Sunday, March 29, 2009

A house should be a home, not a retirement plan....

I think I've made the point a couple of times that the primary driver behind purchasing a home should be an individual's preference to own not some fantasy that your house will be your lottery ticket.

There are a number of flaws with this chart that I'll address below, but it's interesting to note on an inflation adjusted basis the median home price in the US is now on par with prices from the 1980.

"In fact, a home buyer who bought the median priced single-family home at the 1979 peak has actually seen that home lose value (1.6% loss). Not an impressive performance considering that nearly three decades have passed."

There are a number of issues with this chart -

Pros for home ownership despite the flat return on investment
1) There are tax benefits of home ownership
2) Rent payments have a 0% return on the money spent.
3) Personal preference toward home ownership.

Cons against home ownership
1) Property taxes
2) Maintenance costs - roof, HVAC, etc.

The morale of the story enjoy your home (especially, on warm March weekends), but don't plan on funding your retirement, kid's college education, or purchase of that 1966 Shelby Cobra 427.

This is just one canary in the coal mine, but I find in interesting that hedge funds in London are threatening to leave.

Financial firms - investment banks, hedge funds, private equity, etc - bear much of the blame for creating the current economic crisis. However, they are massive employers with many high wage earners and as we head down the slippery slope of more regulation of financial firms, I think there is an outside shot that a country with more lax enforcement might become a haven for hedge funds and the new class of investment banking start-ups. Is some small, warm island nation decided to follow the Bermuda/reinsurance business model they could potentially steal many, many high wage jobs from London, Boston, NYC, etc.

As one hedge fund manager says in the article "We don't have to be in London".


RWiley said...

I went into retirement owning a home that was bought and paid for with no mortgage and in good repair. I always considered that as part of my retirement plan. Having a mortgage payment in retirement is not a wise idea. If I had invested the money in the market instead of my home, as I was advised, I would have lost much of it. I saw many of my contemporaries try to retire with a mortgage or two or three. Big mistake!

And guaranteed tax sheltered annuities? Sweet!

The Artful Blogger said...

It is a good point about having a mortgage in retirement. I try to convey to people that a home is a place to live. If it goes up or down in value should be very low on your list of considerations for why you want to own a home.

Unfortunately, far too many in the HGTV-era felt that the only reason to own a home was to sell it for more than they paid.

Thanks for the comment!

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