Is your house an asset, or not?

Homeownership can have a dramatic impact on most other financial goals and obligations, particularly retirement

Just as we have questioned the true value and cost of higher education in an era of increasing student loan debt (and stagnating wages), how we handle the questions of where to live and how much to spend on housing should also come under scrutiny. 

The quest for homeownership is such a part of the American culture it has been celebrated in classic movies such as “It’s a Wonderful Life,” where George Bailey at his Building & Loan helped folks purchase their first homes — a first step on the road to prosperity. 

Since the end of World War II and the implementation of the G.I. Bill, which helped turn tens of millions of veterans into homeowners, the economics of homeownership have been overlooked and taken for granted. Both younger and older Americans are finding out that home ownership can be a hidden anchor and even a drag, not enhancement, to one’s financial security.

While it is true that the housing market has recovered since the collapse of 2007-2008, it doesn’t mean the status quo has been restored.

Housing is primarily tied to three key variables: location, personal incomes and interest rates. And, different than other advanced countries, our government artificially inflates housing markets with mortgage tax deductions and other incentives. The reality is that the true cost and value of homeownership is often complicated, misleading, and has a dramatic impact on most other financial goals and obligations, particularly one’s retirement. 

For decades, the U.S. housing market had been a stable long-term investment, but housing trends and the demographics that support them have changed:

• Middle class wage growth has been stagnant for the better part of the past 20 years, despite rising property prices, healthcare costs and educational expenses.

• The so-called “McMansions” that became ubiquitous in the 1980s and 1990s have been found to be wanting as an “investment.”

• The cultural trend is downsizing to smaller dwellings that are easier to maintain and make energy costs more efficient.

• Locally, a 2014 study by the NH Housing Finance Authority and NH Center for Public Policy Studies reported an increasing mismatch between current housing stocks and changing demographics — there were too few people for too many bigger houses (a trend in many regional housing markets). 

• Low interest rates may have helped homeowners lock in lower mortgage payments, but have also starved public pensions (and insurance companies) of returns in line with their assumptions and long-term liabilities. To avoid cutting pensions these deficits are likely to drive real estate tax rates considerably higher in the coming years.

With the margin for financial error more narrow than in eras past, the homeowner, prospective buyer or “downsizing” retiree need to assess more carefully the true cost of ownership. 

Where we live and what we choose to pay either limits or affords us the opportunity to pursue all our other interests and ambitions. It’s that simple. And we’ve seen many “downsizes” turn into significant “upsizes,” compromising one’s financial security.

It is true that renters do not have a chance to get back the money paid for housing, but they may also be living more within their means and aren’t tied to an investment with an often uncertain return. The same goes for owning a second home for those more financially secure: Do you really need it? Can you really afford it, particularly the long-term carrying costs? Might you be better to “rent your fun”?

Different approaches have merit, and we encourage everyone to spend time assessing how ownership or renting may influence their future through various scenarios:

• Do your current and future financial situations afford annual maintenance and carrying costs, especially if property taxes and insurance premiums rise faster than the general cost of living? 

• In an age of planned obsolescence, replacing appliances and various necessities (e.g. septic, furnace, etc.) can increase unexpected annual expenditures. (Some may have noticed how an early career change to becoming a plumber or electrician might have been financially advantageous.) 

• Ownership is a risk vulnerable to job loss or unexpected life events that can quickly disrupt a family’s financial security. 

• Are you able to responsibly save in pursuit of all your other life’s goals? 

No matter one’s age, ownership need not be a one-size-fits-all proposition. If you have income suitable to pay for a mortgage, budget for unwanted expenses and the prospect of considerably higher real estate taxes/insurance premiums, AND save for the future, then ownership may be a long-term “investment.” If not, it’s OK. With a thoughtful and proactive approach, we believe a responsible decision would make even George Bailey proud. 

Tom Sedoric is managing director-investments of The Sedoric Group of Wells Fargo Advisors, Portsmouth. D. Casey Snyder is a financial consultant with the firm. They can be reached at 603-430-8000 or through thesedoricgroup.com.