Why houses are like dishwashers

September 2, 2010
lot of people have been quoting this passage from Chip Case's op-ed on housing as an investment:

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A lot of people have been quoting this passage from Chip Case’s op-ed on housing as an investment:

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.

I read it a lot of times, and couldn’t really understand what it meant. So I decided to phone up Professor Case to ask him.

There are two things here which are easy to misunderstand. Firstly, when Case says “think of it as an investment”, he’s not using the word “investment” to mean “something which holds its value over time and which with any luck will actually appreciate in value”. Instead, at least in this passage, he’s thinking of an investment in much the same way as you might consider a dishwasher, or any other durable good, as an investment. You pay a sum of money up front, and then you get a stream of valuable services more or less in perpetuity. In the case of a dishwasher, that means clean dishes; in the case of a house, that means shelter in the place you want to live.

(Incidentally, that’s why I think Ryan Avent’s criticism of Case is misguided: the location is just as much a part of the service that you’re receiving as the shelter is.)

Secondly, when Case talks of this part of the investment being “constant over time in real terms”, he means something almost tautological: the value of any given service is constant in real terms by definition. What he doesn’t mean is that you’re going to get a constant 6% return on your investment after maintenance and repair. That number, he’s happy to admit, can rise and fall over time, and fluctuates mainly with the market rent for your home.

Essentially, what Case is saying here is that once you own a house, you’re guaranteed to be able to live there as long as you like, and that guarantee has real value. If what you want from any investment is an annuity — the ability to get constant real value out of it indefinitely — then in that sense a house is an investment. But that’s emphatically not the same as thinking of a house as an investment in a mark-to-market sense of how much you could sell it for.

Case is a long-term bull on housing: “sooner or later”, he says, prices will rise. Well, yes. But if it’s later rather than sooner, and if they fall a lot from current levels before they start rising, then you might not take much solace in the fact that you’re still getting the same kind of value out of your home that you’re getting out of any other durable good.


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