Tuesday, January 12, 2010

Fed economist: housing is a bad investment

Federal Reserve economist Karen Pence says housing is a poor investment compared to other asset classes for several reasons:
  1. It is an indivisible asset. If you own stocks and bonds and suddenly need a little cash, you can sell some of your stocks or bonds but not all. With a home, on the other hand, “you can’t just slice off your bathroom and sell it on the market.”
  2. It is undiversified. You can buy stocks or bonds in industries or countries all over the world. A home is a bet on one single neighborhood.
  3. Transaction costs are very high when you buy or sell a home because of real estate agent fees, mortgage fees and moving costs.
  4. It is asymmetrically liquid, meaning it’s easy to get money out when home prices are going up. (You just take out a bigger mortgage.) But it’s hard to take money out when prices are going down because refinancing becomes more difficult. ...
  5. It is highly correlated to the job market, meaning that home prices in a neighborhood tend to rise when the job market is improving in the area and fall when the job market is worsening. This means that your main financial asset provides the smallest cushion to you when you might need it most.


  1. Where are the housing bulls to refute this bubbleheaded claim?

    Who knew Karen Pence was a bubblehead?

    Lance, Lance, where are you when the housing bulls need you so?