Just How Terrible Is Housing as an Asset Class? Roubini Weighs In

For some time now, we've been noting that the recently-concluded housing bubble wasn't like most of the bubbles that preceded it. Unlike the railroad, telegraph, and dot-com bubbles--which, for all their short-term wreckage, created new infrastructure of immense economic value, as Daniel Gross argues in Pop!--the housing bubble has left behind virtual ghost towns, economically useless infrastructure (e.g., roads, water, and power leading to virtual ghost towns), and a brutal overhang of household and government indebtedness.

So we were pleased to see the (sometimes breathless, often prophetic) Nouriel Roubini make special note of the unproductive nature of the U.S. housing stock. Here are the key passages from Roubini, via Naked Capitalism:

...Sixth, the existence of [Government-Sponsored Enterprises] GSEs...is a major part of the overall U.S. subsidization of housing capital that will eventually lead to the bankruptcy of the U.S. economy. For the last 70 years investment in housing –- the most unproductive form of accumulation of capital -– has been heavily subsidized in 100 different ways in the U.S.: tax benefits, tax-deductibility of interest on mortgages, use of the FHA, massive role of Fannie and Freddie, role of the Federal Home Loan Bank system, and a host of other legislative and regulatory measures.

The reality is that the U.S. has invested too much – especially in the last eight years – in building its stock of wasteful housing capital (whose effect on the productivity of labor is zero) and has not invested enough in the accumulation of productive physical capital (equipment, machinery, etc.) that leads to an increase in the productivity of labor and increases long run economic growth. This financial crisis is a crisis of accumulation of too much debt -– by the household sector, the government and the country –- to finance the accumulation of the most useless and unproductive form of capital, housing, that provides only housing services to consumers and has zippo effect on the productivity of labor. So enough of subsidizing the accumulation of even bigger [McMansions] through the tax system and the GSEs.

We're not sure that the subsidization of housing capital "will eventually lead to the bankruptcy of the U.S. economy," but we're pretty sure it's not a very good use of currently-finite resources in growing the country's real wealth. But aside from that non-trivial quibble, we think Roubini gets this under-appreciated story exactly right.

Comments

[User 118015]

The only saving grace to this housing bubble is the intrastructure is still there and WILL BE USED SOME TIME IN THE FUTURE AND HAS REAL VALUE while the paper backing this up has depreciated or evaporated. Our goal should be to concentrate on becoming energy independet and the housing bubble will gradually correct itself...like I said after the paper burns the house is still there.

[usa-optimist]

While I agree an inventory of housing is an unproductive investment. Home ownership is certainly related to the productivity of labor and I'm pretty sure it adds to the consumerism that is the foundation of our economy. Therefore, I can't agree that an historic goal of subsidizing housing in the US economy has been without benefit to the overall economy.

[mbborak]

The only productive effect that housing has on the economy (once it is actually built) is in propping up consumer spending. Those consumers with more space tend to accumulate more stuff and spend more on upkeep and improvements to their houses. Aside from that, it is a drag on federal, state, and local budgets, as households continue to demand public services, and a drag on the actual long-term financial health of the consumer by way of the increased debt burden that they must finance. Now, as the illusory price increases of the past decade reverse themselves, we will unfortunately see even more demands for subsidies resulting in an even higher burden on the taxpayer.

Policymakers have to resist the enormous pressures of the housing/housing finance lobby and the baby-boomer homeowners in the interest of putting this locked-up capital to better use. Good luck - maybe that bit about bankrupting the US economy wasn't so far off.

[Niko]

I don't understand you obsession with consumption. You don't spend your way out of a recession. You can not consume forever. Somewhere something has to give.

[mkreisel]

Whenever there is oversupply, it means capitals are wasted.

Same thing happened with canals in 1837;

Same thing happened with railroads in 1876;

Same thing happened with lots of stuffs in 1929;

Same thing happened with sugar in 1974;

Same thing happened with oil in 1979;

Same thing happened with optical fiber networks in 1999.

[friend]

For an ordinary citizen in any country , marriage - have kids - a home -financially sound , are the the package that one trying to achieve at all times .

Home is the essential and a must to any family .

My " learned " author here suggested that the Administration ought to give up on helping the public to acquire a home because such attempts are proven bad investments .

Firstly , we are talking about people's homes and not investments .

Secondly , houses and land properties are the best investments in any sound economy .

The author pointed out that such is not true in USA .

I can see why by my experience in the stock market since August , 2007 .

Any middle class investing his / her hard earned savings into the supposedly " safe " bank stocks ended up losing all or became heavily in debts .

The once well to do family would not be able to pay their mortgage any more ; foreclosure is inevitable .

The subprime crisis became visible in August , 2007 .

The crisis as some article unfolded , might have been related to fraudulent matters - inflating appraisal on a house and then had some one with bad credit rating , mortgage the same house to a bank at a " price " well over and above the true market value .

I can see those financials relating to the subprimes would have a downward run in their stock value .

However , the short sellers by their concerted effort extended the downturns to regional banks which have nothing to do with the subprimes .

Many middle class who invested " safely " in the regional banks got hurt.

The vicious cycle naturally , spiralled into more and more home foreclosures .

The Administration saves the economy by shoring up Fannie / Freddie .

Those opposing to it apparently , work to a complete destruction of the economy of USA .

[Who's the patsy]

Home is an essential, yes, but as a home, not as an investment. It is dangerous to become emotionally attached to any investment. Sadly, this principle is forgotten when people make their home their biggest investment. Egos get caught up in "keeping up with the Jones' s" . As a result, the decision to invest in a house isn't based on sound investment principles at all, the most basic of which is surely not to put all of your eggs in one basket.
I have owned six homes in my lifetime and I have never made as much money on any of them as I have in the stock market, particularly when you adjust for risk.
Since most people sell their homes within 5 years anyway, the idea of "ownership" is a psychological illusion. Especially when it is mortgaged to the hilt (The bank owns it then; you just own a leveraged option). I sold my last home in 2003 and have rented ever since. No single asset accounts for more than 10% of my investment portfolio. And I find it is perfectly possible to feel at home in a place you have rented for years. Actually, my ideal "home" would be a hotel. An apartment in the Carlyle in New York.

[eternitus]

Friend,
You seem nice but are nonetheless largely wrong. Shelter is a must for any family, not homeownership (Did you know that more Germans rent their houses than purchase?).

Housing is a dreadful investment under normal conditions, barely keeping pace with inflation over the very long run, despite draining an enormous amount of money from the "owner" in the form of property taxes, maintenance and generally interest expense.

In the current climate, with such substantial differences in the dollar cost of renting and owning, it is much easier to build equity saving and investing the difference (in my case 100% of my rent payment) than it is owning a home, which is more likely to depreciate or stagnate in value than anything else, barring an unlikely rise in incomes in general.

However, that is not the type of investment Dr. Roubini is talking about. He is speaking of capital investment as referenced in economics. In such usage, economic participants make capital investments to improve the productivity of factor inputs (basically to improve the productivity of a worker), which makes us all richer. After shelter is provided for everyone in sufficient quantity, housing produces zero economic benefits for us. Generally, building McMansions does nothing to improve the economy, as Mr. Roubini says. That capital would have been put to better use in R&D or building infrastructure, which would benefit us today instead of sitting idly, as houses are currently doing.

[Wez]

Are we at or near a bottom in housing when we start to doubt the very usefulness of owning a home?

[Umm, yeah]

Isn't the bigger problem that people were overusing their ability to get credit/loans? They bought too big of a house (assuming the equity would grow at the same astronomical rate), filled the garage with 2 or more SUV's (again either leased or bought on credit), filled the house with furniture (again bought on credit), a big screen TV (again on credit), and just now realized that they're spending more each month than they earn? Especially now that food, gas, energy, etc., have all significantly risen in price.

[Malkiel]

It's always amusing to listen to these conservative economists who live in such rarified air that all the fundamentals of life on planet earth can be ignored if they inconvenience pure market theory. The last I knew, economics was the study of how goods and services were exchanged by humans living and dying as humans within the limitations of nature. Shelter is one of those fundamentals that can't be ignored--I suspect that Roubini would consider agriculture a waste of time too, but to what point? People have to eat, and the resources have to be allocated to enable that "unproductive&quo... part of the economy to continue.

It's been a truism of the last 20 years that consumer activity drove the US economy. Instead of a late-Victorian world where humans lived in squalor so that every penny of the economy could be devoted to production profiting the few, we now have an economy where all the members of the society can use the forces of the market to incrementally improve their conditions. People who owned their shelter have a salable asset that they can sell or barter in old age for medical care and nursing home shelter. Does Roubini have a problem with that? Please Mr. Scrooge, can we have just one more sausage to fill our empty stomachs before we go back to your assembly line?

[johnthebear]

Unfortunately, it became politically expedient to talk about the percentage of home ownership as justification for lack of mortgage standards.

I expected more from government than this lack of moral understanding of the economic role that housing plays in the countries long term well being. I pray that the next administration, whoever, will require all levels of government regulators to follow traditional common sense as well as the rules.

The tragedy that has befallen American homeowners and the world wide loss of $14 trillion dollars in stock prices was totally avoidable, and it will take decades to recover.

Shame, shame on them.

[syndicat]

Broadbased home ownership is very desirable. There was excess and the excess is being corrected. Like always.

The US Gov't actually lessened the "subsidies" by reducing interest deductions on large mortgages and second homes, eliminating property tax deductions for those taxpayers in the AMT, and ending the ability to roll the entire proceeds of a sale of a home (regardless of price) to another same or higher priced home with zero tax liability.

[Flash Gordon]

I've been seeing this argument a lot lately and it is interesting. They are right. The U.S. passed the point where larger better houses helps overall productivity a long time ago. That said, I enjoy my too big house. I lived in the bay area a long time and I tell you, it takes a lot of guts to do the sensible thing and buy a house you can afford when everyone who was irrational and bought more house they can afford made a lot of money because it always kept going up a lot. Only recently has it dropped and you can tell, they are all in shock (except the people in "the city" and there time will come.)

[iThinkBig]

Investment in innovation has been severely lacking for five years now. Is it coincidence wages have remained flat, especially considering some guy in India or China can push paper for 1/4 of the price? I remember trying to raise money for my Consumer Healthcare marketing venture a couple of years ago. The options were:

1) Skew my business plan with lots of fluff, get $15 million in VC money (that was the investment threshold, at least at the time) and give up 70% equity.
2) Accept $500k in angel investment and give up 51% equity.

To a skilled innovator and entrepenuar, would you accept either? No, of course not. I did what any skillled enrepenuar does that also understands economics, I went on the road and sold my product with the sales team, kept all equity and since I had such deep skin in the game, the model was profitable. Actually, still is even with an ad depression going on right now. The technology and methodology were always based on Economics 101 to create VERY good sales leads. Problem is, the market didn't want it at the time. Now the risk sharing model is paying off in droves, because all the marketers with a cushy job buying the cheapest widgets to show they were doing something are all gone. Nice to have only a handful of competitors left. The reason I am saying all of this is simple, all the easy paper money in housing is evaporating, the smart investors left to mop up assets for pennies on the dollar and it pays to do business according to fundamentals, always! The other lesson is it's time to innovate massively in energy. This will happen despite what some greedy, self-serving dinks attempt to do to prevent it. They can only forestall our American ingenuity.

[SteveFronte]

in the 70's and 80's the dollar fell in real value and houses were a good investment.. but is it the same now? if everyone's money loses value then it's an even playing field but what if everyone's money doesn't fall the same distance and the dollar, when the banks finish their desperate sell off of long term foreign holdings that currently they are repatriating and keeping the dollar up lately.....then falls again even harder?

that's might be a problem if most of the things you count on are in dollars, example, Treasury bonds (the Trust Fund).

[Gary Lucido]

The idea that a home is a great investment is one of these myths propagated by the government and the real estate industry. The government has a vested interest in people owning homes because people who own homes don't launch a revolution against the government. In case you are interested I did a post a while back on housing prices in Chicago (where I live) and what has really happened with them. It's just not a great investment. The story is the same for other cities as well.
blog.lucidrealty.com/2.../

[Bigbuilder]

The major points are correct:

1. Diminishing marginal utility. A family of 4 can live in 1,800 square feet OR in 3,600 square feet. They are NOT twice as well off in double the space.

2. Opportunity cost of capital. IF you live in 1,800 square feet and invest the difference ANYWHERE else, you will be richer in the long term. This is true for individuals and for the entire nation. We will miss the possible productivity increases that wiser investment would have created.

3. Over leveraged personal balance sheets are reflected, for a short time, in a strong consumer economy. BUT, leverage on the way down is a killer.

4. The nations under funded long term committments (e.g. social security and medicare) will "bust our chops" financially. Excessive debt at all levels AND capital tied up in media rooms and fancy kitchens will not pay for that.

5. Personally occupied housing is only an investment if you are exiting the housing game. When you die, your heirs will realize this "investment"... Until then, you will merely shift the current value of your housing capital from one location to another, or from one form (i.e. owning) to another (i.e. renting).

6. The housing bubble will destroy neighborhoods and local governments and will inflict real costs (both dollars and quality of life destruction) far in excess of the "paper" loses on bad mortgages. The collateral consequence for national productivity and morale of the citizens is very negative.

Basically, there was no "free" market. Intervention by all levels of government to favor a specific behavior by consumers was done in order to create quick wealth for the campaign contributors of your elected officials. This mess will be an affliction for decades.

[Zeppelin]

So, how can we get rid of the current misguided FED and get Mr. Roubini to take over the reigns, as FED Chairman Can we "VOID" Bernankes' contract, due to incompetence?

[Lee. Raconteur]

friend
Jul 17 01:58 PM:

Home is the essential and a must to any family .

You assume a home MUST be a house, single family, stand alone dwelling.
People can rent a house, live in an apartment, condo, townhouse, efc.

[TheyKnowNothing]

Rent or Own
If one has to spend too much money on housing/shelter...ther... be no money for anything else.

Rent or own....it has got to be affordable...that excess money can then be used to help the consumerism economy of ours.

Bottomline -affordable housing is a min a government must provide to 'market' to its pple..... basic infracstructure: housing, transport, telecommunications, news, health care etcs these are always going to be profitable corporate or government owned.

Free up the money for the failed SS, med, and allow american to use the SS and the 401k to make monthly payment for the mortgage.

[johnthebear]

An observation:

State and local property tax revenues are about to be drastically reduced as tax appeals skyrocket. Tax officials will not roll over without a fight, but when revenues are cut 30%, there will be a lot of pain that will not go away for many years. No one is predicting re-inflation of property values to the former level anytime soon. It will take a long time, IMO.