Your Home: Do You Own Too Much of a Good Thing? (Part Four)
- Why too much home and other real estate could put your financial health at risk (like many Americans).
- Case study of how we help families to find potential relief
- Read our analysis of the health of the overall US housing market, why our local region has experienced such a housing boom, and what might pop the bubble.
If you had the choice of ascending a large skyscraper, would you rather ride up in an elevator held by several strong cables? Or would you prefer riding up in an elevator suspended only by one cable?
While many people would prefer to ride an elevator with many cables, the reality of their lives is just the opposite.
According to a study by the National Bureau of Economic Research [source], many middle and upper-middle class Americans have placed a huge part of their nest egg in real estate, namely in one asset: their own home.
Nearly 2 out of every 3 dollars of their net worth consists of their primary residence.
In contrast, only 1 out of every 3 dollars of their net worth is available to fund their lifestyles once their income decreases (such as retirement or unemployment).
With very little liquid, financial assets, it is difficult for many Americans to sustainably fund their future retirements, even if they have some financial savings.
People often justify exposing so much of their personal balance sheet to residential real estate for non-financial reasons: location, comfort, raising a family, and others.
However, they risk “falling in love” with their home. By the time retirement approaches, they might end up just as vulnerable as other middle and upper-middle class Americans.
Case Study of How We Might Help You
Let us share a case study of people we work with, how we try to help them, and also what issues they need to overcome.
Consider a married couple whose kids are in the process of graduating college and where one or both parents are a few years away from retirement. Here are 3 situations we often see:
This family can experience a shortfall in income.
Most people who retire experience a reduction in income, sometimes dramatic. While certain expenses might decline, such as college tuition when children graduate, other expenses might reappear. In addition to taking international trips or other discretionary spending, older children have an increasing tendency to move back home.
Residential real estate, a major part of their net worth, is tied up in a dead asset.
Let us define “dead asset”. We mean that this asset (2 out of every 3 dollars of many Americans’ net worth):
- Does not produce income (unless you rent your house)
- Often is illiquid (average time of a home on the market is 6 months even in today’s reheated market)
- Periodic expenses (taxes, repairs, renovations) can eat away at liquid net worth.
The family gets educated about their fragile situation, but emotions need to be overcome.
This couple clearly understands the logic of diversifying their holdings out by downsizing their home and investing in more liquid assets. So what makes them hesitate?
Most of their hesitation comes from sentimental ties to the home, reluctance to adapt to new seasons in life or just inertia. We understand that change can be difficult. While we are sensitive to these issues, we persuade clients that change in life is something inevitable. It is not a matter of “if”, but rather “when” and “what type of” change they will experience. Do not let too much euphoria on residential real estate put your future at risk.
While the current housing market remains in “boom” mode, let us not forget that only 10 years ago, people were scared that real estate prices would never recover. People who were about to retire ended up having to work a few more years or else retire and accept a substantially lower standard of living. Heavy reliance on one investment – even your own home – can hurt your prospects for a solid financial future.