Homeownership is not an investment

Investments, by their very nature, can generate income without being sold. They are productive assets. Stocks generate dividends, bonds are redeemed over time, commercial real estate generates rent. Owner-occupied homes are not productive assets because they do not generate income unless they are sold. Homes are not investments, they are a cost.

Most home-buyers think of owning a home as an investment. In many cases, this leads them allocate their resources differently than if they thought of their home as a cost. There are many good reasons to own a home, but owning a home as an investment vehicle is not one of them. While it’s true that real estate generally appreciates in value, it does so roughly at the pace of inflation. Some cities and neighborhoods will appreciate faster because those areas become more desirable, but as a whole the real estate market appreciates with inflation over the long term.

If homeowners think of their homes as an investment, the only way they can get a return on that investment is by selling it to someone else for more than they paid for it. If the new buyer is also thinking of the home as an investment, the only way they can see a return on the investment is if they, in turn, sell it to a third person willing to pay even more for the home. Each subsequent buyer is betting that they’ll be able to find somebody to pay a higher price for the home in the future.

This behavior of people buying an unproductive asset for ever higher sums of money has a name, it’s called a bubble. We’ve seen, very vividly in 2008, what happens when homebuyers start thinking of their homes as investment assets and an bubble is created and bursts.

Not only do we end up with real estate bubbles when we think of our homes as investments, we distort our asset allocation. This negatively impacts the economic and environmental sustainability of our cities because it causes us to have a greater desire to be homeowners than we might otherwise. The desire to own a home for investment purposes often forces people to live further out in the suburbs, where homes are more affordable, and commute longer distances. This has a direct impact on the number of miles they drive which increases the wear and tear of our streets and the amount of CO2 in the atmosphere. In addition, it encourages people to spend more, because they are “investing”, causing them to be “house poor” and reducing their disposable income and slowing the economy as a whole.

There are many good reasons to own a home, even good financial reasons for owning a home, but home-ownership is not an investment vehicle. As a society, we need to stop thinking of buying a house as an investment. Without this change in attitude towards home ownership, we cannot encourage enough suburban communities to rebuild as sustainable and walkable.