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A few of my friends have now received that well-publicized letter from the Bank of America telling them that their home equity line of credit has been, let's just say, "expunged from the records."

The letter basically tells people that the home they originally thought was worth $1.5 million is now worth $1.1 million, and, considering that million-dollar first mortgage, there is no longer any equity left to borrow. As a learning experience for the rest of us, a family in Moraga is to be commended for sharing their experience in what was a great human-interest story in a rival newspaper.

Any one of us could have our home equity credit line evaporate, and we should keep that in mind when considering the next extravagance.

Under the circumstances, this is a good time to revisit that old adage about real estate and the myth that it is by far our best investment. A typical house in Orinda or Moraga that sold for about $100,000 in 1977 is worth about $900,000 today. That works out to about an 8% annual return, but it doesn't count the cost of the new roof, paint, new foundation, gourmet kitchen and all the costs that make it worth today's asking price. Without those ongoing improvement costs, a house runs the risk of being what the building industry calls a "scraper." That's a house with so much deferred maintenance that it's cheaper to scrape it off the foundation and start from scratch --- with a value of what the land is worth minus the demolition costs.

Real estate is a successful investment for reasons that don't have to do with money. It forces those of us with little willpower to save what we otherwise never would have socked away. The "Millionaire Next Door" used to be right in our own back yard thanks to home ownership and the forced savings it represented. Then, the lending industry lost the regulatory guidance that protected it from itself.

The National Association of Realtors states that home prices rise at 1.7 points above the rate of inflation. This would put the increase at about 4.7 percent if average inflation is 3 percent. We don't know if that figure is reduced by the cost of the new roof and gourmet kitchen. Ken Fisher, in his earlier book of charts and graphs, pegged the average increase in residential home values over 100 years at about 3 percent per year --- minus whatever the cost of upkeep might be.

This is all pretty dismal. Investing the same $100,000 in the Dow Jones average 30 years ago, and reinvesting the dividends each year, would give us $3.3 million today. This amounts to about a 12.5 percent average annual return. Of course, there are compensations to be gained from living in a good school district and living a lifestyle out of Sunset magazine, but in strictly monetary terms, a house is not the great investment many blindly consider it to be.

So, what is a house good for? Well, we have to live somewhere, and the interest and property taxes are tax deductible. The net after-tax cost is comparable to what it costs to rent equivalent space.

Moreover, when home equity approaches half of a home's value (or greater), the fluctuations in value are generally not as great as those we endure in the stock market. The Moraga home cited above is a good example. Owned free and clear, the loss of equity would have been about 27 percent instead of almost 100 percent, and we are operating today under extreme market conditions. Generally speaking, home equity is comparatively stable and acts in many ways like bonds in a portfolio of investments.

While failing to recognize that home equity is loosely equivalent to a bond portfolio, many people are overly conservative in their stock market allocations. Target date funds, heavily promoted in retirement plans today, shift the mix of stocks and bonds toward progressively more bonds as people approach retirement.

By age 66, a typical age for throwing in the towel, most of these programs have by then moved 50 percent of the assets into bonds. Even 30 years before retirement, (by age 36) they have shifted 10 percent into bonds. These canned programs operate in a bubble of ignorance and can cost retirees what could have been 50 percent more money throughout retirement.

Why? Because, we already have what amounts to a substantial "bond equivalent" in our home equity. A retiree would typically own a home free and clear by the time retirement rolls around. Any meaningful financial plan should take this into account and count it as the bond portion of a portfolio. Meanwhile, IRA's, 401(k)'s and inherited money can remain positioned to benefit from the far higher potential returns of the market.

The retiree's challenge is to fend off what could become rampant inflation. At a hardly "rampant" 4 percent inflation, 15 years reduces $1,000 of spending value down to $555. Protection from this "silent killer of solvency" can only be accomplished with stocks held through several market cycles.

The subtext of a "dear John" letter from the bank is the reminder that residential real estate is not what we thought it was.

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