If a house is a purchase, why should one expect it to grow in value or even hold its value? When you buy a car, you don't complain that after paying off the loan it's worth less than when you bought it. There's wear and tear, introduction of newer competing products, and the newer products have more features. The same goes for a house, but on a larger scale: wear and tear/maintenace, new housing developments, new features such as central air or modern design. We accept the depreciation of the car because the benefit we get from the use of that car is very tangible. People aren't willing to put any monetary value on the benefit of owning a home - they expect negative depreciation on their purchase! As far as a house being an "essential" purchase, in most areas of the US a car is just as an "essential" purchase as a house. The alternative to owning a car is leasing one - analagous to renting.

But I've heard many people say that buying a house is so much different than buying a car. I don't agree, but the argument seems to be that a house is an investment rather than solely a purchase. If so, let's compare this investment to other investments like a mutual fund, bonds, etc. There are few investments that carries any sort of guarantee that you will not lose principal - savings and government bonds. The safety of this investment is offset by the low rates of return offered on savings accounts and CDs. If you wish to have a higher rate of return, you assume the risk that you could lose the entire principal. If you don't have the cash on hand to make a particular investment, you can borrow money but are subject to a margin call if prices drop too much. Except in cases of corporate malfeasance, people accept these losses and the prossibility of margin calls without requesting government intervention (unless their names are Citigroup or Bear Stearns).

So, which is it? Is a house a purchase of an asset that one should expect some amount of depreciation? Or is a house an investment made with borrowed money and subject to a margin call (foreclosure)?

And finally, why should I (i.e. the government) pay for the depreciation of some people's assets or provide backing to help people avoid (really just delay since they are obviously over extended) margin calls on their investments?

Q: "And finally, why should I (i.e. the government) pay for the depreciation of some people's assets or provide backing to help people avoid (really just delay since they are obviously over extended) margin calls on their investments?"

A: Because the lenders swindled the lendees into believing that they could afford the loans. A legal loan is not necessarily an ethical loan.

In my opinion, the lenders should pay for all of this, not me, you, or the government.

= Because the lenders swindled the lendees into
= believing that they could afford the loans

Yeah, heaven knows that people can't figure out that not paying off the principal on a loan means that you'll never pay it off. And they sure can't be expected to find online calculators, or talk to their friends, or get a second opinion.

= A legal loan is not necessarily an ethical loan.

But a legal loan, is -- by definition -- not a swindle.

The government is to blame for the problem. They could have enacted laws to prevent this, like for example, requiring a down payment. Greenspan, however, encouraged the lenders to make the bubble which is now bursting.

mike_in_nm:

Q: "And finally, why should I (i.e. the government) pay for the depreciation of some people's assets or provide backing to help people avoid (really just delay since they are obviously over extended) margin calls on their investments?"

A: Because the lenders swindled the lendees into believing that they could afford the loans. A legal loan is not necessarily an ethical loan.

In my opinion, the lenders should pay for all of this, not me, you, or the government.

And the borrowers are justified in blindly trusing a lender that they could magically now afford a house which had been beyond their means at a significantly lower price a year or two prior?

Also, the lenders are paying dearly for much of this. Many of the lenders operated on a business model dependent on the continual increase of prices attached to the properities which served as collateral when they re-sold their loans to get money to fund the next round of lending. Many of these lenders have gone out of business (with the less ethical fly-by-night operators likely leading the charge), or have seen their businesses decimated over the last year, and the larger banks around the world who bought some of the loans are writing off billions of dollars in losses on those deals, and the bond insurers who backed many of these deals are in serious trouble (which is already sending shockwaves through municiapal bond auctions, as those bonds are also insured by the same companies). Many of these loans are also held by such greedy capitalist swindlers as 401(k) plans, union and public employee pensions, and even public school districts in some cases.

The flip side is that virtually all of the proposed policy attempts to reduce foreclosures will, one way or another, lead to higher mortgage rates (if mortgage loans are made redefinable by judges the way credit card terms are, increased rates would result from increased risk to the lenders, and if bond-holders are held liable for the practices of lenders then the increased risk premium will flow all the way down to the borrowers), which will in turn depress housing prices further, possibly triggering another wave of foreclosures down the line.

Finally, the case of lower income homeowners being foreclosed out of where they live way well be a minority of the foreclosures at this point, at least in many of the largest and most active markets. In the "bubble" markets, affordibility of housing has been a largely theoretical concept for the last 3-4 years with speculative "flippers" driving up prices rapidly (aided by more and more exotic loans) to the point where somewhere in the range of 80%+ of sales in California were to current homeowners in 2005 (much of the speculative money in L.A. got driven across state lines to help fuel bubbles in Phoenix and Vegas as well). Many of the current foreclosures are likely these speculators handing over the keys to houses they don't live in themselves and had hoped to re-sell at a profit before their ARMs adjusted (which fits the current break with the normal pattern of credit card/auto loan delinquencies and defaults leading mortgage defaults, this time it's the other way around).

Not that lower income homeowners will be unaffected, but anyone who can afford their house and intends to live in it for at least 10 years should be able to ride out a "paper loss" of a temporary decrease in it's value (since this doesn't cost them money in any direct sense). If the natural cycle of things is finally allowed to run its course, then at the end housing will be much more affordable for everyone, and the longer term benefit to the greater number of people should become apparent through the shorter term pain for the relative few.

The price of both houses and cars reflect supply and demand. Some of the reason that cars lose value over time is that older cars are simply less reliable than new cars, and cars aren't scarce. The reason that cars immediately lose value once they are taken off the new car lot is explained by the market for lemons: <link>. The basic idea is that the seller knows more about the condition of the car than the buyer, so the buyer has to price in the chance that the car is a lemon in his valuation.

Compare this to houses. When you buy a house, you are also buying the land it sits on. No one else can buy another house on that same plot of land. If land is scarce in that area, this will tend to push up prices. If you walk into a Ford dealer looking to buy a new blue Taurus, it typically doesn't matter if someone else buys a blue Taurus 5 minutes before you do: the dealer has more to offer, and they are all going to be the same (or similar enough). But if someone's offer on a specific house is accepted before you get to make your offer, you lose and no other house is on that same plot of land (of course, right now as housing inventories rise, there may be close substitutes, this is part of the reason why prices are falling). Often times it is the land, rather than the condition of the home, that drives much of the price. Inspections are also common in home transactions, so it is difficult to hide the lemon-ness of a house anyway.

Home purchases are both investments and consumption. People have practical reasons to want to pay more money for more space in a given location, or to choose one location over another (for reasons like better school districts, safer neighborhood, etc): this is consumption. But the market invites speculators as well who will never use the homes they buy as residences. This is investment, because only the cash flows matter here. It can also be viewed as a mixture for some home buyers: a family may choose to buy a home as consumption (to live there), but may choose a particular location over another because of a belief that the area will appreciate more quickly, treating the purchase partially as a speculative investment.

I don't think the distinction between cars and houses is as clear cut as NotAGenius claims. Sure there are less houses/lots as cars - that's one reason they cost more - but all the arguments about why a house/lot is a special purchase have straightforward analogies when buying a car.

For instance, if I want a blue Ford Taurus (or a particular house and associated lot) and someone else comes in and buys one, I may be able to find another blue one (equivalently attractive house and lot) or would be willing to settle for a different color (similar house in a different but equivalent neighborhood). If I want a blue Corvette Z06 with a particular option package because I like high-performance cars (a particularly nice house in a good school district because I value my kids' education) then because there are significantly less of them available I would have to move fast or possibly loose the opportunity to get that car (house in a particular school district, etc.) Also, there is (was) a demand for new houses in areas where there are used houses on the market.

This implies there is an implicit premium for newer houses (e.g. wtih central air, better styling, newer sidewalks, etc.) Just as cars 15 years ago didn't come standard with A/C, ABS, airbags, passenger airbags, side-impact airbags, backup-view cameras, traction control, etc., houses built 30 years ago didn't have as standard central air, vaulted ceilings, etc.

Factor all that in with the 6% in transaction costs when selling a house and you could say that a house loses more than 6% of its value immediately on purchase. That's not quite as bad as a car, but still pretty hefty.

Plus, a car that is maintained well can run indefinitely. Sure, after a few years major things can go wrong that necessitate rebuilding/replacing the engine or transmission. It's just like a house which has just been built can be expected (and warrantied) to be problem free for the first few years with perhaps needing minor/major repairs later on (new furnace/heat pump, new roof, etc.). Just as there are particularly old cars which have been maintained well and moderatly old cars which are falling apart, there are houses which are particularly old which have been maintained well and moderately old houses which are falling apart.

I guess I'm trying to get at the point that I see no reason to treat the purchase of a house/lot as fundamentally different from the purchase of a car (except for the magnitude of the purchase). It seems to me that homeowners have been conditioned to believe that they should be getting something more than the house/lot for their purchase. They're getting a house and a lot. They aren't paying rent. Why are we bemoaning that people somehow had had to pay for the house/lot they live in? Why do we find it a shame that their house didn't appreciate in value enough to cover their interest rate?

The same thing goes if you think of purchasing a house/lot to be an investment. Sometimes you lose money in an investment. If you had to borrow the money to make the investment and you lose too much money, you have to make the margin call. Sure we complain when we buy a stock and it tanks. We just don't expect the government to lend us money to stave off the margin call.

If you can afford your mortgage (and you weren't dumb enoungh to get an interest-only or negative-amortization loan) you're getting a house/lot! You may have overpaid for an asset, but you're getting the asset. If you can't afford your mortgage (or got an interest-only or negative-amortization loan) you made an investment on margin with the house/lot as collateral. If you can't make the payments - you made a bad investment. Sell, take your losses to reduce your taxes, and learn from your mistake. If you can't afford to do that without too much pain, you made a really bad investment and shouldn't be investing - in real estate or otherwise.

Zarniwoop, I think your anologies are fine (except for the transaction cost one - that's a liquidity issue, not a market price one), and I agree that there isn't an intrinsic difference between the two (I began by stating they were both subject to supply and demand). But it's an empirical observation that most cars tend to lose value over time while most houses tend to gain or hold their value over the long run, with occasional bursting bubble, like we are seeing right now in many areas. I was merely attempting to explain some reasons for these empirical differences - there's a reason the real estate motto is "location, location, location," and when a particular area of limited capacity is sought after by home buyers, prices are bid up. When a car becomes popular, the manufacturer tends to just make more of them. Of course there are exceptions, as you pointed out.

Anyway, I agree with your conclusion. I made a similar point to your stock comment here: <link>

I saw that other post and realized I had misread your post. I agree about the transaction cost to a certain extent. It's not a "real" drop in value, but it is a loss that you would take if one day after purchasing you sold the house and then bought it back (not feasible, but illustrative).

Swindle: to obtain money or property by fraud or deceit

Just because banks and other lenders found a legal way to steal what little savings working class people had doesn't mean it wasn't deceitful. Banks need to follow laws and regulations. They also need to behave in an ethical and professional manner.

To many believe that in finance whatever you can get away with is OK. There needs to be a "bar" or professional license-granting organization for financial professionals. Lawyers, doctors, teachers, and social workers all have such oversight. Why not those in the banking industry?