I’m puzzled by Daniel Inviglio and Felix Salmon’s war on housing investment. Felix argues that:

“Some people are looking to buy a home — that’s understandable, given that everybody needs shelter. And some people are looking to invest money with a long-term time horizon. And some people even fall into both categories at once. But that’s no reason to desperately try to conflate the two, and to describe yourself as being ‘in the market for a home as a long-term investment’…. 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.”

Felix is arguing that housing should only be considered a consumption good, and you should only be willing to pay the net present value of the future stream expected rents. In fairness, Daniel at least concedes that housing is inherently an investment, whether you want to speculate or not. He does, however, ultimately agree with Felix that “If you’re looking to use capital in order to speculate on an investment to maximize return, then by all means do not buy a house now or ever”. Both seem to be suggesting that securities or other investments are perfect substitutes for housing investment, and even more than that they’re arguing that securities are always better investments. There are several reasons why housing as an investment is different than securities in a way that makes it an optimal investment for some people.

I should note that I’m not arguing that now is the time to buy, or that I would even know when that was. I am simply arguing that sometimes owner-occupied housing investment is optimal as an investment and as consumption.

It is also important to note that many of the benefits of housing investment given below are actually driven by the fact that you live your house, which means a lot of the investment benefit of buying a home is inseperable from living in it. Contra Felix, there is definitely good reason for some people to conflate the consumption of and investment in housing.

1: Leverage – Securities are not a perfect substitute for housing investment because two 20-somethings with steady jobs and good credit scores can’t get a 80% LTV loan for $200,000 to buy stocks and bonds. You can, get that loan to buy an owner-occupied house. The reason you can borrow heavily to invest in a house and not securities is that you live in the house, and so banks have a greater confidance you will pay them back. You can make a hugely leveraged bet on a housing investment that you can’t on securities. This alone makes housing investments very different than securities.

2: Diversity – Housing markets are very local in a way that securities are not. As this paper by Bosch, Morris, and Wyatt shows, housing can be an optimal investment if it’s covariance with the rest of your portfolio is low.   There’s no security that allows you to invest in a neighborhood like a house does, and diversify your portfolio in the same way as investing in a home.

3: Rental Price Risk – Buying a home allows you to insure against rental price increases and volatility. Say you live in a neighborhood that you believe is going to clean up, crime will go down, housing stock will improve, and rent is going to go from $500 a month now to $1,000 in three years and then grow at 8% a year perpetually. Investing in a house allows you to insure against having to pay that higher rental price in a way that rental markets may not. Long-term leases may be available, but they may not.

4: Local Markets – When you speculate in the market for securities your investing in a highly liquid, highly global market where your ability to “spot a deal” that the market hasn’t is slim to none. Housing markets are extremely local; block by block even. It’s much easier to spot a trend that others haven’t, and have local knowledge that others don’t, when the relevent market is your neighborhood. The idea that you’re better at predicting future prices on your block than all your neighbors, and even all the rubes in your town, is a lot easier to believe than it is to believe you’re better than the market at predicting the future path of G.M. stock.  Your knowledge of local markets may also allow you to make improvements to your asset to increase it’s value in a way that matches the local tastes. This might even be a skill of yours. You can’t make improvements to GM stock.

Overall, a housing investment is more like buying a small business than it is like a security investment. In fact, it is buying a small business; the business is being your own landlord. Being a landlord is more likely to be a profitable venture if you have reliable renters who you can trust. As a landlord, you’re the best renter you could ever want, which makes being your own landlord less risky than being someone elses landlord.  This is because being your own landlord solves the principal agent problem inherent in the rental relationship; the owner/renter interests are exactly aligned.

These are all things you can’t get in a security, and reasons why the consumption of and investment in housing should be conflated. If someone sees Felix Salmon and Daniel Inviglio buying up dozens of homes in the D.C. area let me know. Then we will know why they are discouraging owner-occupied housing investments; the soon to be launched Inviglio-Salmon Realty, Inc. Until then, I am puzzled by their war on housing investment.

[UPDATE: Fixed link to paper, but still can’t find an ungated version. If anyone knows of one let me know.]