Wednesday, February 13, 2008

Home Ownership, Saving & Incentives

I think many people will agree that the current financial situation was largely brought on by concerns about sub-prime mortgages. The concerns are varied: unscrupulous brokers pushing complex financing on uninformed buyers; unscrupulous buyers taking advantage of rising home prices and ridiculously priced financing in an effort swap property; confused regulatory agencies that all thought someone else was watching this; and even financial middlemen charged with assessing risk on packaged mortgages before selling them to third parties.

It has also raised concerns about how or whether we view our homes as an investment. Political candidates have even raised concern. According to some candidates, people who looked upon home ownership as a way to save now face a poorer future as their dreams disappear because of an inability to pay the mortgage.

All of this ran through my mind when I looked at an article by Johnathan Clements explaining "Why Your Nest Is Not Your Nest Egg." And while I may disagree with his verb usage (I would suggest "Should Not Be" instead of "Is Not"), the points he makes are all valid. And they are relevant for use in either personal finance or economics classes.

To the personal finance course first: Clements speaks to the fundamental differences between investing directly in real estate and other financial mechanisms, such as savings accounts, stocks, etc. The liquidity aspects related to price and profit realization are substantial. And the expenses involved in buying, holding a selling are an aspect that many overlook. Granted, many of the expenses are related to the fact that the house is not just an investment; it is usually an active home. But that doesn't make the expenses less real. These generally are not concerns when examining other saving vehicles. And then there's the leverage issue that takes us back to original crisis.

For the economics teacher, there are also lessons. One can certainly use housing as a fundamental example of decision-making (buy or rent), examining opportunity costs of both, etc. Additionally, one can look at how the real estate market differs from other financial markets (liquidity, term, risk). There are even topics to relate to fiscal policy, the role of government, and economic institutions. What is the tax break on housing and why is it there? Should government promote home ownership as a social goal? How should it be regulated? Should it be regulated? And how do the rules (formal and informal) and organizations (commercial, political, social) we establish shape our views and direct our choices? These last questions are important, because they again take us back to the original financial crisis. The situation was one of our own making. Emphasize our as the large social collective that is our nation. We have certain thought and beliefs about economic good. We encourage private sector innovation to help promote that good (albeit with a profit motive). And as individuals, we take advantage of the mechanisms in place for our own profit - emotional, physical and financial.

There's a lot to pull out of the topic. And the article is sound, fundamental personal financial education. I strongly encourage you read the article. I look forward to your comments.

1 comment:

Vancouver realtor said...

As a Vancouver real estate agent I should say that owning a house is widely considered to be the social goal, one of the driving forces which help to realize your dreams. However the pressure is to much especially on young couples to achieve their goal in life and they are making premature decisions, taking mortgage without considering their budget and usually overestimate their income. There is nothing wrong with the renting a house scheme as others may disregard it. It`s alway worth to invest in a real estate but a serious and conscious approach is necessary.