Re: Best way to budget for mortgage payment?
Posted: Sun Apr 07, 2019 11:37 pm
The whole "homes appreciate at around 0.5% or 1% a year over inflation on average" is generally true, but has several important caveats.jason wrote: ↑Sun Apr 07, 2019 11:11 pmI 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?sophie wrote: ↑Sat Apr 06, 2019 7:58 amI 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 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?
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.