Monday, January 17, 2011

Buy the Most Expensive House One Can Afford?

When we were shopping for our first house, the mantra among the older lawyers at my firm and among most other older adults was "buy the most house you can afford."

I have been going through my AIER Research Reports today, and I came across one published on March 15, 2010, entitled "Rethinking the Home as an Investment." The concluding paragraph reads as follows:

Everyone needs a place to live, and homeownership is preferable to renting if you will stay long enough. But on a purely financial basis, it pays to buy the least expensive property that serves your needs, and to invest the savings in stocks or other assets that are more liquid and offer a better track record.

Those in my generation and a little older, who thought that they would be able to store increasing value in a big house until retirement and then cash out with a sale of that big house and a move to a smaller residence, are confronting significant disappointment.

I think the problem is really a matter of diversification and timing, because I know older adults who were able to realize a substantial profit before the bubble broke. The problem arises when a disproportionate share of one's savings is in a particular class of asset and the time to cash out of that asset arrives in the midst of a downturn in values for that asset.

1 comment:

Lindsay said...

Off subject, but wondering if you saw this: Angela (the coordinator profiled) is a friend of mine.