For years some advisers encouraged physicians to put a big chunk of their net worth into their homes. Real estate was seen as a safe investment — and during the boom years, a spectacular can’t miss.
Now comes the rethink.
The rationale for loading up on housing was a financial triple play: Doctors would get an asset they could live in and enjoy, the home would appreciate in a fast-moving real estate market, and it came with tax write-offs and legal homestead protections to discourage lawsuits.
But today, with home prices apparently beginning to stabilize but still way off their highs, many physicians and their financial advisers are re-evaluating how much of their net worth should be tied up in first, second, or third homes.
“Years ago you could count on doubling your money [on a home] in a relatively short period of years, but that’s not true anymore,” says Earl Romans, an accountant in the Detroit area, one of the nation’s hardest-hit real estate markets. “We’re telling clients to buy what they need, and no more.” At least in his area, he says, the days when physicians craved showplaces for entertaining large crowds are gone.
Some physicians seem to be making housing costs a bigger factor when deciding on where to settle. David Holdt, an OB/GYN and president of Regional West Physicians Clinic in Scottsbluff, Neb. (population 14,732), says his town may lack glamour, but the value proposition is becoming clear to some of the younger physicians he has recruited there.
“I have a partner who bought a nice home on the fairway here for about $350, 000,” he says. “She was just talking about going back to a medical school reunion, where a lot of her classmates were living in $1.5 million homes in urban areas with long commutes. We have a different set of expectations here” about returns on real estate investment dollars, he says.
Mindful of primary-care physicians’ generally lower salaries compared with specialists, internist Kevin Pho says cheaper housing was a big reason for relocating to Nashua, N.H., four years ago from Boston.
Nevertheless, Pho, who writes frequently about medical economics on his popular blog, www.kevinmd.com, knows the value of his two-story colonial in Nashua took a dive this year.
“I have no doubt the house is worth less, but it doesn’t keep me awake at night,” he says, partly because he has no plans to move, but also because he never counted on the house to be a major wealth builder.
Unfortunately, a lot of doctors can’t rest so easy. They’re stuck with huge adjustable mortgages that are due to reset but they can’t get an appraisal for anywhere near the amount they paid, says Romans.
If you’re in that position, Romans suggests sitting down with the bank to negotiate the possibility of keeping the rate the same with no additional cash added to the property. It may be a long shot, but the bank might just conclude that a working physician willing and able to make her current payments is preferable to foreclosing on a property that has tumbled in value.
Meanwhile, financial advisers are writing down home values as they assess clients’ overall financial positions.
“We try not to view homes as a retirement asset, but as a use asset,” says Lane Jones, a principal wealth manager with Evensky & Katz in Coral Gables, Fla. Of course, in pricey markets and when markets tumble, sometimes there is no other way, he says, so it’s important to know roughly how much equity could be pulled from a home if necessary.
A slew of Web sites, www.eppraisals.com and www.zillow.com to name two, can offer instantaneous estimates of a home’s worth based on nearby comparable sales, but it’s important not to panic at the number if it seems dramatically lower than you expect, experts say. The tools these sites use are imprecise and their assessments should be taken with a grain of salt.
Thinking of your home equity with a trader’s mentality could force you to sell out at the bottom of the market, experts say.
So unless you’re planning to move (in which case the real value will be determined by the actual sales price), the numbers should simply ring a cautionary bell about adding too much new debt onto your mortgage or justifying that pricey kitchen remodel because it will be such a great return on your investment, says Hugo Benitez-Silva, an associate professor at SUNY-Stony Brook who has studied homeowner expectations about property values.
Put your HGTV fantasies on hold and overfund your retirement accounts as an asset protection strategy instead, suggests Michael Goodman, president of Wealthstream Advisors Inc. in New York. Retirement funds are generally protected from creditors, too.
“After all the home improvements and upkeep, the internal rate of return on housing just isn’t so great,” says Goodman.
Almost laughable in the housing run-up, an old real estate rule of thumb — putting no more than two years’ pay into a home — looks ready for a comeback.
At the very least, take a look at your net worth statement today and see what percentage of your bottom-line number is riding on a home equity value from yesteryear. If you and that number are both over 45, step away from that brochure for the lakeside cabin.
Janet Kidd Stewart is a freelance writer based in Marshfield, Wis. As a contributing columnist for the Chicago Tribune, she writes a weekly, syndicated retirement column called “The Journey” that appears in Tribune newspapers across the United States. She can be reached via physicianspractice@cmpmedica.com.
This article originally appeared in the October 2009 issue of Physicians Practice.
