Thursday, April 4, 2013

Homes, Stocks, and Choices

Managing expectations and exuberance

While not off their lows, home prices have begun to rebound and are about 8 percent higher nationally than a year ago. Stocks, too, continue their march upward with the Dow and S&P 500 indices near record highs.

My wife and I own a house and have no mortgage. We bought our home when prices and interest rates were low, but we still had to watch our budget. Over the course of 15 years we renovated our home and were fortunate enough to pay off our mortgage. As we paid off our mortgage the proportion of our household assets dedicated to home equity increased and the benefit we received from taking advantage of mortgage interest deduction decreased; now, we get no tax break. At its peak, half of our household wealth was imbedded in our home – a single, fixed, immobile, illiquid asset.

We also own stocks via mutual funds but own no single stock. The stocks that make up the mutual funds are issued by companies large and small. established and new, growing and undervalued, domestic and foreign. In other words, we're diversified. The funds are maintained within our taxable household savings account as well as tax-deferred retirement accounts (employer 401(k) plans and IRAs). Now that we've paid off our house, we're able to contribute more to household savings. And because I'm over 50, I'm able to make additional "catch-up" contributions to my 401(k) plan. Our household portfolio is more balanced as we temper our home equity with stock and bond funds that can be easily traded and liquidated.

That's the landscape and, boy, there's a lot going on. So let me get it out of my system.

Owning a home is the American Dream. It's a status symbol that purportedly separates the middle class from the poor. But government promotion of homeownership – through direct subsidy via the mortgage interest deduction and indirect subsidy via the loan guarantees of Fannie Mae, Freddie Mac, and Federal Housing Administration – encourages indebtedness, discourages labor mobility, skews investment, and concentrates (rather than diversifies) household wealth.

If we sell a mutual fund, we can sell all or part of it. Most of the time, there's no cost; sometimes it'll cost $20. If the fund is in a tax-deferred account, there is no tax liability; if in a savings account, we owe taxes on capital gains. If we sell our house, we have to sell the whole house on which we'll likely pay up to 6 percent of the sale price in commission: that's $15,000 on a $250,000 house. As long as our next house costs as much as our last house, we have no tax liability on any asset gain.

There are lots of advocates for homeownership: real estate agents, home builders, loan originators, loan consolidators, and government-sponsored enterprises that sell mortgage-backed securities. As a result of government subsidies, trade group pressures, and cultural differences, the homeownership rate in the United States is about 65 percent whereas in Germany it's about 40 percent. There are lots of groups promoting stocks and mutual funds, too. Watching weekend sports we're bombarded with TV ads for stock brokers. Sure, they're making money from our money. But the avalanche of ads also means there's healthy competition in the industry.

Look – I love my home, I'm happy to be a homeowner, and I know others like us. But I also know people who owe more on their home than it's worth, can't sell, and are stuck. Sure, people lose their shirts in the stock market. But those losses are more attributable to personal greed than government policies, social mores, and asset bubbles.

So keep your eyes open, your expectations in check, and all your options available. But don't ask me to help you pay for your choice.