Many American households have their wealth tied up in their houses. For many Americans across all different income levels, the value of their houses exceeds the value of all their other financial assets. There is also a history in the United States of home ownership being recommended as a sure way of becoming wealthy, or at least financially comfortable. But in this day and age, should you really rely on a house as a retirement asset?
Gains Are Not Guaranteed
The past few decades have seen a steady and seemingly relentless upward movement in housing prices in many major markets. Many people who bought houses at the beginning of their careers in the 1970s and 1980s have seen huge increases in their home values. In major markets such as New York, California, and Washington, DC, quadrupling or quintupling of home values over that period of time isn’t unusual. The median house price in the Washington, DC metropolitan area, for example, has nearly quadrupled in the past 30 years.
That type of asset growth has led many people to believe that a house could and should be a family’s primary retirement asset. Rather than being viewed as a useful product that can provide shelter, warmth, stability, and a sense of home, a house is now viewed primarily with an eye towards the appreciation of its value. There is less thinking about “Is this house good for the current and future needs of my family?” and more about “Will this house keep its value and earn us a good return when we decide to sell it?”
But just like any other asset, there is no guarantee that housing prices will go up. Because the financial and media elites who dominate the news cycle live in housing markets that have seen enormous amounts of price appreciation over the past decades, they assume that that is the normal state of things. But in many areas of the country, house price appreciation has not been quite that significant. And while many areas across the country have had years of consistent home price growth, it is not uncommon to find suburbs in major metropolitan areas that continue to see stagnant price growth. In short, relying on housing to grow your wealth won’t guarantee a great return on your investment.
Houses are also no longer seen as a depreciating asset, although in many cases that’s really what they are. Homeowners tend to look at the headline numbers, what they paid for the house and what they can sell it for, and forget about all the other expenses. Property taxes, utilities, and regular maintenance all add to the real cost of owning a house.
Keep that house for a few decades and you’re almost guaranteed to need some sort of major repair, from new plumbing to new windows to a new roof. All the little repairs and regular maintenance that take place year after year add up too. And if you don’t continue with that upkeep, the resale value of your house will suffer.
Home Equity Loans
One of the features of the last housing crisis was the number of households who had treated their homes as ATMs. Home values had increased so much that many people owed less on their mortgages than their houses were worth. Those who didn’t cash out by selling their houses often took out home equity loans, mortgaging their houses to be able to take advantage of that newfound equity.
Of course, that money had to be paid back eventually, and when the housing bubble collapsed and many homeowners lost their jobs or found their house values declining, they ended up defaulting on those mortgages. That was a hard lesson for many homeowners to learn, that home equity wasn’t a never-ending stream of easy money.
Can You Sell Your House?
One of the major drawbacks of currently high housing prices is that many younger Americans are unable to afford those high prices. The generation X cohort is significantly smaller than the Baby Boom generation, and the millennial generation is only slight larger than baby boomers and only starting out in their careers. That limits the market for the by now expensive homes that many baby boomers occupy. When it comes time for you to retire, you have to ask yourself whether you will actually be able to find buyers who can afford to buy your house at your desired asking price.
Nominal vs. Realized Gains
It’s important to remember the difference between nominal and realized gains. Yes, your house may be “worth” $500,000, but until you are able to sell it for that amount you really haven’t gained anything. It’s just wealth on paper that isn’t liquid and can’t benefit you. So if your retirement strategy is to sell your house for a lot of money, you may be in for a surprise once it comes time to retire. By that time the housing bubble may have burst yet again, the housing market may then be a buyer’s market, or your city or neighborhood may no longer attract the buyers it used to.
That’s why it’s important to have a multi-faceted strategy that relies on a diverse investment portfolio. That should include both financial assets as well as alternative investments such as precious metals. Putting all your eggs in one basket, no matter how good an investment you think it is, is playing with fire.
Hopefully you’re not one of those people whose only investment is a house. And hopefully you’ve taken advantage of 401(k) accounts, IRAs, mutual funds, or other investment options to grow and build your nest egg. But with an overheated housing market you also need to take steps to protect the wealth you have already created. And there is no better asset for that than gold.
Gold has been a trusted asset to protect wealth for centuries. Gold keeps its value during good times and outpaces financial markets during times of crisis. When markets crash, gold is always in demand. And with a gold IRA, you can benefit from gold’s wealth protection while still enjoying the same tax advantages as a traditional IRA account.