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?