Real estate myths

I believe that an educated market benefits everyone. I had a conversation this week with an acquaintance who was clueless about the real estate profession. I have him in mind as I start this new feature. You might have heard (or even believe) these myths--they're often perpetuated at the neighborhood summer get-togethers.

I hope you find this information useful. Please feel free to comment!

Myth #1 'The bank owns most of my house'

"I hear that statement a lot, and it makes no sense," says Chris Mayer, a real-estate professor at the University of Pennsylvania's Wharton School. "Suppose you buy a house for $250,000 and you put $50,000 down. You might think that you own 20% and the bank owns 80%. But if the house's value goes down $50,000, you lose $50,000 and the bank loses nothing."

Fortunately, the leverage that comes with a big mortgage usually works to enrich homeowners. Consider that $250,000 house bought with $50,000 down. If the home's value climbs just 20%, to $300,000, the value of your equity would double to $100,000.

Still, because of the debt involved, purchasing a house is a risky proposition. To get a better handle on the investment bets you are making, it can be helpful to consider your house separately from your mortgage. If your home's current value is $250,000, that is your real-estate exposure.

Meanwhile, think of your mortgage as a bond, suggests William Reichenstein, an investments professor at Baylor University in Waco, Texas. But in this case, instead of buying bonds and receiving interest, you are effectively selling a bond and paying interest.

What are the implications? Suppose you are retired with, say, $300,000 in bonds and $200,000 in stocks. You might think your portfolio is conservatively positioned.

But if you still have $125,000 outstanding on your mortgage, you would need interest from roughly $125,000 of your bonds to pay your mortgage interest. The bottom line: Your net bond position is really just $175,000, and thus your portfolio has more in stocks than bonds.

Thanks to Jonathan Clements of The Wall Street Journal