A House Divided: Investment or Shelter?

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A House Divided: Investment or Shelter?
Published:    January 23, 2008
Author:    Nicolas P. Retsinas

Dictionaries are not static. Some words go unused for so long that lexicographers dub them archaic. Definitions also gravitate to that catch-bin.

The plummeting housing market has forced a reevaluation, not just of the financial value of a home, but of its meaning. Once just a place for a family to live and take root, the home in recent times has been elevated to Investment Opportunity, a place where you stayed for awhile, made a lot of money, then moved on to the next home-investment.

Is the definition of home about to change once again?

Family sanctuary

When immigrants crowded into this country, they yearned for shelter, a sanctuary in a new land. That shelter could be a tenement, a farmstead, a ramshackle cottage. For families, home had a connotation of safety and stability.

Banks did not lend with 30-year amortizing mortgages, but with 5-year loans and a balloon payment at the term's end. A family needed to amass a 50 percent down payment; few Americans could. So homeownership was neither a plausible individual aspiration nor a policy prescription. The word home had no investment connotations.

The ultrarich owned mansions, but home does not describe those sumptuous resting places on peripatetic journeys: People summered in Newport, wintered in Manhattan, or toured Europe, moor-less, for years. If you had asked an Edith Wharton matron where home was, she would have asked what you meant.

Home as anchor

When the federal government introduced long-term mortgages, people could finally afford to buy their domiciles. The definition of home shifted. A home became an anchor, a stake in the community. Veterans from World War II seized upon the FHA and VA mortgages to sink roots into the middle class; one hallmark of middle-class success was owning a home. The Levittowns and their ilk sprung up. For a machinist at an automobile plant, the American dream was to own a 3-bedroom expandable Cape Cod cottage.

The anchor was construed as just that—an anchor. The home was more a place to live than the linchpin of an investment strategy. Economists praised homeownership as "forced savings": People might eventually pay off their 30-year fixed-rate mortgages, celebrating with neighbors at mortgage-burning parties.

Owners hoped to be upwardly mobile, to get promotions, to find higher-paying jobs. But the house itself was not the catalyst for the increase in wealth. People did move—the starter house (a term now listed as archaic) came first. After a new child, or a promotion, some fortunate families moved to larger homes, often in better neighborhoods. Others expanded a dormer or converted a breezeway. But most home-owning families stayed put, expecting to age in their homes.

This experience was not unique to America. In most of the world, homeownership still carries that expectation of rootedness. Home also represented an asset, but an asset that was illiquid and that was not expected to reap mega-returns. Indeed, many homeowners, coping with repairs, renovations, and taxes, saw their homes as money-pits.

Home as investment

Over the past decade, home became an exciting investment, more a place to buy and sell than to live in. Americans who lacked the prescience to pick up shares in Google or Amazon could buy a house, thereby netting double-digit returns on their investment. People who bought homes expected to sell them at a huge profit. Some owners converted their homes into ATM machines, borrowing against ever-rising equity.

Mortgage products evolved to let everybody, even people with shaky credit and no savings, sign on the dotted line. Some people made their living by buying and selling homes. "Flipper" entered the lexicon. Home might or might not be where the heart is—but home was clearly where the money was.

But 2007 reminded us that this economic juggernaut carries risk. Investors know that the price of all assets rise and fall. In much of the country, home prices are falling.

Soon the dictionary, under home, may shelve "investment" as archaic, reflecting a period of inflated values, easy credit, and wild expectations of profit. The standard usage definition will hark back to the older one: an anchor in a community where a family can live, work, and play.

Future generations may wonder why Americans for a brief stint redefined home into an ultra-profitable financial investment. That frenzy made many people wealthy, but left many others adrift.

About the author
Nicolas P. Retsinas is a lecturer of business administration at Harvard Business School and director of Harvard University's Joint Center for Housing Studies.