RALL: The Bizarre World of the Home Appreciation Fetish
Elayne Robertson Demby bought a one-bedroom apartment in Manhattan six years ago. Five years later, she wrote in the New York Times on Feb. 9, she moved out to the 'burbs, but the coop "wouldn't sell." Well, actually, according to her real estate broker, she could sell it if she wanted to. The place would have to be listed, Demby groused, at "$30,000 less than the remaining principle on the mortgage, or about $50,000 less than I paid for it." Rather than take a loss, Demby has been renting the place out -- and spent the rest of her article bemoaning the various perils of becoming a landlord.There's nothing unusual about Demby's story, but it sure is weird.No investment, with the exceptions of government-backed securities and savings accounts, guarantees a net appreciation in value. Not coins, not precious metals, not classic cars, not gems, not antiques, not even laminated items produced by the Franklin Mint.Contrary to popular perception, the most consistently advantageous long-term investments available to Americans are found in the stock market. And while the object of the Wall Street game is quick return, no educated capitalist assumes that he or she possesses a God-given right to sell their Texaco March 20s for a higher price than they paid for them. For knowledgeable investors, taking a loss now and then comes with the territory. As my old brokerage-firm boss used to say, "Every day hundreds of millions of shares change hands on the New York Stock Exchange. In every single one of those trades, one party is getting over and the other is getting screwed."Real estate is the ultimate money pit, an obscene waste of national resources on a product -- housing -- where productive labor only occurred once, when each house or apartment was originally built. Subsequent renovations and redesigns, even when extensive, add only modest value compared to the base price of a housing unit--and reduce value just as frequently. As of 1993, America's 61 million housing units were appraised at a total of $5.3 trillion, an amount roughly equivalent to the national debt. Each subsequent generation of home purchasers is expected to remit this monstrous amount to their parents and grandparents -- plus a tidy profit -- for the privilege of not shelling out a third of their incomes on rent. While logic might dictate that real estate prices should drop with the passing of time -- as floors and roofs and plumbing and wiring wear out -- most Americans believe that they're owed a profit every time they sell their homes. Strangely, even as more homes are constructed -- making housing less scarce -- asking prices on older homes rise to reflect the loss of land to those new homes. Real estate is the bastion of guaranteed capitalism, a unique oddity which can only gain value.In the San Francisco Bay Area, for instance, highly-inflated asking prices have led to what would-be sellers universally agree is a "bad market." Yet those who want to buy can't find many offerings listed, because owners, paralyzed by their guaranteed-profit obsession would rather sit in a house they don't want any more than sell at the lower market price. But what about those outstanding mortgages? What about them? When housing markets fall, you can buy a new home at a lower price than you would have had to pay before. Nothing prevents a homeowner from assuming a new, lower mortgage, to supplement what remains of an old one. It really doesn't make any difference.The ensured-gain mentality worked well during the postwar economic boom, when average wages increased faster than the inflation rate. Now that most Americans are earning less every year, however, this reasoning has caused the real estate market in many regions of the country to stagnate. In addition, interest rates on mortgages are higher than they were in the 1970s, making it even more difficult for post-Boomers to buy. Pig-headed owners refuse to accept less than what they paid, so young adults are now being forced to keep renting much longer than previous generations. In 1980, the average home sold for $69,000 and the average first home owner was 28 years old. Now, with wages no higher than they were in 1980, the same home costs $148,000 and the average new buyer is 32.The real estate profit fetish makes even less sense when one considers the following factors:Market Relativity: Taking a loss on a house has no net negative effect in a market that is declining overall. If, for example, you buy a house for $200,000 but can only sell it for $100,000, that typically means that other houses that formerly cost $200,000 are also now worth only $100,000. So the money you get from selling your old place gets you into a new residence that's no worse than your old one.Depreciation: As with cars, and time take their toll on a home, making it worth less for accounting purposes. The IRS, recognizing this fact, taxes you on the difference between the selling price and the depreciated value -- not the purchase price -- when you sell. But people still buy $30,000 cars for which they'll be lucky to get $8,000 in five years, because they enjoy the use of the vehicle during that time. Homeowners get the use of their houses as well--so, in the absence of some special circumstance like discovering oil in the backyard, why should their properties appreciate while they're living there? There is no free lunch -- except for property owners.Real Estate Is a Lousy Investment: Even during the boom of the '70s, it was extremely rare for real estate to outpace the rate of inflation. Houses are really for people to live in; investors looking for big returns ought to call Merrill Lynch.It's time for Americans to stop viewing their domiciles as cash cows and for the government to end its use of the tax code to prop up economic activity based on zero productivity. Changing the names on a deed creates nothing. In fact, the only discernible function of real estate speculation is to doom an entire generation of young people to lives as rent serfs. Unlike fixed mortgages, rent can increase at a landlord's whim (except in a few cities), making it difficult for renters to have the spare cash to make productive investments in the markets, buy consumer goods or even afford to have children. It isn't overstating the issue to say that creating a nation of renters damages the economy, alienates younger citizens and thus contributes to social instability. If you own a house, do the patriotic thing: Sell the damn thing!