Felix Salmon

Let Krugman spend his money

By Felix Salmon
August 13, 2009

Contra Ryan, I’m perfectly happy to take Paul Krugman’s purchase of a new apartment at face value. Does it mean that Krugman thinks home prices aren’t going to fall? No, of course not. Is it a bullish indicator? Similarly, no. A home is not an investment. It’s a place to live.

Krugman wanted an extra bedroom and a washer-dryer. He had $1.4 million from his Nobel prize burning a hole in his pocket. Why not spend it on something which will make your life more pleasant? The alternative is to save/invest, which is essentially delayed gratification for no particularly good reason. So good for Paul, that he thinks of money as a means to an end — something you spend to get what you want — rather than always as something to be invested and grown.

Update: Ryan responds by saying that Krugman could just have rented. But for a busy professional like Krugman, the pain-and-suffering costs of moving house are huge, and so there’s real value to locking in the option never to have to move again if you don’t want to. Plus there’s inflation risk if you rent — the rent could rise quite a lot, even as your cash loses purchasing power. And where’s Krugman meant to park his $1.4 million in the meantime, while he’s renting? In many ways, it’s much easier to buy, if you have the money just lying around. After all, there’s no downside at all if you consider that you’ve just bought somewhere to live, as opposed to an investment.

3 comments so far | RSS Comments RSS

Hurray! Someone else with a sensible view of housing.

Posted by Eitan | Report as abusive

By the way, at the recent Worldcon science fiction convention in Montreal, Krugman had an on-stage discussion with Scottish science fiction author Charlie Stross. An MP3 can be downloaded at Charlie’s blog, http://www.antipope.org/charlie/blog-sta tic/2009/08/a_fireside_chat.html

Posted by Jon H | Report as abusive

The professor should have read this before buying:

If your mortgage payments are higher than prevailing rents even as your mortgage balance is higher than the value of your home, you’re not benefiting in the slightest from your decision to buy: quite the opposite. And it’s not just subprime borrowers, either: here’s a representative example of prime borrowers going through just as much pain. A mortgage is a form of financial leverage, and leverage magnifies both upside and downside; right now, it’s all about the downside.

http://www.portfolio.com/views/blogs/mar ket-movers/2007/09/10/the-downside-of-ho meownership/


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