Your House Doesn't Add Up The Way You Think
In areas like metropolitan Washington, where real estate values have soared dramatically during the past decade, buying that house 20 or 30 years ago often seems like the smartest investment you ever made.
But was it? And -- if we view the roof over our heads as an investment, what role should it play in planning for retirement?
Coming off the recent housing boom, it's hard to think of investing in real estate as anything but a slam dunk. Even if you lived through a dip in prices in the early 1990s, and are watching prices settle now, the trend seems almost unrelentingly up.
But a recent study by Fidelity Research Institute offers a longer-term dose of reality, noting that inflation-adjusted returns on a dollar invested in residential real estate from 1963 to 2005 have been only slightly better than returns on low-risk Treasury securities over the same period. Stocks performed much better as an investment, averaging a return of 5.95 percent versus 1.35 percent for residential real estate. Even in the Northeast and the West Coast, where the growth in real estate values has been the highest, stocks and bonds beat real estate.
If that seems surprising to you it may be because we often use selective memory when we think about our homes as an investment. I've often bragged about buying my house -- now valued by the city at $730,740 -- for $42,000 in 1972. That makes me feel pretty smug, until I think about all the additional money I've invested. There was the nearly $100,000 loan in 1978 for renovations; the assets I gave up in return for my ex-husband's share of the real estate, and many thousands of dollars spent over the years for insulation, appliances, windows, doors and other upkeep. On top of that, there's the interest I've paid on the mortgage and home equity line of credit. After several refinancings, my current mortgage is for more than five times the original price of the house, albeit at a low-interest rate.
Dallas L. Salisbury, the head of the Employee Benefit Research Institute, says it's fair game to count your house as part of retirement assets as long as you also factor in related expenses. And "if you count it, you have to make sure you're focused on the fact that, when push comes to shove, you still need a place to live." A new home, though smaller, may wipe out most of your gains.
The fact is, most current retirees don't use the equity in their homes to support themselves in retirement, said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. They either reinvest it in a new home or leave it to their heirs.
But that trend may be coming to an end, she said: "I think, going forward, that is a luxury people are not going to be able to afford anymore, and it may be prudent to think about the house as an investment to tap in retirement."
People who are retired now are probably fine, she said. But those who retire 10 years from now "are going to be in trouble," because they will be less likely to have traditional pensions, will get less of a salary replacement benefit from Social Security and will pay more for Medicare. And they may not have enough time between now and retirement to save enough to cover the shortfall.
Although it may be painful to think about, more retirees may need to turn to reverse mortgages, Munnell said. Reverse mortgages provide cash that allows the homeowner to stay put. Once the homeowner leaves or dies, the loan is repaid, usually from the proceeds from the sale of the house.
But homeowners may not be able to tap as much value as they anticipate, she said. Many people have used home equity lines of credit in recent years to take money out of their real estate holdings for other purposes. That might not leave as much equity to take advantage of through a reverse mortgage. "You need to be careful how much you tap into it while you're working," she said.
Younger buyers especially should be mindful of the longer-range data on returns on investment in housing and not be swayed by periodic run-ups in real estate values, said Munnell. "It's not a killer investment," she said.
There are many other good reasons to buy a house, though. You need a place to live, you will build equity, and you'll get to exercise your creativity shaping your home to suit your own tastes and desires. But buying less house and more stocks might serve your long-term financial interests better than overextending yourself to buy a bigger house than you can afford.
Imagine yourself sitting in the swing on your back porch, opening your mail and looking at those big balances in your retirement savings accounts. That would be the best of both worlds.
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Tax reminder: If you're filing your taxes this week, remember that you can split your direct-deposited refund among as many as three accounts. That means you can have a portion deposited in your checking or savings account and put the rest in an individual retirement account. It's a convenient way to increase retirement savings.
Any questions about retirement that you'd like to see explored in the column? Please e-mail me firstname.lastname@example.org.