Lots of people think renting is for suckers. Part of this is because of landlords, widely reputed to be deadbeats who collect rent for doing nothing. But rent is just another way of consuming the necessary good called shelter; homeownership is simply an alternative that masks the consumption process as depreciation and mortgage payments. For some reason people don’t mind paying bankers rent in the form of interest payments on the money they borrow to buy housing, perhaps because of the tax breaks on this expense. But mostly it is because people fetishize ownership and misconstrue homes as investment instead of consumption. This list of five home ownership myths (via Ezra Klein) makes this point very succinctly.
The reality is that housing is not an investment. It’s shelter. That is all housing has ever been. Self-serving organizations like the National Association of Realtors like to tell people that buying a home is a good way to build long-term wealth, but this statement couldn’t be further from the truth.
Although home prices can go up (and down), the rate of appreciation on housing does not surpass inflation levels over the long-term. Between 1890 and 2004, the real return on housing was a pathetic 0.4 percent per year over the last 100 years, according to Robert Shiller, a housing expert and Yale economist.
Real estate investments aren’t that much better over the short-term. The gain in new home prices over the last 20 years has been a mere fraction of the Dow’s gain. The average person investing in stocks between 1987 and 2007 would have made more money than the average person who bought a new home in 1987.
The homebuying frenzy sustained a lot of people in the parasitical industries that surround the fiendishly complicated process of real estate sales, but that doesn’t mean it was necessarily any good for the people making the purchases. Those now in negative equity are probably finding that out, and I wonder how much solace they have in the fact that they are making mortgage payments and not “throwing their money away” on rent.
// Notes from the Road
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