My uncle, a dyed-in-the-wool apartment-renting Brooklynite, was arguing with my parents, suggesting they were fools for having bought a house and paying all that money to the bank. “Did you ever look at all the money you’re really paying,” he demanded in an argument that took place 40 years ago. Some 20 years later, I recalled his words at the closing for my first house, as my attorney quickly flipped through page after page of a printout showing where I’d be spending my paycheck over the next couple of decades and the cumulative amount I’d pay for the privilege of owning my modest condo. Unlike my uncle, more and more Americans have bought into the American dream over the past few decades–the national homeownership rate was 68.4% as of year-end 2003, according to the U.S. Department of Housing and Urban Development.

For many folks, their home is the biggest asset they’ll ever have, and the main material legacy they’ll leave their children. It’s not such a bad investment: David Berson, chief economist of Fannie Mae, wrote recently that home prices rose 10.8% in 2004 and 8.4% annually over the past five years. There are more ways than one to make a home pay off: a recent National Association of Realtors report found that 23% of all home purchases last year were for investment purposes. Some of those purchases may have been made through self-directed IRAs that invest in real estate. I was reminded of that option last month by Joan Owens, a VP with Fiserv ISS Investment Administration Services. The Fiserv unit is one of the relatively few institutions around the country that can arrange IRAs that hold non-standard assets like real estate for you and your clients (we’ll be reporting on that option in future months), and business is booming.

There are other method of investing in real estate, of course–public and private REITs, mutual funds, limited partnerships, etc. They all provide some of real property’s benefits: appreciation, income, and a negative correlation to the performance of equities and fixed-income securities.

Another way real estate trends touch individual’s portfolios is in the field of mortgage-backed debt. Patrick Kelly of LaSalle Broker Dealer Services is an unabashed proselytizer for fixed income, arguing that the asset allocation plans of most investors underestimate its value. He argues that CMOs in particular should find a home in many investors’ portfolios, regardless of their age. Kelly’s colleague, Rich Moogan of LaSalle Bank, points out that there is more than $5.4 trillion of securitized debt classified as mortgage-backed securities, making it the largest debt market in the world. Some $1.7 trillion of that debt has been repackaged as CMOs, which Moogan points out are safe (La Salle’s offerings range from triple-A-rated private-labeled instruments up to full-faith-and-credit GNMAs) and have other benefits. “We can get you a better return, a higher coupon, a better check each month, if you’re willing to trade off the ability of knowing when your maturity will be.” Moogan admits that if an investor knows he needs his money back in three years, “you don’t buy a CMO, because I can’t guarantee that maturity.” Since Americans move on average every seven years, however, these days most 30-year mortgages hardly last 30 years.

Speaking of paying off mortgages, this month’s installment of The Puzzler by Ben Warwick (page 95) addresses a home-related conundrum: If a client comes into enough money to pay off her mortgage, should she do it? Ben ran the numbers to find the minimum return that lump sum must produce to justify paying off a mortgage early.

As for my mortgage, it turns out I made a fair return on that condo when I sold it a few years later to buy a bigger home. Twelve years later, our house has tripled in market value, and we’ve refinanced a good three or four times. As for my uncle, he ended his days living in his daughter’s [mortgaged] home.