Your House Doesn’t Add Up The Way You Think

The Washington Post Sunday - - Business - Martha M. Hamil­ton

In ar­eas like metropoli­tan Wash­ing­ton, where real es­tate val­ues have soared dra­mat­i­cally dur­ing the past decade, buy­ing that house 20 or 30 years ago of­ten seems like the smartest in­vest­ment you ever made.

But was it? And — if we view the roof over our heads as an in­vest­ment, what role should it play in plan­ning for re­tire­ment?

Com­ing off the re­cent hous­ing boom, it’s hard to think of in­vest­ing in real es­tate as any­thing but a slam dunk. Even if you lived through a dip in prices in the early 1990s, and are watch­ing prices settle now, the trend seems al­most un­re­lent­ingly up.

But a re­cent study by Fi­delity Re­search In­sti­tute of­fers a longer- term dose of re­al­ity, not­ing that in­fla­tion- ad­justed re­turns on a dol­lar in­vested in res­i­den­tial real es­tate from 1963 to 2005 have been only slightly bet­ter than re­turns on low- risk Trea­sury se­cu­ri­ties over the same pe­riod. Stocks per­formed much bet­ter as an in­vest­ment, av­er­ag­ing a

re­turn of 5.95 per­cent ver­sus 1.35 per­cent for res­i­den­tial real es­tate. Even in the North­east and the West Coast, where the growth in real es­tate val­ues has been the high­est, stocks and bonds beat real es­tate.

If that seems sur­pris­ing to you it may be be­cause we of­ten use se­lec­tive me­mory when we think about our homes as an in­vest­ment. I’ve of­ten bragged about buy­ing my house — now val­ued by the city at $ 730,740 — for $ 42,000 in 1972. That makes me feel pretty smug, un­til I think about all the ad­di­tional money I’ve in­vested. There was the nearly $ 100,000 loan in 1978 for ren­o­va­tions; the as­sets I gave up in re­turn for my ex- hus­band’s share of the real es­tate, and many thou­sands of dol­lars spent over the years for in­su­la­tion, ap­pli­ances, win­dows, doors and other up­keep. On top of that, there’s the in­ter­est I’ve paid on the mort­gage and home eq­uity line of credit. Af­ter sev­eral re­fi­nanc­ings, my cur­rent mort­gage is for more than five times the orig­i­nal price of the house, al­beit at a low- in­ter­est rate.

Dal­las L. Sal­is­bury, the head of the Em­ployee Ben­e­fit Re­search In­sti­tute, says it’s fair game to count your house as part of re­tire­ment as­sets as long as you also fac­tor in re­lated ex­penses. And “ if you count it, you have to make sure you’re fo­cused on the fact that, when push comes to shove, you still need a place to live.” A new home, though smaller, may wipe out most of your gains.

The fact is, most cur­rent re­tirees don’t use the eq­uity in their homes to sup­port them­selves in re­tire­ment, said Ali­cia H. Mun­nell, di­rec­tor of the Cen­ter for Re­tire­ment Re­search at Bos­ton Col­lege. They ei­ther rein­vest it in a new home or leave it to their heirs.

But that trend may be com­ing to an end, she said: “ I think, go­ing for­ward, that is a lux­ury peo­ple are not go­ing to be able to af­ford any­more, and it may be pru­dent to think about the house as an in­vest­ment to tap in re­tire­ment.”

Peo­ple who are re­tired now are prob­a­bly fine, she said. But those who re­tire 10 years from now “ are go­ing to be in trou­ble,” be­cause they will be less likely to have tra­di­tional pen­sions, will get less of a salary re­place­ment ben­e­fit from So­cial Se­cu­rity and will pay more for Medi­care. And they may not have enough time be­tween now and re­tire­ment to save enough to cover the short­fall.

Al­though it may be painful to think about, more re­tirees may need to turn to re­verse mort­gages, Mun­nell said. Re­verse mort­gages pro­vide cash that al­lows the home­owner to stay put. Once the home­owner leaves or dies, the loan is re­paid, usu­ally from the pro­ceeds from the sale of the house.

But home­own­ers may not be able to tap as much value as they an­tic­i­pate, she said. Many peo­ple have used home eq­uity lines of credit in re­cent years to take money out of their real es­tate hold­ings for other pur­poses. That might not leave as much eq­uity to take ad­van­tage of through a re­verse mort­gage. “ You need to be care­ful how much you tap into it while you’re work­ing,” she said.

Younger buy­ers es­pe­cially should be mind­ful of the longer- range data on re­turns on in­vest­ment in hous­ing and not be swayed by pe­ri­odic run- ups in real es­tate val­ues, said Mun­nell. “ It’s not a killer in­vest­ment,” she said.

There are many other good rea­sons to buy a house, though. You need a place to live, you will build eq­uity, and you’ll get to ex­er­cise your cre­ativ­ity shap­ing your home to suit your own tastes and de­sires. But buy­ing less house and more stocks might serve your long- term fi­nan­cial in­ter­ests bet­ter than overex­tend­ing your­self to buy a big­ger house than you can af­ford.

Imag­ine your­self sit­ting in the swing on your back porch, open­ing your mail and look­ing at those big bal­ances in your re­tire­ment sav­ings ac­counts. That would be the best of both worlds.

Tax re­minder: If you’re fil­ing your taxes this week, re­mem­ber that you can split your di­rect- de­posited re­fund among as many as three ac­counts. That means you can have a por­tion de­posited in your check­ing or sav­ings ac­count and put the rest in an in­di­vid­ual re­tire­ment ac­count. It’s a con­ve­nient way to in­crease re­tire­ment sav­ings. Any ques­tions about re­tire­ment that you’d like to see ex­plored in the col­umn? Please e- mail me at hamil­tonm@ wash­post. com.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.