She’s one of the nation’s leading financial planners and she’s uncertain about the future of housing values in America.
But guess what?
Peggy M. Ruhlin, president of the International Association for Financial Planning, is expecting to build a brand-new home soon in the “country French” style. She and her husband are plotting an estate property with at least 4,000 square feet of living space, four acres of ground, a backyard pool and a library to house her collection of 8,000 books.
Like many people, financial planners are ambivalent on whether making a major investment in housing will prove a prudent choice as the Baby Boom generation, born between 1946 and 1964, begins to approach retirement.
“I’m concerned about who is going to buy my big house in 15 years,” says Ruhlin, herself a boomer.
Yet, at the same time, Dallas Coffman, another certified financial planner (CFP), says, “I love real estate as an investment.”
Coffman contends that given the vigor of the U.S. economy and the earning power of many young Americans, there will be a rising demand for homes such as the one Ruhlin and her husband expect to build. And that should mean rising long-term values, too, he predicts.
Granted, the post-Boomer generation is a smaller group than their parents’ generation. But Ruhlin argues that many young people with college degrees and good jobs will have both the means and the ambition for upward mobility in housing.
“Their parents have spoiled them rotten,” he jokes.
Patricia Houlihan, who holds a seat on the Certified Financial Planners board of governors, advises a middle course on housing purchases.
“I’m in favor of being a visionary when you buy a home, but I’m not suggesting that you do it at all costs. I don’t think you should put yourself in a position where you can’t breathe financially,” she says. Still, experienced financial planners such as Houlihan are nearly universal in their preference for owning a home rather than renting.
“Renting gives you no tax breaks and no equity build-up,” Houlihan observes.
Not only is most mortgage interest deductible on your annual tax return, but the new tax law–which took effect in May 1997–also allows a couple to avoid capital gains taxes on as much as $500,000 worth of profits from a home they’ve occupied (or $250,000 for a single person).
Furthermore, as Coffman notes, moving into a home of your own with a solid fixed-rate mortgage helps stabilize your living costs. In contrast, leasing means your costs could rise (or possibly fall) depending on the supply and demand conditions for rental units in the area where you live.
“Before you build a solid investment portfolio, you need to fix your overhead,” Coffman says.
The debate among financial planners is not over whether you should own your own home, but on how much of your resources should be tied up in housing vs. other investments, such as stocks and bonds.
Given the uncertainties of the securities markets, Coffman likes the diversifying effect of owning both real estate, which provides a hedge against inflation, and traditional investments such as mutual funds.
“There has to be some balance,” says Coffman, who predicts that housing values could soar in many communities due to the tax law freeing capital gains from housing as well as “newfound wealth” from the stock market.
Coffman cautions against the assumption–based on recent history–that homes in most areas will necessarily be slow to appreciate in the future. Nor does he think the Dow Jones Industrial Average will necessarily continue to climb as it has through much of this decade.
Ruhlin agrees that the stock market is uncertain but worries even more about housing, given the fact that many Americans will be approaching their retirement within the next two decades and may well be downsizing their housing when they do.
“I think it’s a bad idea for people to say, `I’m going to put every penny into my house,’ ” she says.
Another financial planner, tax attorney Richard S. Bardine, agrees with the principle of setting a ceiling on housing expenditures.
“I want enough disposable income not to be cash-strapped, so I chose not to be house poor,” says Bardine, although he allows that he owns two personal residences.
Are you unsure how much of your own financial resources should be devoted to housing? Then these pointers could prove of worth:
1. Make an “emergency fund” your first priority.
Those with stable, established careers and plenty of liquid capital have the luxury of debating among investment alternatives for their discretionary cash.
But Houlihan urges those with no savings to build up a nest-egg big enough to cover at least three months worth of living costs before buying a first home in any price range. Otherwise you’re too vulnerable to financial emergencies, which can erupt unexpectedly due to temporary unemployment, ill health or other factors.
“If you can budget in such a way that you don’t deplete your emergency fund and can realistically manage the debt, I would much rather see you buy a home at any age than rent,” Houlihan says.
2. Consider making a bigger home purchase in an area of rising prices.
The truth is there is no single answer to the question “How much house should I buy?”
Now as much as ever, questions of home value and appreciation are specific to a particular neighborhood where you may elect to live.
“If you’re moving into a booming area, why wait if you can afford to buy now?” Houlihan asks.
3. Don’t believe anyone claiming to know the future on investments.
The reality is that gurus in the real estate field can’t agree among themselves on the future appreciation potential of U.S. housing markets. Furthermore, the new tax law has added a wild card to the deck that some experts think will weaken property values, especially for high-end housing, while others think it will strengthen them across-the-board.
Meanwhile, many experts agree that the stock market may be at a crossroads of late, but few can decide whether it will be heading north or south.
In the wake of so much uncertainty, Bardine, the tax attorney, joins other financial planners in suggesting you focus primarily on your housing wants and needs and secondarily on the investment potential of a property.
“Have a life. Live in your house. But don’t sit around worrying about its value every day. Use it and enjoy it,” he says.
