Your House is NOT an Investment

Recent news reported the 100 hardest hit cities where the mortgage crisis lingers.  Homeowners are “stuck in loans for more than their home is worth.” This situation of “negative equity” or being “underwater” ranges from 22% to 56% in these metropolitan areas with Hartford, Connecticut the highest.  It’s not only an East Coast issue, though, the problem is shared by cities like St. Louis, Milwaukee and Seattle.

One problem is that people have been led astray by the realtor’s and financial advisor’s propaganda about the “American dream.”  There is no shame in renting.  In fact where there are commonly two categories on credit applications and other paperwork:  rent or own, there should probably be three:  rent, own, or buying.  This would remind us that anyone paying a mortgage does not yet own the house, as many who went through a foreclosure now understand.  And those who are “underwater” right now are less well off than renters, since they are making monthly payments but can’t easily “break the lease” if a better opportunity arises or call the landlord to take care of maintenance problems.

A house should not be considered an investment.  This only encourages Americans to buy more house than they need and, in some cases, more than they can afford.  Advisors tell us that it is an investment, using the leverage of borrowed money, not our money, to purchase an asset that will appreciate.  We have little at stake, but get to keep all the appreciation in value.

But investments are risky.  Sometimes they don’t appreciate.  Sometimes, though rarely, houses lose value.  This has been the case lately.  “After bouncing back smartly in 2012 and most of 2013 following the 2006-09 real estate crash, the housing market began slowing last fall.” That’s eight years of turmoil, and the investment at risk is the roof over your head (and your family).

In the whole housing-as-an-investment game, some have been lucky and some have been very unlucky.  When we retire, we still need a roof over our heads.  So when it’s time to cash in our investment, we get the often impractical advice to downsize or move to an area of lower housing prices or take out a high-cost reverse mortgage.  Wouldn't it make more sense to live in the right house in the first place with retirement savings in more accessible assets?