On Housing, Part I – What we do when we invest in a house

By The Banker | Blog Posts, Personal Finance
22 May 2013
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houses and hotelsWhat housing is and is not

Housing, in a personal investment sense, is a confusing combination of necessity, consumption, and investment.  Separating and naming these functions can clarify for you exactly what you’re looking for in a house.

Your house is your roof and shelter from the earthly elements first, as well as the place where you lay your head at night, and where you store some physical possessions. The portion of payments you make for a roof and shelter rank in priority just below payments you make to acquire water and food on a regular – ideally daily – basis.

In that sense your house is a necessity.

To the extent your payments for a roof and shelter provides a personal feeling of comfort, luxury, prestige, identity, and aesthetic personality, then part of your house payments go toward consumption. 

You want these things, but you don’t need these things in a fundamental survival-type way.[1] 

In the meantime, you can have all of these necessity and consumption functions from housing without ‘owning’ the roof, without ‘owning’ and shelter.  What I mean is you can rent and fully satisfy the first two uses of housing.

Owning a home is not a requirement of happiness or middle-class achievement.  It should not be a substitute for the “American Dream,” or fulfilling your wildest childhood fantasies of belonging to some social group.

If you do choose the path of home ownership, your house may also serve as an investment. 

What does the Financial Infotainment Industrial Complex have to do with this?

If housing is partly an investment, then know that the Financial Infotainment Industrial Complex is seeking to mold your thoughts.

The nexus of the real estate and lending businesses – a powerful branch of the Financial Infotainment Industrial Complex – would have you conflate the necessity, consumption, and investment functions into fuzzy thinking.

I’m not saying housing is not a great investment – of course it is.  I’m just advocating for a clear-headedness about what we’re doing when you choose ownership over rental.  A clear-headedness not overly determined by powerful forces shaping your thoughts.

If all goes well for you, and housing inflation continues at a regular clip throughout the period of your home ownership, that fuzzy thinking will work out just fine for you.  But I want to take a moment to ponder what you’re really doing when you launch into the investment side of housing.

Housing as an investment

The good news

First, there’s no other investment vehicle which has done so much to foster middle class savings and wealth accumulation as home ownership.

With 4 to 1 leverage,[2] housing inflation, affordable and forced monthly payments, income tax breaks for mortgage interest, and generous tax exemptions for capital gains – I mean, this is one big, fat, middle-class birthday present for people who invested in housing over a long-term period of time, say, any time in the last 100 years.

To repeat: Nothing (nothing!) combines so many advantageous factors for middle class wealth accumulation.

The bad news

On the other hand, housing as an investment periodically punishes the individual, a municipality, or an entire country for over-exposure to housing and its parallel ill, over-indedebtedness.  Just ask your foreclosed ex-neighbor, the City of Detroit, or, for example, the entire Spanish nation.

So, yeah, there are risks. 

I  review some of the risks, and opportunities, in the next two posts.

See subsequent post On Housing Part II – The Risks

and On Housing Part III – The Opportunities



[1] When the vampire apocalypse happens, for example, you will settle for housing that fulfills a necessity, rather than insist on consumption.  And that necessity is keeping those scary scary blood-suckers outside of your four walls and roof.  Heavy duty reinforced steel and a panic room is my advice there.

[2] Assuming a 20% down-payment, 80% mortgage at inception, you are getting in financial terms 4 times the amount of debt ‘levering’ your down-payment.  Hence my financial lingo “4 to 1 leverage.”  Nothing else broadly available in the ordinary retail investment world comes close to that kind of financial gearing.

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3 Comments

  1. [...] my previous post on housing I posit that the money we spend on housing may be thought of as fulfilling a combination of [...]

  2. Bradley says:

    Is any part of home ownership really an investment for the vast (non-flippers) majority of home owners? To me an investment has to be something that either produces income while I own it or is something that will be sold in the future. Since you will always need some sort of housing doesn’t the buy vs. rent really break down to increasing your control over your housing situation and/or attempting to reduce your lifetime housing expense?

    • The Banker says:

      In my view, if you rent, you can achieve the ‘necessity’ and ‘consumption’ part of housing, and for many people that’s sufficient…They need not, and should not, be investing in housing.
      But I do think home-ownership also involves an investment component. (see my 3rd post on the topic ‘on Housing’ for the reasons why the investment has advantages over other investments.)
      By your own criteria, homes do qualify as investments because they will, eventually, be sold. For most long-term owners of homes, for the last 100 years in America at least, the sale produces significant ‘investment gains,’ which can be reasonably compared to other types of investments.
      If you’re in 18th Century England, and a home (or castle?) can never be sold because it constitutes an inter-generational legacy that establishes the landed gentry credentials of the “Bradley” family in perpetuity, in that case I think a home is not an investment. Its something else, like protection against Scottish border-thieves, and a way to establish upper-class credentials. I agree if a home can’t be sold then it serves some other function.
      But if it can be sold, even if after 50 years, then some part of it is investment, and will have investments gains or losses.

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