Very astute response to this strategy. When people start talking about turning down guaranteed immediate 50% returns to get a potential 100% return over 5 years it sounds bubblicious to me. The top is when grandma wants to cash out her retirement and buy a bigger house for investment purposes. :)
I'm with you. I max out my 401k every year and have for the past several years. It's a solid investment that should be a priority for every person (especially with the viability of Social Security in question) who cares about his/her financial health.
"Past performance is no guarantee of future results". Be it in real estate or 401k. What any market will do in future is completely random and current prices are a sum of everybody's hopes and fears about future
Isn't it true though that you only get the gains when you realize them? That means for a fast appreciating home to yield a tangible gain that outpaces a 401k, you have to sell your house, or alternatively, get a reverse mortgage from a bank, which dissipates the asset. My only point is that by not saving liquid investments in the form of cash, stock, or something other than one's home for retirement, a person who puts all or most of his/her eggs into one basket (their house) seems to be guaranteeing themselves that they will have to move to a lower-cost housing market during retirement in order to reap the benefits of their home market's rapid appreciation. After all, isn't this reason for the abundance of New Yorkers in Florida?
Anyone have any comments on this?
"In our "ownership society," it is not uncommon that people stretch their affordability and end up with commiting 40% or more monthly income to big houses. What if you save the same amount in 401(k)?"
Yea, but can you live in your 401(k)?
"Yea, but can you live in your 401(k)?"
In todays market, you can save by renting and perhaps invest the remainder in your 401(k)!
A couple more points to add.
You can get 500k tax free earnings on your house if you live there for more than 2 years.
Houses are fair game in bankruptcy and civil suits, whereas your retirement accounts like your 401(k) are much harder to touch.
Thanks for all the comments.
To Josh, yes, you cannot live IN a 401(k),but using 40% of income to service a shelter is excessive.
Nathan, good point on tax! On the other hand, 401(k) is fully protected in backruptcy courts.
Yes, you can get 500k tax free earnings if you live there for more than 2 years, but most people are selling under that because of the insane appreciation.
Then you are subject to capital gain taxes
I still don't understand where those people who sell for their tax free income are going? Presumably all of the houses in their markets are appreciating, so if they're selling their primary residences, they have to live somewhere, right? Are they renting? Anyone with actual experience out there care to comment?
I live in Phoenix, AZ and the real estate market has been crazy this past year.
We plunked down less than $10K in 1998 for the down payment on our house. Our payments were only slightly more than what renting a house would have been at that time. We recently sold the house and cleared over $120K in a little less than 7 years. We had even refinanced a couple years back and were paying less than what the rental market was for the last 2 years. Not a bad investment at all. Our retirement accounts are only up about 20% from that time, including dividends.
On the other side of the real estate market we are also buying a house (in the same locale) that we had under contract back in October 2004 (a resale - retirees...). Did we think the market would go up between then and now - yep. But we just wanted to get into the nicer neighborhood with a park system in it. We've probably gained close to $80K so far and we haven't even closed on it yet. Would we be able to buy it at today's prices - NOPE. We probably couldn't qualify for it now if we bought it at today's price.
I don't know where all the money will go from others that have sold their houses lately, just into bigger mortgages as they move up into better neighborhoods I guess.
It sure smells like the stock market in 2000 to me... I would be very careful when buying any real estate right now - I would think things could more easily go down 20% than up 20% in the near future.
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