Housing Is No Longer An Attractive Investment, Now What?

The fallout of the housing bubble had one clear result: people will no longer blindly assume that housing will always be a good investment. Indeed, we now know it can be a terrible one. Many Americans, however, relied on their home as their central source of wealth due in part to the false promise of appreciation. Without being able to use their homes as an investment going forward, where will Americans turn? They must instead utilize the only other options available: stocks, bonds, small business, or savings accounts. This is a good change.

The New York Times has an article today, explaining how housing is fading as a strong option for investment:

Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.

"People shouldn't look at a home as a way to make money because it won't," Mr. Baker said.

While this view is somewhat controversial, few believe that housing should normally appreciate the way it did during the real estate bubble. At best, it could slightly outperform inflation, though it might not. But it's not like Americans have no other place to put their money -- plenty of other investment options will be available in the future. Many of them would be an improvement over real estate for economic growth.

To be sure, the thriving residential real estate industry did help the U.S. economy. But housing is generally a pretty unproductive end in which to invest. Building a home is very capital intensive, ties up consumer debt for an extended period, and doesn't directly create additional economic activity upon completion.

Many other prominent types of investment are more productive. Take stocks and bonds, for example. When firms offer stock, this provides capital to help them produce more goods or services to sell domestically and/or abroad. The same goes for corporate debt, which often provides funding for expansion.

Another better investment is one in a small business with a good strategy. Rather than flipping houses, for example, an individual can invest in a new restaurant or boutique. This will create sustainable jobs and ramp up economic activity.

Finally, even pure savings accounts have their benefits. Banks will likely be required to hold more capital in the future. With more savings, they'll be able to more easily meet these requirements, which will provide greater financial stability. They can also use this capital for more loans, many of which will go to businesses.

The prevailing view about Americans is that they aren't very good at saving. While that's generally true, housing distorted saving even further. Americans relied so much on their homes as a source of saving and investment that they neglected other options. With their sobering new view of the world, they will now save and invest more of their money in other ways -- and that will ultimately make the U.S. economy stronger.