Is Your House A Home Or An Investment?

Ask this question of just about any American and they will happily tell you that it is both. And why not? From home improvement centers and real estate agents to government programs and tax breaks, the clear message is that it is always better in the U.S. to own a home. The reality is a little trickier, though. And if you plan to use your home as an investment—that is, to actually get additional value out of it at some point in the future—you need to think more clearly about the limitations of living in one of your biggest savings accounts. Here are a few key points to consider:

1. You don't buy a house for the land.

We have a tendency to think that buying a house is somehow a more "stable" investment, as if the fact that we can still touch and see the land means that it's value is not going anywhere. Sure, you can probably still grow potatoes on the land  even if the economy tanks. But let's face it, you didn't pay a quarter of a million dollars so you could grow veggies and no one else is going to either. The value of property, like the value of any other investment, comes from only one factor—what someone else will pay for it at the moment you want to sell;

2. Home values can be just as unstable as stock markets.

Our most recent U.S. Census data shows that median household net worth went up by about 30% between 2000 and 2005 (an increase from $81,821 to $106,585)! This was great news, and it was almost entirely due to the fact that people's home values went up during those years. But when home prices dropped in the 2008 crash, Americans' net value also went down...by about 35% as of 2011. That crash wiped out almost a decade worth of gains, and it left many homeowners with mortgages that were more than the home's value. We haven't all recovered, yet. According to Zillow's 2014 report, 16.9% of U.S. homes were still "underwater" (worth less than their home loans) as of the end of October, 2014. Which brings me to my next point—

3. You can't live in a mutual fund.

Generally speaking, this is a point in favor of buying a home as an investment. Since you were going to pay housing costs anyway, why not put it toward an asset of your own? But if your stock prices crash, you can usually leave them be and wait it out until the market recovers. If your home price crashes and you can't afford your mortgage or you have to move for a new job, you just don't have that luxury. That means you may be forced to "cash in" at the worst possible time, making you a lot more vulnerable to losing all of that money you've put in and possibly more;

4. Your mortgage is someone else's investment.

In our rush to celebrate the great American home-buying dream, we often forget that the reason economists love home buyers is because home owners borrow so much money. Home owners not only tend to take out large mortgages (which can be bundled and sold off into all sorts of investments by financiers), they also borrow more through auto loans, education loans and credit cards because of the sense of safety provided by their home values. It's great for the economy, but it might not be so great for you. If we assume that the average U.S. mortgage is a 30-year fixed rate at about 4.5% interest on a $222,000 loan, then the average home owner is paying a total of about $183,000 in interest for the privilege of being rent-free. This, of course, does not include any of the closing costs, maintenance, taxes and upgrades you choose to do on your home (not to mention the added temptation of new sofa cushions, shelving, curtains, etc...);

5. There's no profit until you sell.

All of us are happy when we get word that our home price has gone up. And thanks to refinancing, we can access some of that money (for a price) by borrowing against the new value. But nothing will change the fact that investments don't make you any money until you sell them, and this applies to your home, as well. If you are counting on the value of your home to help you in retirement, keep in mind that without some creative help from family members, this will mean a reverse mortgage or a sale. And if you choose the latter, you are going to have to find somewhere else (somewhere less expensive) to live.

All of this is not to say that your home in not a good investment. It may very well be! The mortgage tax deduction can offset some of those interest payments, and if you buy in the right time and place you could make a lot of money when it is time to sell. What all of this does mean is that averages will do you no good in determining whether you should by a home. You need to do the calculations based on things like how long you plan to stay in the area, what other resources you have in case of a downturn, what the rental market looks like in your area and what other financial and familial obligations you have.

Most importantly, though, you need to account for the fact that what you are buying is not a house...it's a home. If flexibility, adventure, ease or mobility are what you need at this point in your life, there are probably better investment options for you. If, on the other hand, buying a house ensures that you can keep the kids in school with their friends or that you can finally set down roots in a community, well, that is another kind of investment—one that doesn't come with a calculator but makes a world of difference.

Is It High Finance or Just Hormones?

On this last day of the work week before the 4th of July weekend, I can't passing along this little tidbit.  A study published today in the journal Scientific Reports and picked up by Bloomberg Business News concludes that people—and by "people" I mean young men—with more testosterone and cortisol coursing through their veins were likely to make risky decisions about investments. Scientists ran a series of experiments involving make-believe stock market trading floors. After measuring hormone levels through saliva tests and setting the traders loose in groups of men, women or mixed-gender, the study found that young men, in particular, were prone to dodgy decision-making at higher hormone levels.  Here's what the scientists concluded: "Cortisol directly affected subjects’ willingness to take risks. Testosterone...was associated with significantly increased optimism regarding price change expectations, making subjects more likely to expect stock prices to increase." In other words, the hormones in our young, male traders might be destabilizing your retirement portfolio. As Oliver Staley from Bloomberg writes, "Want to calm financial markets? Add more women and older people to the young men on trading desks."

It's All Greek To Me: Why European Bickering Is Slowing Down Your Investments

Greece is going bankrupt! The Eurozone is crumbling! There are hippos and lions wandering the streets of Tbilisi! Well the thing about the hippos in Tbilisi is true, anyway. Apparently the zoo animals have all escaped during some devastating floods in the capital of the Eastern European nation of Georgia. As to the rest, well, it's all part of Europe's current worry that the Euro, the region's shared currency and 16-year-old experiment, won't survive. In Europe the news that Greece can't make the payments on its loans makes for great headlines. In the U.S., all this European frisson mostly turns up in our investment statements. It's one of the big reasons for that annoying little crawl your investment account has been doing over the past month (last week Golman Sachs declared that our markets were "boring").

To be fair, the niggling daily losses, gains, losses and regains aren't entirely Greece's fault. Our over-caffeinated stock market analysts are flipping coins about when the Federal Reserve is going to raise interest rates,too. But Greece does make a difference. Why? Unless you've been investing big in Greek canned peaches (one of their strongest exports), what you're really worried about is the domino effect within Europe and then, to the rest of us. [Note: I have included a nifty link here in case you would like to import some canned Greek peaches].

The European member created their fancy new currency back in 1999 to turn themselves into one big trading block. That means that they have given and taken out loans to one another, they sell their products—and their peaches—to one another, and their workers all rely on jobs that may well be in the next country over (in 2012 French candidates campaigned in London to reach their voters). This picture of unity works pretty well when times are good, but if country #1 doesn't pay back the loans from country #2, or even if its people can no longer buy those great country #2 imports, then country #2 starts to go down the economic drain. And since everyone is integrated with everyone else, that means country #3 starts to go, along with country #4, country #5, etc... You get the idea.

It turns out that as far away as Europe feels sometimes from the U.S., we do have an awful lot of our own economics tied up in it. And so do Asian countries, African countries and well, Australia. The dominos just keep falling.

So why does Greece matter? Because you don't need lions and floods and hippopotamuses to bring down an economic system. Sometimes knocking over a can of peaches will do it.

Oil Slicks: Behind The Headlines About Falling Oil Prices

One of the biggest stories in investing over the past few months has been falling oil prices and their effects on a whole range of investments. As critical as oil is to powering our everyday lives, most people are uncertain about how the rapid decline in oil prices impacts their investments.

The fact is that most U.S. investors have some of their money in the big oil companies and in equipment companies, distribution companies and other industries that support oil.  The S&P 500, probably the best-recognized index of U.S. public corporations, lists 43 energy companies, the majority of which are dedicated to extracting and distributing petroleum (Exxon Mobile is the second largest corporation on the index by market capitalization). The sheer size of the oil industry means that it is a cornerstone of mutual funds, hedge funds, pension plans, 401k plans, trust & endowments and individual investing. Unless you’ve done something to opt out, you should assume that you are “in” oil.

So what is all of the market concern about? A few years ago, the big discussion was “peak oil,” the observation that oil is a limited resource, and we will hit a point at which supplies are dwindling. We will still hit that someday, of course, but contraversial advancements in oil extraction (from tar sands bitumen and shale, in particular) flooded the market, increasing supplies. This development means cheaper fuel prices, but there is a catch.

The cost to extract oil varies tremendously depending on local geology, method and things like labor costs. Most North American shale fields probably lose money at anything below $60-$70 a barrel. Tar sands oil has even less margin because of the difficulty of refining it. Saudi Arabian oil, on the other hand, is significantly cheaper to extract. And this is what OPEC is counting on. Under Saudi leadership, OPEC has taken the position that letting prices crash in the short term will run some of the competition out of business.

Will it work? No one is sure, yet. But we can say that as long as the oil industry is focused on its price wars, we will be seeing a bit of a damper on the performance of U.S.’s oil-soaked investments.