When a financial advisor considers housing through the lenses of utility and budgeting, rather than as an investment, their perspective is shaped by a recognition of the financial realities of homeownership.
Here’s how they approach it:
Housing as a Basic Need, Not an Investment
Financial advisors often view housing primarily as a basic need – a place to live – rather than a means to generate returns.
The focus is on the utility of the house as a home.
Inflation and Carrying Costs
Advisors understand that the sum of inflation and net carrying costs (like maintenance, property taxes, insurance, and mortgage interest) typically exceeds the nominal rate of return on a house.
For example, if the long-term inflation rate is 3% and net holding costs are 5% of the nominal value of the home (high-ticket project costs have to be amortized over their useful life), the client very likely won’t be getting 8% nominal returns to offset their costs.
A home also isn’t liquid and doesn’t the optionality associated with it (people have to live somewhere).
Budget Considerations
The emphasis is on how the costs of owning a home fit into a client’s overall budget.
Advisors help clients understand what they can afford without compromising other financial goals, spending needs, or overextending themselves.
This includes a detailed analysis of income, expenses, and long-term financial obligations.
Focus on Stability and Risk Management
Advisors typically stress the importance of stability in housing decisions.
This means choosing a home that the client can afford over the long term, which may include periods of economic downturn or personal financial hardship.
It’s about finding a balance between the desire for a home and the need for financial security.
Lifestyle and Personal Value
A home’s value to a client often extends beyond its financial worth.
It includes personal satisfaction, comfort, and the lifestyle it enables.
Advisors recognize that these qualitative factors are a big part of the decision-making process.
Long-Term Financial Health
While acknowledging that a home may not be the best investment, advisors see it as a component of a client’s overall financial health.
A home can contribute to a sense of financial stability and can be a forced savings mechanism through principal payments.
Exit Strategy and Liquidity Concerns
Advisors often discuss the liquidity aspect of owning a home.
Real estate isn’t a liquid asset and selling a property can take time.
They help clients understand the implications of this in terms of their overall financial flexibility.
A home comes with lots of expenses that have to be paid along the way while the equity isn’t liquid and there’s not the optionality with housing because you have to live somewhere.
How a Financial Advisor Views Housing
A financial advisor advising a client on housing decisions would typically consider several key aspects:
Client’s Financial Situation
The advisor would first assess the client’s overall financial health, including income, savings, investments, debts, and credit score.
This helps determine how much the client can afford to spend on housing without jeopardizing other financial goals.
Budget and Affordability
Based on the financial assessment, the advisor would help the client set a realistic budget for buying or renting a house.
This includes considering the down payment, mortgage rates, monthly payments, property taxes, insurance, and maintenance costs.
Long-Term Financial Goals
The advisor would align housing decisions with the client’s long-term financial objectives, like retirement planning, education funding, or wealth accumulation.
Market Analysis
They might provide insights into the current real estate market, including trends in housing prices, interest rates, and the economic outlook.
This helps in deciding whether it’s a good time to buy, sell, or continue renting.
Mortgage Options
For clients looking to buy, the advisor would discuss different types of mortgages, interest rates, and terms, helping to choose the option that best fits their financial situation and goals.
Risk Management
They would also consider the risks associated with owning a home, like market fluctuations and the potential for unexpected repairs, and advise on ways to mitigate these risks (e.g., through insurance).
Tax Implications
The advisor would explain the tax implications of buying or selling a home, including potential deductions and credits.
Estate Planning
In some cases, they might discuss how the home fits into the client’s broader estate plan.
Exit Strategy
For those considering selling their home, the advisor would provide guidance on timing, pricing, and the financial impact of the sale.
Personal Preferences and Circumstances
Finally, they would take into account the client’s personal preferences and life circumstances, like family size, location preferences, career stability, and lifestyle.
Throughout this process, the financial advisor’s role is to provide objective advice, ensure that the client makes informed decisions, and help them understand how their housing choices impact their overall financial picture.
Conclusion
When viewing housing through the lens of utility and budgeting, financial advisors prioritize the personal and practical aspects of owning a home, rather than treating it primarily as a financial investment.
They focus on how a home fits into and impacts the client’s broader financial life and goals, emphasizing affordability, stability, and personal value.
