Isn’t there an inherent error in this initial scenario. The person who has the paid off cheap home, and the exact same spending habits as the expensive home owner probably has higher retirement savings given their much better cash flow.
Maybe I just paid off my house yesterday.
Maybe Sredni inherited $1.5 million and used it as a down payment.
Maybe our incomes prior to today were different.
Who knows why we got to where we are.
I kind of think it’s reversed. The person in the $300k home with the matching retirement savings to the person in the $2 million dollar home while earning the same income has the more lavish life style. They aren’t having to pay off a $500k mortgage and have a lot more free cash flow than the people in the $2 million dollar home. They’re blowing the income rather than sticking everything into mortgage and retirement savings.
The scenario doesn’t work.
Right, so more of their money is going towards retirement.
Ignoring taxes (say $150K is our after tax income) and assuming an annual mortgage payment of $50,000 on a $500,000 loan I am setting aside $75,000 a year for retirement and SV is only setting aside $25,000.
Rabbit holes, people!!!
Mini Me wants a rabbit…
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Having equity in a house may it may not help you retire. It depends on party on how flexible you are about where you live. But having a paid-off house makes a huge difference. When we stopped paying the mortgage we were suddenly a lot richer.
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Yes, that’s why I said that it matters why you are calculating your net worth whether it makes sense to include your home equity. If you’re planning on downsizing that’s radically different from if you’re keeping your big expensive house until you die. Neither choice is wrong… but it’s hugely relevant in assessing retirement readiness.
I try to explain this to people who celebrate paying off their cars.
Great… keep making that monthly payment but instead of paying it to the loan company, pay it to your own high-yield savings account. You’re now saving to buy your next car with cash! But the great thing about this is that it’s voluntary. If an emergency comes up you can skip a month with no penalty, unlike a loan. The only consequence is that it’s now going to take you an additional month until you can buy your next car with cash. But that should be the goal. No more car loan ever again.
People look at me funny and then stop and think about that. I probably get through to maybe 5% of the people I say it to because car loans are so ingrained in our culture. If I can tell that there’s absolutely no way they’re waiting another 5 years to buy a car then I suggest a tiered approach. Save for 3 years and then you’ll have a large down payment. Then instead of getting a 5 year loan you can get a 3 year loan. Then when you pay THAT loan off you can save to buy the NEXT car with cash.
Obviously the same concept applies to paying off a home mortgage… on an even bigger scale.
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We did something similar with the mortgage. We got a 15 year mortgage when we bought the house. And then interest rates dropped for several years, and we refinance a couple of times. But you can’t buy a 12.3 year mortgage. So we got new 15 year mortgages, but calculated what the payment would be if we paid it off on the original schedule, and paid that much each month. So, a voluntary amount more than we had to.
Which is why i now live in a paid-off house.
If I liquidated everything in my brokerage account, I could pay off my mortgage (as of yesterday’s paycheck actually). I’d have about $2000 left in my checking account. I won’t do that since at least for now I can earn a 2% spread over my mortgage rate in short term treasury ETFs.
I am actually planning on doing this! My car will be paid off in a few months and I already have a high yield account opened and ready for those deposits.
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as an aside - when people in CA (or FL) are lamenting losing their uninsured home bc of their fixed income not being able to keep up with insurance prices…this is what I think of. They must own it outright and the RM seems like a needed thing (barring moving)
Home as an investment - are you buying other properties with the equity, then renting them out?
I sort of wish I did this with my last two homes (Kenosha, Nashville). Those 3% interest rates were nice.
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We ended up doing that several years ago with a condo nearby (I lived in the complex as an undergrad). We may have our kids use it in a couple years if they stay local for college. For now we just rent it out and it pays for itself.
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Did something happen in 1981-82?
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i bet it is more that interest rates came down from the “credit card interest rate” level and payments came down. but I was a kid so wouldn’t know if there was a crash
I am not sure that should be a concern, maybe a little, but not what the chart implies.
There are three generalized dimensions, interest rates, home size, market/buying conditions.
The 2008 bubble was mostly a market bubble - everyone was buying a house, including many with almost 0 savings. Maybe you could say interest rates were artificially low due to subprime lending standards and poor (credit) buyers taking on floating rate loans. That drove up prices.
Right now, we have rising interest rates pushing up that metric, but people also want bigger homes (for a home office) and there has been a lack of supply due to many owners not wanting to give up their 3% loans. There will be pressure on prices as supply loosens up, wfh demand drops, and boomers finally give up their larger homes, but that is something that can unwind slowly over many years rather than shock the market in a short period.
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