I recently wrote a post stating that I would not be shocked if we end up having another real estate bubble.  The government and the Fed are engaging in policies that distort the market and it is quite likely that some of this capital is being directed (or misdirected) into housing.

I received a comment from that post that said the following:

“You’ve recommended buying real estate as an investment, and I’m curious why that is?  What makes a single family home or a duplex a suitable investment rather than a depreciating good like a car, other than the hope that inflation might outpace the depreciation?  Just wondering what your thoughts are.  Thanks.”

As stated above, I have recommended buying investment real estate several times.  I have said this without thinking that there will necessarily be another real estate bubble.  I have multiple reasons for liking the prospects of investment real estate.  It helps that prices are much lower than they were 5 years ago.  Housing would not have been a good investment in most places 5 years ago when you can now buy in some places for almost half the price.

I also like investment real estate because of Federal Reserve policy.  With huge deficit spending and other problems still to come (like the massive unfunded liabilities), I think the Fed will continue to pursue monetary inflation, at least until price inflation gets out of control.  Since houses are hard assets, they can benefit from inflation, or at least provide some wealth protection.

It also helps that you can get a 30-year fixed-rate mortgage for under 4 percent right now.  You get to borrow money at a low and fixed rate and have your renters pay it off.  If inflation continues, then you will pay off your loan with depreciating money.

In response to the question about buying housing versus buying a depreciating good like a car, the question already has the answer.  A car is a depreciating asset.  The more you drive a car (and even if you don’t drive it) the less it is worth.  The engine wears down fast.  While both cars and houses are consumer goods, houses hold their values better.  There are repairs involved with housing too, but there are many houses that are decades old and still in good shape.  That is rare for cars.

If price inflation is bad enough, then perhaps the nominal price of a car could go up.  But the real (inflation adjusted) price will almost always go down, unless you foresee a huge shortage in cars.

The other major difference between houses and cars is that you can continue to rent out a house.  I don’t really know anyone who rents out cars, other than car companies and rental companies.  Rents are another hedge against inflation.  Rental prices for housing are likely to go up in an inflationary environment.  Even if rents do not go up as much as price inflation, you don’t need to worry as a landlord.  You may have some variabilities with taxes, repairs, and insurance, but your biggest cost is fixed.  It is even better once you pay off your loan.  So your revenue should go up more than your expenses, at least over time.

If you personally need a car to drive, it may be a good time to make a purchase if you can get good terms on a loan.  But it is only an investment in that it can get you to work and to the store.  It is more of a necessity than an investment.  But I do not see it making sense as an investment in the sense that you would buy investment real estate.

One other thing to note is that housing has an advantage even against other hard assets like gold.  As stated above, you can rent out your investment housing.  It is much easier to buy gold.  It is much easier to hold your gold.  And gold is a good hedge against inflation.  But you aren’t going to rent out your gold.  You will rent out your investment housing, which will help you pay for it and will provide a nice stream of income if you accumulate enough and start to pay off loans.  It is more work, but most things aren’t free and easy in this world.  If you get any appreciation on the price of your housing, that will be like icing on the cake.