Some time ago there was a blogospheric debate about whether a house should be considered an investment. I contended that almost necessarily it has a large investment component, and should be thought of as such. In addition, for many people -although I don’t know how many- housing can be a good investment. Felix Salmon and Ryan Avent disagreed, with Ryan arguing housing was an investment, but rarely a good one, and Felix arguing that it was not an investment at all. Today, esteemed economist Karl E. Case of Case/Shiller fame weighs in on the housing as an investment debate:

But for people with a more realistic version of the American dream, buying a house now can make a lot of sense. Think of it as an investment. The return or yield on that investment comes in two forms. First, it provides what is called “net imputed rent from owner-occupied housing.” You live in the house and so it provides you with a real flow of valuable services. This part of the yield is counted as part of national income by the Commerce Department. It is the equivalent of about a 6 percent return on your investment after maintenance and repair, and it is constant over time in real terms. Consider it this way: when Enron went belly up, shareholders ended up with nothing, but when the housing market drops, homeowners still have a house. And this benefit is tax-free…

…This financial crisis has made us all too aware that we live in a Catch-22 world: the performance of the housing market drives the economy, and the performance of the economy drives the housing market. But housing has perhaps never been a better bargain, and sooner or later buyers will regain faith, inventories will shrink to reasonable levels, prices will rise and we’ll even start building again. The American dream is not dead — it’s just taking a well-deserved rest.

Karl wants you to think of housing as an investment, and he wants you to invest. I’ll agree with him on the first point, and remain agnostic on the second.

He also makes an important point about how housing lacks any true fundamentals like financial investments do:

Real estate sales are unlike other financial transactions. You can place a rough inherent value on a stock or bond by looking at fundamentals: a company’s profits, price-to-earnings ratios, quality of its products and management, and so forth. But a house is worth what someone is willing to pay for it. That’s a very personal, emotional decision….

This lack of solid fundamentals is an important problem with identifying housing bubbles. It is entirely possible for there to be an exogenous increase in the preference for home ownership that will drive up the prices of housing, as well as the price to rent ratio. Capitalization rates, which determine how an individual translates a flow of housing services into a house price, differ among individuals. Demographics can shift in ways that will affect cap rates, for instance average income or age can increase, but so too can the raw preference for home ownership. So house prices went up 15% while rental rates remained constant; what just happened? Is this irrational speculation, or did preferences for home ownership increase?

UPDATE: Felix does some real reporting and gets Case on the phone. I am apparently interpreting his use of “investment” too literally.