Wednesday, July 08, 2009

"Invest" in a house? Not so much

“Your house is your biggest and best investment.”

In how many ways and from how many sources have we heard this bit of commonly accepted wisdom? The collapse of the real estate bubble is, of course, the universally acknowledged source of our current economic downturn. Everyone now agrees that in many, if not most, markets house prices had increased at unsustainable rates. Bottom line: all at once it was recognized that real estate prices were too high and had to come back down—in some places, way down.

Okay, so things got out of hand and it’s going to take awhile for prices to readjust to realistic levels. A lot of people are going to lose money and/or their houses, but a lot of those were houses people really couldn’t afford anyway. But, conventional wisdom says, “Your house is still your biggest and best investment.” Isn’t it?

A recent post and resulting conversation at
Economist’s View makes clear this “conventional wisdom” isn’t nearly so simple or obvious, and may be just plain wrong. The post is a look at causes of the housing bubble, especially the question of whether easy credit (and the financial chicanery that created it) was the primary culprit. Read the post and the comments yourself for that debate (the whole thing is very informative).

What jumped out at me, however, was the assertion that something that has become a staple of popular financial wisdom is likely wrong: houses, even over the long haul, do not increase in value. “[T]he belief that real housing prices rise over time is false, the evidence suggests that real housing prices are relatively flat over the long-run.” The piece looks at and shoots down several of the reasons people believe real estate will inevitably increase in value. It also recognizes that in such a large and complex market there are exceptions, but at the national lever these are balanced by exceptions in the other direction.

In any case, the assumpton that you can buy a house at a reasonable price and in a good location, live in it for twenty years, and come out money ahead, it would seem, is simply wrong. Much more likely is that you will break even. Am I wrong that this directly contradicts the beliefs of the typical American consumer?

In other words, don’t think of your house as an investment. Perhaps you can think of it as an enforced savings plan. Best of all, however, is probably just to think of it as a (nice) place to live. This is not a message you are likely to hear on HGTV, from a mortgage loan officer, or from a real estate agent. But as the mess on Wall Street and Main Street continues to spread we should all be relearning this basic truth: when someone is trying to sell us something always ask, whose interest do they most have in mind?

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