Inflation, Houses, and You
It has long been a big part of the American Dream to own your own home, whether a single-family bungalow or a condo or a co-op. That has become even more urgent since inflation became the bugaboo of our lives and drove home prices into the stratosphere in many parts of the USA (especially here in California where I am sitting right now).
Economics is — or should be — about making yourself as happy as possible within your limited means.
But why? Why do we all love property? First of all, we love property because everybody else loves property. It’s a fad, even an obsession, that we should own our own homes. It’s the Hula Hoop of our day.
But it’s much more than that. There are authentic reasons based in the arcane system of economics, the dismal science that showers so many good things on those who bother to learn anything about it.
Reasons for Homeownership
First of all, turn to that perennial: how do homes compare with government bonds?
If you bought a government bond, you would get a coupon every month or every quarter or at some other interval. The payments on that bond would be fully taxable at the federal level. When it came time to sell it, if there were a capital gain that income would be fully taxable.
In fact, a large portion of the government’s income that year would come from taxing the income on your bonds, either as regular coupons or from capital gains on those same bonds.
If you bought a home, the “income” from your home would mostly consist of the enjoyment you derived from living in and occupying that home. It is not considered taxable income under the Internal Revenue Code.
However, any gain you and your family enjoyed would be considered “capital gains” income. At some points it would have been taxed at far lower rates than earned income, i.e., income from actual labor. Nowadays, the rate fluctuates quite considerably, but as income tax rates change, the differential between earned income tax rates and capital gains rates has narrowed.
Homes as a Hedge Against Inflation
Two: Inflation: We all observe that what we might call “hard goods,” brick and mortar and soil, rise rapidly as inflation gnaws at the economy. Radio waves as transmitted by the Internet tend to drop in value and in cost. Investing in the Internet seems to drop in both value and cost as the costs involved in making the content of the Internet fall.
A home is a combination of labor and materials that tends to rise in value as inflation roars along. Plus — and this is important — it tends to create value as time passes, even as high tech tends to fall. Plus, as environmentalists make building a home ever more difficult, the value of a home rises just as the value of a medical degree rises as ever more restrictions are placed on that MD.
Three — and this is highly subjective — many years ago, I had the great pleasure of having a lengthy conversation with America’s greatest economist, Milton Friedman. Dr. Friedman was asked by me what the single best investment would be as far as he was concerned.
“Whatever you enjoy the most,” answered the great man. “If new shirts from Brooks Brothers make you happy, buy them and wear them. If a date with a girl in your class makes you salivate, ask her out and don’t pay attention to the cost.”
(I do not pretend that these are exact quotations from Friedman. They were part of a lengthy conversation, much of which would now be considered not just politically incorrect but sinfully incorrect, most of it coming from Ben Stein.)
In times of painful inflation, Friedman noted that some of the sting could be taken out of the equation by the simple expedient of making yourself happy. This certainly has been my experience as well.
Economics is — or should be — about making yourself as happy as possible within your limited means. It has always made sense to me.
(This file is licensed under the Creative CommonsAttribution-Share Alike 4.0 International license.)
(http://reason.com/blog/2012/07/31/vid-happy-100th-birthday-to-milton-fried)
READ MORE from Ben Stein:
Indispensable Lessons From My Life
The Mrs. Nixon I Have Always Loved
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