It was remarkable to read the headline: Fed Economist: Housing Is a Lousy Investment this morning, especially when it was written by a Federal Reserve economist at a time when much of the Fed's efforts are aimed at stabilizing the still flailing housing market. 

As a mortgage professional who has helped many homeowners use their home equity to accomplish a myriad of financial objectives, I feel the need to rebut the factors Karen Pence claims “make homes a lousy investment”. Today I’ll tackle factors #1 & #2— a rebuttal to factor 3, 4 & 5 to come.

PENCE'S FACTOR #1:

A house is an indivisible asset.   If you own stocks and bonds and suddenly need a little cash, you can sell some of your stocks and 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”.

MY REBUTTAL
Homeownership is not meant to be a short term “divisible” investment, and therefore whether the house is ‘indivisible’ is inconsequential for most homeowners. Also, I question how “indivisible” stocks and bonds are?  If they are housed in the standard vehicle afforded to most Americans, the 401k, just “selling some stocks and bonds” comes with a hefty tax penalty.  And despite recent mortgage guideline tightening, home equity lines of credit and reverse mortgages still allow borrowers to access a “slice” of the equity in a crunch.

For working, tax paying homeowners, with some simple financial mortgage planning, the mortgage interest write off can generate a yearly tax refund allowing the homeowner to accumulate a liquid emergency account at the end of a given tax year. That benefit wouldn’t be available to a working tax paying renter.

PENCE'S FACTOR #2:

It is undiversified: You can buy stocks and bonds in industries or countries all over the world.  A home is a bet on one single neighborhood.

MY REBUTTAL
Homeownership should always be considered part of a diversified investment plan.  There is security in the fact that it is a bet on one neighborhood; doesn’t that make the value trend easier to track?  You watch the local public records to see what sells, look at the "For Sale" signs to track listing prices, and you have a pretty easy gauge of the value of your asset. A bit more transparent then perusing prospectuses from “industries and countries all over the world” who hopefully haven’t adopted reporting standards on a par with Mr. Madoff and his kin.

A borrower with a $150,000 mortgage at 5% has a potential tax write off of $7400/year.  That’s $7400 he/she would otherwise be giving to the Federal government, which is undoubtedly a far worse investment choice than a home purchase, given the current deficit projections for 2010.
 
Stay tuned for Part II—I hope other mortgage professionals will jump in with their rebuttals as well....