Is A House An Investment?

Over at Reuters, Felix Salmon commented today on a post I wrote last week indicating that it appears to be a pretty good time to buy a home. I specifically said that this would apply to anyone "in the market for a home as a long-term investment, say at least 10-15 years." He seems to find this statement sort of unclear, so let me clarify.

First, here's some of what Salmon says:

It's hard to know what to make of this. Some people are looking to buy a home -- that's understandable, given that everybody needs shelter. And some people are looking to invest money with a long-term time horizon. And some people even fall into both categories at once. But that's no reason to desperately try to conflate the two, and to describe yourself as being "in the market for a home as a long-term investment".

He goes on to explain that homes aren't investments. I sort of agree, depending on how you define investment.

If you're looking to use capital in order to speculate on an investment to maximize return, then by all means do not buy a house now or ever. If you're looking for a pure investment, real estate is rarely going to provide the best return you can find.

But that doesn't exactly mean that a house isn't a kind of investment. In a more general sense, an investment is anything you purchase for which you can sell at a later time for more money.

I think in order for a home not to qualify -- at all -- as an investment, you'd have to assume that it will not appreciate. Despite what the past few years have taught us, history has shown us that homes do, in fact, appreciate in the long-run. Even if something's return is quite low, it still qualifies as an investment. After all, a money market mutual fund an investment even though most are only yielding about 1.5%.

Maybe Salmon would be more comfortable if we talked about economic tradeoffs instead of investments? Back when I was considering buying a place, I created a complex model to evaluate if it made economic sense to do so, given what I would pay renting. In it, I imagined that I would invest the money I saved by renting in some alterative investment instead of the home. The numbers never came out in favor of buying, given my situation. So I never did. Of course, investors and businesses perform similar analyses when determining which "investments" in securities or equipment to spend their cash on.

I don't think Salmon and I really disagree about the heart of the matter when it comes to real estate. It doesn't make sense for everyone to buy, but sometimes it certainly does. With interest rates at historic lows, it might make renting comparably less attractive than it used to be for some people, since they can get more house for a lower monthly payment.

But just to be clear, what I'm not arguing in favor of is "speculation" in the real estate market. That's what drove my 10-15 year time horizon qualification -- I don't know any housing speculators had time horizons that long. In the short-term, real estate prices will likely have some volatility and poor liquidity. But in the long-term, the housing market should again have its usual level of decent liquidity and low, but consistent, appreciation. A longer time horizon will also allow sellers to wait until the economic cycle brings lower interest rates again to entice buyers, another concern that Salmon cites for buying now.