Why homes aren't investments, not enough people think they are

At Reuters Felix Salmon has been making the case that a home should not be thought of as an investment. Here's the the Google Trends for "investment property":


I think the biggest argument that one should be careful about viewing a home purchase as an investment is that many people will now roll their eyes at you when you moot the idea. In other words, a substantial proportion of young adults are going to view the idea of getting locked down into a mortgage with a great deal more skepticism than they would have a few years ago. The cultural shock of the late real estate correction is going to have a significant long term effect on demand for homes. It seems that the real estate bubble was driven in part by a positive feedback loop whereby as homes became more valuable due to increased demand, the demand itself began to rise as more & more wanted to "get in" on a "sure thing." Without the expectation of inevitably rising values I suspect that many potential buyers will simply focus on more liquid investment opportunities.

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a home is not an investment unless you purposely move to an area that hasnt experienced as much appreciation as the place your are leaving.

since you need a place to live appreciation your home experiences will likely be eaten up by the next home you have to purchase.

you need to own property that is not used as a residence in order for it to be a proper investment vehicle.

A home is a capital investment, if the gene set of kids (larvae) sexually (not asexual clones) reproduced (permutatively replicated) and nurtured (coccooned) in the home (quasi-embryo) is uniquely valued (quantized/qualified) as capital (future utility) to the overall society's (colony's) survival (absolute value) and well being (marginal value). [maybe]

It's an investment.

Consider retirement.

1) You've invested in a home and paid the mortgage off.
2) You're renting.

In the second case you have to spend quite a bit of money. In the first case far less.

That's the same as having a large pool of money in a savings account that pays the rent.

It's an investment because it looks walks and quacks like an investment.


What are you trying to persuade yourself of, Razib?

By bioIgnoramus (not verified) on 09 Dec 2009 #permalink

let me say it this way: for many people, if you want to "make your money work for you," buying a home might not be the best choice. there are various upsides and downsides to securities vs. real estate. but if you buy a home which you plan to live in, it will effect various other choices (jobs, etc.), which might be positive or negative. IOW, as far as investments go securities are relatively a la carte. a home is a lifestyle choice as well.

If you've paid the mortgage off, it's an inheritance for your kids. But since you need a place to live (other than the hospice), it's not an investment. You can't cash it out; you can only roll it over.

By the way, I can't begin to understand DD. Can someone translate?

By Bob Sykes (not verified) on 09 Dec 2009 #permalink

A home can be an inheritance for your kids. You also can roll it over by moving from a high-priced area to a lower-priced area to retire. This especially makes sense if you were only living in the high-priced area in order to be near work.

During the bubble decade people would sell in LA, move to Portland, buy an equally nice house and have a wad of cash left. The Portland seller would move to Chehalis or Missoula or Olympia. The Missoula seller would probably move to North Dakota. The buck stopped there, I think.

Either being tied down or having to sell in a hurry can cost you a lot. Maintenance costs you, and there's a lot more sweat equity in home ownership than people calculate. Taxes and credit cost you. On the other hand, after 30 years renting you have nothing whatsoever to show, though if renting was cheaper than buying you could have invested your down payment and a certain amount monthly, retaining your mobility and lessening your risk.

I never even considered home ownership because of the sweat equity / risk / tied down factors, but I may have been wrong. No regrets though.

By John Emerson (not verified) on 09 Dec 2009 #permalink

Try reading DD's sentence without the parenthetical phrases and it makes slightly more sense, though I'm not sure of the overall point of it...

Are we saying that owning a home in a safe or advantageous location for raising children is an investment in those children's reproductive fitness? Perhaps.

I can attest to the hazards of raising children in low income rental housing...


"A home can be an inheritance for your kids."

So can almost anything else you can buy. A home is a thing you buy for money, and you use it. Like other things you buy, it may or may not be worth more money when you are done using it. As Razib points out, during the bubble, people bought a house with the expectation of selling it later for a profit, in a relatively short amount of time (changes in the tax codes also encouraged this). This was a relatively new thing, though there has always been a concern over property values, because the amount of money and debt involved was generally large. Now, there have always been real estate investors and speculators, and people who buy income properties to rent. But investment property was usually not the primary residence of the investor. I think people will continue to want to buy homes, but the speculative aspect will diminish; more traditional metrics and considerations, such as the relative cost of renting, family needs, etc., will return.

er, not quasi-embryo, but quasi-womb (home)

Enough theory. The data:


3rd from last paragraph has an Excel file containing a time series of home prices from 1890 to present. Home prices fell from 1890 to 1920, stayed flat until 1940, made a jump through the mid-'50s due to the Baby Boom, stayed flat through the late '90s, and then there was the housing bubble.

So unless you plan on there being another housing bubble or huge Baby Boom, invest your money somewhere else.

I am not buying the idea... or data... that home prices were stagnant from the mid or late 50s to the late 90s.

Does not compute.

The Schiller chart is a price index, not nominal price data. In relatively stable times over the long term, nominal house prices on a national average level have tended to appreciate at a rate slightly faster than inflation (i.e., are fairly stable in real terms, hence the flatness of the index). The big exceptions were the Great Depression and the recent bubble. In the past there were localized bubbles (in the 1980s, Boston, New York, Texas, and southern California were quite bubbly), but the recent bubble was fairly unprecedented on a national level. If you look at a house as a purely monetary investment apart from its utility value, then indeed, you should put your money elsewhere. If it's your primary residence, then you have to consider its cost and value relative to your other options, such as renting. This is something you have to decide for yourself based on your own needs and circumstances. One of the traditional benefits of owning was that over the long term (with a conventional fixed-rate loan) you were protected against rising rents. However, thanks to recent overbuilding, rents in many areas will be slow to rise for years. In some places (the devastated rust belt cities, bubble-financed exurbs) housing values and rents may not recover for a very long time, if ever.

one should be careful about viewing a home purchase as an investment.

There is real estate that you buy to live in, and real estate that you buy for investing. It is important to remember the distinction between the two. If you make money as a real estate investor, it is either by flipping or by renting it out to tenants whose combined rent should at least cover your expenses (if it doesn't, it's probably a bad investment). There is no upside for a small-time investor in high-end properties, but you may have good reasons for wanting to live in one.

@agnostic, @Donna: The graph clearly shows the bubbles of the late 1970s and late 1980s. After those bubbles popped, prices returned to the baseline seen for most of the 1950-1995 period (the big run-up in the 1940s appears to have been during and immediately after WWII). I'm assuming that the index is adjusted for inflation (Shiller's page does not explicitly say so). Then came the bubble of the last decade, which dwarfed anything else in the data series.

By Eric Lund (not verified) on 10 Dec 2009 #permalink

Re # 14 the runup of the mid to late 40s was caused by a severe supply shortage, due to low building in the 1930s and very little building during the war. Supply and demand brought forth the Levittowns to correct the situation.

Nah, the major effect of a home on one's heirs is that they will have to clean up all the accumulated junk.

My mortgage on my home which I've lived in for quite a few years now stays essentially flat (other than increases from taxes, fluctuations from insurance costs) while rents have continued to rise around me. Even now, my mortgage payment is less than contemporary rents for a comparable residence, and I can count on that holding into the future.

[Not to mention the other perks, a yard where my granddaughter can play, a place to work on my antique hobby car, room for my dog to run, etc]