Home Sweet Home

So just how big is your house?

Have you noticed how big some houses have gotten? My wife and I were looking at some new houses in the area last week and it seems like each house is a wee bit bigger than the last one.

Amazing how blessed we are here in the US.

You can't tell it sometimes listening to the media. From their biased perspective any increase in the Prime rate will burst the housing bubble, send realtors scurrying for cover and lock an entire generation out of the housing market. They predict that more 20's and 30's plus kids will be ending up with mom and dad because they can't afford the price of a new house.

Fortunately, these people have it all wrong. More people are living in homes that they themselves own then ever before. Almost 70% of all families in the United States own their own home. Not only that, homes are getting bigger. Now, I know that bigger isn't necessarily better but houses are bigger because the average home buyer can afford it.

One of the reasons people like owning their own home is it has become an amazing way to save. By the time a person retires, his or her home can be a very significant portion of retirement savings. The reason this happens is because of what is called leverage. A down payment of say 20% on a new home that appreciates 10% a year for the next few years is actually returning a 50% return on the investment (call me if you want me to walk through the math).

One of my good friends, Paul, moved to Boston in the early 1980's. Our boss assured him that it was a promotion despite the differences in cost of living. One piece of advice that he gave him was to "buy as big a house as you can possibly afford". I remember thinking that I may have not given Paul the same advice.

Remarkably, our boss was right. Within two years, Paul was asked to return to headquarters with his family. The company helped him sell his house and the $75,000 in equity and gained another $110,000 in appreciation. I'm a finance guy and that looks like about a 150% return, all at a tax preferred status and with company subsidized moving and closing costs.

Our government bureaucrats are funny. Did you know that the US Government DOES NOT include the asset appreciation on your house NOR your 401K plan or even your taxable savings plans in what they report as the "savings rate". Here are some comments from Bear Stearns Economist David Malpass:

"Some say that a flaw may exist not in our national character but in the way the government calculates savings: because the bureau's method of tallying income and consumption doesn't take into account structural changes in the finances of Americans, it may systematically understate income and overstate consumption. For example, income includes wages and salaries, interest on bonds, and stock dividends. But it doesn't include capital gains on stocks, profits from selling a house, or withdrawals from 401(k) plans. Nearly 70 percent of families own homes, nearly half of all households own stocks and mutual funds, and an increasing number of baby boomers are turning to 401(k)'s for income. Those trends, some say, can make a big difference. "The structure of the household portfolio has changed over time,"

I really don't know why people want to believe that somehow, without the Government providing for us, we would all be destitute. Federal Reserve statistics show that the net worth of all household - their total assets minus what they owe - was up 9.6% in 2004 over 2003. A 9.6% increase in total net worth is significant. Not only is it significantly higher than the anemic "savings rates" that have been typically reported but it is considerably greater than the 2.5% inflation rate reported in the United States in 2004.

So go ahead, if you think you can afford it, pull the down payment together for that new home. The goal of home ownership is typically not necessarily monetary but while the IRS is willing to make the home the "mother of all tax shelters", I say take advantage of what is typically a conservative investment. Recent IRS rules allow a couple to ignore the first $500,000 (yes, that is a half-million dollars) in appreciation. You don't have to be a day-trader or have an advanced degree in investments to enjoy some great appreciation while enjoying "home sweet home".