By DAVID MOON, Moon Capital
November 19, 2006
Everyone please repeat after me: my
home is not an investment.
I was away last week,
and in my place was a very well-written essay describing the investment
qualities of owner-occupied residential real estate versus other generic
vehicles that an individual might purchase, particularly within a tax-deferred
environment. The article noted that from 2001 to 2004, the average stock
portfolio declined 34 percent, compared to a 22 percent increase in the average
We also learned that a
significant number of Americans are in worse financial shape because they choose
to pay down (or off) their mortgage, rather than manage their house debt like
any other investment.
I am certain there are
exceptions, but in more than 20 years I can't recall a single client ever
selling one home and moving into a less expensive one. An exception might be
someone moving to a relatively less expensive region of the country. Even then,
however, the tendency is to spend the same amount of money on a larger house.
I've seen people move
into smaller homes that were just as expensive. I've seen them sell one big
house and buy two less expensive ones. But mostly I've seen people buy and live
in houses because they like them, not because that particular residence lowers
the beta of their investment portfolio or might produce excess
Even so, doesn't it make
sense to keep your mortgage big? There is a legitimate algebraic argument in
favor of carrying as large a mortgage as possible, provided you can service the
debt, deduct the interest expense and earn more on your financial investments
than the after-tax cost of your mortgage debt.
This scenario encourages
you to pay as little principal as possible on your mortgage, even to the extent
of paying none if your lender will agree to it.
In some cases, lenders
don't even make the borrowers pay the full interest amount each month. They just
add the unpaid amount to the loan balance each month.
Now back to the real
world. It's interesting that most of the folks I've seen make that algebraic
argument are in the business of selling houses, mortgages or financial
investments. Get a bigger mortgage, buy a bigger house, and please, don't take
money out of your investment account to pay off your
Balanced against the
algebraic argument, however, is the emotional peace of owning one's home. It is
a disappearing notion in today's America.
Does real estate
encourage weird thinking? In a recent ad, the National Association of Realtors
advised, 'It's a great time to buy or sell a home.' Now there's some investment
advice. It is a good time to both buy and sell. Price is irrelevant. Just do
A house is a place to
stay warm and dry, to grow flowers and kids, to have Thanksgiving dinner and
clean dog pee off the carpet. It may make tax sense to mortgage the place to the
hilt, but personally I don't want to be thinking about leverage, liens and the
effect of a layoff while worrying if I can afford to buy my kids a trampoline.
Not having those
thoughts is worth something. Ideally, birthday parties should be about balloons,
not balloon payments.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).