it doesnt matter what my house is worth

March 10th, 2008

It Doesn’t Matter What My House Is Worth

I hear on TV and the radio a lot discussions about the concept of “equity” and how much equity people have in their homes. There’s the equity that one gets from paying down the mortgage on their house (or from paying cash for part or all of their home purchase) and then there’s the equity from the value of the house rising, independently of what you paid for it. I used to think about that second kind of equity as some kind of return on my investment, but not any more.

For me, that second kind of equity doesn’t exactly matter, and here’s why. I live in an inexpensive part of the country. If the value of my house shoots way up, I know that the value of more expensive places have shot up even more. I don’t live in a place where it’s really possible to downsize very much – yes, I could live in a smaller house once my kids grow up, but the difference in price between my house and a much smaller house, in my particular market, is not all that much. Not enough to retire on or anything like that, in fact, not even enough to support us for a year. And there aren’t a lot of other places in the country I could move to that have even lower home prices than we do.

I’m fast approaching my mid-thirties, and there is no way I’d want to still be paying a mortgage when I retire. The equity in my house that I contribute to – by paying down my mortgage – is important to me, because once the house is paid off, I can use the proceeds from selling the house someday to buy something else reasonable and not have a mortgage, if we choose to move. But I don’t expect to make a huge profit from that and walk away with college for my kids or our retirement all taken care of. The amount my house increases in value just keeps me able to buy something else someday if we did decide to move, since all the other similar houses go up in value as well right along with mine.

Maybe I’m a pessimist, but I prefer to see it as realism. As long as we’re just staying put in this house, it doesn’t really matter how much fluctuation happens in its value. And at some point in the future, if we decide to move, the increase in value just needs to keep up with everyone else’s so we can break even. It’s not an investment, its just our home. We have to live somewhere, after all.  I do look forward to when we earn a good chunk of equity from our own payments, though.

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18 Responses to “It Doesn’t Matter What My House Is Worth”

  1. I think it is important to have the mindset you have when you are in a home for the long run. It is healthy to view a house as home rather than an investment. I can’t wait to live in a home rather than an investment. I envy you.

  2. And that’s how we all got in this mess today..looking at homes as investments and cash cows. We bought our house at almost the height of the market and will have to stay put, or keep it, for a long time to not lose at least what we put into it!

  3. I really feel the only time we should think of residential real estate as an investment is if we decide to be landlords. If it’s something you yourself are living in, it’s a place to live. There are better investments out there with risks involved which won’t leave you homeless and foreclosed at the end of them.

  4. I agree with your article completely. Throughout the entire housing boom, I felt uncomfortable with the idea of a home as an investment. It’s nice to know my instinct was right :)

  5. @emily – you’ve actually put sweat equity into your house though fixing it up, so you’ve increased the value more than just the passage of time. And you live in a home and an investment – it is certainly a home! I’ve seen the cute pictures! :)

  6. We always buy a smaller/well priced home in the best neighborhood that we can and remodel it. That way, the money we put into it can be remade if we have to sell- we don’t outbuild the neighborhood. We recently sold a home in a dead market and made $80K after realtor fees. I look at it as an investment in the sense of is what I am buying a good buy. Don’t buy the top of the market price because you get stuck. We moved and bought a home that is in a great neighborhood. It was priced about 75K under value and we are remodeling. Three homes have been on the market for $100K more than us. It is an investment in the fact of knowing that we can make our money back if we have to sell. I don’t look at it as an investment of where we put our money for investment purposes for college and retirement.

  7. I think homes are a non-traditional investment…they’re a psychological investment more than anything. And it’s good to have one, whether you own it or rent it. I’m a bit invested in our little apartment, which is good because it keeps me from dreaming much about other places.

    As you say, the best you can do is get less or no mortgage someday if you move. That’s a good thing, but you’re totally right about its not being an investment.

    I like Dana’s point that landlording is what turns real estate from a home into an investment.

  8. The house thing is the one thing I can’t figure out when doing net worth calculations. It seems that you’re supposed to take the value of your home minus the amount you still owe, but I have no idea how much my house is worth (I won’t know until I sell it either)! I know how much I paid for it, so maybe that’s what I’m supposed to use. I can’t find anything that tells me. Does anyone have any suggestions?

  9. During the last 5 years, I really cared what my house was worth!

    I bought my first house 5 years ago. I put as much into the loan payments as I could, and bought an average house in a good area. It went up in value, riding on the coat tails of the other houses in the area. I sold it, and bought another average house but in a far better area. I continued paying it off over 2yrs, it went up in value even more, I sold it, and moved up another notch which is where I am now. My first house cost $275k with a loan of $250. My current house is worth $650k and I have a loan of about $100k.

    My next move is not so much downsizing, but downgrading. I don’t need/want a flash house in a flash area, so the next house will be more like my first. It will cost about $450k now, so when I move I’ll have no home loan, and perfectly good house, and $100k left over.

    Moving is a pain, but this worked well for me. I’ll stay put next time – and then I wont care what my house is worth!

  10. The only way to really, really know how much equity you have in your house is to sell in and see how much money is left over for you at the close. This will always be true in any property … “it’s all trash, ’til you are holding cash”

    For residential property there is no way to influence the market swings in property values.

    Commercial property is different. In commercial real estate the value of the property is linked to the income in generates and you can “force” appreciation by growing the income. That is why commercial values are MUCH easier to calculate.

    My apartment building that used to produce $5000/month in income is worth a LOT more now that it produces $7500/month. I can bank on it and the buyer will pay for it.

    My two cents

  11. I’ve had the same thoughts. A few years ago when property values were up, my friends kept telling me we should sell since our house would be worth as much as $80K more than we “paid” for it. But, the other houses had gone up in value, too, so it seemed to me we would have to pay at least $80K more for the new home AND we would have to move and incur all the expenses of moving. I still wonder about it, though. The friends that encouraged me to sell have done well financially, so maybe they know something I don’t. (?)

  12. Such an important post; it is related to the 20% Rule that I posted, which says: never have more than 20% of your Net Worth ‘invested’ (as equity) in your own home.

    Withdraw some of that equity (by refinancing at today’s historically low interest rates … lock in for as long as possible!) and use that to buy some cheap stocks and rental real-estate (hold for as long as possible!).

    Result = Rich!

  13. There’s a good reason not to think of a house as an investment: it isn’t. In general, over long periods of time, residential housing simply tracks inflation. That makes sense because unless you improve it, it’s the same house less wear and tear. But what about all those people who claim they made a fortunate in real estate? Some of them did, if they bought and sold at the right time. Timing is everything. If you bought well before the housing bubble, sold near the top, and became a renter, then you made out pretty well. But not everyone is so lucky (I did exactly that and I’m lucky). Of course you need to know how to calculate your rate of return properly. You need to include opportunity costs, maintenance costs, insurance, taxes, transaction fees etc. The gain is not simply the purchase price divided by the selling price. Home prices tend to have long-period oscillations around a trend line that rises at the rate of inflation. Those who timed it right crow about it, but those who lost tend to be quiet. Hence the common perception that “real estate never goes down.” The actual real return you get from real estate is the money you don’t pay in rent. In other words, real estate is a really a consumption item, not an investment item. Even if you own, you are still paying rent because you could rent out the home you own and live somewhere else. In other words rent is an implicit cost for the homeowner. Owning a home also induces people to over spend on it because they think of the improvements as an “investment.” However, at best, you only break even on those improvements. If you had invested the money you spent on the improvements, in general you would be ahead. But don’t you build equity instead of “throwing your money away on rent?” You do build equity, because in effect owning a home forces you to save. But it’s more expensive (once you include all those other costs) to own than to rent, and if you invested the difference you might come out ahead. And as I said, you are always paying rent, unless somehow you can live someplace for free. Some people lack the discipline to save, and owning a home is a good way to force them to save.

    I’m not against owning real estate just so long as you realize that you are consuming, not investing. Unfortunately since the 1970s Americans have been over consuming because they were advised to “buy as much house as they can afford and then some.” This bad advice has caused many people to live in houses that were more than they needed and to get into too much debt. Now we are paying the price as the crashing real estate market takes down the American economy.


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