Fed Economist Claims That Owning a Home is a Poor Investment Choice

According to the Wall Street Journal (link below), Karen Pence of the Federal Reserve believes that "homes are actually a terrible investment".

The WSJ claims that Pence made the comments at an American Economic Association meeting last week. The WSJ states that Pence was merely speaking for herself when she made the comments, and was in no way speaking on behalf of the Federal Reserve.

According to her profile on FederalReserve.gov, Karen Pence is Chief of the Household and Real Estate Finance Section of the Federal Reserve, which is a division of Research and Statistics. Pence has a Ph.D in Economics and currently sits on the Board of Governors of the Federal Reserve System.

Pence argued that buying a home is a bad idea for five major reasons:

1. Homes are an indivisible asset, meaning that you can't sell off a small piece of it (like you could with a stock, for instance) to raise cash. It's either all or nothing.

2. Unlike a portfolio of stock and/or bond investments, you can't diversify when you purchase a home. You are buying a specific house in a specific neighborhood, whereas with a portfolio of stocks, you can buy pieces of companies in different sectors and in different parts of the world.

3. Transaction costs are very high.

4. It's hard to get money out of your home when real estate values are dropping.

5. The value of your home is highly correlated to the job market, meaning that the value of your home is likely to drop if you fall victim to an increase in the unemployment rate. This would serve to be a double-whammy for you financially, as you would be able to raise less cash from the sale of your home when you needed it the most.

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While Pence is certainly entitled to her own opinions, you can't help but think that many in government and at the Fed wish that she would have kept her mouth shut.

I mean, the United States has tried DESPERATELY to re-inflate both the credit bubble and the real estate market over the past couple of years (unsuccessfully).

I wonder how many other people at the Fed think that a home is a poor investment?

Source: WSJ.com - Fed Economist: Housing Is a Lousy Investment


Filed under: General Knowledge



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