I recently stumbled across a fascinating chart by Deutsche Bank highlighting that more families than ever before have ZERO or NEGATIVE non-home wealth. In other words, roughly 30% of households have no 401k, no IRA, no after-tax investment account, no private equity investments, no venture debt investments, no nothing beyond the value of their primary residence!
Check out the chart below.
If you have no investments outside of your primary residence, I’m not sure how you are ever going to be able to retire or reach Budget Financial Independence because Social Security alone is not enough to cover expenses after the age of 62.
I’m not even sure the average Social Security check of ~$1,200 a month is able to cover all your healthcare costs. Let’s say you were “fortunate” enough to have worked 40 years and paid maximum FICA tax each year. You’d still only be getting a maximum Social Security check of ~$2,700 a month in today’s dollars.
The reason why the 2008-2009 financial crisis was so severe was because the vast majority of Americans had the majority of their net worth locked up in their primary residence, and the chart above excludes the primary residence as part of one’s net worth. When the housing market crashed, so did the fortunes of the ~64% of Americans who owned their homes. Americans didn’t have enough cash or defensive bonds or even commodities to protect them from selling at fire sale prices.
What’s Going On With The Lack Of Outside Wealth?
Since breaching previous stock market highs at the end of 2012, the S&P 500 and the Dow Jones Industrial Average have marched to new highs each year. Further, real estate around the country has also improved dramatically. With so many asset classes doing well, why do a record number of Americans have no wealth outside their primary residence?
Here are some reasons I can think of.
* Runaway trains. After the economy started settling down in 2010, the typical American began thanking their lucky stars they were still solvent after the worst financial crisis in modern times. I cannot stress enough how shell shocked people were after experiencing so much wealth destruction in such a short time.
When you’re catching your breath, you’re not looking to aggressively invest in new assets. But starting in 2012, the stock market and real estate market really began to really take off. Meanwhile, the pace of appreciation for new assets like cryptocurrency rose faster than any asset class in history.
By the time Americans finally felt comfortable taking on more risk, all the investments we wanted to buy started giving us post traumatic stress because they’re at the same sky high valuations before the crisis. As a result, we couldn’t part with our cash. The trauma was just too recent.
2) Spend before you lose all your money again. After the financial crisis, a lot of people questioned the wisdom of saving and investing all those years given it was so easy to lose so much money. Distrust in the stock market grew to new heights as people decided to spend their money on things and experiences rather than invest for tomorrow.
Here’s a millennial survey done by Goldman Sachs in 2015 about their thoughts on the stock market. GS should have asked millennials whether they trusted GS! I’ve come across many 35 and under people in my time who are cashed up and all about YOLO.
3) Don’t know what to invest in. Despite TV, podcasts, books, and personal finance blogs, there is still a huge knowledge hole for how and where to invest one’s hard-earned savings. As a personal finance blogger, this makes me kind of sad because anybody who got on the “saving until it hurts” and investing train since I started this site in July 2009 would be much wealthier today. But as an online business owner who has two mouths to feed, this knowledge hole makes me extremely bullish about Financial Samurai’s future!
Of course, I can see a scenario where people finally gain the confidence and knowledge to invest only to see the stock market and real estate market start declining once again.The key is to at least have index exposure to various risk asset classes based on your risk tolerance.
Related: The Proper Asset Allocation of Stocks And Bonds By Age
4) Real wages haven’t kept up. We can’t assign blame for lack of saving and investing solely to fear and ignorance. Despite nominal income increasing over time, real median household income has gone nowhere since the financial crisis. As such, real wages haven’t kept up, while everything has gotten more expensive in real terms. Thus, it’s much harder to accumulate disposable income for investment.
Related: The Median Net Worth Of Households Has Gone Nowhere
5) The median age homebuyer is getting older. The median age for a homebuyer in America is 32. But as home prices outpace wage growth and more education is required to get the same paying job, it’s easy to see the median homebuyer age increase. Once you’ve put down a large downpayment, it’s hard to have anything left over, especially if you bought in an expensive coastal city.
There’s An Even Worse Scenario To Consider
Yes, it stinks if your entire net worth is made up of your primary residence. But can you imagine not only not owning any investments outside your primary residence, but also renting all these years? What a disaster! Renting is equivalent to shorting the housing market. For some reason people find shorting the housing market more palatable than shorting the stock market. But the end result is quite similar – negative returns.
By now, there should be no debate between owning versus renting. If you know where you plan to live for the long term, it’s best to stay neutral inflation by owning your primary residence. People who invest in stocks and rent realize this. However, those against homeownership just don’t want to acknowledge the truth that like with stocks, the long term trend for real estate is also up and to the right.
For some reason, stock only investors trick themselves into believing they can’t simultaneously invest in both asset classes for the long term. It’s the weirdest thing! But this thinking just goes to prove point #3 above – there’s a lot more financial education that needs spreading.
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I think many folks don’t have steady work that offers a 401k and other benefits. I’ve been a professional services temp since 2012. No job, even though they have been relatively well-paying, has offered me the option. I had to set up my own IRA and many people in my position have not, because they are still, irrationally, hopeful to a return to “standard” employment.
I remember doing research on the characteristics of rich people and how they have such a diverse asset base beyond primary residences. It sure holds true.
@Untemplater what was considered “rich” in your research and what kind of assets did the rich folk have?
Am I rich? 6 houses, three cars, stocks, bonds, annuity, various real estate notes and some old furniture that the boomers would consider quality but millennials would think “firewood”.
Hi. I have always been invested outside of my primary residence except when I used my investments for the down payment on my first house which had a 9.75 percent negative amortization mortgage. I’ve had 6 houses since.
I have always sat through all corrections In the market and kept my eyes on the mountain chart on my wall and my time horizon and continued to invest
I sold my last house a year ago in so CA close to the top of our market and waited for a year before I found a house in Florida about $100,000 over what I made on the sale of my home in So Cal I’m sure the new house would be 1.4 in So cal.
Here is my dilemma: I don’t want to put any money into my primary residence. 2007-2008 soured me on having a lot of equity in my home. I’m not even sure I want to have a mortgage where I need to pay principal.
What would readers do: I can have a 30 year fixed loan for 4.1 percent I’ve never had anything but an arm. Or a 7-1 fully amortizing arm for 3.5 percent.
I could pay a chunk at the end of 7 if I’m still there to keep my payment the same.
Or a 10 year interest only for 4.1. I will put down 30 percent or about $250k still leaving me another $500,000 from my gain to invest.
You can make almost 3.5 percent in Fairly stable net asset value investments. There is no way I’ll ever pay my loan off at my age nor would I want to.
Would anyone want to comment on their view of paying principal into their house or on there mtg philosophy versus cash for other investments.
Thanks
I currently rent the most affordable place I can in Washington DC (so not that affordable) until my wife finishes grad school. At that point we will have a better idea of where we want to settle for an extended period of time. I am not going to buy until I fully intend on staying there for 5+ years, ideally 10+.
I grew up a privileged kid and was fortunate enough to get some money early enough in my life to buy a condo in San Francisco and invest in some conservative stock funds. I’ve always held too much cash and that’s looking particularly foolish right now with stocks and real estate at all time highs. Currently I’m holding 20% of net worth in cash which is about $500k. I feel guilty having all this cash and this net worth and hardly needing it and using it. Maybe someday I’ll decide to start living a more lavish life? I work as a tennis instructor and live in the resort where I teach. They feed us, house us and even pay me $1k per month. I’ve owned bars and restaurants and it’s a lot of stress, even if you make decent money.
Sad indeed. This is what happens when people gorge on debt and don’t bother thinking about the future. In Canada, the debt to income ratio is now at a historic high of 171.1, way beyond the dti ratio of 147 in the United States right before 2008.
This will not end well.
So does this mean that when the mass of Boomers retire, there will be a national glut of housing (and a corresponding drop in prices) but not a stock market crash? This could get interesting…
Is that 30% of all households, or 30% of households which own their primary residence?
I’m absolutely shocked that we’re at record proportions of nil non-household wealth. Especially with the abundance of high-quality, easily understandable financial information out there these days through popular blogs and websites. I would have bet much money on the opposite being the case – especially with the recent run in the stock market.
Perhaps its a younger generation thing, valuing current experiences and travel greater than future wealth? Not sure how the Australian stats would compare, but the younger generation in Australia seem to have all but given up hope on ever entering this insane property market, and perhaps they’re just living it up while they can!
For those who have equity in their homes however, our ongoing property boom has provided access to even more potential wealth to invest elsewhere (my preference being Fully-Franked shares!) although the obsession with property still seems to dominate here…
Who would trust the stock market ? WS is a disaster ! I really wouldn’t put my money in stocks after what happened in 2008. The next one is just around the corner…bonds aren’t safe….what’s best? Keep piling your money under the mattress…and saving more to compensate for inflation…the only safe way yet not 100%
In Orange County, many people have a million dollar net worth, but only because their primary residence has gained so much value in the last 20-30 years. I have family members who bought properties currently valued at $1.6 million to $1.8 million for $90,000 back in the early 80s. However, they can’t pull any of that money out unless they sell. They would have to downgrade house and location if they want to see any cash from selling the house. They have saved and invested responsibly, so they are financial solid outside their home, but this is the situation for many people in Orange County. They have a laudable net worth, but the cash flow doesn’t match up. You could say that the “real feel” net worth is closer to the 400-500s rather than 1-2million.
At 22 years old, I have around 80,000 in investments, but balk at dumping that sum or more into a property within the next five to ten years. I know that buying a primary residence would stop me from losing on rent every single month, but the growth upside barely keeps with inflation. In the exceptional example above, my family members barely beat inflation adjusted SP Index (90k at 7.8% for 35 years=1.25million) not including property taxes, maintenance or any of the remodeling they did. The owner, my uncle, who owns another million dollar property down the street from his house (purchase price 40k), admits that basic indexing would have put him out ahead after all the ownership costs. He says he wouldn’t change it though, saying that psychological benefits of physical ownership of the property outweighed lost gains.
What about BURL? Doesn’t it make sense to only rent a house (as opposed to buy it) when you don’t have the money and/or financial savviness to invest in other asset classes, especially if you live in a HCOL city?
People are financially literate & even know how to invests & where to invests. But they are not able to invests in differnt assets classess only because they do not have enough money/income/salary coming evevry month. Lack of capital, not lack of kowledge is the reason according to me.
Some coworkers (in Silicon Valley) have no asset other than their home. How can this happen? Because they took out a giant mortgage when buying their primary home, then they sold all their stocks/options as soon as vested to pay off the mortgage, which will take them another 20-30 years. That’s why they have no assets outside of their home!
Sad? Yes.
Is the YOLO mindset too much? Perhaps, but there is some merit as long as it is in moderation.
Moderation is key in everything. Don’t YOLO too much, be sure to save for your future self.
From a philosophical argument, for your future self, would you rather have something when you are older and can’t work? Or just live it up now thinking you might not make it to an old age, then live off only SS and just scrape by when you do get old? I’d prefer to think positive that I will live a long life, and I would want to be comfortable when I can’t (or don’t want to) work.
If you live it up now and don’t save, at least you could be the old person telling the young’uns stories “when I was your age…” haha
Given that most people who read this consider their finances a hobby or even part time job, its easy to see why we can all be amazed that Americans just don’t save money. However, I do have some compassion for most of these people and we shouldn’t be so quick to judge.
I think there are two factors that contribute to this phenomena. First of all, Simply living is expensive: food, shelter, clothes, car, healthcare, rent/morgage, ect. ect. ect….. Then come the children with their own costs: more food, more shelter, **College is too expensive**!. The pressure of real wages against living costs is enormous for the average American. For most people, there isn’t much left after living expenses. Second, most people are incredibly busy. They don’t have time to determine where costs can be cut. Working long hours, taking care of a family, a home, its exhausting! I think most people have the desire to save, but are always blocked by living expenses and time. There is a reason why the #1 advice regarding savings on the Internet is to simply set $100 dollars aside each month. Its quick and fits most people’s budget.
As a single 22 year old, Its easy for me to hound over my expenses and investments. Its easy for me to decide whats worth spending “fun money on” (a nice truck btw), and where to cut costs to still invest >50% of my income. I have both the time and money. As such, my #1 goal right now is to set myself up for a time when I may not have either of these luxuries while maintaining longterm steady investment growth.
Hmm – too busy – why is TV and streaming internet TV so popular? On the contrary, life is actually very easy today compared to man’s history. Hell only about 50% of working age population actually works.
Even if one is “busy,” it may not be real contribution to one’s improvement. Spending the weekend digging a big hole in backyard on Saturday and then filling it back up on Sunday is hard work. It would not contribute on iota to value though. Many people, need to step back and actually think more about what they are busy at. They might be surprised what they see.
It is definitely a struggle to generate additional assets beyond primary residence. I do have some investments, but I also carry a mortgage. At this point my investments are not sufficient to pay off my mortgage. I am hoping SS in some form would be around.I don’t want it to cover all my expenses, even if it covers a portion I am happy.
Interesting post, but not very surprised I must add. I’ve seen these numbers working on both ends first-hand with my parents (each 63yrs old now). My mother, who is retired, strictly because she was, practically, forced to create a retirement acct as a state employee. My father on the other hand, was self employed for about half his working life and now employed, only seriously put towards retirement around age 50ish. They almost own the home the home they live in, built by my father.
I have an additional question/comment. I’d like to layout my personal financial scenario and have the community comb it over, since there seems to be some respectable gurus here : )
Is this frowned upon, discouraged?
Cheers
This isn’t a forum. I’d visit a financial subreddit for that kind of take from a similarly savvy community. Depending upon your goals you could visit Financial Independence, or Personal Finance.
We fit the “make money in one place, then move to another place” mold. We are still in the place where we can make good money. We have lived in a great school district for the past 13 years. Have a 5 bedroom, 2.5 bathroom house, 2500 sq ft. We will be downsizing in 5 or 6 years and moving south. At this point, it appears that owning was a very good move for us since we should make a ton of money on the house. However, I am not sold on owning my next home. A nice apartment would be fine by me. I don’t want the hassle of dealing with issues.
It certainly was not a mistake to live where I lived and in the home I am living in. Anything but a mistake.
The combination of renting and analysis paralysis about what to invest in is a deadly combination. I’m equally shocked about the % of non-home wealth. Where does the money go? This made me think about you post detailing the family making $500,000, yet are barely scraping by. Sad indeed!
I am a home owner but haven’t built up much in other investments yet because I thought we were supposed to pay off expensive school debt first ? I mean if a doctor or some other advanced degree holder has 100- 150k in student loan debt theoretically he or she wouldn’t have much in other investments for quite a few years after graduation right?
It depends on the interest rate, the risk-free rate of return, and the current economic environment. I’m a proponent of paying down debt and investing. See Investing Review Of A Surreal 2017 for details. Also, I recommend following the FS-DAIR framework to pay down debt and invest over time.
If you’re on the younger side (<35), I wouldn't sweat not having that much money outside your primary home. Everything just takes time. At least you own your primary residence and know where you want to be. Lots of folks are lost.
Yes sir I seem to fit in this category as I am under 35 (I turn 33 next month). This year I’m putting the FS-DAIR to use so that way at least I am moving in the right direction and over time it will just keep snowballing. To not invest anything at all is a bit disheartening and feels like I’m treading water even if I’m paying debt off.
I’ve owned a house for almost 12 years now. The upside is that I have been able to do reduce the monthly payment throughout the years by paying off the 2nd mortgage and refinancing. Additionally, I have about 35k equity built up. When I move I will be faced with a decision. Do I rent out my home for double my mortgage payment leaving me with about 6k cash flow/year or walk away with 35k minus realtor fees? I’m leaning toward the former because being heavily invested in stocks currently, I’m seeking some passive cash flow that isn’t currently DRIP.
With renting, I used to be opposed to it, but if I move somewhere with a higher COL, I’d rather rent on the outskirts than buy a $300k average priced house in the area. With a 60k down payment, just not interested in this stage of the game.
I think your blog readership is going to skew the poll results to “Yes, absolutely. I own my primary residence and have other investments.” :)
I think a decent bit of people having no wealth, outside their home or even within, is due to lack of education in personal finance. People just don’t understand the importance of saving, and thus react emotionally. Plus, people tend to fear what they don’t understand.
I think a lot of people keep renting because they aren’t willing to commit to owning a home and they aren’t knowledgeable enough to the downsides of renting. There’s a lot that goes into purchasing something on the magnitude of a home purchase, and for most people that’s far too much to get into. Renting is the easier choice, so it’s the one they go with most often. Couple that with not understanding why renting long term is bad and more and more people aren’t going to consider changing their ways.
So, really it comes down to a lack of knowledge about proper finance choices. That’s why I started subscribing and reading sites like FS.
I agree with you Cole. If I could add a over generalization for people my age I think that the home buying process is just being delayed.
Lots of young people have to find some stability and a sizeable down payment before they pull the trigger on a home. Also many are not willing to “get started” and buy something in a neighborhood they don’t want to be in. It costs a lot to be a hipster these days.
I think that those that delay the process will just come to realize the sooner they get started the better.
I would definitely agree with that DM. I would have been renting well into my 30’s had it not been for my wife. I think I was waiting until I had a family with kids in the plan and until I had a career that felt like it was going to be the right career for a long time. It probably also doesn’t help that I was living well above my means for so long!
My paid for home only represents a small single digit percentage of my net worth. I don’t consider it an investment at all, it is more like my clothes or cars or toys. It is a possession I own for quality of life purposes. We raised three kids in it and we love living in it. It costs almost nothing to maintain and it is very nice looking out on my backyard right now with three inches of fresh snow and 800 acres of wooded wetlands behind my property. I can’t imagine having to balance a substantial house value with my living expenses if it represented more than throw away money.
Never met anyone that was living a financially “easy” life by only owning their personal residence. This hit me early on in life. All the people who were living a life of luxury (appearances of course don’t tell much) had invested in something outside of where they live.
I own my personal residence because it is so much nicer then what I would be renting. I just got lucky that it was in a major metro area that experienced a boom. I am not naive to think that I can replicate this again but I will take the win.
More so then anything else it has allowed me to enjoy where I live and keep my expenses much lower and I actually do invest the difference.
I do think it should be everyone’s goal to have a paid off home in case you can no longer earn income. It is one of life’s biggest expenses and we can control it by planning today. Then it does not come down to crossing fingers and hoping we hit certain investment %’s into perpetuity.
This is not a surprise to me in the least. There are large segments of the country where the primary industries of 40 to 50 years ago pretty much no longer exist. Sadly, many have steadfastly refused to accept that and really believe it will all come back. It won’t. I have cousins in coal country in PA. For decades, they refused any re-training programs for other industries. These programs have existed since Clinton was in office. They would rather work the few hours they could get until things pick back up. Well, even now, although they are getting more hours (my one cousin works 20-25 a week now – that is a lot when compared to the last 20 or so years), they still cannot save anything. Honestly, most are on gov assistance of one form or another. They have small houses that are probably worth 80 to 90K. In one case, it was inherited.
There is an economy for the college educated an another for non-college educated and they are world’s apart. Yes, there will always be examples of a non college person striking it rich or the inverse. They are the exceptions though.
I don’t see this changing anytime soon.
Then there are the people who simply cannot spend their money fast enough. What they make doesn’t matter because it all goes out. A friend of mine has that affliction. I tried to provide him guidance on saving for the future and his response was, “I am not going to pass up on a new kitchen so that I can go to Hawaii when I am 66 years old”.
I have some 40 years experience in financial services/investments. My firm is an IA/RIA and I am a CFP. When asked about investments much of what I recommend is based on the “time horizon”…when is the money needed? In spite of a heated market, if the money is not needed for 15 to 20 years or longer, no question be in the market but be diverse. Avoid cash/commodities. My IA/RIA, Finlayson Financial Planning, recommends US-Large Cap, Mid-Cap, Small Cap, International (not Global as that includes US), Emerging Markets, Micro-Cap US, and REIT’s. Maybe equal amount for a long time line and be sure to re-balance annually. Before that have a financial plan and an updated balance statement. Try to keep it simple-watch expenses. Go to a fee-only planner (fiduciary), meet annually and avoid brokers! Sam, you do good work. Ross Elliot, CFP
I work at a CFP firm as well. That’s what we recommend as well.
In the bay area, the housing price is just too high even to accumulate the down payment unless you have consistent 300k+ income or parents’ money. Even if you worked hard enough to save the down payment, the mortgage and tax would cost most of the net income. I can totally see that lots of bay area people just don’t have much other than the precious (expensive) home. At least good thing is that the housing prices skyrocketed every year.
A few of my friends left to other states simply because they can’t afford a home here even though they had a decent job.
I’m scratching my head about that Gallup poll question. Why did they include the words “self-directed”?
My answer to that Gallup poll question would probably be something like “yes … oh wait, my investments in the stock market are not in forms you mention in your question … so, no? … should I answer based on what I think you are trying to ask … or do I answer based on a literal interpretation of what you asked?”
I’d be curious to see another option in your questionnaire:
Yes, I absolutely have other investments but do not own my primary residence.
Personally I own enough assets (mostly stock) to be categorized between your “baseline” and “blockbuster” financial independence levels, but do not want to deal with the hassle of home-ownership. Also, as someone else also posted, where I live the property taxes alone – which are no longer deductible above $10,000 – would be comparable to what I am paying in rent.
The lack of knowledge has to be a big cause. If people knew how powerful the stock market can be (especially like the past few years), they would have the confidence to put disposable income in it. I understand why people became scared of the recession, but you have to believe that the market will have ups and downs and that is just part of life. However, I suspect the word “families’ heavily applies to younger couples just starting out in the workforce. Instead, they may just be piling money into their checking account and waiting to see more stability in the stock market.
How to reconcile low investment rate with highest margin loans at the present time?
That’s a huge percentage. I’d like to see it break down by age. A big part of that 30% is probably the young adults. They’ve had it rough.
I think they will recover, though. Once the Millennials start building families, they will spend less and save more. I read that they are moving out to the suburb more now.
I read that too but it’s not by will but by force. If the urban villages weren’t so darn expensive, millennials would choose that instead (I know I would!)
The knowledge gap is definitely there, combined with emotions. Some of my friends I know don’t invest in anything, and rent. I’ve tried to point them in the right direction but honestly part of it was that a lot of times I think people don’t know what they want.
Imagine this:
You’re 28 years old. You’ve been working for 7 years, and make decent money. You aren’t dating anyone, and don’t know if you will ever get married. It’s not a huge priority for you. You travel with some of your friends and have a blast visiting countries all over the world. You make enough to save up cash, but sometimes that cash is spent on those trips. You don’t have any big long-term goals like owning a home or starting a family. You have no desire to start your own business, and are content working at a job that lets you explore the world for a few weeks a year.
What purpose does that person have to invest for their future, in their eyes? They’ve got it made now. They can live what they consider an ideal life right now, because they can’t envision what would be better in 10-15 years if they’d invested.
Many people are the same way. I think that’s part of the reason we’ve seen this paradigm of ‘spending on experiences’ – because for some, the future that older generations pursued (starting a family, owning a home, etc.) isn’t the future they envision for themselves.
Maybe that’s not anything to do with it, just something I’ve observed among some of my friends. I personally think it’s short-sighted, but without a strong drive, a clear picture of where you think you want to be, how would you advise somebody to NOT be short-sighted? How do you convince somebody to forego at least SOME of what they’re spending on today, to save for tomorrow, when they have no idea what they want tomorrow, and assume it’ll be the same thing they want today?
That sounds like me. And if I spent everything I made, there would be no difference in 10-15 years. But I want to still travel like that in 30-50 years. Investing allows me to maintain that kind of lifestyle indefinitely.
“How do you convince somebody to forego at least SOME of what they’re spending on today, to save for tomorrow, when they have no idea what they want tomorrow, and assume it’ll be the same thing they want today?”
I deliver the sobering reality that at the current savings rate, one will require a substantial decrease in quality of life. Usually, the first step is asking how much the person’s current monthly spend is and then asking what they think it will be in 10 years. Usually, I get a blank stare. When I then say that if you don’t know how much you spend, how can you possibly gauge whether you are saving enough. After that, I usually have to buy that person a drink.
Invest invest invest…in whatever it may be, but get the money out there working for you.
I can tell you from first hand experience that after a natural disaster, owning a home and being well insured will put you way ahead of renters.
In my experience, after a hurricane, renters do bettter. With so much damage, insurance payouts and repairs can take a long time (even with out of state companies, there’s a long waiting list for them to get to the house), so it can take a year or more to get repairs. So you’re living in a house that has water looting in any time it rains. And even if you have replacement coverage, the insurance company will not pay the increased prices (repair prices go up when demand goes up).
Renters take their stuff and move somewhere that’s not damaged.
I’ve lived in a hurricane prone area my whole life, and I was never nervous until I bought my house.
Maybe true for hurricanes, but in a fire the owners I think come out ahead. I have seen a lot of renters get moved out of their homes because the fire victim owner wants to now live into the rental. Plus insurance pay out is pretty good if you are well insured.
When commenting on the current stock market, I’ve repeatedly said that the market can’t go down because there’s not enough retail money invested for the hedge funds and market makers to take. The only ones that would lose are the ones that have put the money into the market, so there’s no reason for them to allow it to go down. It’s a very weird situation.
Great post. Really addresses some of the false security people have when they own a home. It is sad to see that many people won’t be financially secure once they retire.
I’ve also really been liking the podcast.
To me, a house is not an asset. It’s a liability, and everyone realizes it every time there is a hurricane in the Gulf.
With interest, taxes, insurance, and maintenance, physical objects are a money sink. Everything wears out and gets run down eventually. But in general, I’m disillusioned with this physical world, so I’m a bit biased.
Even if you end up making a little money after you sell your house, all other houses have gone up too, and you still need somewhere to live, so you have to put it back into another house that has also gone up in value.
See, so you aren’t actually making anything. The best case is that if you live somewhere a long time, it costs less than renting (if you move a lot, it costs more than renting). But this is an expense minimization problem, not a money making venture.
So what to do? Buy as little house as you can (the opposite advice that people were handing out 10 years ago), and put the extra in the stock market. Selling stocks does not make you homeless, so you can take the money from those sales and spend it however you like.
We have owned 6-7 houses across many states as we have moved for careers and lifestyle, I think I agree with you. I have never done the calculations but if sat down and determined total cost of home ownership over 30 years and compared to similar location rents, I bet we are behind. Especially if difference were invested.
Not sure we would have done things differently because each home provided great emotional pleasure but financially, maybe not the best thing.
I do hope that there will be some value propositions ahead as we move to a new phase of life. We now have two paid off homes in PNW, and we plan to move to SE or midwest for retirement to escape high costs and liberal nuttiness of left coast.
So there’s a conflict with renting. A renter has no incentive to put a lot of work and money into the place they are currently renting. Even if the landlord allows it, they could wait until you are done doing the work, refuse to renew your lease, and then rent it out to someone else who will pay more because you fixed it up. So if you rent, you have no incentive to fix it up.
If you are the landlord, you only have the incentive to fix it up if you can charge more rent for it. If something doesn’t increase rent, there’s no incentive to invest money in improving the property. And so much of what I’ve done on my house is to customize it to my preferences. Someone else could come in and change it back the way it was. Customization is only an improvement for that particular tenant. So, the landlord has no incentive either.
So, you only have a strong incentive to fix something up or highly customize it if you own. Then you invest, not to increase the property value, but to improve your own enjoyment of it, when you know that you can’t be kicked out by landlord. You enjoy it until you choose to move.
That is the main reason for owning, which is I think what you mentioned as well.
This too is similar to expense minimization. The longer you stay somewhere, the less it costs, because you are going through this customization process fewer times.
Buying a small or reasonable-sized house instead of a mansion is absolutely the way to go. As is NOT buying a house in an area that gets regularly bulldozed by nature. The more excessive the house is, in terms of size and purchase price, the more money you’re going to throw at something that you really just need to be a roof over your head. And for pete’s sake, don’t buy a house if you’re going to need to sell it within a few years. The transaction costs are nuts.
But I disagree that it’s not a money-making venture. Saving expenses over rent in the long run IS a money-making venture. You can use those excess funds to invest in the stock market. Or to buy a rental property that appreciates and brings in a cash flow.
And I get your point about making money on the sale of a house being a fool’s errand if you just have to put that money into a different house which has gone up similarly in value. But you’re glossing over the fact that a lot of people with mid-size or larger houses downsize in retirement, and pocket the increase that their bigger house has made over the smaller houses (same percentage, but more dollars). Downsizing or moving to cheaper markets (Arizona, Florida) like the snowbirds do can actually be a decent boost to retirement savings.
To me, downsizing means that someone was in a house that was too expense is now right-sizing.
And while moving to Florida is good, that means that we’re not living in Florida before.
These are not so much smart money making moves, as they are correcting for past mistakes to avoid negative consequences going forward.
So, downsizing and moving to Florida is still worse than right-sizing in Florida all along.
Yeah, I completely disagree with you there. Sorry. Living in a high-cost-of-living place during your working years leads to higher income. Higher living expenses, too, but you can accumulate more savings dollars there. Cashing out of the place and moving to a cheaper place in retirement is a very popular way to live wealthier in retirement than you could have if you had stayed in a low-cost-of-living place all along.
And downsizing doesn’t necessarily mean correcting for past mistakes. If you’re a couple with 2 or 3 kids, you need a bigger space than you do in retirement when it’s just the couple living in the home.
Depends on the industry though. In some smaller metros/suburbs you can earn more compared to more expensive areas (healthcare as an example).
Sure, there are always going to be a few exceptions to the general rule. Good point. I’m just saying, it isn’t always a “mistake” to move from an expensive area to a cheaper one. It’s often calculated.
As a physician, I take care of a bunch of patients living off of social security alone. It’s a pretty miserable existence.
Missed the actual link. The first link is more of a tounge-in0cheek response. this one has some numbers in it. jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
2010-2012 was the worst time to sell. After 2012 is when the real estate market and the stock market started picking up. Remember all our biases. If JL did indeed sell around that time and rent since then, then he is going to be more biased against housing. It’s just human nature.
I have a feeling that your readers are going to differ from the general population here. These stats are scary but I believe them. It’s very difficult to support yourself at the low end of the wage spectrum let alone save anything. Others who have a a good income may not be financially educated and understand the value of compound interest and investing. I’ve heard people talk about their finances proudly saying “at least I don’t have credit card debt.” The crazy part is that just not having cc debt probably does put them above average.
I am a millennial and have investments outside of my primary (rental) residence which have been purchased over the years.
I’ve been looking at the companies I’m invested in with my index funds and they don’t match my personal values. I’m considering investing outside of the market going forward, for example buying an air b n b rental. If I invest in the market in the future it will look a lot different, investing in primarily municipal bonds, REITs, and in socially responsible and eco friendly companies.
A member of my family who will remain nameless lives off social security and a paid off house. This person gets 1500 a month from social security. So it can be done. But they also rarely ever leave their house and talk about not being able to afford property tax on their home. Seems a horrible way to live.
It is unfortunate to see some of these stats.
I do believe there are different categories of groups within the segment you’ve highlighted, Sam.
There are a number of households who really do struggle to make ends meet without any, or at least very little, discretionary income. In more expensive cities in the US, like NYC for example, numerous households have a large chunk of their income going to housing each month (e.g., rent), as well as other basic necessities.
On the other hand, there are plenty of households that likely do have ample discretionary income. They just allocate to other expenses – not investments.
I’m generalizing here, but I do think some households really can only be focused on the basics, while others do have the means to save/invest but just don’t. In the latter group, there could be a few reasons as to why.
On your other questions, we’ve been renters the last 10 years and will likely do so for a few more at least. To counter balance, we’re indirectly long real estate via REITs (~25 percent net worth).
Thanks. – Mike
I came across a similar chart from the U.S. Census Bureau while working on a recent article that showed the median net worth,excluding home equity divided by age group. Here’s the basic #s:
<35: $4,151
35 to 44: $14,226
44 to 54: $25,006
55 to 64: $45,447
65+: $27,3522
Those are some frightening numbers. I think that most people fall into 3 groups: Those who have no assets outside of their home and are not actively building wealth.
Those who contribute enough to their 401K to get an employer match.
Those who are aggressively accumulating assets to be able to actually retire someday.
If that first group is 30%, I wouldn't be surprised if that 2nd group is roughly 50%, with only 20% on track to have a decent retirement. The early F/I community of people saving north of 30% of their income for retirement with a goal of retiring before 50 is probably less than 1%. I got that number from an article on 70 being the new retirement age that showed less than 1% of people thought they would retire prior to 50. I think 51 – 54 was only at 3%.
I have been renting for years, but I’ve been moving to various locations due to college, new job, moving in with significant other, etc. Now we are finally able to settle down and we are looking to purchase our first home!
Our lease begins going month to month starting in June 1 so I think this gives us an advantage in flexible closing dates. Therefore, we don’t want to rush into a house and prefer looking for a house that really fits our lifestyle at a good price. Any concern in extending rental timeline in order to find a great home purchase?
Take to from someone who has lived and owned in several homes in multiple states. Do not overthink the lifestyle question. People can get into a paralysis by analysis when looking for the perfect home.
In the end most of us can boil needs down to safety, relative quiet and a good location for family and resale. The building can be changed over time to meet a need.
Always think about resale potential. You will want out someday and believe me it is nice knowing you are in a area of demand.
(Do you have any investments outside your primary residence?)
( Yes, absolutely. I own my primary residence and have other investments.)
Is the above primary residence mortgage free if not you dont own it.
Regards
What an incredibly naive statement. Sour grapes?
A leveraged asset is still an asset. I’m happy to “own” my home by borrowing money from a bank at 3.25% for 30 years for many, many reasons. Enjoy paying off someone else’s investment which they have undoubtedly taken out a loan for, which you’re paying.
Pretty sure that was a question. I had the same.
It only makes financial sense if your house is also appreciating at 3.25% a year. Otherwise not.
It makes perfect sense to me, being an American who’s seen the direction this country has been going in for decades. Forget about wages and investing. Smart people Compensate for such things. But we’re not talking about Smart People here when we’re talking about the masses…
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It’s official now. America is a Narcissist Nation. (Don’t believe me? Look who’s President!) The masses are not only dumbed-down but programmed by the media to buy-buy-buy beyond their means. Watch the sheeple run! And I’m not just talking about Xmas and Black Friday. You are judged solely by Where you live, What you live in, What you drive, What your job is, the number of Luxury Cars parked outside your McMansion, and so forth. Even if you don’t play this game (like yours truly) They Don’t Know It. Practice stealth wealth and you’re treated like…you live in a shithouse. You Need the latest and greatest Everything; the latest model, the latest version, the biggest and Loudest.
Where I live, the neighbors almost literally scream “Look at me! Look at me! I’m Better than You!” through their excessiveness.
They need to be part of The Group. Or at least Project that they are a part of this elitist country club. They do this by voting Republican, by the way. Because that’s what Winners do (in their minds).
The bottom line is, Americans want to project the image of being Big, Powerful, and Classy–at the exclusion of sacrificing their savings and future. Instant gratification–living here and now–takes precedence over everything else. Again: dumbing-down, as in the power of Prayer will pull them out from future disaster should they lose their jobs. Common sense, reality, Science plays No part in this. Today’s so-called grown-ups are actually existing at a juvenile level, mentally. If they eventually do mentally mature, it’s usually much too late in life to pull out of the deadly nose-dive they’ve put themselves into.
There’s no cure for stupid. Don’t even Bother to reason with the sheeple. If they have no savings, they are to blame and no one else. Saving money is one of the basic components of learning to live in a capitalist society. It should come as natural as breathing. There’s no cure for stupid. If someone’s pulling in a 6-figure salary and loses it all, don’t feel sorry for the a-hole–instead, Laugh at him.
While your post is a bit harsh, I cannot disagree. Not only is most true, but people who build some wealth via prudent lifestyle and good choices will be chastised by EVIL politicians (think NY and CA Democrats) and other leftists who think THEY, not you should have a greater percentage of your wealth via taxation and confiscation.
Punished for good choices. Rewarded for bad choices. No wonder people don’t invest.
Wow! You are passionate about this subject! I couldn’t agree more though!!!!! And now the young kids are spending spending spending too on the designer stuff they cannot afford.
+1
You are so right.
Well, your words are harsh but mostly I agree with your observations. Unfortunately, many people spend to define their place in the social hierarchy. Choice of neighborhoods, schools, houses and cars drive the kind of overspending that people use to enhance their status. It’s sad. But it’s more than individuals making choices, there’s an infrastructure that propels people in this direction. Thirty years ago when I bought my house, it was the real estate agent who asked your income, your outstanding debt etc. then told you that you should be getting a mortgage of $X. It’s an assumptive sales tactic where they’re congratulating you for being qualified to borrow so much money. Hooray for debt! I know the process may be different now, but the outcome is the same. There’s an assumption that you will leverage yourself as much as you can. All this even after what we’ve witnessed in real estate in the last 10 years.
Wow, I remember that day 20 years ago. Mr. Realtor wanted to sit in the discussion with Mr. Banker, wifie and me. I looked at him and asked him to leave the room, that my income and assets are none of his business. Mr. Banker told us what we could afford. Then Mr. Realtor was allowed back in and he received a pre-approval for what we “wanted” to afford.
My rent across the street from where I work is less than some of my coworkers’ taxes on their houses, certainly if you include purchases/maintenance/upkeep. My money and time in this locale is personally far better spent invested outside a primary residence, with REIT’s for realestate exposure.
Yep, I have to chime in and agree that buying a primary residence doesn’t always makes sense. There are some places where renting makes sense. In my Seattle neighborhood I rent a 2 bed 1.5 bath apartment for $1800. Great neighborhood amenities, good schools and a very comfortable apartment.
To buy a comparable condo in the same neighborhood I’d need to spend somewhere around $500k. The all in payment (including HOA) would be around $2800 per month. To get the payment to $2800 I’d have to put $100k down.
So by renting I’m able to keep the $100k cash available for investing. And every month my outlay is $1000 less, so I can invest that too.
On top of all this the state of the housing market here is such that you have to be willing to waive every contingency and add escalator clauses to your offer to even have a chance of being the winning bidder. More reason to rent.
Would that $500k condo appreciate over the course of a ten year holding period? Of course. But supposing we can count on annualized returns around 8% then my $100k diverted from a down payment and my presumed $1000 (delta between mortgage payment and rent) monthly savings could appreciate significantly over the same 10 year period.
That’s fair. But if you know you are going to live in Seattle for the long term, why not get neutral inflation by owning your primary residence and investing in the stock market? After you pay for the down payment you are going to continue to earn income to Invest after all. And, Seattle is one city where I wish I bought. It’s nuts out there!
Yeah, I will probably give it some more consideration. I owned a home in a far out Seattle suburb from 2014 to 2017. It was the only place I could afford to buy a single family residence at the time. I put a lot of labor into the house and got a nice payday when it sold. So I can afford to get a decent house in my neighborhood at about $700-800k. I’m just not used to having a mortgage payment that big — even though I can swing it.
Anyways want to say thanks as always for your incisive perspectives and deep financial commentary. There’s no one else I’ve read in the FIRE community who talks like a CNBC host. And you always do it with an entertaining flare.
Well, since it’s the same topic, I’ll repeat my comment from another post:
I own my home, but I do not think that renting is for losers.
In addition to the mobility and flexibility advantages you mentioned, purely from a financial standpoint, owning is not a clear winner over renting, especially in speculative markets (i.e. the hyperinflated coasts).
More specifically, ROE (return on equity) in places like San Francisco is dismal. Capitalization ratios for owners are around 40! So what’s happening? Are all home buyers delusional?
No. The only reason these capitalization ratios are sustainable is if there is a lot of home value appreciation expectation, appreciation above and beyond inflation that is. Even people who do not fully rationalize it are basing their home purchase decisions in these expensive areas on the expectation of great home price appreciation. Otherwise they would rent instead of buying, or other more financially savvy people would tell them to.
If you buy a house in San Francisco to rent it out, even if you put 30% down, your cash flow will be negative because the cap ratio is so low, and the little your mortgage payment contributes towards principal no way makes up for it. So it all hinges on significant home value appreciation above and beyond inflation (inflation only appreciation is no appreciation, that is for losers).
So far home appreciation in San Francisco and other expensive west coast areas has indeed far outpaced inflation, and kept up with speculative expectations, primarily due to an enviro-nimby coalition that chokes off new housing supply (an environmentalist renter, now that is a financial shoot-yourself-in-the-foot looser in my financial book). But the moment this strong appreciation expectation fades away, these markets will collapse, since it makes no sense whatsoever to buy at these cap ratios if there’s no appreciation. People will stop buying and a vicious cycle of price declines will bring prices back to earth.
It has not happened yet, of course. But can prices (and wages) keep exponentially diverging between the coasts and the rest of the country? It’s very hard to answer a perpetual “yes”.
Remember, there are short term bubbles that burst (two to five years) and then heal, but there are bubbles that burst and never recover. After all, in the fifties and sixties Detroit was the dynamic industrial activity center everyone wanted to be in. Today?
Will high tax enviro-nimby California always be able to extract ever larger sums for housing just because it’s the electronics capital? In perpetuity? Without any other area worldwide been able to break the inefficient high tax nimby cartel and undercut California productivity, wages, and home prices? In perpetuity with ever higher capitalization ratios diverging into infinity?
As the pace of everything human keeps irreversibly accelerating many things that we never thought possible will happen. Which ones, remains to be seen. The investor who has even slightly better intuition than random will come out ahead.
There’s a rather substantial climate difference between SF and Detroit. The auto industry kept Detroit roaring in spite of that. The climate keeps California’s coasts full populated in spite of what Sacramento does.
Choosing to rent here is a far more dangerous proposition, unless you’re prepared to exit the area entirely.
Choosing to buy to become a landlord – the pricing frankly is less scary to me than the restrictions on property owners. Unless you have the capital to buy many units, the risk of having just a single bad tenant out of 1-4 units is too daunting.
Agree on the climate difference between San Francisco and Detroit, and the underlying price difference such a geographical advantage may sustain.
But will this advantage and price differential keep diverging? We went from 2:1 home price ratios of SF vs heartland to now 6:1 ratios. Will we go to 10:1 ratios? then 15:1 home price ratios? This is what is implied in a market that still buys SF homes at these astronomical capitalization ratios (and thus essentially negative cash flows). At some point, the home price multiple differential (and what Sacramento does) chokes of the flow — in spite of the climate difference. At that point, these high capitalization ratios will create enough of a barrier to stem the flow. I already see many more people rejecting offers to relocate into lucrative Silicon Valley jobs once they realize the essential drop in living standards that the high housing costs entail. This a situation whereby any hesitation in the expectation to ever increasing home price ratio differentials will create a self perpetuating home price collapse. So the bubble bursts and home price multiples between the heartland and SF return to price ratio differences that are indeed truly sustainable by the superior climate.
In other words, continuously relying on the fact that the price differential between SF and the heartland will continue to diverge to infinity because of a real — but finite –climate advantage seems highly speculative to me. Definitely not something I would rely on to achieve financial independence. Hence why many people who seek financial independence find it instinctively (if not rationally) better to pursue it through the reliable income streams of the low cap ratios in the heartland, rather than the speculative housing inflation of an arrogant Sacramento.
I’m glad you share my view that the valuation difference between coastal and non-coastal cities can’t keep getting wider. There is eventually a ceiling b/c wages have not kept up with home price appreciation. People ARE indeed rejecting places like SF to move to Austin, Memphis, Portland, Seattle etc. Due to technology, there really is NO NEED to be in an expensive city anymore.
It is a no brainer to move to a lower cost of living area if you can. People just don’t due to family, friends, fear, and inertia.
Related: Focus On Trends: Why I’m Investing In The Heartland Of America
I think people are still shell shocked from the recession and are waiting for the market to pull back. I have a friend that has been in cash since 2011. He’s missed an incredible run up and he keeps saying just wait. I think I read recently that even if the market pulled back by 20% that it would hit when Trump was elected and a 35% pull back would hit Feb. 2016 levels. I guess that’s why most people shouldn’t time the market.
Agree 100%. Better to schedule investments (monthly, quarterly, etc.). This way you’ll catch the markets in all phases (high, mid, and low). Hopefully, the average will play in our favor.
Yep those numbers are about right. Let’s give your friend the benefit of the doubt and say he went to cash near the top in mid-2011. He needs a 52% decline from today to get back to that price. And considering the S&P hit 1,100 in late 2011 he needs a 60% decline to get to the lowest level he had the opportunity to invest at that year. Peak to trough the financial crisis was a 56% decline in the S&P…
And that doesn’t include forgone dividends over 7 years.
This is me exactly, except I’m not so sure that a pullback is coming. My problem is that I’m so loss averse that any drawdown in the capital I’ve worked so hard to save over the years would be terrifying. I already feel like I “should” have 2x, so any less would be awful.
This is where I’m at as well. Have a amount of cash saved up and ready to invest, but can’t quite bring myself to pull trigger, knowing that the highs we are at cannot continue.
I’m open to investing, and have played with portfolio visualizer to even create a model I would be comfortable with, but not quite sure what I’m waiting for at this point.
What should I do? What would you do if you were starting today?
There’s no time like the present! I know it’s easier said than done but you can’t worry about when the market is going to correct. It could be tomorrow or it could be 2 years from now. The worst thing you can do if you’re trying to grow wealth is to sit on the sidelines. As mentioned above, people have been calling for a correction since 2011. If you sat on the sidelines this entire time, then you’ve missed out on some huge gains.
Let’s go back in history and say you had the worst timing ever. You put all your money in the market in September 2007, just before the crash. Had you left it alone and reinvested dividends, you’d be up 8% annually through the end of 2017 despite weathering the worst economic crisis in our lifetime.
Dollar cost average into index funds. Every two weeks buy into them at amounts that are significant but won’t keep you up at night. That way, you still keep your cash reserves but slowly expose yourself to the market.
This is what I’ve been doing while also keeping a reserve of cash on the sideline. If a big correction happens, I’ll jump into a few stocks. Until then, I’ll gladly take the market returns.
I feel like the best bet is to take whatever capital you want to deploy – divide it by 24 and put in the same amount each month for the next two years into whatever you think is best to buy at that time (SPY or a beaten down sector dividend aristocrat, etc)
I think this the only way to invest in a market like this.
I have been trying to do this for the last 6 months and it has worked out, I plan on doing this going forward as well.
I think I am foolish, in post tax I have about 70% in cash and only 30% in stocks (of liquid net worth). I have no passive income other than dividends / online savings interest. It is really hard to keep investing the cash in ever growing asset prices.
I could pay down more of my mortgage but i have a very low rate so I don’t think its worth it.
Does the new tax plan change the calculation for paying off a mortgage? If the interest is effectively no longer deductible, should we pay it off now? Then take the standard deduction
If you don’t like today’s prices in the indexes, then get paid to wait for your price.
Sell puts on the index. January SPY 270 2019’s will give ya about $11 to wait. If Mr. Market keeps going up, you keep the $11, if it drops below $270 you purchase at $270 but keep the $11, making your price $259. You’ll have to have the cash to cover the purchase in the account.
I believe we have the same friend Mr. MSM! We tried to time the market in 2016 (just because things seems so high at the time) and missed a 20% gain year. Timing the market adds too much mental anguish for investors like us. We should take a less tortured view of money and simplify not based on greed.
I’m the opposite. I can not stack cash. If someone comes to for me for cash I don’t have it. I have to sell something to get it. I’m amazed at how people are able to stack cash. If I see cash stacking then I want to use it.
I have a very similar friend! He’s been calling for a recession since 2012 and was convinced Trump would cause a very big pull back.
Time in the market > timing the market (well unless you’re 80+ and don’t have 5 years+ for the market to recover after the next recession!)
I pretty much went all in on stocks from 2008 to about 2014. 2014 was the year I decided that stocks were getting too high, so since then I’ve been hoarding cash. As you all can see from hindsight, I’ve missed several good years and dividends from 2014 to today. Can definitely see now why people say you shouldn’t time the market.
That said, all the stocks I bought, I still held onto. I’m going to continue hoarding cash for one more year, and if there’s no correction in 2018, I’ll slowly start buying again in 2019 (not going to go all in though).
Can’t really blame your friend, I’m in the same exact boat. Coupled with the fact that I always seem to manage to get into things exactly the WRONG time (hello Bitcoin), every time always seems like the wrong time and I end up in a permanent state of “just wait”.
We might have the same friend. I’m constantly trying to explain to my friends that the stock market can correct, but if it still ends up higher than when you originally should have jumped in then you shouldn’t be saying I told you so.