Owning the house is the best deal IMO. But what I’m saying is I know or know of far too many people who are of the mindset “we don’t have to save anything, our house is earning 8% per year! Woo hoo! We’re building net worth like a motherfuck!” Case in point is a friend I have in California who brags that his net worth is about, ironically, $500,000 due to the housing market. However, if you eliminate the house (and mortgage) from the equation, then his net worth is about (-$30,000). That can’t be good.
Just like you should diversify your investments, your house should be no more than a small fraction of your total net worth. Like Ice Machine said, maybe less than a third. Personally, I would say his 20% example is a good one to follow. But then I’m a scientist, not an investment banker.
Our house is about 50% of our net worth. However we are in our early 40s and our investments grow faster than our house value. I think that 20% or even 33% is somewhat age dependent. Additionally we own over 2/3rds of the value of our home, so it could take a large hit and we will still have value left in the house.
On **Sarafeena’s ** point about how cheap it would be to live in a house with no mortgage: Well in NJ the Taxes are exceptionally high. I would expect that in 20-30 years, my property taxes will be in the $15,000 range. That is not something you want to be paying, when you are no longer working. We plan to sell the house and downsize and move someplace with very low taxes.
True, it is age-dependent and would fluctuate over time. Our house hasn’t really increased in value and was probably about 40-45% of our net worth when we bought it 6 years ago. It is now paid off and we may consider moving in the next couple years. The new house would likely be about 40% of our net worth but will drop to about 25% or so after a few years. The real trouble is for people like **Una Perrson’s ** friend and several friends I have where their house is their entire net worth. I think location also has an effect. Housing is fairly inexpensive here unlike some places.
I’m also an engineer so financial advice isn’t necessarily my strong point.
I’m not an investment banker, either, but I totally agree with you. Owning a home, I think, is important. Owning a huge, expensive home not so much. I don’t necessarily believe in “trading up” to a bigger/nicer home just because you can.
We have high taxes, too…we are already paying almost $10,000, so by the time we retire, I can’t imagine what they will be. That’s why a lot of people do downsize, but my point is the same…if you own a house, you can buy a smaller/cheaper place outright, and still have no monthly mortgage/rent. If you downsize a lot, you might have a bundle of cash left over, as well.
There’s another proposition that lets you keep your low property tax if you’re over a certain age and shift to a house that’s the same size or smaller. I’m afraid I don’t remember what the prop number is. You may end up paying the same property tax for a smaller house, but you don’t get the ballooning effect.
I won’t argue with the idea, but I’d always heard that your house payment should be about a third of your monthly income.
Being able to buy a small place and pay not mortgage/rent has to do with having assets, not with owning a house. You could do the same if you invested in something else.
My Dad retired form the Air Force in 1968. He received retirement from that time to a couple months ago when he passed away. It started at about $500 per month and through COLA ended at about $1,700. I have calculated that at the time of his retirement the present value of those cash payments to be about $260k. In today dollars this would be about 870K. This does not include all the free medical care that he received. He was not a rich man
So 500K is really only a good start for retirement savings. I fear that it will be a busy time in the future at the local dumpsters with all the retirees digging for a little extra money to by food and drugs.
Sure, but having a place to live is something you need, so why would you rent, when you never get any of that money back, and try to save on top of that? Buying a house kills two birds with one stone…no, wait, actually three…gives you a place to live now, gives you a relatively good return on investment, and gives you a place to live virtually cost-free when you are retired.
Not to mention the government subsidy of your investment via the home mortgage interest deduction. And the capital gains exemptions on sale of your home.
For most people, that is simply not practical. Houses (at least in major cities) are so expensive, such a formula would either require more cash than the average person is ever likely to earn, or require them to forgo house ownership.
Remember, that’s dollars saved after tax, and after expenses.
Edit: my house is a modest 3 bedroom in a good community. It cost $660,000 two years ago; comparable houses are going for $850,000 today.
It’s not always that simple. In some inflated housing markets, it costs a lot more to buy a house than you’ll pay in rent. Admittedly, the market value of a house may increase fast enough that it’s still worthwhile to own, but that’s not always the case.
But I’d like to hear more from VCO3, as he’s stated so far that he doesn’t plan to buy a house, buy stock or save money in an interest-earning account. His OP here seems to argue against the very idea of saving money at all. So I wonder how he plans things like buying a car, or taking a trip, or whatever. Is it OK to save some money this month so one can fly home for Thanksgiving next month? What about saving up to buy a new car next year? And do other people share the same philosophies as VCO3?
So in other words, your household income is about $250,000-$350,000 a year? Seriously, given the median household income in the US is very low ($48,201 in 2006) how could anyone afford a house there?
Modest 3-4 bedroom houses within 10 minutes of the “tech corridor” here can be found right now for $150,000 to $200,000. A very nice 4-bedroom 2700 square-foot one which was totally restored inside and out, with huge trees in the yard, and which is 5 minutes from the tech corridor went for $210,000. The average household income is (IIRC) about $75,000 for the county - but then, it is the “richest” county in the 2-State area. I can’t imagine spending more than twice my gross income for a house.
Ummm, that’s terrific, but what’s your point? We should all move to places like Indiana or Nebraska where land and houses are cheap (and jobs are few)?
You should check out real estate prices in Toronto. You can’t get a doghouse here for $150,000.
Here is a typical house you get in Toronto these days for $650,000. Not a mansion by any means: REALTOR.ca
I am a fairly high-income earner (I’m a lawyer, this year I estimate I’ll earn around $250,000 before taxes; my wife, a financial editor, another $70,000). I have no idea how people with a modest income afford houses. I suspect that mostly they don’t, in this city; but rents are also quite high, I undestand.
How can people afford to live here? I honestly don’t know. There must be a lot of money around, though, since houses costing more than a million are now quite common.
I don’t really consider us “rich”, though our gross household income is high - around $320,000. We can take whatever holidays and buy whatever books and toys we want it is true, and we can afford a nanny for the baby (my wife’s aunt) and a relatively modest 3 bedroom house; we own a six-year-old second-hand car; we are saving money in a retirement fund, and making extra mortgage payments (in Canada, we don’t get that mortgage interest tax break). We are doing okay but far from truly wealthy.
Though many in my income level spend more than I on a house … often, they’ve been building up house equity for years (I rented for a long time, because I’m debt-adverse).
You can’t get a doghouse here for $150,000.