Random Thought on Home Ownership

I'm thinking of the three major consumer purchases that are probably at the base of the hierarchy of needs:  Fuel, food, and shelter.  Its interesting how very different the media and public perception is of price changes in these areas.

The reaction to fuel price increases is easy to predict - they are always portrayed as bad.  Rising prices hurt everyone, producers are evil, and speculators who make bets on rising prices are even more evil.

The reaction to rising food prices is more mixed.  That's because we have come to the collective decision that producers of food are sympathetic figures whereas producers of oil are unsympathetic.  So media laments about rising food prices are often tempered by good news stories about rising farm profitability.

And then there is shelter.  For this category of consumer expenditure, everything is flipped on its head.  Rising prices are good, and falling prices are bad.  One might argue that housing is different, because consumers often take an equity position in shelter that they do not take in food or fuel.  But all this means is that home buyers are speculating on the price of shelter, going long on bets that prices will rise.  They could easily just rent, and pay for their shelter month-to-month like they pay for their food or fuel, but many consumers bet on rising rents and shelter prices by buying shelter futures (ie purchasing a home).  In a real sense, home buyers are all speculators (using margin accounts at that!), but this is one case where we encourage speculation, and even have tax subsidies for it.

If the reader finds this a funny way to think of home ownership, here is a thought experiment.  Let's say at the age of 30 I wanted to take an equity stake in my current and future fuel needs.  I take out a loan to buy enough Exxon stock such that the annual dividends will cover my fuel purchases for the year.  If fuel prices go up, the dividends likely go up as well, so I am sheltered from the vicissitudes of worrying about my monthly fuel bill, and all I have to do is pay off a regular and predictable mortgage on my Exxon stock.  In 30 years, when the note is paid off, likely I have a big capital gain in my Exxon stock, which I could cash in at retirement if I want to downsize to less driving and fuel use.  Or I can pass it on to my kids.

The only difference I can come up with, economically, between this example and how we do housing is that in my example, consumer capital is invested in productive enterprises rather than dead real estate.


  1. HS:

    Money is the root of all evil so how can you say they are not evil?

    First, not all home buyers buy a home to make money. Alot, like me, buy a home for stability. I chose my place so my son will get the best education I can afford while having a stable enviroment for him to grow up.

    Second, dividends do not go up when companies do well. When companies do well, they horde the cash as stock holder equity. Dividends go up when trying to attract more buyers or trying to increase value, usually in a time when the company is stagnant.

    My thoughts on equity in general is people want something for nothing.

  2. damaged justice:

    At least get the quote right: "The love of money is the root of all evil."

    And I don't buy that, either.

  3. Scott:

    Great piece. HS is right, might be better to use a royalty trust like BPT in your example rather than exxon for yield.

  4. ErikTheRed:

    I think that in the abstract it's a good analogy, but when you delve into specifics it falls apart - there are just so many intangibles associated with home ownership. For example, the ability to customize one's abode has a tremendous amount of intangible value.

  5. Will H.:

    "The lack of money is the root of all evil"
    George Bernard Shaw and Reverend Ike

  6. nicole:

    But there are also other negatives to home ownership, e.g., decreased mobility which will be a problem if the local economy goes downhill while better job opportunities develop elsewhere. No, the analogy is not perfect down to the last detail, but certainly it's an illustration that would be enlightening for a lot of people who unquestioningly accept the weird ideas we have about rising house prices.

  7. Anonymous:

    I love your blog and learn a lot here but I suspect you are being deliberately disingenuous with this post. Fuel, food, and "shelter" are three very different expenses for the vast majority of people who make up the category "ordinary" or "typical".

    Let's start with fuel which "normally" means gasoline. I daresay the vast majority of non-urban-dwelling 'murricans commute to their place of employment on a daily basis. Yes, I know that modern communications technology has made the daily commute somewhat less prevalent or necessary but most people still commute every day, but automobile. And that often applies to more than one family member. So let's just pick some numbers: stuff like TFC (Total Family Commute) = 400 mi/wk, MPG (miles per gallon, of course) = 20mpg, PPG (price per gallon) = $2. The weekly cost of fuel for commuting will, of course, 400/20*2 = $40/wk * 50 wks = $2000/yr rough cost of fuel. If the cost of fuel jumps to $4/gal the annual cost of earning a living doubles and there's not much that people can do about that. Unless you need a new car it is not cost effective to dump your 20 MPG auto for a 30 MPG auto - the payback would be the life of the car (or longer).

    Which is all to say that people have very little ability to change their fuel costs. We can start planning our errands better and, maybe, start teaming up for rides to work, but by and large when gasoline prices go volatile they have a substantial impact on people.

    Just as an example, gasoline costs for my wife and me went from roughly equal to our monthly utility bills to utility bills + mortgage in just a few short months. That's an impact that hurts the vast majority of people.

    The other two costs, food and shelter, have undergone some change in how people view them over the past decade or two.

    Everyone with children loves to complain about the cost of a gallon of milk but reality is that the selection of foods available to ordinary people has exploded. We can now enjoy most anything we can imagine we might want to try and the costs are (or were until recently) quite stable and reasonable. To put it another way - we eat very well on the cheap anymore. Typical people have some ability to control what they spend for food - most of us can eat healthfully for less money if we need to. We may not like it but we can. And that's not to mention how much the wholesale clubs have helped those who have large families to feed or have vast storage capabilities.

    Now... shelter... Our housing is typically much more than "shelter" to us. A man's home is his castle and all that. How 'murricans view their housing has clearly changed over the past couple decades and the whys and wherefores of that are open to discussion. But there hasn't always been this rather nutty demand for McMansions. Until relatively recently people "invested" in their house to accomplish one or both of two basic things. One was building equity - the hope being that over 20 or 30 or 40 years one's house would rise enough in value to fund a smaller "retirement" home plus yield some money left over. Or, if the home wasn't to be sold it would eventually be paid off and provide a relatively inexpensive dwelling for one's dotage. Keep in mind that a mere 20 or 30 years ago the "home" was the ONLY (or nearly so) equity investment ordinary working people made. Ordinary folks didn't buy stocks and bonds. 401Ks and IRAs are, relatively, new developments. And people didn't normally buy homes they couldn't afford. Most people stretched a bit and sweated the mortgage payment for a few years but people didn't generally bury themselves under mortgages that would financially kill them if things went sour for a few months. This speculative bubble for housing is not the "norm" for ordinary Americans.

    And while people frequently overestimate the value of their home as an "investment" the fact would, I believe, show that housing has been about as good, on average, an investment as others. You live in your home, keep it up, and it grows in value over time.

    I'll also mention that it was the high price of renting that initially drove me to purchase a home. Looking out 5 years I saw it being cheaper to buy than rent (and it was and remains so). I'd have a difficult time affording the rent on what I own.

    What about the perceptions of evil vs. good. People are not exactly famous for being rational or well informed. If the typical person won the lottery and then was blasted by all their neighbors demanding they pay a "windfall tax" they'd be aghast. But when oil companies (or other business) hit the good times and make big profits people hate them for it. Not rational or smart, but there it is.

    And the fact that falling housing prices are good for those trying to enter the home ownership game seems to escape most people is perplexing. But people aren't rational.

  8. Tom Hanna:

    "home buyers are speculating on the price of shelter"

    Technically, hedging, not speculating.

  9. Miklos Hollender:


    I think you are thinking about economically about something that's partially outside the field of economics.

    Remember that f.e. the term the Buddha used for laymen, not monks, was "householder".

    A "householder" is more than just the owner of an economic good. He is an established man. One who is settled down, has a stake in the neighborhood and in the country, he has roots. He has something to defend, against the gov't if he must, he won't easily move somewhere else, he is patrotic and invests into the local community, he is, in a sense, a full citizen, a shareholder of the country. He'll always be a citizen, an individual, never a part of a "mob" or a "mass".

    This is psychological, not economic. And it's something important.

  10. Mesa Econoguy:

    I take out a loan to buy enough Exxon stock such that the annual dividends will cover my fuel purchases for the year. If fuel prices go up, the dividends likely go up as well, so I am sheltered from the vicissitudes of worrying about my monthly fuel bill, and all I have to do is pay off a regular and predictable mortgage on my Exxon stock.

    This is exactly what I have done (though without dipping into margin), and have enjoyed until recently, outstanding (200%) capital appreciation, and about 15% dividend. It is/was the perfect fuel hedge, and I’m still getting monthly checks. If you can stomach some principal value swings (and like to average down), you could get in down at current levels, collect 22% div yield on some of these things, and if you’re feeling really adventurous, write covered calls against your position, netting 35 – 40% return. That’s pretty damn good nowadays.

    Note: someone above mentions BPT rather than XOM. That’s definitely the way to go, and is my example.

  11. lascivious:

    The big difference is that tangible assets like houses don't declare bankruptcy. In addition, the value of tangibles strongly depends on their inherent utility. The value of stocks is tied to the popular sentiment associated with them, often resulting in values far out of proportion to their assets.

    You can try to characterize house purchases as margin account speculation, but unless we have millions of dollars invested in multiple properties, we simply can't play that game. We have one house, and we can't easily sell it because we live in it.

  12. Mesa Econoguy:

    Housing certainly does declare bankruptcy. It’s called foreclosure. If you have a mortgage, you’re on margin.

    The fungibility of real estate is what makes that market fundamentally different than the others.

    That, and the fact that realtors speak in incorrect market terminology: “Let’s make an offer to buy…” You bid to buy, you offer to sell. You don’t offer to buy.

    Sorry, pet peeve.

  13. Dr. T:

    Wow, this post touched some nerves. I fully agree with Coyote. The concept of farmers being good guys and oilmen being bad guys should have been thrown out long ago. Both groups are businesses run by businesspersons. The one big difference is that some types of farms (dairy and grains) get massive support from government.

    Many people do treat houses as assets rather than homes. The average family moves every seven years, and they have come to expect a profit when they sell. (Of course, they don't realize that the profit is eaten up when they buy their next house.) Lascivious claims that people can't easily sell houses (because they live in them), but that is untrue. I've known people who sold their house and moved locally: they wanted to be in a different neighborhood, a fancier house, a smaller house, a house with no stairs, etc. In some of those cases part of the reason for the sale and local move was to improve their financial position. For example, a family recognizes that the neighborhood is declining and house prices are falling. They sell now while they can still make a profit, and then move into a nicer neighborhood where they hope house prices will keep rising. Selling a home isn't as easy as selling stocks, but it isn't hard. We sold our first house (no realtor) in 17 days. Our second house was sold in two months. Our third house was sold in one day. Many of the semi-professional "flippers" lived in their assets.

  14. Scott Wiggins:

    Houses remain a tremendous investment for the individual homeowner and will remain so as long as financing and tax policy favor homeownership. Historical trends show that housing across the board, coast to coast keeps pace with inflation at roughly 3% per annum. When one factors in the leverage of say 10:1 for a 10% downpayment then 3% per year appreciation results in 30% return on investment. Now, take the mortgage interest deduction to shelter some of your hard earned money and you add a few more percent return on investment. And finally, all the while you are paying off your mortgage, unless you are treading water with an interest only loan. You can't consistently get these kinds of returns in the stock market...It's hard to see this "investment pearl" for what it is in the midst of our deflating housing bubble but housing prices will stabilize in a year or so. They aleady have in many markets. Yes, many got burned in the frenzy of our last housing boom. Those late to the party always do in market bubbles whether housing, dotcoms, or tulip bulbs...Homeownership will survive however and should remain a cornerstone of personal weatlh building. One final caveat here is that some chronically depressed economies do not provide for housing appreciation because they are likely to be losing population. They don't fit the macro trends so caution is advised. And no, I don't work for the national association of realtors. I've been investing in Real Estate for around twenty years however...

  15. Noumenon:

    What a coincidence -- Tim Harford just wrote an article at Slate saying it would be much more prudent for young people to buy stock on margin for their retirement, the same way they take out mortgages while young.

  16. Kelly:

    "If the reader finds this a funny way to think of home ownership..."

    It's the only way to think of home ownership.

  17. Paul:

    I remember going on a finance course and the economics guy was from UK and he said he had sold his house to some institution and rented it back from them, and put all the money in deutchmarks (this was pre-Euro in late 1980s or early 1990s). I believe he even had an option to buy his house back at some ridiculous seeming lower price like 25% less than he had sold it for. This seemed weird to me at the time, since I don't think most people think of their houses as a true tradable investment. Anyway, London prices fell by about 30% in the next few years, the pound fell out of the EMU and this guy should have made a fortune and ended up with his house back as well.

    But generally with houses you don't get the same choice to buy or lease, like you do with a car. The houses for rent and the ones for sale are different, plus there is a very different feeling about upkeep on your own house ("investment") versus a landlord's ("money down the drain") which leads to much better housing in ownership areas (compare public housing anywhere in the world to equivalent type of private estates/tracts).

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  19. LowcountryJoe:

    I think you are thinking about economically about something that's partially outside the field of economics.

    Is this even possible? In my opinion, Economics can explain almost anything.

  20. LowcountryJoe:

    What a coincidence -- Tim Harford just wrote an article at Slate saying it would be much more prudent for young people to buy stock on margin for their retirement, the same way they take out mortgages while young.

    That would make sense if one could leverage a stock as much as one could leverage a house and if houses did not have the same taxable treatments [write off the interest on your mortgage if it puts you over the standard deduction; avoid capital gains -- to a certain amount -- and if your home qualifies] as they do now.

  21. Noumenon:

    That's a good point about the tax treatment, Joe.

  22. Mike:

    Those that criticize Coyote for trying to make home ownership analogous to fuel expenses don't see the point Coyote is trying to make.

    I read a comment: "The two are different because one can customize their abode".

    But that goes beyond the scope of the analogy. However, I could argue that I can do as I wish with the fuel I purchase. I can go on a camping trip. I can travel to New York City. I can put it in a boat, and go fishing.

    While you may not own a home for the equity, many people do. I remember when I bought my house, my boss asked me if I was going to turn around and sell it for a profit. I of course had to explain to him that doing so would be illogical.

    If my house increased in value by 100%, it's a good bet that every other house has also increased by ~100%. Chasing a new home every year would be foolish. However, I can buy other properties, and use them as rentals to long term financial security. At a future time, I can sell them for a profit, and retire more comfortably and keep my home.

    Of course, I don't believe that money is the root of all evil. Consider the following:

    Who commits more violent crime? Those that have a lot of money, or those that have very little? How many rich gang bangers are there out there?

    I believe that there are evil people, money is a tool for them to do more evil things. I don't think money make Saddam Hussein evil, I believe he was evil from the start.

    Osama bin Laden has no money, yet he seems to be quite evil.

  23. GU:


    Osama bin Laden comes from an extremely wealthy Saudi family. I am pretty sure he has leveraged his family ties to make lots of money over the course of his life (even if he must live a more ascetic life now). I'm not disagreeing with your "money is not the root of all evil" argument, just saying that OBL was a bad example of someone with "no money."

  24. HS:

    Money was only created to facilitate trade or bartering. I produce something, you produce something, we trade. The greed is when the value of that facility (money) overshadows the underline (production). Since greed is one of the seven deadly sins, it must be evil.

    On other notes...

    People talk about a house as being an investment. To me, investments make income houses do not, unless you rent it out (where as capital gains is just a bet). I think a house is more of a liability, there is no way to avoid the property tax. For this reason, you don't really own your home, the government does since they can slap a lien aginst it even though its paid off.

  25. HS:

    Btw, yes you are right... Timothy 6:10

    "For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows."

    People want and chase money, not what it represents. To me this is coveting money. When people want something for nothing (no work, no production, nothing of value added) that is greed.

  26. lineup32:

    Anyone who buys a home and does not pay cash owns the mortgage while the bank owns the house which is collateral for the loan. Most homeowners are actually mortgage owners rather then homeowners but popular media tends to blur this fact. Less then 30% of homes are mortgage free so the vast majority of Americans are in fact mortgage owners.
    Your description of them as long is in fact correct but they have not bought any CDS to hedge their investment so its a risky bet with luck and timing playing large roles. Credit creation during the past 30 years and its reliance on excessive leverage the past ten years has been the largest factor asset price increase including single family homes. With credit's recent decline in availability, assets are quickly declining in value world wide as the liquidity that drove up asset prices have dried up.