By Zachary Karabell
Five years after the collapse of Lehman Brothers and the onset of the 2008-2009 financial crisis, the U.S. housing market is at last starting to thrive. It has, in fact, been steadily improving over the past years, and that trend has only accelerated of late. Housing is widely perceived as a key ingredient to a healthy economy, and so the revival in the housing market has been heralded as a positive step for an American system that has been sluggish at best. Similar trends in the United Kingdom and parts of the EU are greeted as positives as well.
But is it? Housing is a key aspect of economic activity in most countries, but that doesn't mean that we should welcome a return to housing as a perceived pillar of national strength. And we should be very wary of any return to an ethos that sees either home ownership or housing prices as a barometer of individual and collective success. Those attitudes very nearly imploded the modern financial system, and they could imperil it again.
Homes are places where you live. They are not — and should never have been — investment vehicles. Yes, homes may gain in value and augment one's net worth, but the reason to own a home is that it can be a cost-effective way to obtain a place to live. The minute they are seen as investments, that reality gets perverted, with dangerous consequences.
There's no doubt that the economics of the housing market have been steadily improving. Foreclosures have dropped in half since their peak, from over 1 million in 2010, to a predicted 490,000 this year. Housing starts are up nationally, from a low of less than 500,000 in 2009 to close to 900,000 this year, and prices are up more than 10 percent over the past 12 months.
These national trends are neither evenly distributed nor certain to continue. The Northeast, for instance, has been weaker of late than the rest of the country. The recent spike in interest rates, triggered by the imminent Federal Reserve decision to curtail some of their aggressive bond buying, may dent the momentum as well.
Given that housing has direct impact on GDP, it certainly matters whether it is doing well or badly. Not just construction but millions of retail and industrial jobs are keyed to the housing market, ranging from Home Depot salespeople to Caterpillar engineers. But the notion that housing should be a leading indicator of economic health is unwise, and ultimately destructive.
What was most damaging about the housing boom and bubble of the 1990s and 2000s was that millions of middle-class families bought into the notion that homes should be the repository of their net worth and future wealth. Decisions about buying shifted away from pure calculus of need and acceptable costs and instead were increasingly based on the likelihood (or not) that their homes would increase in value.
It's an easy path from that belief to outright speculation. The idea that homes are a primary investment is not only what drives real estate bubbles but also drives real estate crashes. China today is in the grips of a real estate challenge because middle-class Chinese have nowhere to invest and augment their net worth other than real estate, given that the stock market is widely seen as gamed, there is only a small bond market and they can't invest outside the country. But Americans have multiple avenues to invest for the future; real estate may be part of that mix, but it should not be the anchor.
Why? To begin with, real estate is not liquid. It is a place to live (or work). Its primary utility is to provide shelter, and quality of life. Most people finance all or part of that need with mortgages (credit) from banks. Today, with down payment requirements on the rise, many families will also use a considerable portion of their liquid net worth. That may make eminent sense, especially if they are living in an area that has good schools and decent access to jobs but does not have housing stock that can be rented. That is a reason to buy a home.
Buying, however, comes with substantial costs and constraints. Money that is used for a down payment can't be shifted easily to other investments; it is locked up in the house. Mortgage debt that is fixed can't be adjusted when rates go down, even if fixed rates provide some protection when rates rise. Buying a home may be a necessity, but in multiple ways, it is a highly compromised and risky investment.
A positive outcome to emerge from the past five years would be to dispel the notion of a home as primarily an investment, let alone a good one. It would also be to uncouple the housing market from the national perception of a thriving economy. Buying a home may be the right decision, but it should not be a goal intimately tethered to a sense of success. Once, perhaps, owning a home was indeed a symbol of freedom, autonomy and being in charge of one's own economic destiny. Today, with financing and costs and lack of liquidity, owning a home can be the opposite of all of those.
So before we go back to the future and herald the return of the housing market, let's hope that we don't actually return to the housing market we experienced at the end of the 20th and the beginning of the 21st century. A home is a marvel, and a need. Buying a house or apartment can be a good investment, and the right way to use both credit and cash. But the housing market is an adjunct to a thriving economy, and housing is a cost that families must bear to live adequately or to live well. If it goes up in value, that's a plus, but it should never be the driver of the decision. As the economy has rebounded, we haven't yet returned to the bubble-era ethos. Let's keep it that way.
(Zachary Karabell is a Reuters columnist. Opinions are his own.)