Banking on homes

Living in Sonoma County can mean a trade-off between paying for a roof over your head and saving for retirement.

Both are important goals for most families. But in high-cost areas like Sonoma County, it can be difficult to do both.

Across the United States, more Americans are banking on rising home values instead of the stock market and savings to pay for their retirement.

"They think of their houses as a savings account more so than a generation before," said Bruce Dzieza, a Sebastopol financial planner. "It's become more of a commodity, and people have the attitude that real estate will never go down."

This fundamental shift in the perception of a home, fueled by the eight-year run-up in housing prices that peaked in 2005, has prompted many families to change their investment strategies.

Only 49 percent of U.S. families held stock in a retirement account or other managed asset account in 2004, down from 52 percent three years earlier, according to the most recent Federal Reserve Survey of Consumer Finances.

At the same time, more families are buying homes and taking on larger amounts of debt to purchase real estate. The Fed survey found that 69 percent of American families owned a home in 2004, up from 67 percent in the previous survey.

But a home should not substitute for a diversified retirement plan. Homeowners should view equity gains as a part of the financial package, not their sole resource to pay for retirement.

You can earn substantial sums of money - on paper - if home prices climb, as they have over the past decade. And unlike a stock certificate, you can live in a home while it appreciates in value.

But consider that stocks have outgained increases in home values in Sonoma County, even accounting for the latest housing surge. Homes also are not liquid assets that can be easily sold to generate cash. And selling could mean a major downsizing or a drastic move to a state with cheaper living costs.

Still, the recent housing downturn and declining property values doesn't appear to have lowered Sonoma County residents' expectations that homes are the key to financial stability in retirement.

"The majority of clients we get, that's their biggest asset. And they don't have a lot for retirement," said Dale DeGennaro, president of the North Bay Chapter of the California Association of Mortgage Brokers.

"Traditionally, a home in our area has been a great way to finance retirement," he said. "So if somebody is really buying their home to live in and they're going to be staying there five to 10 years, more than likely they are going to be fine and they will have a lot of equity in their house to help fund retirement."

If you decide to turn your home into a vehicle for retirement, you have some options.

One plan may be to sell a home near retirement, downsize and live off the gains. Or a retiree might refinance a home and turn some of the equity into cash.

If selling is the goal, start planning several years ahead of retirement depending on the direction of the housing market, Dzieza said.

For instance, a couple sold their Sonoma County home more than a year ago and became renters while continuing to work. They bought some land in Arizona to eventually build a home for retirement and invested in stock and bond funds.

"They fell in love with renting. They liked the cash flow from their portfolio," Dzieza said.

Now the plan is to sell the Arizona property and rent there, leaving enough money for monthly living expenses and travel and a down payment for a home if they decide to buy.

Dzieza put together a retirement plan for another couple keyed to the sale of their Sonoma County home. But the couple purchased a ranch in Oregon a year ago before selling here. Now, they have about $400,000 less to work with because their Sonoma County home sold for less than they expected.

"It won't ruin their retirement, but it will have a dramatic effect," Dzieza said.

A third client wanted to stay in her home after suffering a stroke. But, at age 94, she was exhausting interest earnings from certificates of deposit and bonds and beginning to dip into the principal balances.

While she needed to take out a loan on the home that she had long ago paid off, she was able to purchase CDs and bonds to generate enough interest income for living and long-term care expenses. Dzieza worked out the plan with his client and her children.

"They like the control of the cash flow. And they like mom living at home as long as she possibly can without worrying about their inheritance," he said. "I have to reinforce the fact that they're using up some equity."

Critical to each of these alternatives is building equity in a home.

Increasingly, the aim of paying down a mortgage is fading as more homeowners count on the market to generate gains in value. This reflects unflagging confidence in housing as an investment.

Some homeowners and buyers are taking the next step, pursuing a philosophy known as mortgage planning. Instead of steadily paying off the principal balance of the loan, they choose to make smaller payments in order to free up cash to invest in stocks and bonds.

"Basically, you have the same net value. But you have some of it in your house and some of it in cash, if you're disciplined to keep putting that money away," said Hans Bruhner, managing partner for First Priority Financial, a mortgage lender in Forestville. "It's kind of good, and it's kind of scary."

The good: You are diversifying investments. Plus, savings are more readily available than cash tied up in a home.

The scary: If prices decline, you could owe more on a home than it is worth by counting on the market to build value rather than paying down a loan's principal balance.

If you bought your home in 1990, you've done well. The price of a typical home in Sonoma County has climbed 208 percent since 1990, rising from $190,000 to $585,000 the end of 2006.

But the stock market rose more than twice as fast during the same period. One of the best gauges of Wall Street, the S&P 500 index, has climbed 476percent since 1990.

Better to both pay down a mortgage and invest in a retirement account.

"Your home is not a brokerage account. It's a cushion; it's a reserve," Dzieza said.

First, Dzieza said, decide your financial goals. Is it home ownership? Saving for a child's college education? Putting away enough retirement income to avoid being a burden on your children?

Your income pie might seem too small to slice that many ways, but Dzieza said there are ways to boost your net worth in both directions.

When buying a home, aim for what you can afford and resist stretching too far financially. A majority of buyers in recent years, however, have taken out interest-only or minimum payment option mortgages in order to qualify for loans to purchase homes given soaring prices. While they have fallen out of favor, Dzieza still recommends 30-year fixed interest loans, which also include an interest-only option now.

"I think that minimal forced savings of a principal payment is a good thing. Because we hate to see clients, especially in this market, owe more than a home's worth. It's happening," he said. "You shouldn't buy a house you can't afford."

For retirement, invest in a 401(k) at least up to the minimum amount to qualify for an employer's matching contribution. Your investment also will reduce your tax rate.

"It's really an educational process. They have to think about where they want to be when they retire," Dzieza said.