The End of Housing as an Investment?

The market may never be what it was

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The New York Times is declaring housing over "as a means to build wealth." Writes David Streitfeld, "many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century." Is this true? The future of housing has been a vibrant topic lately. The latest round of opinions, coming both as a response to the New York Times article and appearing independently, does appear to be pretty pessimistic about the long-term prospects of the market.

  • Housing Was Never What We Thought It Was  "I've been telling my friends for a decade that housing is a bad investment," writes James Kwak of The Baseline Scenario. In fact, he says, pointing to a graph of "real housing prices over the past century ... housing is generally a worse investment than either stocks or simple U.S. Treasury bonds." People think it is a good investment because of "price illusion" from inflation and because of optimism over bubbles: people get to thinking that "a huge bubble" like the one we just had is "the new normal." His "caveat," though, is that "when 'analysts say' one thing, they are usually wrong ... Generally the best time to buy an asset class is when conventional wisdom has shifted against it" and, though he "still think[s] housing is overpriced," it's possible that, in the long-term, there may yet be some value.
  • 'Homeownership Fetish Hurt the American Dream'  Explains Robert Samuelson: "the pursuit of homeownership dates to the Great Depression of the 1930s." Homeownership can be good, as it "contributes to neighborhood stability and encourages property improvement. Unfortunately, we let a sensible goal become a foolish fetish." The "footloose," the "dependent," and the "poor" or "irresponsible" probably shouldn't be homeowners; yet buy homes they did. Ideally, Samuelson says in The Washington Post, we could adjust policy such that "the homeownership rate ... would probably stabilize in the mid-60s." That's tough to do in this economy, though, without "deepen[ing] housing's depression."
  • Still Builds Wealth in One Sense  "Housing allowed families to build wealth because mortgages were a form of forced saving," observes University of Southern California professor Richard Green.
Housing was a particularly attractive way for those of modest means to save, because they could live in the very piggy bank they were building. In principle, however, these households could have rented and taken the difference between a mortgage payment and a rental payment and put it in another investment (a small business or the stock market). But we know that in the absence of nudges, people tend to save less.
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