are you overweight real estate?

Thicken My Wallet posted an interesting piece today on asset allocation. I contributed to his article and he used my concept of tracking the ratio house value / total assets.

You can find the article here.

how much can we afford?

When a person embarks on the tumultuous journey of a first time home purchase, or for that matter a second or third time home purchase, one of their top priorities is often 'how much can we afford?'. Better yet, I feel the question should be 'how much of our after tax and utility money should we allocate towards paying off our mortgage'.

If you choose to use online tools in order to give you this information, please avoid using this one: Canadian financial news source The Globe & Mail runs a great website called globeinvestor.com. On this website down the left panel in the 'resources' section you'll find a link called 'Mortgage Snapshot'. This link contains the latest mortgage rates from various lenders as well as a chart titled 'How Much Can You Afford'. The chart indicates that if you earn a gross income is $120,000 you can afford a mortgage of $461,808, which provides a home worth $615,744 using a 25% down payment of $153,936 and a 5.8% interest rate. What!

Let's look at this a little closer. Let's assume this gross income is made up of a dual income couple earning $60,000 each per year. After tax, Employment Insurance Contributions, and Canadian Pension Plan Fees they would bring home about $44,000 each, or $88,000 per year. Let's remove RRSP contributions of a responsible 10% of gross income ($12,000 total). Let's also remove a conservative property tax amount of $2,500 per year, heating of $1,500/year, and electricity/water of $1,500/year.

We now arrive at a value of $70,500 for the money our lovely couple will actually have access to, after the tax man, heat, power, and retirement are all taken care of. This is $2,712 bi-weekly.

Using the 'What Will My Payments Be' calculator on BMO.com we see that this couple's bi-weekly mortgage payment would be $1,333. Taking their mortgage payment as a percentage of the money they'll actually have access to, we arrive at 49%. If they decided to make accelerated bi-weekly payments instead to reduce their amortization time to under 25 years, the figure becomes $1,450 or 53% of their accessible funds. So more than half of their disposable income would go to mortgage payments, and this is not even accounting for other fixed costs like groceries and insurance. This situation would be far from ideal. In fact, it might not even be possible. Considering vehicles, daycare, clothes, gifts, cable tv, maternity leave, vacations, and a broken furnace, this mortgage does not seem feasible in the least.

The source for this information on the globeinvestor website is not listed. I believe that this chart is very poor resource for home buyers and it is irresponsible of The Globe & Mail to provide this resource to reader.

10% off houses in Windsor

Thinking of buying a house in Windsor or Essex County, Ontario, Canada? The Canadian Federal Government and the Government of Ontario will actually cover your 10% down payment for you.

In an area being hard hit by the downturn of the auto industry, this program began on January 1, 2009 and ends on March 6, 2009. As of December, 2008 Windsor's unemployment rate sat at 9.1%. Details on the program can be found here.

Some of the details:

• Maximum home value of $160,000
• Maximum income of $61,400 annually
• Loan must be paid back if applicant does not own and stay in the home for at least 20 years
• If the home is sold for less than the original price paid the loan is forgiven

I thought this was an interesting program; it is actually called 'The Canada-Ontario Affordable Housing Program Homeownership Program. I have never heard of such a thing. Like the Hyundai 'Lose Your Job, Return Your Car' program, this is a sign of the times in Southern Ontario.

cleaning, banking, & thinking

Clorox (CLX) has people talking about cleaning:

• Analyst sees downside to Q3 at Clorox (CLX) from Forbes
• Clorox Dividend Analysis from Dividend Growth Investor
• Clorox Stock Analysis from Dividends 4 Life
• Clorox Continued from Long Term Trader

Toronto Dominion Bank (TD) CEO Ed Clark's goodies:

• TD Bank Sees 2009 Profit Boost from Commerce Buy from Reuters
• TD Chief Predicts Growth Slowdown from The Calgary Herald

Articles that got me thinking:

• No Olympic Gold For Vancouver Real Estate Investors says Financial Jungle on Thicken My Wallet
• Harvest The Fruit from Dividends For Life
• Growth in Value thought aloud about Loblaws

homeless in vancouver

It's official, no one can afford to own a home in Vancouver!

RBC economics released its most recent housing affordability survey which showed that in Vancouver 74% of ones's pre-tax household income is needed to service the costs of owning a home. This compares with 47% in Toronto and 42% in Calgary. I knew the B.C. market was bubbly, but this is ridiculous. Apparently this affordability level of 74% is the worst on record, ever.

For example, an Affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household's monthly pre-tax income.

This trend is expected to cool though, as interest rates are coming down, house prices are predicted to moderate, and incomes are expected to grow.

household savings rate feb '07 update

The last time I updated our household savings rate (HSR), (which is the amount of money we save for investments, as a percentage of our after tax income), was on September 30, 2007. By 'investments' I am specifically referring to my non-registered portfolio, my RRSP, my wife's RRSP, and now my son's RESP. Back then we were saving about 36% of our net income. At that time my wife and I were both working away at full time jobs. When our entire mortgage payments were thrown into the 'saving' category our HSR was 51% of net income.

Fast forward to the present day where my wife is taking a government allowance each month, maternity leave, and I am still working full time.

Here are the figures for the last 2 months:

January, 2008 --- HSR = 38%, HSR including mortgage = 58%
February, 2008 --- HSR = 44%, HSR including mortgage = 63%

Also, Goal #1 has been met for both months, as we've now saved $1,388 for our non-registered portfolio for the month of February.

I am extremely pleased with these savings rates. The improvement over late last year might have to do with a general mental attitude to spend less since we are earning less. Another explanation could be the actual reductions in our day to day living costs that come along with caring for a baby.

where renting is underrated...

Well, perhaps real estate is not always a good investment....

Home prices in the United States fell in October, 2007 for the 10th consecutive month, posting their largest monthly drop since early 1991. Home prices fell by an average of 6.7% in the S&P/Case-Shiller home price index. The index tracks prices of existing single-family homes in 10 metropolitan areas compared to 2006.

This has me wondering......What would this type of price action do to some one's net worth who had a large proportion of their assets tied up in their home? (our home is ~74% of our asset base)

Well, assuming I was Joe Average U.S. citizen living in a major metropolitan area:
My last reported net worth would have declined from $131,011 to $116,606, a decline of over 11%.

If I happened to live in Miami, Florida where house values declined a whopping 12.4% during the same period my net worth would have gone from $131,011 to $104,351, a decline of over 20%. That hurts!

Of course I realize that these devaluations are gradual, and not month to month, which is not how I am representing it above but it does have the same net affect. This type of data reiterates why I am trying to diversify away from our over weighting in real estate.

why no REITs

According to Wikipedia, a real estate investment trust or REIT is a tax designation for a corporation investing in real estate, that reduces or eliminates corporate income taxes. In return, REITs are required to distribute 90% of their income, which may be taxable in the hands of investors. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.

Why I Do Not Invest in REITS
The reason for my not investing in REITs is simple. As previously described, our house value already makes up about 73% of our total assets. We are grossly overweight in real estate investments already. Yes, we may live in our house for the time being, but that does not take away from the fact that it is a part of our asset mix. We could sell our home tomorrow and rent another house or condo.

When we borrowed the money to buy our house, we took out a loan in the form of a mortgage from a bank. Compared with our previous life experience with money, the dollar amount of this loan was overwhelming. Even though we had plans to live in our new house, which we do now, we made an extremely large investment in Brantford, Ontario, Canada residential real estate. I prefer not to add to my real estate investments (which already make up 73% of our total assets), by buying REITs. Similarly, if we were renting a condo and we had a $250,000 portfolio of stocks and mutual funds, I might consider adding some REITs or even buying a house.

Post Sponsor: Don't get bogged down with debt use a secured loan or perhaps a debt consolidation loan to get out of trouble.

house value / total assets

Diversification is important for so many reasons. Diversification shields you from the risks of over concentration by spreading your risk out among investments. The success of one or more investments will hopefully outweigh the mediocrity of others. Some periods might see certain investments in favour while others stagnate.

The diversification balance works within a portfolio of stocks or mutual funds the same way it works for the sum of the assets that an individual owns. At this stage in our life, our home is the largest investment we have ever made. Our house is only one asset and only exists on a single plot of land in a single city, and belongs to a single class of assets: real estate. More specifically Canadian residential real estate.

Due to the fact that we needed a place to live when we bought our house about two years ago, we become grossly overweight in this single asset when compared to the rest of our assets. The rest of our assets include mainly investments in corporations, whether through mutual funds or through individual stocks. As we go along I would like to bring this over concentration of investment in our home down quite a bit.

In May of 2006 our house made up 83% of our total assets. As of the present time (November, 2007) our house now makes up 73.5% of our total assets. So we've been able to bring our weighting in our home down about 10% over the past 1 1/2 years. See the bar graph below.

Do you keep tabs on your house value / total assets? Why or why not?

net worth update july, 2007

Results for the two months ended July 15, 2007.

• Debt/Asset Ratio moved down from 0.60 to 0.58

• Net worth up 8.4%

• Total Assets up 4.0%

• Total Liabilities moved up 1.1%

• House Value / Total Assets moved down from 77% to 75%

• Non registered portfolio moved up 19.2%

Good progress. Some more debt was taken on due to our large patio project. After some thought and a little research, I adjusted our house value by a conservative $5,000 due to the addition which ended up costing around $4,000.

an investment in my home

I am currently in the process of making the largest investment I have ever made in my home, aside from my down payment when we purchased the house. I am putting in a stamped concrete step, wide walkway, and back patio in place of an old deck that I have recently removed that existed when I purchased my house about two years ago.

This coloured, natural looking stamped concrete work is costing me $3,816 after tax. This addition will no doubt add much convenience and enjoyment to our every day lives during the non-winter months.

The question is though; how much value will this add to my home?

When updating my home's worth for the month of July, on my July 15th net worth statment, how much should I increase the value by on my balance sheet? I like viewing expenditures as investments, it helps me feel better about spending my money.

I wonder if there is a resource (website, etc.) out there, were they give you a percentage payback on home projects such as this. For example, does putting in a concrete feature in your home landscape like this add 100% of it's installation value to the value of your home, or is it more like 150%, 200%, or even 300%.... I remember seeing something like this when I bought my house, but I don't recall where...