WaPo columnist: Home ownership is a lousy investment

posted at 8:01 am on April 23, 2014 by Ed Morrissey

Most people include home ownership as one of the basic elements of the American Dream. It stands not just for independence, but also in most minds an investment in tangible and significant property. It’s not a universally-held goal — some people prefer to rent even with the means to own — but home ownership is usually seen as one of the building blocks to middle-class wealth.

As I noted, some people prefer to avoid home ownership, but not usually on the basis of it being a lousy investment. See if you can pick out the huge, gaping flaw that the Washington Post’s editors apparently missed in Catherine Rampell’s column:

The fact that Americans still financially fetishize homeownership baffles me. Never mind that so many people lost their shirts (among other possessions) in the recent housing bust. Over an even longer horizon, owning a home has not proved to be a terribly lucrative investment either. Don’t take my word for it; ask Robert Shiller, winner of the 2013 Nobel Prize in economics who previously became a household name for identifying the housing bubble.

“People forget that housing deteriorates over time. It goes out of style. There are new innovations that people want, different layouts of rooms,” he told me. “And technological progress keeps bringing the cost of construction down.” Meaning your worn, old-fashioned home is competing with new, relatively inexpensive ones.

Over the past century, housing prices have grown at a compound annual rate of just 0.3 percent once one adjusts for inflation, according to my calculations using Shiller’s historical housing data. Over the same period, the Standard & Poor’s 500-stock index has had comparable annual returns of about 6.5 percent.

Yet Americans still think it’s financially savvy to dump all their savings into a single, large, highly illiquid asset.

Perhaps it helps to identify the one word that Rampell never includes in this essay … rent. The primary home is not just “a single, large, highly illiquid asset”; it’s where people live, too. If they don’t have a house to own, they will have to pay rent.

For instance, I’ve owned my current house for a little over sixteen years, and it’s the longest I’ve ever lived in one place. I’ve paid between $1,050-$1,125 each month for my “investment,” and the rents in my community for even a somewhat-smaller place run at least that amount (according to Zillow). Either way, I’d have paid roughly $211,200 for a place to live. However, I had the choice to sink that cash into either a property in which a significant amount cash would be recoverable in a sale (equity), or handing it all over to a landlord with no return on it whatsoever.

Which is the better investment? Even if I could squeeze into a smaller space (2 bedrooms), I’d only have saved about $200 a month, or roughly $38,000 overall. In sixteen years, my equity has increased by about three times that amount, even with the housing bubble and crash a few years ago. I didn’t just go out and burn $172,800 by handing it to another property owner without a stake in the property for myself.  This may not turn out to be the best investment I’ve ever made in terms of pure cash return, but it’s saved me at least the $172,800 I would have spent without any return at all — which in real terms makes it the best possible investment I could have made.

Now, this may not be the biggest issue in the public square at the moment, but Rampell’s argument had to go through the “layers of fact-checkers and editors” we hear exist at journalistic outlets such as the Post. Yet no one apparently knew enough about the concept of “rent” and “opportunity cost” to flag the column and ask Rampell to address the gaping hole in her argument. Odd, and it suggests that the people involved aren’t terribly well acquainted with economic reality.

Update: Jim Geraghty suggests other ways to get government out of subsidizing the American Dream. Also, Rampell’s point about scaling back or ending government policies that incentivize home ownership actually works better by underscoring what a great “investment” primary home ownership actually is. Why do we need to incentivize it when the opportunity costs already do so as strongly as they do?

Update: Great discussion in the comments. I’ll only add one more point in the post itself. Most people have the choice to own or rent their living space (the others will either inherit or live with relatives). The choice is, respectively, to put money into your own real-estate investment or into someone else’s. Absent the need to be mobile and assuming one is capitalized enough to afford a rational down payment on a rationally-priced home, why would the latter be a better choice in terms of investment?


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Rents and monthly mortgage payments in our area are roughly equivalent for our size house. With those being equal the reasons we bought instead of rent are, in no particular order:

1) Mortgage interest deduction
2) Fixed mortgage rate (more long term predictability than rent)
3) Real estate in general is one of few hedges against runaway inflation (potentially relevant in light of $7 trillion in QE printing by the Fed)
4) Living in your own home is good for the soul.

If we actually turn a profit if we sell the place, that’s great. But if not, it’ll have paid off in other ways.

JeremiahJohnson on April 23, 2014 at 5:57 PM

demographics is destiny.

WryTrvllr on April 23, 2014 at 6:42 PM

In the postwar era, the median house price has stayed between 1.5 and 2.5 times median annual income. Even in the previous price run-up to the 2008 bubble, it only got to 2.77 x median income.

Now it’s running about 4x. Why? Because the bubble wasn’t allowed to deflate.

Adjoran on April 23, 2014 at 3:41 PM

Sorry, but I have to disagree. Median annual income is a poor indicator of what the median house price in the US should be.

Yes, it is tragic that the median real income has been at a standstill or even declined over the past decades when adjusted for inflation. But at the same time, realize that investors buys a signficant portion of sold homes today. We even have foreign money pouring in. My birth country of Norway has a Sovereign Wealth Fund which has invested billions in the US Real Estate market over the past year, both commercial and residential. This is new to the demand side. Aside from some Japanese investment in the US commercial real estate market in the early 1990s, the foreign investment in US real estate has exploded.

A much better indicator of the health of the housing market is Price to Rent Ratio, because if you don’t buy, the only real alternative is to rent. In most markets today, that ratio is at or near equilibrium, suggesting a stable housing market.

Norwegian on April 23, 2014 at 6:58 PM

It was nuts the first few years. I got several threatening letters about my front yard light being burned out – shorted whenever it rained because the landscaper cut the wire, tied it back together and buried it – took awhile for me to find and fix the problem – so I got a letter whenever the bulb was out for 1 or 2 nights. Also neighbors got threatening letters for: illegal fence – for a 6 inch tall white picket fence style flower bed border; wrong size, color or type of rock in flower beds, cars parked facing the wrong way, and on and on.

The landscapers who refused to work in our area made that decision because they or others they knew had lost money on jobs because the HOA would sometimes do things like change their minds about landscape plans they had already approved, and make them change what was already installed.

dentarthurdent on April 23, 2014 at 4:45 PM

That is utterly ridiculous! On the other hand, we weren’t immune from stuff similar to this from our city’s Code Enforcement Officer. Once we got a letter about our grass being too high (at least they said please mow it), which happened during a very, very, VERY busy time that we weren’t able to get to it. It didn’t stay unmowed for more than two days. Another time we were got a letter about putting a new roof on our garage and that really pissed me off. We did that, too, but the whole thing left a very bad taste in my mouth, particularly when there were other homes in our neighborhood that had their own “violations.” According to my hubby, a little proverbial palm-greasing was going on as well, as well as preferential work for one or two particular contractors in the city.

I don’t blame the landscapers one bit for not wanting to work in your area. The only people that should live in an HOA development are the developers themselves and all those who think they want to slavishly follow the developer’s rules. It’s a liberal environmentalist’s pipe dream. Let’s see them eventually struggle under the onerous rules and watch the resulting infighting that they’re too restrictive. Ha.

PatriotGal2257 on April 23, 2014 at 7:42 PM

It’s very strange that the word Family Is not part of this discussion.
.
Telling.

FlaMurph on April 23, 2014 at 8:20 PM

For all of the California bashing that goes on, this is one way in which California is still the best state of all. We fixed that problem with Proposition 13 back before the state went crazy blue.

fadetogray on April 23, 2014 at 8:50 AM

I’d argue that Prop. 13 is only hiding the fact that Sacramento demands far too much from its citizens. If you have to front-load the property tax burden onto new owners to keep old owners from getting kicked out of their homes, you have a spending problem.

Secondly, Prop. 13 motivates lawmakers to do everything in their power to ensure home prices keep rising, and that they are never reassessed at lower values. It keeps Sacramento’s coffers full but keeps lower income buyers out of the market.

And most importantly, property taxes are the most repugnant, immoral form of taxation because it prevents the individual from being truly secure on their property. In fact property taxes effectively eliminate private ownership of real estate and renders everyone a renter to the state.

TheMightyMonarch on April 24, 2014 at 2:03 AM

This is just a progressive writer, telling young people it’s cool not to own anything. Not because it’s actually cool, but because after 8 years of Barky, they’ll never make enough money to own anything. But they’ll gladly lap it up.

“You didn’t want it anyway” is how progs chocolate coat Obama’s turds.

AppraisHer on April 24, 2014 at 2:11 AM

Food is a bad investment; everything you turns to sheet.

soghornetgunner on April 24, 2014 at 7:49 AM

Purchased our house in 1974 for $37000. Paid it off in 1994. Its great not having to pay someone to have a place to stay except for taxes and up keep. Its probably worth about $160000 now so I’d vote for buying a house.

serbb2 on April 24, 2014 at 11:37 AM

The Market understands that there is little long term value in sticks and gypsum. That’s why The Value is in The Land the construction materials sit on.

The Land, comes with things like Schools, Roads, and Municipal Services. It’s priced accordingly.

FineasFinn on April 24, 2014 at 11:43 AM

As a renter there is no telling who will be moving in or out next door and be sharing your walls. Or how loud or obnoxious they will be. If you rent a house that doesn’t share walls, odds are the neighborhood may not be all that great if housing is a preponderance of rentals. Renters do not seem to take near as much pride in their residences as do owners. Renters are all too often not good neighbors.

lewrod on April 24, 2014 at 11:57 AM

TheMightyMonarch on April 24, 2014 at 2:03 AM

I was not saying property taxes were a good thing. That is an entirely different discussion.

Proposition 13 blocked the devastating affect rising property taxes were having on the cost of owning a home. That was what I was addressing in response to someone who was pointing to property tax increases as being a reason to not own.

Whatever its flaws, Proposition 13 is infinitely better than what existed before it and what still exists throughout the rest of the country.

fadetogray on April 24, 2014 at 12:29 PM

There exists a significant intangible of home ownership: pride & maturity.

Years before the RE collapse, both of our girls had good jobs and were married with a child, like actual adults.
When each purchased their first home, the positive change in maturity level was somewhat amazing.

Neighborhoods with predomintly occupant-owned houses are far more stable and well tended.

Besides, paying off the mortgage was a rush!

Tard on April 24, 2014 at 4:01 PM

Everyone has to find their own truth.

My condo apartment does not represent to me an investment in the same way that investment in Microsoft or a mutual fund would. It is mine. I basically don’t have to answer to anyone about how well or how poorly I keep it (as in I am a packrat, sigh). Since I paid off the mortgage, my out of pocket costs went down. Naturally not to zero because of property taxes, insurance, and condo maintenance, but it is a cost I don’t have to pay no more.

I had a friend who rented and had to move because the rent, over time, went up more than he could afford.

I have a sibling who lived in a rental in a city, moved to another rental, outside the city, then complained about how the rent was going to go up and it would have been wonderful if rent control had extended to that location. Eventually she bought a house to live in, at least then the payments were fixed.

When I retire in several years, I contemplate moving to Las Vegas and have already purchased a house there (shockingly cheap compared to the cost of my condo, even when I bought it 20 years ago) because I don’t think I would want to rent.

To each their own, I guess.

Russ808 on April 24, 2014 at 11:50 PM

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