Matthew C Klein, Columnist

How to Make Housing a Better Investment

Housing is tricky to value because it is both consumption and investment. Separating the two might simplify things.

April 24, 2014 at 3:08 PM UTC

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange. Before that, Klein was a research associate at the Council on Foreign Relations, where he spent more than two years studying the history of the Federal Reserve and the intellectual history of monetary economics for an upcoming book by Sebastian Mallaby. He also worked at Bridgewater Associates, where he studied the economies of Central and Eastern Europe and advised institutional investors on asset-liability management. Klein has a bachelor's degree in history from Yale University. Originally from Chicago, he lives in New York.

Do you consume a house or invest in one? Photographer: Ian Waldie/Bloomberg

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Many Americans think real estate is the best long-term investment, according to a recent poll by Gallup. That has prompted a lively debate during the past few days. The disagreement comes from the difficulty of measuring the value of homeownership. A big part of the problem is that housing is both an investment and consumption. Separating those components might be helpful.

Home equity has inflation-adjusted returns barely above zero across time and countries -- and that's before accounting for property taxes and maintenance costs. Catherine Rampell, writing in the Washington Post, went further and said that renting would have been better than owning during the past 30 years because you could have bought high-returning stocks instead of accumulating home equity. But as economics blogger Bill McBride noted, Rampell assumed that the choice was between buying a home for cash rather than taking out a mortgage that could be repeatedly refinanced as interest rates fell by about 15 percentage points. That cheap leverage juiced the returns to home equity and also produced big tax benefits, since people can deduct mortgage-interest payments and local property taxes from their income.