Opinion

The Edgy Optimist

A recovery without a home

By Zachary Karabell
September 13, 2013

Five years after the collapse of Lehman Brothers and the onset of the 2008-2009 financial crisis, the U.S. housing market is at last starting to thrive. It has, in fact, been steadily improving over the past years, and that trend has only accelerated of late. Housing is widely perceived as a key ingredient to a healthy economy, and so the revival in the housing market has been heralded as a positive step for an American system that has been sluggish at best. Similar trends in the United Kingdom and parts of the EU are greeted as positives as well.

But is it? Housing is a key aspect of economic activity in most countries, but that doesn’t mean that we should welcome a return to housing as a perceived pillar of national strength. And we should be very wary of any return to an ethos that sees either home ownership or housing prices as a barometer of individual and collective success. Those attitudes very nearly imploded the modern financial system, and they could imperil it again.

Homes are places where you live. They are not — and should never have been — investment vehicles. Yes, homes may gain in value and augment one’s net worth, but the reason to own a home is that it can be a cost-effective way to obtain a place to live. The minute they are seen as investments, that reality gets perverted, with dangerous consequences.

There’s no doubt that the economics of the housing market have been steadily improving. Foreclosures have dropped in half since their peak, from over 1 million in 2010, to a predicted 490,000 this year. Housing starts are up nationally, from a low of less than 500,000 in 2009 to close to 900,000 this year, and prices are up more than 10 percent over the past 12 months.

These national trends are neither evenly distributed nor certain to continue. The Northeast, for instance, has been weaker of late than the rest of the country. The recent spike in interest rates, triggered by the imminent Federal Reserve decision to curtail some of their aggressive bond buying, may dent the momentum as well.

Given that housing has direct impact on GDP, it certainly matters whether it is doing well or badly. Not just construction but millions of retail and industrial jobs are keyed to the housing market, ranging from Home Depot salespeople to Caterpillar engineers. But the notion that housing should be a leading indicator of economic health is unwise, and ultimately destructive.

What was most damaging about the housing boom and bubble of the 1990s and 2000s was that millions of middle-class families bought into the notion that homes should be the repository of their net worth and future wealth. Decisions about buying shifted away from pure calculus of need and acceptable costs and instead were increasingly based on the likelihood (or not) that their homes would increase in value.

It’s an easy path from that belief to outright speculation. The idea that homes are a primary investment is not only what drives real estate bubbles but also drives real estate crashes. China today is in the grips of a real estate challenge because middle-class Chinese have nowhere to invest and augment their net worth other than real estate, given that the stock market is widely seen as gamed, there is only a small bond market and they can’t invest outside the country. But Americans have multiple avenues to invest for the future; real estate may be part of that mix, but it should not be the anchor.

Why? To begin with, real estate is not liquid. It is a place to live (or work). Its primary utility is to provide shelter, and quality of life. Most people finance all or part of that need with mortgages (credit) from banks. Today, with down payment requirements on the rise, many families will also use a considerable portion of their liquid net worth. That may make eminent sense, especially if they are living in an area that has good schools and decent access to jobs but does not have housing stock that can be rented. That is a reason to buy a home.

Buying, however, comes with substantial costs and constraints. Money that is used for a down payment can’t be shifted easily to other investments; it is locked up in the house. Mortgage debt that is fixed can’t be adjusted when rates go down, even if fixed rates provide some protection when rates rise. Buying a home may be a necessity, but in multiple ways, it is a highly compromised and risky investment.

A positive outcome to emerge from the past five years would be to dispel the notion of a home as primarily an investment, let alone a good one. It would also be to uncouple the housing market from the national perception of a thriving economy. Buying a home may be the right decision, but it should not be a goal intimately tethered to a sense of success. Once, perhaps, owning a home was indeed a symbol of freedom, autonomy and being in charge of one’s own economic destiny. Today, with financing and costs and lack of liquidity, owning a home can be the opposite of all of those.

So before we go back to the future and herald the return of the housing market, let’s hope that we don’t actually return to the housing market we experienced at the end of the 20th and the beginning of the 21st century. A home is a marvel, and a need. Buying a house or apartment can be a good investment, and the right way to use both credit and cash. But the housing market is an adjunct to a thriving economy, and housing is a cost that families must bear to live adequately or to live well. If it goes up in value, that’s a plus, but it should never be the driver of the decision. As the economy has rebounded, we haven’t yet returned to the bubble-era ethos. Let’s keep it that way.

PHOTO: A newly built single-family home that is sold is seen in San Marcos, California, January 30, 2013. Privately owned homebuilders are seizing on a housing supply crunch to tap the stock market as more Americans, buoyed by an improving economy, seek to buy their first home or move into bigger premises. REUTERS/Mike Blake

Comments
8 comments so far | RSS Comments RSS

There is a big difference between “recovering” and “recovered”. With all the hype about the housing market not being at the bottom of the well, there are still millions of mortgage-holders who remain underwater.

What’s with all the hype? Why are so many reporters bent on proclaiming that we’re out of the water even though most economists like Paul Krugman continue to insist that the United States is still in a protracted depression? Could it be pressure from politicians who are hurt by bad economic statistics? Is that why we have the phony “official” unemployment rate when everybody knows there are fewer people employed than six years ago and that doesn’t even account for the increase in population each year that contributes to an increase in the real labor force. Maybe Americans have just become lazy. That must be it, since the “job creators” have been so busy when they’re not in their counting rooms checking the accumulation of their wealth in foreign bank accounts not subject to US taxes.

Posted by ptiffany | Report as abusive
 

Mr. Karabell, you ignore the “elephant in the room” concerning real estate investment leading to bubbles and busts. What the financial industry is allowed to do with mortgage debt after individuals buy a home is the real systemic problem we need to address. For example,private equity firms have purchased over $1 trillion in mortgages from Fannie and Freddie recently, and you can be sure they used very little if any of their own money. As long as financiers are allowed to speculate on the backs of home mortgages, the bubble and bust cycle will continue.

Posted by changeling | Report as abusive
 

Excellent article sir!
The future for americans is more multi-family dwellings. Fannie and Freddie are moving in this direction as they have stated. Investors too are moving in that direction. Yes, many have bought up the surplus homes that we over-built in the bubble, but they too will be rentals, not re-sales. Times have changed, it’s a new century and things are changing exponentially fast. We have added several BILLION people to the job market and the world middle class. The world cannot afford the old American dream for everyone. That means that Americans can no longer afford it, and the world will not afford it to them.

Posted by tmc | Report as abusive
 

Freedom. Many ways to view it/feel it.

Condos…..the math of constantly rising property taxes and HOA fees. I don’t know why anyone would BUY one if smart spending is a factor.

Posted by SaveRMiddle | Report as abusive
 

A home that you own outright is certainly an asset but I’ve never considered it an investment. Unless everyone who lives in it dies those people will need a place to live if and when the home is sold. In the aggregate (and I know real estate prices vary widely but just stay with me here) when you sell your home you’ll need to buy or rent new digs. If prices rise that new place will eat up a lot of the so called wealth that you received from the sale of the first home. A way around that problem might be to sell that California house and buy one for a dollar from the city of Detroit but I’m thinking that might not be to palatable for most people.

Posted by Missinginaction | Report as abusive
 

Nor should the stock market be a “barometer” of our economic health, since so many of the big corporations on the board have outsourced their labor and built factories in other countries. That doesn’t help our own workers or our economy since those same corporations get tax breaks.

Posted by AZreb | Report as abusive
 

Conspicuous consumption – American housing is conspicuous consumption and certainly not a good investment. Of course, too many people end up going way too far out in the suburbs to get a house worth showing off. Then they have to buy too much car (or monster pickup) as more conspicuous consumption to drive into work because their house is so far out no one sees it.

I am sure that stuck a nerve with quite a few readers, so I’ll shift topics a bit. I agree with @changeling that mortgage as securities where the originators have no skin in the game is a recipe for disaster. I would also point out that the massive off-shoring of manufacturing has meant that too much of the concentration of low U.S. interest rates has gone to housing rather than other areas of economic development.

Posted by QuietThinker | Report as abusive
 

Barometer of health = % of population employed in jobs that are not rent seeking. America offshored a lot of these jobs over the last 10 years. UK offshored all of them. Good luck and buckle up.

Posted by BidnisMan | Report as abusive
 

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