Friday, November 30, 2007

Exactly why is our primary residence is considered an investment?

Somewhere along the way, a dogma was established, perhaps by the RE industry, that we should think of our home as an investment as opposed to shelter.

I can see purchasing a home because it makes financial sense when compared to renting. But does that make it an investment? For example we often purchase cars because it makes more financial sense than renting or leasing? But they are not considered investments because they rarely appreciate in value.

I think we have been conditioned to think of a home as an investment, because there is an implicit assumption that homes primarily appreciate in value. But looking at most inflation adjusted charts we see that is not necessarily true historically.

There are very few things that we actually use (which deteriorate with age), that are considered investments. The only other things I can think of are jewelry and artwork (and they don't really deteriorate much). Do we take out loans using them as collateral? Rarely. (Personally I hate the idea of art as an investment….seems contrary to the whole idea of art).

Collateral is the only aspect of a home that really seems characteristic of an investment. We can take out loans against our homes. But homes are not very liquid assets. As many have learned the hard way, just because you can use it as collateral, doesn’t mean you should.


Gwynster said...

Aside from the fluxuation is the price of the base materials, Jewelry, what we commonly get from local retail outlets, seldom appreciates. In most cases, you have to wait until it gains antiques status or is of a style that gains vintage status to get any return on it. Even then, it just keeps up with inflation.

To qualify as investment grade, you're talking high-end jewelry (we're talking Winston et. al.) or very old items (200 or more yrs old).

Art folows the same pattern. This can be a great investment as long as you have the means and really want to take the time to learn the market - just like stocks.

Same with furniture and other martial culture items, the antiques market is really weak right now. I still get calls for appraisals and restoration work and the market for more common items is very depressed.

If you doubt me, try to sell what you currently own and see.

Gwynster said...

opps _martial_ should have been _material_ though I still follow the antique weaponry market a little.

Buying Time said...

Good and jewelry are only investments when they are rare/unique. Thus you could reason homes are not they should not be considered investments either.

Gwynster said...

Woot, finally got to use that 110k largely unuseable education!

Art can be a great investment and largely very speculative. I encouage people to by what they love and will enjoy and never pay what you can't afford to loose, except if you're buying my work of course **winks**

I guess my point is that you really need a lot of knowledge if you want to "short" those markets. And there are a lot of people that can and do just this, and make it profitable. However, just like stocks, bonds, and fixed asset markets, you can loose everything easily.

If we truly want to commodify real estate, we need to be ready to accept the wild fluxuation of the market. That also means that we include rental and lease rates into that analysis.

Of course I'm not touching on the ethics of commodifying something as basic as shelter. Smarter people then I have been debating it for centuries and I think they're a just a tad smarter then moi' >; )

sacramentia said...

I couldn't agree with you more... a home is consumption.

Even if you have your home paid off, there are still 2-3% in other expenses to 'own' it.

A true investment doesn't require you to go to work and pay for it.

Sippn said...

Buying a home is an investment in life - espacially if you have kids and can afford it.

Its the land that appreicates, while the building is depreciating due to wear and tear, etc.

Land appreciates due to the balance between supply and demand. Both get really abused here in CA.

Demand was enlarged with easy financing on top of growth. Supply (land) is artificially restricted due to approvals, high fees, etc. (G - see Davis).

When prices rise as they did, mountain tops start getting affordable to develop, when prices drop, they stop.

The other parts of a home as an investment - before people could pull their equity out so easily, it was a forced savings plan. The other part is with decent long term appreciation (see the charts) your net final cost of staying in the home can sometimes be "0". Don't confuse that with cash flow!

Have a nice weekend - saw Country wide stock pop up 15% today on news. I think the powers that be might figure out how to put the brakes on this thang.

smf said...


I agree with that post 100%

Paul said...

Amen! I suspect the idea of "investment" has been heralded by the NAR for so long, that now people simply believe it's true.

And now that everyone is jumping on the "freeze teaser rates" bandwagon, I want to freeze Citi Group stock prices at the price I paid for it several months back (about 50% higher). I think if the govt wants to help everyone who made bad investment choices, I deserve as much help as those who made poor home buying/financing decisions! LOL! Why doesn't the govt just propose that we freeze house prices? Wouldn't that solve the problem? Or better yet, the govt could demand that house prices go back UP! Or maybe the govt should offer to buy everyone's house, for the 2005 price. Sorry, didn't mean to hijack your thread, but I'm just feeling very cynical today.

big n rich said...

So how do you guys feel about bailing out all the dumbshits who are loseing their homes?What a bunch of sorry asses.I feel we are all going to pay for the gambleing habits.I think they should be in jail for not paying their bills.Is renting really that bad?

Buying Time said...

Since you guys asked about a bailout....this is more or less what I wrote in an e-mail yesterday.

Wiping out all the exotic financing vehicles is really the only thing worth doing. As a bleeding heart, I am typically prone to helping out the little guy....but in this case I think the market needs to sort this out so that homes are more affordable (for the eventual greater good of all the little guys).

But that also goes for the big financial institutions that seem to have Bernanke and Paulson wrapped around their fingers. It doesn't seem fair they get government support (infusions of cash and capitualation on interest rates in the name of saving the economy from a recession), while the troubled homeowners are left to their own devices.

If government insists on helping, I would rather see it help honest hardworking taxpayers than big business.

sacramentia said...

I'm mixed on the bailout because I think we are taking advantage of the pawns by offering to let them pay for the next 50yrs. when the banks and their investors should take the loss.

But, I also think slowing the bleeding to pace that the economy can absorb without catastrophic consequences is also important.

Personally, I played it pretty safe and don't want to pay for the bailout, but the reality is I'm either going to pay in some way (taxes, fuel costs, recession, inflation). But I made more than I should have over the last few years on real estate so it will all even out in the end.

sacramentia said...

What I'd like the government to do is change the way that appraisals and lending are done.

Instead of looking at recent comps and the price of home to determine the LTV, I'd like to see the Banks loan 100% on the improvements, and no more than 50% on the land value.

That simple change would help stabilize the markets because the land is the part that fluctuates so much as sippn pointed out in his blog.

In a slow market that formula would allow higher LTV, and in a rapidly rising market it would allow lower LTV. Exactly opposite of the credit market behavior today which causes the boom-bust cycle.

And just absolutely get rid of this $/ft mentality. A metric which makes large homes on small lots look like the best value, when in reality exactly the opposite is true.

Gwynster said...

As usual, I completely agree with BT. I'm beginning to think BT and I are twins separated at birth >; )

What I can't believe is that any pol is even stepping forward to put their name on a bailout plan.

A bailout, in any form, is hugely unpopular with the general public. While 8% of the existing homeowners will see this as positive because they will potentially benefit from this, the other 92% see it as a massive entitlement to the least responsible. As an election year issue, shows all the signs of a 3rd rail issue - ouch.

Buying Time said...

Sactia - Good point on the appraisals. I momentarily forgot about that ridiculous part of the industry...
It is incredibly suspicious that apprasials and loan amounts always manage to come out exaclty the same!

Sold in '05 said...

The true fix for the problem is what the Democrats will try to do if they get full control in '08... Tax the hell out of investment based real estate capital gains. Confiscate all profits and force the investors, flippers and speculators out of the market and thereby control the artificial inflation we have seen the last five years, for what amounts to the most important social resource after sustenance, shelter.

The only homes that get a break on the tax should be primary homes sold after being lived in by the owner. Of course some loopholes will be needed to allow builders to build new homes for profit. Also, because rentals have some redeeming social values, we need to preserve the profession of landlord, so tax rates should drop off rapidly for a non-owner occupied property held for a LONG time, say on the order of ten plus years.

This is the only long term fix to this greed driven disaster that we've all brewed up.