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Friday, March 29, 2024

On the Value in Housing

On the Value in Housing

Glazier and paper hanger

Courtesy of Jake at Econompic Data  

Felix Salmon recently made the case in his post Against Liquidity:

Investing shouldn’t be about safety: it should be about calculated risk.

and…

Liquidity is not ever and always a good thing.

And I completely agree. But both of those points seem to be in conflict with a more recent post of his The Housing Speculators Return. I don’t always agree with Felix Salmon, but I typically understand his thought process. That is not necessarily the case in this post. Per Felix:

It bears repeating: homes aren’t investments, they’re places to live. If you can buy a nice house for less than you’d otherwise pay in rent, then go ahead and buy — no matter what the market looks like, or where mortgage rates are. On the other hand, if you’re looking for an “investment”, stick to securities. You can sell those much more easily when you need some money, and they won’t drive you into possible bankruptcy and homelessness if they go down rather than up.

Let me go through my grievances with that one paragraph, then I’ll detail my personal thoughts on housing more broadly.

Homes Are "Only" Places to Live

In addition to living in a home, a house can serve as a long term investment that produces income (i.e. he makes just that point with his alternative to owning… RENTING, which is just paying another homeowner for the right to live in that home).

Rent Must Be More than a Mortgage Payment to Justify Owning

This ignores the fact that rents (typically) rise, while a fixed rate mortgage payment doesn’t. BLS data shows that the cost of renting typically rises by the rate of inflation over the long run.

Thus, if you plan to live in that home for a long period of time (there were previous generations who bought to live in home the rest of one’s life), then as long as rent moves higher than a mortgage at some point in time, you may be better off (not to mention the tax benefits of writing off interest). That includes after 30 years when a homeowner no longer has a mortgage, but renters are still paying rent.

Stick to Securities When Investing
The below chart is from another post from June and shows that it wasn’t just homes that fell dramatically in value in 2008 (equities, high yield credit, ABS, etc… all fell as much or more than housing in that time frame).

Leverage is Only Done in the Housing Market
Felix stated that securities "won’t drive you into possible bankruptcy and homelessness if they go down rather than up". I believe this is just an argument against an irresponsible investment in housing, as an "investor" could just as easily take on significant leverage investing in securities (think the futures market) or in taking out a loan for one’s personal business.
 

My Thoughts on Housing
 

So, with that all as a background, do I think now is a time to buy? Depends. I must say that I agree with the post that Felix’ was responding to. More specific, Daniel Indiviglio’s post up on The Atlantic titled A Great Time to Buy a Home? in which he states:
 

30-year mortgage rates have dropped back down to their record low mark. There are generous government tax credits in place for virtually all Americans to buy a home. Foreclosures also remain high, meaning that there’s significant pressure on prices — it remains a buyer’s market in most areas. Those factors combined sound like a good recipe that should result in a great time to buy a home.

And…
 

Despite all those good reasons to do so, it depends. I think short-term real estate speculation is probably still ill-advised. Even if home prices have hit the bottom, I don’t think they’re likely to increase quickly over the next several years. So if you’re hoping to get in and get out, you might be in for a rude awakening.

But if you’re in the market for a home as a long-term investment, say at least 10-15 years, it’s pretty hard to make an argument against buying now. Even if we aren’t at the precise bottom, it’s hard to believe that home prices could plummet much further in most areas. And even if they did continue to decline a little, the tax credit might make up for most or all of that decline anyway. For anyone who can find an especially good deal on a foreclosure or short-sale property, I find it even more difficult to argue against buying.

In other words, "shake hands with the government"… sounds like risk, but a calculated risk to me. While I personally do not own a home nor plan to do so in the near future (my investment horizon is too short as I am not sure where I will be living longer term), I couldn’t disagree more that a home is not an investment, let alone a potentially good one in today’s environment of subsidized financing where there is considerable potential for increased inflation. The key that Daniel points out is that housing is and should be always considered a long term investment by investors seeking an alternative to renting.

There are times when any asset class becomes overbought or oversold. This can be clearly seen below when viewing the recent performance of equities (in this case the DJIA) or housing (the Case Shiller Index) over the past 20 years.

The chart above tracks equities and housing price levels against their "fair value" based on an assumption that home prices should rise by inflation and stock indices by nominal GDP (quick and dirty) starting in 1989 (as far back as I could easily get home price info). Regardless of whether this is the best approach, we can see how much the actual price fluctuates around these trends for each (actually equities never retreated below the initial starting trend over this 20 year cycle even with the poor performance over the last decade).

So, do I find value in housing? For the millions of unemployed or underemployed? No. For those that want to buy a home outside their price range? No. For those that want to sell within a short time frame? No.

But, for those with the wealth to make the long-term plunge, are willing to accept the risks of home ownership, and can take advantage of subsidized taxpayer money keeping rates artificially low, while the government throws in a sizable refund to boot? Heck yeah.

 

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