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

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.

Even if home equity generates modest positive after-tax returns, the big danger with buying is the vast variations in local housing markets. Many people who bought Manhattan real estate in the early 1970s (and still own it) are now rich, especially compared with renters who don't have the benefit of rent control. The same can't be said for those who bought in Detroit 40 years ago. Making matters worse, housing is an investment that is highly correlated to your income, since you live where you work.


When it comes to consumption, buying a home is attractive if you don't plan on moving for a long time because fixed-rate amortizing mortgages let you lock in your cost of shelter. (The downside is that you can end up in trouble if you lose your job or have to take a pay cut.) Rents tend to rise over time, so ownership can end up saving you a lot of money on the consumption side of the equation if you intend to stay put. Also, homes available for purchase tend to be nicer and larger than those on the rental market.

Ideally, there would be a way for people to separate payments for shelter from investments in individual properties. Even better, people ought to be able to diversify their holdings of real estate without literally buying houses all over the country. Nobody puts all their money into just one stock in the Standard & Poor's 500 Index when they want exposure to the U.S. equities market.

Here's one way to imagine how this might work: Most housing would be owned and rented out by large companies that sell real estate-investment trust shares to the public. Instead of paying a mortgage, which includes both principal and interest, you would pay rent and have the option to accumulate shares in residential REITs. Since the REITs would be diversified, those shares ought to be less volatile than the equity in many individual residences.

Moving to another home wouldn't affect your ability to accumulate housing wealth since you could take your REIT shares with you wherever you went. And the best part is that you wouldn't have to worry too much about rising rents since that money would flow back to you through your REIT shares. As a bonus, concerns about growing wealth inequality due to rising home values would be less salient if everyone could easily buy stakes -- even small ones -- in many homes across the country.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)

To contact the writer of this article: Matthew C. Klein at mklein62@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.