November 9. 2007 00:04

"Even 401(k)’s, when unmatched by the employer, are not as efficient of a use of funds, as buying a home. The 401(k) is difficult to access prior to age 59 ½ and brings no immediate lifestyle enhancement like a home."

But, you can't sell your kitchen sink to pay a utility bill when you're 70. If you can sleep at night knowing you might have to work for the rest of your life to fund your all-important "lifestyle", go for it. But suggesting a home is an "efficient" use of money is irresponsible.

Paragraph 2 states that a home will likely appreciate at over 4% a year. In fact, housing keeps pace with inflation, this is well-documented. Again, this is irresponsible. Can we please get past the part of the bubble where people say what they want without being challenged?

Got Ramen?

November 10. 2007 08:18

You can sell your kitchen sink. It is called a reverse mortgage. The 401(K) issue is complex but I am absolutely sure I am right considering the following:
1. The intangible value of enhanced lifestyle owning a home. This is not just a dollars and sense decision.
2. Economically how much will one flush down the toilet in rent payments while funding their 401(K)? If I put $300 a month into a 401(k) but spend $600 a month in uncapturable rent payments how is that a good economic decision?
3. How much will I pay in interest costs to buy things in my lifetime because I don't have the cash but I do have money in my 401(k) that I can't touch.
4. Whatever the rate of return is on a 401(k), to be accurate, you must dedcut interest and rent costs.
5. "Housing keeps pace with inflation, this is well-documented", even if true it may still make sense to try to buy a home as soon as possibly. I don't believe the statement. I have been a homeowner since 1990 and I assure you may homes have appreciated over double the 4% figure I quoted in the blog.

I am many things. Irresponsible is not one of them.

Bruce Helmer

November 11. 2007 04:02

A reverse mortgage is one way to draw equity out of a house. It also leaves nothing at the end of your life to pass on.

Going on to the points you made:
1) This is an individual decision. Personally I would rather live in a more modest home knowing I am putting away plenty for retirement. I know people who plan to work for the rest of their life, have no 401(k), and sleep well at night, too, in an expensive house. I think either camp would say their lifestyle is a good one. I believe, however (and we won't know until the time comes) that a difference of opinion will emerge later in life.

2) If I put $1K each into a mortgage and a 401(k), versus $1500 to a mortgage and $500 to a 401(k), given the average returns on each, economically I would be better off with the even split. That makes a house the less efficient of the two. Also, contributions to a 401(k) are what they are, whereas with a mortgage you pay 2X or more the purchase price of the home with interest. So in 30 years you have paid $100K for a $50K home that is worth $320K, at average appreciation (see #5 below).

3) That is again an individual decision. Personally I carry no debt other than a mortgage. Likewise I know people who drive a Lexus, have $50K in credit card debt, do a cash-out refi every 5 years to tuck away another loan on another Lexus, and perpetually sit on 25-30 years of mortgage payments.

4) Likewise with a mortgage on a house. As noted in #2, a house will easily cost twice as much over the mortgage's lifetime. And the bigger the house, the more it costs to re-roof or replace the driveway.

5) You actually were correct in your original statement, that homes appreciate over 4% a year. Using the figures linked in another article's comments, I came up with 6.4% appreciation from 1940-2000. As to the appreciation since 1990, we have been living in a housing bubble.

Finally, I apologize for the personal slam. That was off-topic and unnecessary to make a point.

Got Ramen?

November 11. 2007 07:06

A house is is both an investment and an expense. More expense than investment if you're buying more home than you need. I think it's a little over the top to characterize Bruce as being irresponsible though. It's unnecessary to assign negative characterizations. It's funny what people will say when they think their identity is hidden.

I would agree with Bruce's assessment as to the accessing funds from 401ks. Bad idea to put too much in if you can't keep it in. Loans are repaid with after tax dollars, which once repaid are not segregated as after tax dollars meaning you will pay income tax on those funds again at retirment.

Jeremy Green

November 12. 2007 14:32

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November 12. 2007 14:33

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