Felix provides some counterarguments, and a dash of -probably deserved- snark, to my defense of housing investment. I’ll try and respond, sans snark but with graphs.

One of his main points, which he’s argued before and I’ve seen other commenters echo, is that if you buy a house and it’s value goes up it doesn’t matter unless you sell it and move far away, because in“an up market, it doesn’t matter much either. Yes, that gentrifying neighborhood is going up in value. But so’s the old-money neighborhood a mile away, and so’s everything else in a 20-mile radius”; and “you may or may not have any desire to sell in ten years’ time. And even if you do sell, there’s a very good chance that you’ll just end up buying another house elsewhere, which will be similarly more expensive. “ Similarly, Matt Yglesias argues 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?”

The idea that the only way to get the financial value out of a house that has appreciated is by moving out of that city, because you’ll either have to rent or buy a similarly appreciated house, is wrong for several reasons.

Yes, in general, submarket prices tend to follow the metro level trend, but it’s relative appreciation that matters, and there can be a large disparity on a submarket level within a metro area. For instance, the chart below shows median home price sales in Philadelphia submarkets from 1995 to 2007 from a study I worked on. As you can see, in 2001 the median prices in West Philly, South Philly, and North Philly were about the same. By 2007, prices in South Philly were 50% higher than prices in the other two areas. Granted, since then we have probably seen some mean reversion, but not enough to do real damage to that relative gain.

You don’t need to be in a bubble to see such divergence either. From 1997 to 2000 University City had huge gains over the Lower Northeast, despite starting from identical and stable median prices.

The relative appreciation is even more stark in the chart below which uses much smaller geographic areas in the same time period.

So yes, prices in all neighborhoods tend go up together, but relative differences in appreciation between submarkets and neighborhoods within a metro area can be huge.

This is beside the point however, since even if all homes within a metro area appreciated at exactly the same rate it would still be possible to fincially gain from a housing investment. If you bought a house with an NPV based on one rent, and rental prices subsequently go up, then every month you’re getting financial value out of your investment by avoiding higher rent payments. Yes, Felix is correct, this can work in the opposite direction. But this is the nature of investments, they are uncertain. Pointing that out doesn’t make them not investments.

Another counterpoint to the notion that higher home prices screw your future self out of financial gains from the rising value of your home, is that if home prices go up in the future you’re going to have to pay a higher price to rent or buy regardless whether or not you buy a house today. It’s a sunk cost in this calculation. You can either have benefited from the price rise by purchasing a house when prices were low, or you can have not benefitted by renting at the rising market price. Either way, you face the same higher future prices. You’ll either buy a more expensive house or rent a more expensive house, except in one situation you’ll have an asset worth more than you paid for it.

Another of his other main points seems to be that there are a lot of ways to lose money when investing in housing, and a lot of people do so. For instance:

“Remember that it’s sometimes not a good idea to buy a house even if your total monthly payments are lower than what you would be paying in rent on the same place. If prices fall, rents can fall too… If only you’d held off buying, your monthlies would be lower while renting, and you could buy now, if you were so inclined, at a lower price.”

and

“When unemployment is high, there’s a premium on mobility and the ability to go where the jobs are. Houses, by contrast, tend to tie people to one spot. And what happens if your neighborhood goes in the opposite direction to the one you’d hoped for, with crime increasing and all those overextended boutiques and coffee shops moving out? Try asking anybody who owns a home in Detroit whether houses are a good investment.”

He also points out that many homebuyers who beleived they were “investing” based on their “local knowledge” were actually just suffering from confirmation bias, and mistook rising prices in a bubble for investor savvy. I agree, and based on my anecdotal observations, this is in fact endemic, and not only to housing investments, but stocks and pretty much anywhere else people invest. People mistake noise for skill; it’s a fundamental human propensity. It is unfortunate, and Felix is doing a good deed to disabuse people of the notion that housing is a riskless investment goldmine, and that any price rise is a sign of their investing skills.

I also agree with Felix that buying a house is not a certain investment; you can lose your money and your home. Obviously in the past few years many people have, and that’s terrible. Where I disagree, is with his contention that since the outcome is so bad, the potential investment returns are never worth it, and you should stick with other investments which don’t have the added downside of homelessness. I think this notion is belied by the fact that Felix  isn’t arguing that people shouldn’t buy houses, just that they should not do it even partially for investment reasons. He has no problem with you taking the risk of home buying for the consumption value of housing. He says

“In my experience, most people who buy a home do so primarily for psychological reasons. They’re not bad reasons, necessarily, they just don’t make a lot of financial sense.”

So why can the potential cost of losing your money and your home be worth it for the consumption or psychological benefits, but not for benefit of potential financial returns? You can also lose your home and your money if you bought it for consumption reasons, just as easily as you can buy and live in a home you can safely afford whose value is way below what you would rent because you see it as an investment.  If Felix’s point is that the terrible potential downside of buying a home is too great of a cost to risk for the sake of potential investment returns, no matter how large, then shouldn’t he be arguing against homeownership for any benefit?

I understand, given we’re living through such a devastating decline in housing prices nationwide, why Felix would argue that housing investments aren’t investments at all. It is hard to fathom buying a home as a good investment in an environment where so many people, and their families, are paying a terrible price for tempting that same fate.  But Felix is mistaken in ascribing what is true right now in many places to what must be true everywhere and everyplace.

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