and higher net worth.
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Agreed. But I would insist that real-estate investment can be one route to that net worth sans-maison goal. Also equity in a home at the time of retirement makes other financial decisions go more smoothly. People who own big houses with a lot of equity and overall net worth don't generally sell the houses and begin renting when they retire; they move to smaller houses, condos, or retirement communities. I have one relative who, although sick and unable to get around much, continued living in her big house until she died. She used other money to hire caretakers, nurses, etc. and got along fine.
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Deep and excellent point stretching back through the ages, always worth bringing up again. And a great example with the Skybox. You've encouraged me to bring it up as a lunch topic :-) Nothing wrong with being successful and getting a good exchange for one's product, but I think Buddha said "moderation in all things".
I do pretty good oil paintings (classical style). One day after completing a duplication of a Pissaro, I "saw" all the colors I had used, right there living, on a plain old L.A. street. The Impressionists pulled the blue out of the sky and dropped it on the ground, took the Autumn colors and touched the clouds with them. I saw all that. It struck me that no matter how much money one has - billions upon billions cannot buy what I had in those moments.
The thing that bugs me about the current financial crisis is that for all the woes in the housing market, leveraging CDO's took that amount of money and multiplied it by 20. That's a simplified view, but a problem about 20 times as big as the housing market troubles. The leverage was unregulated, the province of "magical" and secretive hedge fund type activities.
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Is it possible this also has political implications? Youth doesn't actually have the right answers?
Elizabeth Richardson
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I know at least one frequent contributor to this group (but not this thread) who would point out that what the credit card companies are actually looking for is the biggest, fattest targets for finance charges, which is how they make their profits. I happen to agree. Part of the propaganda in favor of home ownership that I mentioned earlier does indeed lead one to believe they will be viewed more favorably than renters when it comes to evaluating their financial health. But what it really means is, you're already on the hook for one type of debt, so you're more likely to go for more.
Think about it: if they really cared about your "financial health and higher net worth", they would be more concerned about the equity to debt ratio of your home ownership, not the simple fact of home ownership itself.
-Mark Bole
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That is probably true. What they want is someone who will spend a lot and carry a big balance, but at the same time will religiously make the monthly payments with the high interest added on, month after month. I guess an honest and reliable spendthrift sums up what they are looking for.
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If one is seeking financing at a car dealership (for one), it's true "Do you own your home or rent?" will be on the credit application. But such applications also ask the amount of the mortgage/rent payment and how long one has resided at the home/apartment. When it comes to car financing, I think a high monthly rent payment and long residence at the same apartment may be more advantageous than owning a home with a small (or non-existent) mortgage.
Either way, neither home owner nor renter should think his or her credit score measures the overall soundness of his or her financial situation. As a factual matter, it does not.
Elizabeth and Joe: What you all said about not fussing over how much one's home is returning as an "investment." I personally do not perceive the value of my humble little home the same way I perceive the value of my stock portfolio. Good things, whose value cannot be measured, happen in a home.
Mr. Weldon, I grappled with and then "got" your quotation. Part of the grappling was reading this slightly different version, turned up by google: Más sabe el diablo por viejo que por diablo. (The devil knows more because he is old, not because he is a devil.)
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I agree with this, including your primary home equity skews a persons view on the how successful they are at saving and financial planning.
There's nothing wrong with getting older and wanting a smaller place, but there is something wrong with being forced to downgrade because you home is also your retirement fund.
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First, I can share a similar anecdote - my 80 yr old client. Husband passed a few years ago, and I knew the house was a burden between the taxes and upkeep. Not for cash, but for the ongoing things that needed to be tended to. She sold it for $500K, and moved to a retirement Condo, which has assisted living as part of the complex. Unit cost $350K.
This validates your approach, but I'd suggest that it's far tougher to plan this so far in advance. At 45, I can know my savings vs my current income, I even have a fuzzy idea of my projected SS benefits, but I can't say when my wife and I are likely to build the retirement house, and therefore have no idea what fraction of my home's current value to count as being 'freed up' to add to my numbers. I'll concede that this isn't impossible. For some, even in their 40's they may know just where they wish to move and knowing the relative cost of living between the two cities, they are good to plan X% of their old house as part of savings. (maybe those good planners wonder why I am so clueless on that long term goal for myself.)
Joe
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Absolutely -- they need to understand the difference between liquid and illiquid assets.
But that's part of the propaganda -- "you should buy instead of rent because you'll build equity". Perhaps your view stated above should be required language in all ads by realty agents, home builders, and mortgage lenders, something like: "Warning: prospective home buyers should not take any present or future equity in a home purchase into account when considering their overall financial goals". That is what you said, right? ;-)
The cognitive dissonance on this subject is truly astounding...
That's what reverse mortgages are for -- people whose emotional attachment to a particular investment causes them to hang on to it long after it stops being a good fit for their needs.
-Mark Bole
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Yes, it certainly is difficult to plan far in advance, even if you don't consider unforseen things like major illness, loss of a job, divorce, etc. It seems to me that building up equity in a house is a big plus and does not require as much effort and discipline as putting away cash in a mutual fund or CD or whatever, where there is always a temptation to take out money for this or that purpose. I like the "forced savings" aspect of home ownership.
Another plan I have seen work well is buying a condo in a resort area (or a cabin on the lake, or whatever) with the intention of paying down the mortgage gradually over the years and eventually retiring and living in it. The value of that kind of vacation property can increase over the years, and the mortgage payments can be helped by renting it to tenants part of the time.
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Well, the homeowner vs renter is also a matter of stability. An owner has a much bigger hassle involved with moving. A car dealer wants to know where you live (and are likely to continue living) in case they need to come over and repossess the vehicle. A renter poses a bigger risk of suddenly disappearing with the collateral.
Of course, a long time at the same residence looks good for either owners or renters. But I would expect that owning looks generally better, regardless of time frame.
Why? I would expect exactly the opposite. The person with low or no mortgage burden has a lot more flexibility, including in a crisis. Whereas the renter might lose his/her job, and have to choose between making the housing payment or the car payment. Especially if the rent is relatively high. And a long residence period doesn't really help in that circumstance.
I expect that car financers use an algorithm similar to FICO's. The FICO algorithm rewards consumers for paying down debt regularly. No mortgage = no regular shelter payment. Rent = regular shelter payment = regular debt payment.
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I finally understand how banks made risk short of "disappearing" when lending to sub-prime borrowers. Of course, the massive defaults were written on the wall when many of such contracts were ARMs at all-time low interest rates.
Thanks for the explanation.
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Sheez, dude, I'm not trying to tick you off. I thought we were having a fun conversation here. That's the problem with text, it's difficult to assess mood and intent. So let's start over - go crack a beer before you read this, though...
You consider the house that you own and live in to be an investment. I don't (under most circumstances), but I can certainly understand why you do. A portion of the definition you quoted read, "In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth." I understand that this is not the end-all be-all definition of an investment, but I was pointing out that the house you're living in fails this part of your definition. A house you're living in is not saved until the future as implied by this sentence. I would assert, as other do here, that you are consuming your primary house by living in it. And just like the consumption of other durable goods, that consumption is evidenced by the wear you put on your house. Obviously there are components of the house that do not experience wear, or at least no additional wear, due to the fact that you are occupying the house, like the frame and foundation, barring catastrophic events like burning the place down. But once the house is built, the frame and foundation are not usually separable from the rest of the house in terms of value. In other words, when you buy a house to live in, you usually buy all the subcomponents as well - the land, the interior, the frame, the foundation, the driveway. This is usually sold as a unit as well.
If it wasn't so early, I'd go crack a beer myself. It must be 5pm somewhere, right?
-Will
william dot trice at ngc dot com
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I am still on the fence about this issue, but I will say that I think the definition in question is "broken".
The statement "an investment is the purchase of goods that are not consumed today BUT are used in the future to create wealth" omits provably existing alternatives. The word "but" creates an "either/or" situation. In this case, you either consume it (not an investment) or save it (an investment). However, in reality those are not the only options. You can partially consume, yet still save some. The definition seems to deny that possibility.
ISTM that a house falls under the "some of each" scenario. At any given time a house can be a consumption good or an investment and, more importantly, the same house can freely switch between the two. One could hypothetically buy a house, and live in it, all the while intending to later sell it, move into a smaller house (or rent), and pocket the profit. I don't see how a reasonable person wouldn't consider that an investment. Or the same person could buy the same house with the intention of never selling it, never making a penny off of it, not caring if it ever appreciates, and living in it until death. That, I don't feel, is an investment.
My $0.02: the definition to which the argument is being applied is flawed and thus a source of conflict. Whether it should or not, intent plays a role in investing (especially with real and personal property). I, for instance, collect wine. I have some wines that are worth 10x what I paid for them, but it does not matter because I will never sell them and someday I will consume them. However, I have others that I purchased simply because I felt the wine to be undervalued and I have every intention of selling them when the time is right.
My only source of conflict with the above is thus: even if I have no intention of selling a bottle, does the fact that I COULD still make it an investment?
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[comments snipped in accordance with posting guidelines, and apologies to the moderators for the length of this posting]
First, I'll try to make one reply do the work of two -- Will, I wasn't ticked, no problems there. I do appreciate a good conversation, frankly I was worried about me being too argumentative.
Will, I can only repeat, when you buy a house, a significant portion of what you buy, namely the land and/or the intangible benefits of living in a certain location, are not consumed no matter how long you live there, and everyone *does* expect the value of those things to increase over time (how else to explain why owning a closet in Manhattan can cost a million dollars?)
For both you and kastnna and others -- maybe it wasn't really clear, but I was also trying to bring in the concept of "opportunity cost". Since I started down this path, let me quote again from an Investopedia definition: "The difference in return between a chosen investment and one that is necessarily passed up."
Consider a house owned "free and clear" and occupied by someone who dies. The fact that they never sold nor intended to sell in their lifetime has no bearing on whether it is investment. Think of a Roth IRA that someone never plans to, and never does, make withdrawals from during their life -- still an investment, right? Just one they plan to leave to their heirs.
Now, suppose the heirs are trying to sell the empty house. Let's say they could easily get $300K net after sales expense, but are holding out for more. Suppose they could also park $300K cash in a "safe" bank account and earn 4% simple interest (to keep the math easy -- $1K/month). It's pretty clear to me that every month they hold out for a higher asking price is costing them $1K. If they wait six months and finally get $306K for the house, they have only just broken even (even though probate judges don't seem to get this concept).
Bring this back to the living homeowner: if you *don't* consider the house an investment, or if it is in fact not gaining any value as an investment, then that $1k/month needs to be added in to their total cost of shelter (in the first case), or considered as negative return on investment (the second case). It has to be accounted for somewhere.
Kastnaa, the valuable wine is a collectible, just like stamps, coins, artwork, and so on. There is an opportunity cost to hanging on to it, and if you end up drinking it, you've basically cashed in your investment and spent it on yourself. How is this different from starting a "wine fund" with some cash, letting it grow for a few decades, and the using the proceeds of the investment to buy and then immediately drink an expensive bottle of wine?
To summarize: I fully understand why it's wise to not treat a temporary bubble in housing prices as a reason to stop saving for retirement or to borrow more, but to me that's a different issue from understanding the investment decision you're making when choosing between renting (unbundled shelter) and owning (bundled shelter plus investment).
Which once again brings me back to the original subject of this thread: there is so much propaganda that says "buy a home instead of rent if at all possible", that many who should have carefully evaluated whether such an investment fit their situation and goals, instead jumped desperately at what they thought was their last best chance to buy into the "American dream". So much attention is given to warning investors in securities what they are getting into, but there should be the same warnings when it comes to buying houses. Of course the realtors and mortgage brokers and home builders wouldn't like that.
-Mark Bole
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