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

by Brian Brady

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

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.