Recently I was preparing for a homebuyer seminar. While reading my notes from the previous three seminars I noticed a recurring theme from the attendee. They thought that “housing was a lousy investment”. That theme was echoed recently by an economist for the Federal Reserve (Karen Pence). Her comments referenced two factors that “make homes a lousy investment”. Her first factor was that a home is an “indivisible” asset. If you own stocks and bonds and you need some cash you can sell some of them but not all of them. According to Ms. Pence “you can’t just slice off your bathroom and sell it.” Her second factor is that a home is an “undiversified” asset. You can buy stocks and bonds in industries and countries all over the world but “a home is a bet on a single neighborhood.”
To Ms. Pence and the past and future seminar attendees I submit the following response. In the 35 years of guiding borrowers through the process of owning a home I have never suggested that your home was an investment. I have however allowed many people to understand that their mortgage was an asset not an expense.
First homeownership should never be entered into as a short term “divisible asset”. Stocks and bonds are divisible in theory only. Most hard working taxpaying Americans own stocks and bonds in the same vehicle: 401K’s. Have you ever entertained selling parts of your 401K? If you are allowed the penalty is pretty stiff. However depending on your equity in your home you are still capable today of obtaining a home equity line of credit to “slice off that bathroom”. Secondly as to your home being an “undiversified asset”, “a bet on a single neighborhood” I submit that your home should be a part of a diversified portfolio. Not the whole portfolio. I have no problem making a bet on a single neighborhood. That seems to be a bit more transparent than reading a prospectus from a company using the same reporting standards as Bernie Madoff.
For the average hard working taxpaying homeowner a little mortgage planning will allow him to realize a tax refund. For example the same homeowner with a $150,000 mortgage with an interest rate of 5% has the potential to write off $7,400 a year. Without the home the same hardworking taxpayer would have invested that same $7,400 in the Federal Government with a deficit of one and a half trillion dollars. You tell me which one is a lousy investment.