Three Market Factors that are Turning your Home into an Even More Valuable Investment
Investors, savers, or even advisors rarely view a primary residence (the home you live in) as an asset in the same way a person would see a stock or bond. Generally, I agree with this perspective—that a home is for raising children and creating lasting memories, and not viewed in the same light as Tesla, Microsoft, General Electric, or Apple. However, there are three factors present in the market today that are cause for a new point of view. That is, your home as an investment asset used to generate income or cash flow savings.
FACTOR 1: MONEY MARKET AND SAVINGS ACCOUNT RATES
Money market rates have remained near zero for over a decade. This means for those holding money in checking, savings, and short-term bond investments, there is virtually no return on investment. Include net of inflation, and investors are going backward. Today, these shorter-term accounts serve the dual purpose of offering investors safety and liquidity, but little by way of yield.
FACTOR 2: BOND RATES
Bond rates have followed a similar "race to zero" that we saw in the money market and savings account rates. As of today, an investor must go out ten years to receive .63% on a treasury bond. In other words, a $1,000 investment yields just over $6 per year. Bond investments are GREAT, and will forever be a cornerstone of a diversified portfolio. However, too many investors and their advisors stockpile money into bonds as though it is the only safe way to make a return. Importantly, like money markets, the "real" rate of return (after adjusting for inflation) is negative, going out 30 years! You can find more exciting rate related info at the U.S. Treasury link here.
FACTOR 3: MORTGAGE RATES
Mortgage rates have been at similar levels as today in both 2016 and 2012. So, if you were lucky to buy your home or refinance at that time, there may not be much upside to a refinance. For the rest of us, with the 30-year rate at 3% and the 15-year rate at 2.5%, now is the time to take a second look. More rates from Rivermark Credit Union can be found here.
YOUR HOME AS AN INVESTMENT
The opportunity for homeowners comes when they can look at these three factors (money market rates, bond rates, and mortgage rates) within an overall planning framework. Below are a few examples of how this can work:
Mary and John are staring down retirement. They have a 15-year loan at 4.5% that is five years from being paid off. Their payment is around $1,900 per month, with a pay-off of around $100,000. They have the choice of investing a final bonus of $100k from work at .63% and generating $52 per month income, or they can take that same bonus and pay off their home. It seems like this should be a no-brainer—generate $52/month or save $1,900/month by not having a house payment. But for whatever reason, the repetition of saving money (which is good) into safe investments (which is also good) is not considered within an overall planning context. If acted upon, this scenario puts an extra $1,900 per month into this investor's pocket for paying off the home versus investing it into a bond.
Julie is 45 and has a goal of not having a house payment by the age of 60. She has a $300,000, 30-year loan at 4%, and a payment of $1,432/month. Julie has also accumulated $60,000 from real estate commissions she is looking to invest. Investing in a 10-year Treasury would yield her $31.50/month. A better alternative is to use the money to pay down her loan. In doing so, she goes from a loan size of $300k to $240k. Also, moving from a 30-year to a 15-year loan allows her to have no home loan by age 60. Importantly, her rate is reduced from 4% to 2.5%. Although her monthly payment is more by about $170/month, she saves $167,000 over 15 years in interest expenses—or $927/month!
CONCLUSION
Recent events have presented opportunities for investors, savers, and homeowners. Leveraging a comprehensive financial plan that considers your home, mortgage rates, and reinvestment rates could be the chance of a lifetime to save and earn.
