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Home Is Where the Bad Investments Are


Real estate is a really bad idea for making money.

This week, Pete Schiff discussed what instances homes are investments, when they're speculation, and when they're just a place to live. And I agree with Schiff that for most people who own and live in their own home, the best way to think about homes is as shelter.

The mistake many have made was thinking that home prices would rise forever, and somehow those rising home prices would support retirement. We've since seen how fatally flawed that idea is.

Schiff labels speculators as those buying multiple homes, hoping for price appreciation. Again I concur. Some who got out at the right time made fortunes, other who held on too long and couldn't sell or make their mortgage payments went bankrupt.

Those buying homes to rent (assuming they know what they're doing, where lease rates will support the mortgage payment -- conditions I added) can reasonably be called investors.

Those needing huge price appreciation to cover interim losses and those not having a clue as to what they are doing, can also be labeled as speculators.

Homes as Consumables

I strongly agree with Schiff that a home is a consumable. It has to be maintained or it's worth will head to zero. In fact, homes can be worth less than zero, as has happened recently in Detroit.

Please consider "In Detroit, a housing auction of last resort".

On the auction block in Detroit: almost 9,000 homes and lots in various states of abandonment and decay from the tidy owner-occupied to the burned-out shell claimed by squatters.

Despite a minimum bid of $500, less than a fifth of the Detroit land was sold after four days.

Out of 9,000 homes, there was no bid for more than 7,200 of them. The homes that didn't sell are worth less than zero because it will cost $10,000 or more just to tear them down.

Those were 2006 tax sales. 2007, 2008, and 2009 tax sales are likely to be as bad if not worse.

Value of the land itself may not go to zero (except in instances of excess taxation), but over time, the value of the structure always goes to zero unless it's maintained.

On the rationale that housing is indeed a consumable, housing prices should be included in the CPI. I've discussed this many times, most recently in "Case Shiller CPI at Negative 5.1%".

Substituting the Case-Shiller housing index for Owners' Equivalent Rent, I have the year-over-year CPI at -5.1%. By that measure, real interest rates are huge.

BLS Owner's Equivalent Rent Numbers From Twilight Zone

By the way, even rental prices are overstated in the CPI given that rental prices are falling nearly everywhere. Please see "BLS Owner's Equivalent Rent Numbers From Twilight Zone" for details.

Thus, unless one is very careful, the idea of buying homes to rent them out is fraught with danger, as Schiff points out.

However, the idea of falling rents and falling property prices is hardly what one would expect to see in the hyperinflationary or high inflation environment that Schiff espouses.

In such conditions, one should expect rising prices to bail out otherwise bad investment decisions. There has never been a hyperinflation in history where real estate prices have fallen. That means some of Schiff's overall logic on inflation, the dollar, and home prices is flawed.

In regards to investment properties outside the US, there may be some select places such as Argentina where property values are still reasonably cheap. However, as a general thesis, I disagree with Schiff. Property bubbles are nearly everywhere.

Moreover, I think the US dollar is due for a strong bounce even if one could find some otherwise reasonable opportunities.

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