Satoshi's Sidewalk #23: Home is Not Where the SOV Is

BREAKING: your home is neither a store of value nor an investment

You’ve been conditioned to believe the home you buy will increase in price, and therefore value, forever. The value of your house magically goes up so when you’re ready to go bigger or retire you can sell for a million dollars or more. Cha-ching! Why does it seem like home prices go up all the time? Increasing home prices are confused as a working store of value (SOV). There are a number of reasons prices could go up: location, neighborhood improvements, updating interior finishes, subject valuation, reduction of property taxes, etc. Market professionals such as real estate agents know implicitly that housing prices go up when mortgage interest rates go down. Market participants rarely make the connection between mortgage rates and interest rates set by the central bank.

Manipulated rates set by central banks reverberate through the entire economy. Housing prices, and real estate more generally, are massively distorted. Homes only appear to be a store of value due to rate manipulation downwards, causing housing prices to rise upwards. Flip the script and you see real estate prices move the other direction. It’s all about the price of debt. Moving rates too low sparks unsustainable production and consumption. No one ever seems to talk about home prices going down. Or that one time home prices were cut in half and the global economy teetered on the edge of collapse. I ‘member.

Your house isn’t a store of value - it’s a mirage of value.

Another whopper: owning a home is “the largest investment most people will make.” Buying a home to live in is not an investment. Building equity in your home by making monthly mortgage payments is not an act of investment. It’s fulfilling a contract. You’re the owner-in-name-only until the title is free and clear. (We’re ignoring the "ackshually, government owns your property” argument for now - it’s not relevant.) The equity built up can be wiped out by a number of outcomes outside of your control. Sounds a bit more risky than what we were told growing up. When home values decline, owner equity is affected first. Equity in your home is not a form of investment or savings.

Remember, I’m talking about your primary residence. Not about the rental property you own for the purpose of collecting rent to stack sats with. That rental is an investment. Shelter as a rentable good is a perfectly fine business plan. Detached homes typically demand a premium over apartments in the rental market for obvious reasons. This is all well and good but is not our focus for today. You have placed capital at risk with the specific intent of providing a service (shelter) for a return.

One might argue Airbnb gives homeowners the opportunity to rent out a spare bedroom for income, therefore the home could be or is now an investment. I’m skeptical. The original purpose of buying the home is to provide shelter for you and yours. Airbnb gives you a new, secondary purpose to rent out a spare bedroom. If you did buy a house solely to rent out the spare bedrooms then 1) don’t tell your bank/city/neighbors and 2) unsubscribe from this newsletter, you psychopath.

If you’re home isn’t an investment or store of value, what is a home?

A home or house, often referred to as a person’s primary residence, is a durable consumer good which provides shelter to the inhabitants. It’s no different than owning a car. The better you take care of your car, the longer it will last. You use the car for specific purposes and don’t expect it to go up in price. Before the Great Depression a home was a large purchase (~2.5x annual household income, today it’s ~6x), and it was not an investment. The house served its purpose and the land could be adapted for another use later. As time passed, the land’s location typically increases in value as cities grow or the land is used for more productive purposes. The house on top of the land slowly erodes in value until it needs a serious HGTV makeover or needs to be scraped. The process of buying a home today is where the SOV/investment confusion is reinforced.

When a homebuyer purchases a home they obtain financing via a mortgage. The terms of the mortgage are what’s important to the borrower. The borrower goes through a qualification process and a maximum monthly payment is determined. The monthly payment and the interest rate dictates what the borrower’s budget is when shopping for a home. Ultra-low mortgage rates increase the borrower’s buying capacity (not purchasing power) without the borrower actually making more money. This is how Joe the Starving Artist and Jane the Underwater Basket Weaver can afford a $1.5M house/renovation on *insert random episode of any HGTV show*. The home purchase (and HGTV network) is only possible with central banks manipulating rates downwards. Fiat money really fucks things up.

Homes under a bitcoin standard can’t be anything more than the durable consumption good they’re intended to be for the buyer. Money can be made on the extra bedroom here and there, sure, but that’s not what’s important. The important element is the homeowner not relying on their home’s price increasing in the hopes of cashing out in the future. A kind of wishful thinking called hopium. Cashing out of your primary residence in the future to retire is a distortion of economic reality. Realizing this reality will be painful and the store of value mirage will be found for what it is - castles built on nothing but sand.