Housing as an Investment

Felix Salmon is making the case against homes as investments. I think the clearest way to make the point is just to observe that no matter what happens to the price of your home, it’s very hard to actually take advantage of any gains you may make. Bubbles aside, property values in a given metro area really can separate from the national trend in a fundamental way. Over the past several decades, the Detroit area has become a much less attractive place to live relative to the national average and some other cities have become more attractive relative to others. So you can “make money” buy buying property in a city whose attractiveness increases relative to the average. But how are you going to realize these gains? By moving to Detroit?

I thought the tax subsidies and the fact that I liked the place made it worthwhile for me to buy a condo a bit more than a year ago. In the future, it might be worth more than what I paid. But if it is, that will almost certainly be because DC-area property in general has increased in value. So if I, say, need to move into a bigger place to have kids then an increase in property values isn’t going to help me. Sure I’ll “make money” on selling my existing place, but I’ll just need to pay more for a new place.

To really make money in this way you need to be some kind of major property owner, not an individual who needs to live in his house. Which should serve as a reminder that contrary to the way it’s discussed in the press, unless you own some vast array of properties around the country expensive real estate is a bad thing. If real estate values go up in an area that can often be the result of overall improving conditions, but the pricey real estate is a net negative. Real estate—housing, office space, etc.—is a cost to households and businesses. When real estate is cheap, people can get space at low cost and spend their resources on other things. What serves people’s interests is not expensive real estate and a fruitless quest to make money speculating on property, but cheap real estate and the ability to have a nice place to live and also money left over to buy furniture.