Bigbuilder

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

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.

Nowhere Near a Real Estate Bottom

The statement that the bank will receive "nothing" is simply wrong. The bank will not get what it bargained for. It will lose lots of $$ but the loss will not be total.

That having been said, I do agree generally with the observation that it will take some time for balance to return to the residential market. I saw an analysis that indicated that the current total value for residential property in the USA is about $22 trillion. In order for that total value number to return to the long term trend line that measures the relation of the value of housing to the total economy, there needs to be a drop in value of $4 trillion. This adjustment could come via increases in the rest of the economy, but in any event, this is a long painful journey and those who tied up significant capital in assets that consume $$ rather than produce $$, the pain will be great.