Bad housing advice of the day, Philly edition

By Felix Salmon
February 1, 2011
Erin Arvedlund -- yes, that Erin Arvedlund -- has a pretty crazy column in the Philadelphia Inquirer, under the headline "Why buying gold may be better financially than buying a house".

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Erin Arvedlund — yes, that Erin Arvedlund — has a pretty crazy column in the Philadelphia Inquirer, under the headline “Why buying gold may be better financially than buying a house.” It says pretty much what you’d expect: house prices are falling, gold prices are rising, and therefore before you go ahead and buy a house, you should probably consider whether you’d be better off buying gold instead.

Arvedlund talked to a bunch of people for this column, mostly rent-a-quote types like Barry Ritholtz and Peter Schiff, but the central conceit is all hers: none of the people she quotes is literally saying that people should make a speculative punt on gold rather than buy a home to live in. Indeed, Schiff comes out quite explicitly and says that homes are not an investment, they’re more of a consumption good. (He’s right.)

Arvedlund, here, has committed the journalistic equivalent of mixing toothpaste and orange juice. Either tastes fine on its own: it’s perfectly OK to pen a column pointing out that house prices might well continue to fall, or another one looking at gold as an investment and saying that it has a fair amount of possible upside. The really nasty taste comes when you combine the two.

To see just how crazy Arvedlund’s thesis is, look at how she presents it:

Maybe you’ve saved enough for a down payment. But should you bet your money on home prices, even with a tempting low-interest, fixed-rate mortgage? Or is it financially smarter to continue renting and invest the money in an asset that could appreciate for at least another few years?

By definition, money that has been painstakingly saved up for a down-payment on a house is not risk capital which can or should ever be applied to a highly speculative investment like gold. It might well be smart to continue to rent rather than buy a home. And indeed it might even be true that gold will rise in value over the next few years. But that doesn’t mean that anybody in their right mind should seriously consider taking their down-payment nest egg and investing it in gold.

Being “financially smart” is not the same as investing in whichever asset gives you the highest return over some given time horizon. If that were the case, then everybody should just go out and start selling lottery tickets without any downside protection. The fact is that nothing is a good or a bad investment in and of itself: you always have to look at it in the context of the specific risk profile of the investor in question. And if the investor is someone scraping together a down-payment on a house, then it’s trivially true that using some or all of the down-payment money to buy gold at $1,350 per ounce is downright bonkers.

Essentially, Arvedlund is proposing an exotic relative-value trade here: she’s saying that houses will underperform gold, or that the price of a house in gold is going to go down rather than up. Which brings us to this graph, which is the price of houses in gold:


Arvedlund’s trade has been a good one for a long time — pretty much since 2002. Over those nine years, whether house prices have been rising or falling, the price of a house in gold has gone down, and you would have been financially better off buying gold than taking that money and using it as a down-payment for a house. On the other hand, from 1980 to 2002, Arvedlund’s trade was an utterly atrocious one, which would probably have lost you money on both legs.

One look at this volatile time series tells you all you need to know about Arvedlund’s advice: it’s way too risky for her audience, and in fact, over the long term, it’s pretty likely that the price of a house in gold is going to revert to its long-term mean and go up rather than down.

Arvedlund is writing for the Philadelphia Inquirer here, not for Barron’s or for people with huge amounts of risk capital and disposable income. The last thing this audience needs is speculative advice about buying gold now and trying to time the market so that you sell it before the bubble bursts. But if I were a hedge fund manager, I would wonder whether this column marked some kind of a turning point. It’s entirely possible that  Arvedlund has hit the very moment at which gold starts to underperform house prices. Which isn’t to say, of course, that either of them are going up.


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Absolutely agreed, Felix. Houses are not investments. Houses are capital goods that depreciate slowly and are very nice for keeping snow and sleet off your head.

Gold isn’t really an investment either, however. It doesn’t invent anything, produce anything, or earn anything. It simply sits there and looks pretty. (If a gold coin sits unobserved in a safe deposit box, does it still count as “pretty”?)

To me, at least, it makes perfect sense to juxtapose the two. If one insists that a house is an investment, and insists that gold is an investment, then why not speculate on the two simultaneously? Of course most speculators lose their shirts, but isn’t that half the fun of speculation? A little like Russian roulette? How can an “investment” be any fun if nobody loses their life savings?

You might be right that articles like these are a sign that the speculative bubble is fully inflated and about to burst, but then I felt that way half a year ago too…

Posted by TFF | Report as abusive


Coming from the only journalist to ever misquote me in print, I find THAT pretty damned funny.

(I dont disagree with your assessment of the article, though).

Posted by BRitholtz | Report as abusive

had the article been featured on the cover of Time magazine, it would be assured that gold has peaked and housing has bottomed.

as it is, both of those events are probably close at hand

Posted by arrgh | Report as abusive

I just don’t know how people keep saying this. Of course a house is an investment. You put in the down payment, interest, taxes, upkeep, insurance, and you pull out imputed rent and (some day) appreciation (maybe!). Houses are durable–the land they stand on certainly is–and they are generally sold at some point or another, rather than being scrapped. Just because we no longer live in a bubble world where you can pull out 20% a year in equity loans doesn’t mean something is not an investment. Just because you lose your shirt on something doesn’t mean it is not an investment. It might have been a _bad_ investment, but so what? In the large view, a house will tend to return about as many real dollars to you as you spent to purchase it, and in the meantime it pays you imputed rent every month you live in it. That’s one more thing than gold does for you, and even people like me who use the phrase “barbarous relic” will acknowledge that gold is an investment. (Expected real return: zero. But the same is true of the futures market.)

From a dollars and cents view, buying a house to live in is so achingly similar to buying a simple interest bond, I just don’t follow how anyone can claim it is not an investment.

Posted by ckbryant | Report as abusive

“…in fact, the value of a square foot of housing in the U.S. is up 58% from its January 2000 level for the 25 largest U.S. metropolitan areas…”

Just to play Devil’s Advocate here for a second: that statistic is precisely why I doubt the housing market has found it’s bottom yet. Reversion to the mean is one of the strongest forces in the universe. I would anticipate housing has another 10 to 20 percent to fall in real terms before it is close to its long-term averages…

Posted by ckbryant | Report as abusive

Amen, ckbryant! For a decade (more really) we heard about what a great investment housing was. No sooner was it proven to be a risky “investment” than we were told it was no investment at all. Both points of view are rubbish intended to make a political point (before: if you don’t buy an overpriced house you are a bad investor; now: if you bought an overpriced house you were a bad investor–subtle? not really).

And Mr. Levitan, do you even know that you are talking out of both sides of your mouth at once? Housing should not be seen as an investment! But if you did invest at the right moment, it was a good one!

So, let me get this straight. An investment is only something I end up making money in. If I lose money, it was not an investment.

And as for “investment” advice going forward: Be lucky! Or, as with many Wall St and Washington insiders, make your own good luck.

I feel so much smarter now.

Posted by LadyGodiva | Report as abusive

I don’t believe that this financial cycle will be done until articles like this stop being written.

Housing is a depreciating capital asset used for basic living and requiring O&M that is sitting on a speculative investment (land). Gold is an alternate currency. These are completely different investments for completely different purposes, so it is no surprise that the gold/housing ratio swings wildly over time.

I think that there is still a fair amount of speculative value in the land values in many of the major cities. This is obvious when you compare the housing stock prices in major cities to the many smaller cities that did not participate in the housing boom.

For a long time, people tended to have separate buckets of money for staples, housing, emergency savings, long-term retirement investments etc. Starting in the 80s, this started to change and almost everything began to be viewed as “investments,” including stuffed animals (Beenie Babies etc.). I don’t think we are going to be done with this financial crisis until we are back at fairly well-defined buckets again with rational expectations and increased income and wealth equality.

Posted by ErnieD | Report as abusive

“So, let me get this straight. An investment is only something I end up making money in. If I lose money, it was not an investment.”

LadyG, people often confuse “investment” with “speculation”, perhaps because they have so much fun speculating on investments? But the two concepts are truly distinct.

Investing is the allocation of capital to an activity in the hopes of producing something. You invest in education to make your labor more valuable. You invest in a dump truck so you can haul mulch for your landscaping customers. You invest in IT to better manage your customer accounts. In each case, the money spent allows you to do something that will earn you money.

If you have excess capital, you can invest in the (hopefully productive) activities of OTHER people. You can loan them money so they can do something useful. You can buy a share of their operation, as VC do. But this is still fundamentally “investing”. People who have capital offer to share it with those who need capital.

The market price of an investment fluctuates with economic conditions, however it is generally irrelevant to the investment itself. You still own the piece of equipment or the share of a company’s profits, and in theory ought to be more concerned with whether or not that equipment/company is doing something useful than with the question of what you can sell it for.

Speculation? It may superficially look like investment, but it is driven by completely different principles. When you speculate, you care less about whether your capital equipment is useful (or whether the company is profitable) than you do about what you can sell it for tomorrow, or next month, or in three years time.

One easy way to differentiate between the two: If you invest in something and the price falls 30%, you’ll surely kick yourself for missing out on a great deal but that WON’T make it a bad investment. You still get the same production you expected at the same price, and so should be just as happy with the deal as you were the day you signed. If a drop of 30% in the price causes you to panic over “lost value”, then you were simply speculating all along.

Owning your own home could be treated as an investment. You allocate your capital to a capital good that produces something useful (housing) over a long period of time. If pursued under this rationale, you shouldn’t be bothered by price fluctuations any more than you would be bothered if that iPhone you bought last month went on sale. The same logic applies to landlords. They invest in the capital good to sell the product, with some risk, but the quality of the investment depends on their ability to sell the product rather than the market price of the capital good.

Gold cannot be an investment because it doesn’t DO anything. Which doesn’t necessarily mean it is a bad choice for speculation, if you know what you are doing. Stocks? Professionals typically speculate on the stock markets, but unsophisticated amateurs like myself prefer to treat them as investments. I am often puzzled by the price fluctuations, but happy as long as I continue to own profitable companies that engage in useful economic activities.

Posted by TFF | Report as abusive

Lady G:

One way to think about house prices:

Compare your mortgage, property tax, and maintenance costs etc. against the cost of renting a similar property. If renting is cheaper, then you need to think about whether or not you are really getting the best bang for your buck especially for short-term stays (less than 3 years or so) given the high transaction costs of real estate.

However, unlike most investments, it is permissible to factor in intangibles such as the freedom to knockdown a wall and re-organize the living space or have pets. Personally this is worth a significant amount to me, especially since we bought our current house 17 years ago with the intention of staying in it for a long time. fortunately, at the time that I bought the house renting and buying was virtually a wash so I got the intangibles for free.

One of my basic rules of thumb is that in high interest rate periods, median house prices in an area should not exceed more than about 3 times the median household income. In low interest rate times, that could extend up to potentially as high as 5 times given the lower cost of a mortgage. However, this only works for long expected holding times where the difference in interest rates is actually a real cost difference and short-term price fluctuations don’t play a role. It is a bad rule of thumb for short-term flipping.

In the area that I live, the median house prices have never exceeded 3 times the median household income, so we haven’t seen large price apprciation or depreciation over the past few decades. Unfortunately, that is not the case in much of the country.

Posted by ErnieD | Report as abusive


Excellent discussion on speculation vs. investing. It should be a chapter in personal finance books.

Posted by ErnieD | Report as abusive

All very good points TFF, but in this world of fast buck corruption, flips and HFTs eyes glaze over when discussing houses as long-term investments.

People looking to buy a home to become homeowners need to wait in the overblown value areas where gambling and speculators abound. Doing some background checking on house value fluctuation where you wish to buy will determine that. The bottom isn’t there yet by a long shot.

And if you want to buy gold, you better be rich enough to assure you can still eat and have a roof over your head after speculating in it.

Stick to comparing houses in your area with renting unless you are rich like this guy… =125

Posted by hsvkitty | Report as abusive

So are we back to the old norm? Housing markets that move independently of each other, each driven by their local dynamics more than national trends?

Prices may have farther to fall, but it might not save you money if you need to finance the purchase with a mortgage. Over the last few months, the borrowing costs on a $200k loan have risen over 7% (from a bottom of 4.2% to roughly 4.8%). Still cheap, but prices haven’t fallen to match — at least not here.

In general, I would expect rising interest rates to be only partly balanced by falling prices.

Posted by TFF | Report as abusive

…of course that logic only applies if you hold a house for decades.

Posted by TFF | Report as abusive