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Re: Best way to budget for mortgage payment?

Posted: Sun Apr 07, 2019 11:37 pm
by D1984
jason wrote:
Sun Apr 07, 2019 11:11 pm
sophie wrote:
Sat Apr 06, 2019 7:58 am
I don't think you should assume that you'll profit from selling your house. Generally, housing prices keep up with inflation but don't do more than that, absent a housing bubble.

What most of us do is regard the house as a consumption item. Your home equity figures as part of your net worth, but it does you no good unless you plan to tap it using a home equity line of credit or reverse mortgage. You might reasonably do these things late in your life, but I'd regard as an emergency measure only. Personally, I'm reserving home equity as a form of long term care insurance.

If you plan to sell your house and downsize in the near future, you can figure that into your retirement calculator as a one-time income event (home equity minus costs of the selling and moving process and purchase price of the condo) followed by reduced annual housing costs. That's why I like cfiresim, it makes it easy to do that.
I have also read that houses keep up with inflation. Homes appreciate around 3.5% per year, on average, which is similar to inflation. But because I have a mortgage with a 20% down payment, doesn't that mean I have 5X leverage? How do I calculate my potential CAGR on my own house based on historical averages?
I still don't get why a mortgage payment would be treated like a regular expense line item in a retirement budget. The main difference between making a mortgage payment and paying for a vacation is that if you spend $10K on a vacation, that money is gone forever. You will never get a single penny of it back, ever. But if you spend money by making mortgage payments, you will likely get a lot of that money back eventually, if you sell the house down the road. So, isn't a mortgage more like a piggy bank or a forced savings account than an expense?
The whole "homes appreciate at around 0.5% or 1% a year over inflation on average" is generally true, but has several important caveats.

One, that is ON AVERAGE. If you buy, say, several thousand homes, in several different regions of the country, spaced out over a decade or so to buy all of them, then yes, once you get all of them bought your average annual return afterwards is likely to be in that range. Now, averages can be kind of deceiving...stocks, for example, may "average" 9% or 10% per year over the long haul but that average is made up of excellent years like 2017, good years like 2013, crappy years like 2002, meh years like 2005, and god-awful-please-make-the-pain-stop-when-will-it-end years like 2008. Housing is not quite as extreme in its variance of annual returns but the concept is the same; the years from 2000 to 2006 were golden; the years from 2007 to 2011 or so were horrible, and the years from then to the present have been OK to very good. A major chunk (after location) of what determines your return on a piece of real estate is when you buy and when you sell. This is not even getting into the most important factor in real estate.....location, location, location! Buying a home in San Francisco or NYC 20 years ago would have been a brilliant move; buying a similar home in inner-city Flint, Michigan or rural West Virginia coal country would have been a disaster. Since most people don't own dozens of properties but only one or two, their returns will tend to differ quite considerably from a nationwide average and will be heavily determined by when and where they bought and when and where they sold.

Two, as for why the mortgage payment is treated as an expense item rather than as forced savings: It's simple; you have to keep paying it or they take your house. You have a choice whether to fund a savings account or brokerage account each month if hard times arrive and push comes down to shove; no such choice exists for a mortgage (at least for a non neg-am mortgage, anyway). Even if you do wish to count a mortgage as forced savings, you should really only count the principal amortization portion and not the whole payment as being part of said savings...and be sure to subtract maintenance costs/maintenance reserves from the amortization buildup; if you built up, say, $8,000 of equity in amortization one year but had to set aside $3,000 for maintenance and capital expenses (because hey, roofs leak, water heaters break, major appliances need replacing, etc) then you should really only count $5,000 as your "forced savings" that can be subtracted from the total mortgage payments made that year, rather than counting the full $8,000...and this is not even counting taxes, insurance, PMI, etc since those are part of the payment as well but obviously should not be considered as any kind of forced savings since you pay them straight to someone else.

Three, even if you do count the amortization as forced savings, how do you plan on accessing it? What good is a forced "savings account" if you can't tap it? Why should that even count as savings? I guess you could get a HELOC but beware that banks can cancel those at a moment's notice...oftentimes right when the real estate market crashes along with the economy (like circa 2007-08) and someone might need it most (i.e. if they lost their job or if they wanted to buy stocks or junk bonds on the cheap after a crash); the only other option to monetize the "forced savings" from amortization and capital appreciation would be to sell and move but if that's the case you have to find another house and the whole thing starts over again. If you ever find yourself in dire need of funds you can liquidate part of your stock portfolio, part or your gold holdings, a portion of your bonds, or half or a quarter of a savings account....but you can't sell only "part" of your house....it's either all or nothing.

Re: Best way to budget for mortgage payment?

Posted: Mon Apr 08, 2019 7:17 am
by Kriegsspiel
jason wrote:
Sun Apr 07, 2019 11:11 pm
I still don't get why a mortgage payment would be treated like a regular expense line item in a retirement budget. The main difference between making a mortgage payment and paying for a vacation is that if you spend $10K on a vacation, that money is gone forever. You will never get a single penny of it back, ever. But if you spend money by making mortgage payments, you will likely get a lot of that money back eventually, if you sell the house down the road. So, isn't making mortgage payments more like putting money into a piggy bank or into a forced savings account than a regular expense?
Yes. Some of it is like a piggy bank (principal), some of it is like rent (interest, taxes, insurance, maintenance, HOA).
If so, how do I incorporate the value/equity in my house into my withdrawal rate calculations?
You don't. Go back to the piggy bank analogy. Putting money in a piggy bank isn't the same as investing in productive assets like stocks, bonds, rental properties, etc. It's wealth that belongs to you, but you can't withdraw a % of it each year; you have to break it open to get at it. Now, you could also break it open and glue it back together and start refilling it again (cash-out refi/HELOC), but you could have just put that money into other assets that don't have the large transaction costs real estate does, and that don't require you to make payments on them or else you become homeless.

Like pugchief said, you still have ongoing costs that are "gone," just like any other expense that isn't savings. In the good scenario, these expenses (combined with the lost opportunity cost of your home equity) are less than what it would cost you to just rent a place.
My plan is that if the PP does very well, then I can likely just live in my house long term. If the PP does very poorly and my assets are shrinking too fast, then I can sell the house, likely at a profit, and then downsize.
I would plan to be able to live in your house or downsize independent of what your portfolio does. IE, once your house is paid off, are you going to be able to cover your expenses with a safe (perpetual?) withdrawal rate from your investments?

Re: Best way to budget for mortgage payment?

Posted: Wed Apr 10, 2019 11:48 am
by jason
Kriegsspiel wrote:
Mon Apr 08, 2019 7:17 am
jason wrote:
Sun Apr 07, 2019 11:11 pm
I still don't get why a mortgage payment would be treated like a regular expense line item in a retirement budget. The main difference between making a mortgage payment and paying for a vacation is that if you spend $10K on a vacation, that money is gone forever. You will never get a single penny of it back, ever. But if you spend money by making mortgage payments, you will likely get a lot of that money back eventually, if you sell the house down the road. So, isn't making mortgage payments more like putting money into a piggy bank or into a forced savings account than a regular expense?
Yes. Some of it is like a piggy bank (principal), some of it is like rent (interest, taxes, insurance, maintenance, HOA).
If so, how do I incorporate the value/equity in my house into my withdrawal rate calculations?
You don't. Go back to the piggy bank analogy. Putting money in a piggy bank isn't the same as investing in productive assets like stocks, bonds, rental properties, etc. It's wealth that belongs to you, but you can't withdraw a % of it each year; you have to break it open to get at it. Now, you could also break it open and glue it back together and start refilling it again (cash-out refi/HELOC), but you could have just put that money into other assets that don't have the large transaction costs real estate does, and that don't require you to make payments on them or else you become homeless.

Like pugchief said, you still have ongoing costs that are "gone," just like any other expense that isn't savings. In the good scenario, these expenses (combined with the lost opportunity cost of your home equity) are less than what it would cost you to just rent a place.
My plan is that if the PP does very well, then I can likely just live in my house long term. If the PP does very poorly and my assets are shrinking too fast, then I can sell the house, likely at a profit, and then downsize.
I would plan to be able to live in your house or downsize independent of what your portfolio does. IE, once your house is paid off, are you going to be able to cover your expenses with a safe (perpetual?) withdrawal rate from your investments?
It there a way to run a Monte Carlo simulation to determine the CAGR of owning a house based on historical averages for real estate increases and inflation? For example, if I'm paying $3,000 per month in mortgage, taxes, and insurance each month, I'd like to figure out approximately how much of that I would get back (in real dollars) if I sold my house down the road, assuming average performance. And a Monte Carlo simulation normally would show a range of best case and worst case scenarios. I understand that I really can't count on average performance actually happening, and that real estate could crash, but I'm just wondering about the range of expectations based on historical performance.

Re: Best way to budget for mortgage payment?

Posted: Wed Apr 10, 2019 11:56 am
by Xan
A single house isn't an ideal candidate for Monte Carlo. It would be like trying to do Monte Carlo with a single stock. I'm sure you could come up with something... But no Monte Carlo is going to have much of a clue what the floor or ceiling are for your residence.

Jason, I PM'd you a while ago; could you update your email address in the forum so that I quit getting bounces when it tries to email you?

Re: Best way to budget for mortgage payment?

Posted: Wed Apr 10, 2019 12:52 pm
by ochotona
Xan wrote:
Wed Apr 10, 2019 11:56 am
A single house isn't an ideal candidate for Monte Carlo. It would be like trying to do Monte Carlo with a single stock. I'm sure you could come up with something... But no Monte Carlo is going to have much of a clue what the floor or ceiling are for your residence.
Totally agree. How will the simulator know about your inclination to paint it, redecorate it, fix the AC, fix the foundation, or chase out the Crips and Bloods?

Maybe study iShares Residential Real Estate ETF | REZ, but that would be apartments I think.