House is an asset, not investment

David MoonBlog

Your house is an asset, but it is not investment.

It may be exciting for homeowners to see news reports of quick home sales and bidding wars resulting in higher-than-list sales prices. But if you own only one house and you live in it, those real estate price increases are little more than a balance sheet accounting adjustment you will likely never monetize.

According to Fannie Mae, the value of the median-priced home in the U.S. increased $35,000 in the past year, essentially equal to the $35,800 increase in home construction costs resulting from increased lumber prices. Zillow tells us that the average value of a “middle price tier” home in Knoxville rose 15.7% in the past year, to $243,520, implying a net worth increase for these homeowners of $33,000.

What can you do with that extra $33,000?  If you sell your house to capture that gain, the prices of similar houses you might buy are also more expensive. And if you are seeking to “trade up,” the prices of larger, more expensive houses have increased even more.

You could always use the $33,000 as increased collateral for a home equity line of credit to build a pool or take an around-the-world cruise, but you’d have to repay the loan, or else we get the 2008 mortgage crisis again.

For most of us, a house is a place of utility. We may assign some emotional or ego value to living in the “right neighborhood” or some utilitarian value to living near our frequent activities, but a house is not like a perfectly restored antique car one can easily sell if offered outrageous price. What difference does it make if it’s a “seller’s market,” if every seller is also a buyer?  You have to live somewhere. Few people, if any, would sell their residence and then rent, waiting for a decline in real estate prices.

In 35 years of working with people and their money I have seen someone willingly move into a less expensive single-family home only twice. I’ve seen plenty of people move into smaller houses as they get older, but almost never into a less expensive one.

My wife and I bought our first home two months following graduation from college, paying $76,000 for a brand new, 1,600 square foot house with a yard about the size of my current front porch. We sold it 10 years later for $114,000, netting a $38,000 gain, excluding property taxes, a decade of routine maintenance, a small fortune in lawn tools and the cost of removing a family of skunks from underneath the porch. I have never seen a penny of that $38,000.

David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.