By Craig Erwin, Ph.D.
Don’t bet everything on your house even though houses mean a great deal to Americans. For most Americans, their house is their single biggest investment. Of course, many Americans live paycheck to paycheck and have very little saved. The Federal Reserve found that 46% of Americans would not be able to come up with $400 in an emergency. And the median 401(k) balance is $22,217, far less than the value of a typical American home. So, for many Americans, their home is by far their most valuable asset.
Is it a good thing that most Americans’ biggest investment is their home? No. Although having a home certainly beats not having a home, and many view it as a way to force yourself to save, a home lacks many of the qualities you would want in an asset. It is far less liquid than stocks and bonds. Plus, it can’t be easily sold to raise cash when you retire because, then where would you live? It is also very expensive to maintain, unlike stocks and bonds. You must pay steep property taxes, utilities, insurance, and maintenance expenses, so it is quite an expensive asset to own. Although its biggest benefit is that you can use it for shelter, that shelter does not come cheap. By the time you finish paying off a 30 year fixed loan, you will have paid 2.5 times the amount of the original loan and almost double the value of the home.
Clearly, Americans are very fond of home ownership. New home construction is at its highest level in a decade (in the midst of a pandemic). Builders are struggling to keep up with demand and the market for existing houses is humming along too. Existing home sales just hit a 14 year high. Americans are definitely in love with the idea of owning a home.
Although I own a home and I am usually happy I do, it would terrify me to have my home as my most valuable asset. And let’s face it, most of us don’t really own our homes; the banks own them. We slave away, struggling to pay down the mortgage for decades so we can finally say we own our houses for a few short years before we die. The vast majority of us only own a small fraction of our houses and build equity painfully slowly.
Not only are homes expensive to maintain, they can be money pits. It is tempting to keep replacing things like furniture and appliances, to keep remodeling regularly, and to keep filling our houses with expensive knick-knacks and gadgets. But, all of these things cost money. And the more money you pump into your house, the less you can save for important things such as college expenses and retirement.
Is there a better way? Should your home be your most valuable asset? I spent much of my life in apartments, even though I have had a house with a mortgage for the past 15 years since my kids started school. The benefit of spending my early years in an apartment is that I didn’t have to pay property taxes, PMI, insurance, or maintenance expenses. As a result, I had a lot more disposable income. What did I do with it? I saved aggressively for retirement through my employers’ retirement savings plans. By the time I bought a house, I had already accumulated a sizeable retirement account balance. After buying a house, I had to sharply reduce the amount I regularly contributed to retirement savings so I could pay the mortgage, PMI, insurance, etc. Fortunately, though, I had already laid a great foundation for retirement. I would have had less disposable income to use for retirement savings if I had bought a house when I was young; as a result I would have accumulated much less for retirement.
Owning a home can be a wonderful thing, but it can also be a burden and it won’t come cheap, so go in with your eyes wide open. Much like having children or adopting a pet, it’s unwise to buy a house on a whim. Before you buy, make sure you are ready for it, you really want and need a home, and you can afford it. Roughly 7 million people lost their homes during the great recession between 2007 and 2009. For many of them, buying a house was the worst decision they had ever made. If you choose to buy a house, make very sure that you are ready, you can afford it, and it won’t wreck your retirement savings plans. Owning a nice house is great, but it’s perfectly okay to rent, especially if you’re young and you don’t have kids. You don’t have to own the place you live in, especially if it could throw your retirement plans out the window.
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