A House Is a Home—Not an Investment

It could be the most important lesson from the Great Recession.

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Five years after the collapse of Lehman Brothers and the onset of the 2008-2009 financial crisis, the U.S. housing market is at last starting to thrive. It has, in fact, been steadily improving over the past years, and that trend has only accelerated of late. Housing is widely perceived as a key ingredient to a healthy economy, and so the revival in the housing market has been heralded as a positive step for an American system that has been sluggish at best. Similar trends in the United Kingdom and parts of the EU are greeted as positives as well.

But is it? Housing is a key aspect of economic activity in most countries, but that doesn’t mean that we should welcome a return to housing as a perceived pillar of national strength. And we should be very wary of any return to an ethos that sees either home ownership or housing prices as a barometer of individual and collective success. Those attitudes very nearly imploded the modern financial system, and they could imperil it again.

Homes are places where you live. They are not — and should never have been — investment vehicles. Yes, homes may gain in value and augment one’s net worth, but the reason to own a home is that it can be a cost-effective way to obtain a place to live. The minute they are seen as investments, that reality gets perverted, with dangerous consequences.

There’s no doubt that the economics of the housing market have been steadily improving. Foreclosures have dropped in half since their peak, from over 1 million in 2010, to a predicted 490,000 this year. Housing starts are up nationally, from a low of less than 500,000 in 2009 to close to 900,000 this year, and prices are up more than 10 percent over the past 12 months.

These national trends are neither evenly distributed nor certain to continue. The Northeast, for instance, has been weaker of late than the rest of the country. The recent spike in interest rates, triggered by the imminent Federal Reserve decision to curtail some of their aggressive bond buying, may dent the momentum as well.

Given that housing has direct impact on GDP, it certainly matters whether it is doing well or badly. Not just construction but millions of retail and industrial jobs are keyed to the housing market, ranging from Home Depot salespeople to Caterpillar engineers. But the notion that housing should be a leading indicator of economic health is unwise, and ultimately destructive.

What was most damaging about the housing boom and bubble of the 1990s and 2000s was that millions of middle-class families bought into the notion that homes should be the repository of their net worth and future wealth. Decisions about buying shifted away from pure calculus of need and acceptable costs and instead were increasingly based on the likelihood (or not) that their homes would increase in value.

It’s an easy path from that belief to outright speculation. The idea that homes are a primary investment is not only what drives real estate bubbles but also drives real estate crashes. China today is in the grips of a real estate challenge because middle-class Chinese have nowhere to invest and augment their net worth other than real estate, given that the stock market is widely seen as gamed, there is only a small bond market and they can’t invest outside the country. But Americans have multiple avenues to invest for the future; real estate may be part of that mix, but it should not be the anchor.

Presented by

Zachary Karabell is Head of Global Strategy at Envestnet, a financial services firm, and author of The Leading Indicators: A Short History of the Numbers that Rule Our World. More

At River Twice Research, Karabell analyzes economic and political trends. He is also a senior advisor for Business for Social Responsibility. Previously, he was executive vice president, head of marketing and chief economist at Fred Alger Management, a New York-based investment firm, and president of Fred Alger and Company, as well as portfolio manager of the China-U.S. Growth Fund, which won a five-star designation from Morningstar. He was also executive vice president of Alger's Spectra Funds, which launched the $30 million Spectra Green Fund based on the idea that profit and sustainability are linked. Educated at Columbia, Oxford, and Harvard, where he received his Ph.D., he is the author of several books, including Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It (2009), The Last Campaign: How Harry Truman Won the 1948 Election, which won the Chicago Tribune Heartland Award, and Peace Be Upon You: The Story of Muslim, Christian, and Jewish Coexistence (2007), which examined the forgotten legacy of peace among the three faiths. In 2003, the World Economic Forum designated Karabell a "Global Leader for Tomorrow." He sits on the board of the World Policy Institute and the New America Foundation and is a member of the Council on Foreign Relations. He is a regular commentator on national news programs, such as CNBC and CNN, and has written for The Wall Street Journal, Newsweek, Time, The Washington Post, The New Republic, The Los Angeles Times, The New York Times, and Foreign Affairs.

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