There’s no place like home. An expression offered across the country, from tired people at the end of a long day, to families coming home for the holidays. We think of our homes as a sanctuary, our castle, a respite from the crazy world outside. A funny thing happened a few years ago; our humble homes started growing, dominating and becoming the superman of dwellings. All of a sudden people started viewing their homes as their biggest asset, the key to wealth, for many even an ATM that couldn’t run dry. Until it did run dry. The “biggest” asset went back to being a liability, and the “key to wealth” couldn’t unlock anything. How could our good homes turn so bad?
Once upon a time owning your own home was the American dream. Somewhere along the line it became viewed as a right rather than a dream. Then there was the long line of people, (let me just refer to them as anyone who could benefit from the housing boom), who enabled this massive bubble to grow and burst. A lot of people want to assign blame and point fingers, but there is such a large shirking of responsibility from everyone involved that almost everyone has some dirt on their hands. That being said, let us look at what happened so we can learn from this, make changes to limit any damage, and plan better for the future.
Your house is a shelter. That is its purpose. That is why it was created. Anything else above and beyond that is great, but let’s just keep its original intention in mind. Some will say that it is also a great tax advantage. That is not always true, in fact that is rarely true. We are discussing your primary residence, not a vacation home, not an income property, and not a commercial property. Some of these other entities do offer great tax advantages and can be part of a well balanced and diversified investment strategy. But we are only speaking about your home. I keep harping on this, but for the sake of this article it is very important to keep this in mind. Your primary house does not offer near the tax benefits as other types of real estate. Yes you can deduct your mortgage interest, but that still means you have to pay that interest. Which would you rather have, the tax deduction on the interest, or not having to pay the interest. Once you look at it from that angle, a deduction is never as good as the alternative.
Another part of the craze was that everyone wanted to “get in” before prices went even higher. Many were motivated by the notion that prices only went up and there was no ceiling on this historically high growth. The result was many people paid too much for the house they are in. You may even be drastically upside down on your mortgage meaning that you owe more then your house is worth. This is not the end of the world, in fact it may be alright. At some point houses will increase in value again, at least on a national level. So if you remember that you liked your house, it met your family’s needs and it is just shelter, then you are fine. You have a nice place to live that meets your needs and that hopefully you can afford. The other issue with individual home prices is that they are so localized, that it is hard to say what truly the right price for a home is, and where that price is headed. Parts of the country have stabilized, some higher end homes have continued to go up in price, and yet part of the country is still in a form of free fall.
I mentioned in the previous paragraph that hopefully you can afford your home. I am directing that more towards people that purchased a home in recent years and may have gotten in over their heads or purchased a variable rate mortgage. Now, let me put in one caveat before your mind starts thinking about how bad adjustable rate mortgages (ARMS) are. Finance and investment products are often referred to as tools and sometimes vehicles. That’s because you use them to serve a purpose, fix a problem, or get you to your end goal. They are not inherently good or bad. Depending on your situation, different tools may be good and work for you, and other vehicles may be bad and get you nowhere except the poor house. Now back to the topic at hand. ARMS used properly are just fine and serve a purpose. The bad part is that many people utilized this tool incorrectly and are now running into problems. If you can afford to live where you are, that is great. If you can’t afford your current situation, please act as quickly as you can to improve your situation. Call your lender for starters. Many lenders can work with you and may even restructure your loans to keep your home affordable. You may have to sell and downsize or rent to make your budget work. Please do whatever it takes to get a proper shelter and not destroy your credit in the process. Those long term effects can be much more serious then delaying home ownership or a home upgrade for a few years.
Now, assuming you’re living in a home you can afford or are in the market for a home, let’s look at some of the lessons we have learned and approach this situation from the right frame of mind. House prices do not always go up. They often go up by only modest levels and frequently stay level for many years; not normally what you want to look for in an “investment”. Also, this so-called asset costs a lot of money in up-keep. Besides the cost of home owner’s insurance, property taxes, electric, water and sewer for many people, heating & cooling, general maintenance & up-keep, there is the interest on the mortgage that you don’t get back. There are a slew of other costs to owning a home. If you view these as the cost of shelter and living for your family, it’s well worth it. If you view it from an asset frame of mind, it costs a lot of money for a potentially small long term return, which you have no control over.
One last thing to consider is how illiquid a house can be. With the lending market right now, it is hard to get a home equity loan to be able to use all of the money you accumulated (if you have any). Also there is something wrong about having to borrow and pay interest on your own money to take it out and use it; not to mention how difficult it can be to sell a home right now. So all of this “wealth” that is built up inside your home is very hard to tap into, if you can get to it at all. If you do cash out and sell, besides possible tax implications you will still need somewhere to live. Remember it is a dwelling place first. So either you get a new mortgage, start renting, or buy a smaller dwelling which will eat into that chunk of money you thought you had.
Something that costs a lot of money, with minimal upside, almost no tax advantage, and is difficult to access is not something I would ever recommend to my clients as an investment. As a home, it can work out, but as a “key to wealth”, I’ll let you decide that.
