<p>Ha. Yeah, well that game he’s playing works OK until (as it’s almost sure to at some point) the market has a rough patch. Then, like those in the article, those who that overextended themselves by buying too much house on a trade-up are left holding the bag with payments they can’t afford on a home where they paid far far more than anyone is now willing to buy it for.</p>
<p>I think in the end it’s all about diversification. Some people gamble and win, but many more lose out. Having a smart financial life is all about reducing your risk for the future and, as some of these folks that got burned in the real estate market found out, not about maximizing your potential for a possible windfall. I think most people would take a 90% chance of retiring on 2 million over a 10% chance of retiring on 4 million (but a higher probably of having less than 2 million) anyday. </p>
<p>You don’t want all your net worth in your home… for one because if the real estate market tanks you could be screwed but equally because one generally needs to sell that home and significantly downsize before you can actually use that equity for something other than buying another house. There are some schemes out there like ‘reverse mortgages’ but there are some big catches and never quite as good as they’re made out to be. </p>
<p>I think one should never consider putting additional assets into their home (above and beyond a modest place to live) until they’ve funded their retirement accounts to sufficiently cover their desired income in retirement. Once that’s been taken care of, then go ahead and invest more in a bigger home (but don’t stretch too much) and any windfall that comes from that choice is a bonus… but at least you can sleep at night knowing that first and foremost you’re retirement is going to be fully funded to the level you desire. </p>
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Again, I think it’s all about balance. Live now, but don’t forget that once you retire you’ll need to allow your assets to fund the lifestyle you want to have then.</p>
<p>I get that in some circumstances, there can be public benefits to bailouts. In neighborhood X, suppose that 70% of the buyers made smart decisions and aren’t in danger of losing their homes. If their neighbors in the other 30% go bust, and the homes sit vacant and attract vandals/squatters, that’s extremely bad for the responsible people. Their homes will lose value, their local small businesses may fail, and they’ll go bust too, through no fault of their own. Although I think state or county bailouts would make more sense than federal bailouts because this is a localized problem.</p>
<p>On a personal level, it’s a different story. No, I’m not sympathetic to people who overspent their means. I make a very good living and save the majority of my income. I’ve thought about replacing my (one) TV, which was about 10 years old when my parents discarded it 6 years ago. But it still works fine despite frequent use, so I don’t think I ought to spend the money to upgrade. I’d like to know how many of these foreclosed families are moving a flat screen TV out of the house at eviction time. If I can live without one, so could they.</p>
<p>“I think one should never consider putting additional assets into their home (above and beyond a modest place to live) until they’ve funded their retirement accounts to sufficiently cover their desired income in retirement.”</p>
<p>I think that’s a bit much. There are risky and low-risk ways to put additional money into your home. Certain upgrades that are highly desired in your market (like sophisticated kitchens in my market, or a second bath in many suburbs) are very, very likely to increase the relative value of your home no matter what happens to the market. If you make those upgrades when you’re 40 instead of 50, you get to enjoy them longer as well as (hopefully) benefit from or break even on the cost of the upgrade.</p>
Yeah, I certainly agree with that (so long as the upgrades are likely to add value to the home, not all do, and you don’t go into significant debt to make them). I was mainly referring to people spending boatloads to buy much bigger houses that they really can’t afford. I wouldn’t make such improvement at the significant expense of properly funding a retirement account, but shaving a little off is fine if those funds are diverted into a reasonable use (a new Mercedes probably not, but new siding for the house probably yes). Especially if you’ve followed my previous bit of paying extra down on the mortgage so you’re much closer to owning the home. </p>
<p>If you spend a huge amount on home improvements (vs paying down the mortgage more) to at least make your money back you not only have to earn back the value of the renovation investment but ALSO earn an additional amount that’s more than what it cost you to not apply that money to the mortgage principal (e.g. the extra interest that you pay as a result). Early in the mortgage it probably pays more to apply most funds to the principal, but later on it makes more sense to use more funds to make home improvements.</p>
<p>It’s good to see the couple in the article don’t lay blame on anyone but themselves. They obviously over-extended on a gamble and lost the gamble. A lot of the people losing their homes are losing them because they overextended and have made some bad gambles - that the housing market will always appreciate ‘in the short term’ (which has never been something one could depend on), that variable interest rates obtained when rates were at a long time low would never go up (which is ridiculous - that’s exactly the wrong time to get a variable and the right time to get a fixed), and that nothing could possibly happen to their income (problematic when one’s income depends on the volatile housing market in a particular area as it was for this couple).</p>