When a recent Federal Housing Agency report revealed that the one-year 7.6 percent increase in Knoxville home prices ranked in the country’s top ten, it provided rationale for real estate sales folks to proclaim that now is a great time for Knoxvillians to sell their houses. Of course, even in my follicle-challenged condition, my barber thinks it’s always a good time for me to get a haircut, too.
If you sell your house today at a big profit, what will you do with your newfound gains? You have to live somewhere. You will buy another house, likely more expensive than the one you just sold. You won’t practically realize the gain unless you’re going to rent for a while or move to rural Alabama where the nicest house in the county costs $90 a square foot and includes a herd of feral goats.
No matter how many times you’ve heard it, your house is not an investment. It is a place to sleep, eat and watch episodes of Judge Judy. While it is the most expensive asset that most people ever purchase, seldom do people realize the price appreciation of the asset. People trade smaller, but they rarely trade cheaper.
While you shouldn’t think of your house as a part of your investment portfolio, you can improve your net worth if you will apply a little “house logic” to your 401(k).
If a stranger called the day after you closed on your new $250,000 home and offered you $230,000 for the house, would you panic and sell, fearful that if you wait 6 months it might only fetch $200,000?
Or, if you are interested in a house that is on the market for $300,000 would you wait until the sellers raise their asking price before making an offer?
These actions sound rationally defective in the context of buying a house. But investors regularly do this when investing in the stock market. They will panic and sell a stock because its price declines. Or they will buy a stock simply because its price has increased, without any assessment of the underlying asset: the company.
It may be a superficial metric, but every potential home-buyer at least evaluates the price per square foot of a house, providing some rudimentary gauge of the asset’s price relative to its possible value. But with stocks, the only buy/sell criteria for many investors is simply price.
As with your house, if your decision to buy a stock or mutual fund was well-rationed, sometimes it’s best to ignore daily fluctuations in the price someone else is willing to pay you for it.
David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.