There’s always something to howl about

Housing Might Not Be a Good “Investment” But It’s Not a Bad Hedge Against Inflation

Debra and I had the good fortune to met Anthony Randazzo at a Reason Foundation dinner last week.  Mr. Randazzo published an article today, about real estate as a “store of value” (which was consistent with what we’ve been talking about here on BloodhoundBlog).

Few people will dispute that more homeowners adds “social value” to communities.  Greg Swann articulated that nicely here:

The essence of our freedom is the free ownership of the land, and yet everywhere we turn, private property is subjected to one law after another, and everything that is not forbidden is compulsory instead.

This is a grievous error. The men who become Brownshirts or Klansmen or Khmer Rouge — the men who make up murderous mobs — are men without land. It is the husbandry of the land — each man to his own parcel — that most makes husbands of us, that sweeps away our willingness to live as brigands or rapists or thugs.

By robbing the private ownership of the land of its meaning, the state is, by increments, robbing its citizens of their humanity. No one burns down his own home, nor his neighbor’s home. But when the time comes that we all seem to own our homes only by sufferance, none of us will have anything left to defend.

What Greg was arguing against was an activist government, abusing eminent domain laws.  I was happy to read that locally, the brigands disguised as National City, CA Councilmen were defeated last week but the war in defense of private property rights will be a long campaign.

Mr Randazzo’s article however, demonstrates how that “social value” (op. cit.) can be distorted when the planners keep planning:

When looking at housing this way, the “ownership society” lauded by President Bush in the early 2000s, sounds like a good idea. Especially when considering the social values associated with homeownership, like being a good neighbor and having a stake in nuturing a community. However, while owning a home is rarely a bad thing, it might not be the great investment our parents told us it would be.

When you adjust these numbers for inflation, housing prices stayed nearly flat from the end of World War II until the mid-1990s. Only once the so-called 1992 Government-Sponsored Enterprise (GSE) Safety and Soundness Act opened up the floodgates of federal subsidies, later to be caffeinated by the Federal Reserve’s loose monetary policy in the early 2000s, did prices double nationally. Of course, that price jump was a bubble and prices have fallen nearly back to levels last seen in the 1990s.

Randazzo shows here, with charts, that activist economic planning, in pursuit of what would otherwise be thought of as a noble goal (a deed in every safety deposit box), distorted the market, detached housing from its traditional characteristic as a “store of value”, and turned it into a commodity ripe for speculation.

Eventually real housing prices picked up, doubling from 1996 to 2006 on the back of the housing bubble. But in trying to boost investment values, policymakers and poorly incentivized bankers drove prices unsustainably high, and the peak of growth was short lived as home values have steadily fallen back towards the pre-bubble trend line, as can be seen in the below graph.

Moreover, the government-encouraged speculation had an opposite effect when the final chair was pulled in the musical game:

This is not to say homeownership is a bad thing. And on an individual level, low- and middle-income families certainly were able to build equity during this period—which is a good mechanism for creating wealth. But a lesson from the evolving “foreclosure society” in the wake of the housing bubble is that what many thought was homeownership was simply a twisted form of renting. If the only means of getting a family in a home is to provide government subsidies that lower interest payments and down payments, then the homeownership is all a façade, and there is no equity growth.

To be sure, homeownership is a worthy and attainable goal, but not before a household has the means. A house is not a stock to be wielded as an investment, but rather it is a savings account that maintains its value with inflation.

Read Randazzo’s article here.  He is one of the few economists who is not only willing to point out the failed policy problems of the past but offer pragmatic policy solutions for the future.

Certainly, private ownership of real property is not only a virtue of American Exceptionalism but a demonstrable benefit to communities,  Those of us who practice the craft of trading and financing property, would do well to defend our clients against an activist government which would steal their property, and protest loudly when it tries to bestow premature gifts of property to their neighbors.


6 Comments so far

  1. Greg Swann April 26th, 2011 8:49 pm

    You know you’ve hit a home run in Dogtown when you have to wait for someone to puncture the looming silence. There is no greater tribute to this post than that.

    One of our jobs, I think, as middlemen, is to transmit the culture of the world we inhabit and mediate for. We owe it to our clients to show them everything that matters about being middle class, not just whatever sub-manifestation we happen to bring to the marketplace. This is one of the benefits that accrues “organically” as a consequence of sustaining relationships. Humanity is not natural. It is learned. We learn it from each other, all the time, all through life. Capitalism (meaning trade without crime) makes better things and better wealth, but that’s all just secondary consequences. Capitalism makes better people. That’s the business all of us are in.

  2. Jeff Beck April 27th, 2011 9:38 am

    With charts! He must be right if there’s charts. 🙂

    Seems to me that America has had a succession of bubbles, market manipulations and public speculations since the mid 80s. Gold/Silver in the mid 80s, the Saving & Loan scams later, then the tech stock mania, then the real estate bubble and now we’re seeing gold/silver mania again as well as two recent bouts of crude oil speculation.

    And these things were caused by activist government planning? No, these things were caused by BIG, BIG money jumping from place to place and “making the market”.

    Guess what. Before you know it, the gold/silver bubble will start to deflate as the manipulators start to fire up their next bubble machine.

  3. Roxanne Ardary April 27th, 2011 3:49 pm

    Excellent article. I agree with the majority of your post. While housing in most areas isn’t currently hedging against inflation, historically speaking that is exactly it’s performance if held long term.

    @Jeff, I agree with your statements as well, there will always be speculators in markets. However, I have to agree with the article in that had the government let things alone, the speculators wouldn’t have been able to obtain all that easy money.

  4. Brian Brady April 27th, 2011 6:45 pm

    “Seems to me that America has had a succession of bubbles, market manipulations and public speculations since the mid 80s”


    “No, these things were caused by BIG, BIG money jumping from place to place and “making the market”. ”

    What makes it “jump”? You’re almost there, Jeff.

  5. Jim Klein April 27th, 2011 8:00 pm

    > What makes it “jump”? You’re almost there, Jeff

    Great line after a great post. Thanks, Brian. “Almost there? But where am I?”

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