Thursday, December 10, 2009

Home on the range

A debate has been raging in the blogosphere lately (no, not really) about the concept of home ownership as an investment. Matt Yglesias verbalized something I've thought for awhile:
I think the clearest way to make the point is just to observe that no matter what happens to the price of your home, it’s very hard to actually take advantage of any gains you may make. Bubbles aside, property values in a given metro area really can separate from the national trend in a fundamental way. Over the past several decades, the Detroit area has become a much less attractive place to live relative to the national average and some other cities have become more attractive relative to others. So you can “make money” by buying property in a city whose attractiveness increases relative to the average. But how are you going to realize these gains? By moving to Detroit?

Indeed, really the only way to play the housing market is to buy your first home when the market is down. But once you're in, well, that's it.

That's not to say that buying a home is a bad idea, compared to the alternative of renting. There are a lot of calculators that you can use to decide rent v. buy, which more or less come down to, well, how long are you gonna be around in place X. Certainly it doesn't make sense to buy a home if there's a good chance you'll be moving in 6 months, as there are a lot of transaction costs. But the longer you'll be in one place, the more sense it makes to buy. If you rent a place for 30 years, at the end of 30 years, you have... nothing. But if you buy that place, at the end of 30 years, you own a home and have no more housing costs to worry about. I don't know if that qualifies as an "investment" per se, but that doesn't mean it is a bad idea.

One thing I would like to see is reform of the tax code, which right now "encourages" (though I have no idea to what degree) home ownership by allowing a deduction of mortgage interest. While I think it would be essentially impossible to eliminate that politically, one thing you could do is instead expand the deduction to also allow people to deduct their rent. Indeed, Massachusetts does this on the state level, although it is still not comparable to the mortgage deduction.