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A man's home is his castle, not his retirement plan | ||
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By DAVID MOON, Moon Capital
Management 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 home value.
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.
Oh my.
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 alpha.
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 mortgage.
Balanced against the
algebraic argument, however, is the emotional peace of owning one's home. It is
a disappearing notion in today's 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 something. Please.
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).
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