Housing

I was shooting hoops with a friend of mine when the subject came up about money. We are both newly married and earn well, but we have different persepectives when it comes to buying, selling, and saving. He has just purchased a new house, a big new house, with a big note and lots of big bills. I still rent.

Everyone says what a great investment houses are, but for the life of me I just can't buy into that idea. The Bible says for us not be indebted so I can't imagine going into debt to buy a house that will take 30 years to pay off. Well, Sean, houses go up in price so its a good investment. That my friend is called, inflation. However, prices cannot rise indefinitely because inflation cannot rise indefinitely, so just because you house costs more, doesn't mean it is worth more.

Bill Bonner explains what the wise rich believe:

Mr. Vernon W. Hill, a Monroe County banker, considers the “wealth” accumulated in the housing market an illusion, as we do. He believes it will lead to big problems among both borrowers and lenders. To avoid the big problems personally, Mr. Hill, like Warren Buffett, lives in the same house he bought nearly 40 years ago. Avoiding the big problem professions, Mr. Hill requires prospective borrowers to show him their finances without considering the house they live in. Whatever value there is in the lived-in house, he says, is “inactive.” It doesn’t really earn any money for you; if you were to sell it, you’d just have to buy another one. And you can’t ship it to China to pay for your flat-screen TVs or to Japan to pay for your SUV.
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But, what about our houses? Aren’t we rich? So what if the Chinese and Japanese sell our bonds, we still have our houses!

The two economists note, “when you include capital gains, 401(k) retirement plans, and home values, U.S. domestic saving is around 20 percent of GDP, the same as in most other developed nations.”

They should talk to Mr. Hill. They don’t seem to realize that home values are “inactive.” We have yet to hear of a factory built with increases in house prices. We have yet to see a debt paid from a rising house price – without an equal debt arising somewhere else.

“Much of our meager savings and massive borrowing has gone into housing,” says the Monroe County banker. “How convenient it would be now if mansions and subdivisions could be exported, to improve our foreign trade balance. Since they cannot be exported, perhaps the foreigners who own our massive debts can be repaid by coming to live in our McMansions, with homeowners serving as houseboys and house maids to the visiting Japanese and Chinese owners of our debt.”