Homes as Investments

Ben Bernanke lives with his wife and two children in a house on Capitol Hill. Oh, wait, scratch that: according to Brendan Murray, Ben Bernanke lives with his wife and two children "in an investment that's turned cold".

Maybe it's just me, but I find this kind of reporting rather irksome. Bernanke is chairman of the Federal Reserve, he works in Washington, he has a family, it makes perfect sense for him to own a house on Capitol Hill, to live in. Not as an "investment", just as a place where he can make a home and provide comfortable shelter for his family.

Historically, homes were not considered "investments". You bought a home because you needed a place to live, and you paid it off slowly over time with the help of a 30-year mortgage. Investments were stocks, or mutual funds: things you bought in the hope and expectation that they would go up in value and you could make money by selling them for more than you paid.

Then, of course, came the housing bubble, which meant that homes became much more expensive - much more expensive than the alternative, which was renting. And the only way to justify the vast extra expense of buying over renting was to factor in house-price appreciation. At that point, there was an element - but only an element - of "investment" to any house purchase. Flippers and speculators, of course, were all about housing-as-an-investment, but they were always a small minority of home buyers, and clearly Bernanke doesn't belong in their ranks.

The biggest unanswered question about the housing crash is what is going to be done by people who are able to pay non-recourse mortgages which are larger than the value of their homes. The biggest bears, like Nouriel Roubini, think that as many as 50% of those people will walk away from their homes - which is the rational thing to do if you think of your house as an investment. Personally, I think the percentage will be much smaller. Can you imagine Ben Bernanke uprooting his family and defaulting on his mortgage if the value of his house falls a lot further? It's unthinkable. In fact, think of the families you know with mortgages, and ask yourself how many of them would default and suffer through foreclosure just because doing so works out cheaper than staying current on the mortgage. They might have hoped, when they bought their houses, that prices would continue to rise. But that doesn't mean they were making an investment, as one might in shares of General Electric, one which you can always give up if it turns sour.

Homes - primary residences especially - really are different from any other investment. Yes, default rates on first mortgages are at historically high rates, and they might well rise further; certainly the RMBS market is pricing an extremely high number of future defaults. But that doesn't mean homes have become nothing more than investments. At least, I hope it doesn't.

(HT: Alea)