14 March 2013

Houses Are Not An Investment

Somehow this story popped up in my stream again:

Regan followed up with a question that got Shiller perked up.
"Then why buy a home?" she asked. "People trap their savings in a home. They're running an opportunity cost of not having that money liquid to earn a better return in the market. Why do it?"
"Absolutely!" Shiller exclaimed. "Housing traditionally is not viewed as a great investment. It takes maintenance, it depreciates, it goes out of style. All of those are problems. And there's technical progress in housing. So, new ones are better."
"So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000's. And I don't expect it to come back. Not with the same force. So people might just decide, "Yeah, I'll diversify my portfolio. I'll live in a rental." That is a very sensible thing for many people to do."
Adam Johnson also noted that this was in line with Shiller's assessment that real U.S. home price appreciation from 1890 to 1990 was just about 0 percent. This is explained by the falling costs of construction and labor.
For people who can't wrap their heads around this, Shiller offers an analogy.
"If you think investing in housing is such a great idea, why not invest in cars?" he asked. "Buy a car, mothball it, and sell it in 20 years. Obviously not a good idea because people won't want our cars. It's the same with our houses. So, they're not really an investment vehicle."
Any homeowner knows that you can't sell a home with 30-year-old roofing, carpet, and kitchen appliances. Sure, the home price might go up, but you have to adjust for years of maintenance and renovations.

Real estate is an investment.  Personal property is not. There is nothing wrong with owning a home, of course, but there is no point in pretending it’s an investment, for you are unlikely to recoup all of the money your pour into your “investment.”

If you want to remodel your kitchen because you want something prettier or more functional, or more spacious, or whatever; then remodel your kitchen because you want to.  But don’t pretend that remodeling your kitchen is somehow an investment in your home.  That’s just bullshit that salesmen use to get you to spend lots of money on upgrades.

If you want a nice, comfortable place live that you can customize to your exact preferences and specifications, more power to you.  But don’t lie to yourself and pretend that modifying your home to your specs is somehow a reasonable business investment.  It simply is not.

And if you want to invest in real estate, either buy rental property or buy development property, or some other property that you can flip in short amount of time.  That’s investing in real estate.  Remodeling your home is not.