Over the past couple of years, we’ve had time to reflect. Most of us found a lot of time on our hands,
and many of us used that gift to enhance our most significant invest — the home that shelters us.
You might wonder, isn’t a retirement account one’s major savings vehicle? Yes, it is an important avenue to save and accumulate wealth for retirement. Indeed, one may have a variety of sectors in a retirement portfolio, from money market to bonds to stocks, and even real estate investment trusts (REITs). They all provide a store of value and offer a return proportional to their risk.
Our homes do that as well. Indeed, real estate of all sorts has of late and over the decades been an excellent investment vehicle that offers a risk-adjusted rate of return commensurate with other investment opportunities.
One’s rental property is also an excellent investment vehicle. But there is something special about investment in one’s home. Not only does the home increase in value with the prevailing increase in real estate across the nation and especially real estate in our region, but it also offers a bonus to the owner and no one else. It provides for a flow of consumption services economists call housing.
In other words, as we improve our home, not only does its investment value go up, but so does its flow of housing services to us, the owner. We can take double pleasure that the updated kitchen, the fresh coat of paint or the new deck increase our housing value and also our enjoyment. This is something every homeowner wrestles with. I may like that funky and unique bathroom design, but I must also be mindful of how others appreciate my funk. If they do not, I may be indulging my own desire to improve on the consumption of housing services, but at the potential expense of the depreciation of my housing asset.
Millions of people across the country have been working that equation in their heads over the past couple of years. With lots of time and pent-up energy on our hands, demand for the products of building supply stores, architects, house painters, and builders has been through the roof (no pun intended). The stock in corporations related to home improvement have been on the rise, lumber prices touched historical highs and building permits have rebounded nicely after the post-Great Recession depression.
This renewal of housing investment has some unintended consequences, though. First, it is clear that we must rebuild a supply chain that we once thought was robust and the envy of the western world. Clearly there are long delays for contractors because they can’t get their components in on a timely basis. Even some major construction in our region has come to a standstill because parts promised have not been delivered. It is likely to be some time before this new supply chain is normalized. That is all part of the new normal which is the constant refrain.
Second, housing prices have gone through the roof, because of our accelerated investment, our reflection on where we want to live and because of our reassessment of what housing consumption we want.
Third, the dramatic shift in the pattern of our consumption has made billions for some corporations such as Amazon, and for the aforementioned building supply sectors, among others. Some very wealthy corporations and individuals became incredibly wealthier in the past couple of years. No doubt many of you also saw a nice run up in your own retirement investment portfolios.
The problem is that we have created asset bubbles, both in the stock and the residential housing markets. We will have to see what happens to those bubbles once interest rates rise to more historically regular levels. Many think that will cause some deflation in both the stock and the housing markets. That correction might be a healthy one. While any such correction is not without some financial pain, it may also give us another opportunity to reflect.
Indeed, we should not be surprised if we respond the same way as we did in the COVID era that induced us to invest in our homes in the first place. We may recognize that we may be living in our homes for longer than we might have imagined just a year ago. Indeed, there may be a point where we realize we cannot, in the short term, get out of our home as much financially as we have invested in it. With that recognition may come a renewal of the sentiment that our home is our castle, and we should focus on deriving as much enjoyment from that flow of housing services as we possibly can. If so, the past mantra of “flip that house” might revert to “enjoy that home”.
In the process, I expect we will maintain what has been a steady flow of purchases at building supply stores and contracts with local tradespeople. As you know, the trades have been overwhelmed with work of late, so we must be patient. But we should also remember that this is a labor of love, and improvements in our home should not be rushed and should be contemplated for the long haul.
Our young people too might take note. The trades find it hard to attract people into their professions. These are good jobs with strong career prospects and with the nice feature that those employed in helping homeowners add to their housing capital stock are also part of a profession that brings dreams to reality.
Dr. Colin Read is a professor of economics and finance at SUNY Plattsburgh’s School of Business & Economics. You can read his weekly blogs on the economy at www.everybodysbusiness.online.