PP vs. Home equity (as percentage net worth), what's the right balance?

[barrett]

On my big ass spreadsheet of Assets and Liabilities, I have a section dedicated to the return on investment from my assets.  Since this is what I live on, only assets that are legitimately likely to support living expenses on a 10 year rolling average fall into this category.

Obviously, you can fudge the boundaries based on your own age and life expectations, but I think it is reasonable to qualify an investment as something that you can reasonably expect to produce market returns over inflation -  over time.

Mark,

Would you then take this one step further and slide that home over to the liabilities column?

I really wish I had understood the "home as consumption item" concept before I put myself in a position where I am definitely way fracking long on housing no matter how it is sliced. With family involved it can take a while to extricate oneself from this problem. I really think that owning a home is a big reason that lots of people, at least here in the US, have not been able to get ahead financially. I know that owning two the last seven years has been the worst financial mistake I have made... There is just so much bad information that is taken as fact buy most people ("real estate always goes up", "Where else are you going to put your money? The stock market? Ha!", "In times of inflation -because we are definitely going to have inflation with all this money printing - you can't go wrong holding hard assets."), etc.

Financial lessons are almost always painful. And sequence of financial mistakes (SOFM) is important too!

I realize that among posters on this forum my situation is understood as regrettable at best. But when I say to someone that I can't wait to be rid of a big non-productive asset, they always ask me what I am talking about. I guess all I can say is, if you have kids of your own, teach them this stuff. Ditto with friends and other family if they are willing to listen.

[Mike59]

Is housing not similar to gold, a speculative investment with no yield , but only a monthly burden (your taxes akin to MER/storage fee?) that in the right market conditions can lead to a tremendous capital gain? Bought at an unfavorable time or market top, there are capital losses potentially?  Considering the capital gains are not taxed, there is potentially a benefit over your portfolio if you time it right but with the risk that capital losses are not deductible?

To clarify what some of the replies have echoed, I do not count my home equity as part of the  PP, but I see no reason not to count home equity in your "net worth". One day when the kids are grown we will sell this house and downsize, the equity then becomes liquid, it is readily available to spend or invest.  I would argue as well that I can tap about 80% of the equity within 24hours via a loan and put the house up for sale (done it before was easy as pie), if it has to go you list it at the bottom of your range and it sells at least here in Canada where people are tripping over each other to bid on homes. 

There are uncertainties in stocks and PP as well, you can't necessarily liquidate your gold or stocks and get the cash out all at once exactly as you feel fit, you are limited to the bid/ask spread and the process just like with a home equity transaction.

Housing here has beaten the pants off most market conditions over the last 2-3 decades, perhaps this is a top but it's been irrational for as long as I've followed it. We sold high a couple of years back and moved to an area yet to see the boom (double the lot size, larger house, same cost!) and new construction is only getting started, so am hoping that even if there is a big correction it will be tolerable if one is stationed correctly and solvent.

[Pointedstick]

I definitely consider a house to be a liability. In order for its value to actually go up the way it's "supposed to," you generally have to spend a decent chunk of money on maintenance and upgrades to match the current state of the real estate market. The appliances become considered ugly, the kitchen and bathrooms are "dated," the exterior paint is peeling, the flooring materials and windows are "worn out," the iron water pipes need replacement, the roof needs replacement, the water heater needs replacement, the A/C needs yearly service because of that slow refrigerant leak none of the HVAC guys can find...

If you don't do this stuff, then the market value goes down and you'll start getting offers from flippers who will do this work themselves. It's sort of like an expense ratio, but it's much higher than an index ETF. The "expense ratio" of a house you're considering an appreciating asset, when you consider taxes, maintenance, and upgrades, is probably 1-4% a year.

That said, a house can be a really wonderful thing to own. I love mine. It's taught me a ton about construction and renovation. It's the place where I can plant my garden. It shelters me from the driving snow currently outside my window. But I don't consider it a part of my investment portfolio.

[Libertarian666]

Is housing not similar to gold, a speculative investment with no yield , but only a monthly burden (your taxes akin to MER/storage fee?) that in the right market conditions can lead to a tremendous capital gain? Bought at an unfavorable time or market top, there are capital losses potentially?  Considering the capital gains are not taxed, there is potentially a benefit over your portfolio if you time it right but with the risk that capital losses are not deductible?

I guess gold and housing are similar in some ways, but much more dissimilar in inherent characteristics, including:
1. Portability
2. Risk of loss
3. Expense level to maintain (store)
4. Liquidity

In all of these ways, gold is better. On the other hand, you can't eat it.