Last year, 1.7 million homeowners escaped negative equity positions, according to CoreLogic. Above, rows of homes stand in a housing development in Mesa, Ariz. (Justin Sullivan, Getty Images / March 6, 2013)
On June 22, 2013, Andrew Khouri writes in the Los Angeles Times:
Five years after the financial crisis, a new sobriety among homeowners and lenders has taken hold, tempering economic growth as consumers keep more money in their pockets.
That’s a good thing, in the long term… During the boom, homeowners with low credit scores were much more likely than others to borrow against their home equity, he said. Today, many of those people either can’t qualify for a loan or have lost their home to foreclosure.
Home prices rose 16.6% in Los Angeles in March compared with a year earlier, according to the Standard & Poor’s/Case-Shiller index. The index of 20 cities jumped 10.9% on the whole.
That has banks more willing to allow people to tap their homes’ equity. Wells Fargo & Co., the nation’s largest mortgage lender, has seen more demand for home equity products, especially in regions with steep home price increases, such as Los Angeles, said Kelly Kockos, a senior vice president at Wells Fargo.
But the mind-set has changed. The inquiries are more focused on much-needed home improvements or debt consolidation, Kockos said.
“It used to be more desire driven — a fancier car or vacation,” she said. “I think people have learned from the past.”
At the Center for Economic and Social Justice (www.cesj.org) we believe that it is important to understand that one’s home is not a capital asset because outside earnings were needed to buy that home. Also as interpreted by federal and state tax law personal residences are classified as consumer goods rather than capital goods.
In their 1967 book, Two-Factor Theory: The Economics of Reality, Louis Kelso and Patricia Hetter stated:
“Consumer goods purchased on credit increase neither the buyer’s income nor his productive power; on the contrary, interest costs … decrease the effective purchasing power of his income to buy useful goods and services. Consumer goods are thus inherently non-financeable. They do not pay their costs of acquisition. They do not produce wealth or income after they have been acquired.” (Page 61)
On page 120 (Ibid.), Kelso and Hetter further state that as one of their thirteen “guiding considerations” for a national legislation to universalize citizen access to capital ownership:
(3) The credit system of the economy should be used primarily to finance new capital formation and the building of new viable capital estates. Only secondarily should it be used to finance consumer goods. Its objective should be to raise productive power so that consumption can be financed as fully as possible out of current earnings rather than out of borrowings. Of course expensive consumer items such as houses and perhaps automobiles may continue to require consumer finance, but, with rising incomes and diminishing prices, it should be easy drastically to shorten credit terms in order to minimize loss of purchasing power through interest.
On page 191, footnote 34 of Two-Factor Theory, Kelso and Hetter state clearly:
It should be obvious that consumer credit widens rather than narrows the purchasing power gap. On conventional twenty-five year installment purchase of a residence, the purchaser pays for more than two houses in order to buy one. And a personal residence is not an income-producing asset.
The definition of a capital asset is one that pays for itself with the future stream of income it produces. It is the capital instruments themselves that, once acquired, will earn the costs of their own formation or purchase.
While a home is a highly prized asset that most consumers traditionally acquire, or seek to acquire, it only produces marketable wealth when it is sold at a appreciated value, which then becomes a capital gain value. In and of itself, a house does not produce marketable goods and services –– wealth –– and thus is not a capital good.
Most obviously, of course, a house does not produce living space. A house is living space. Nothing is self-generated or created. A house-as-house does not produce a house-as-living-space. It is a house-as-living-space.
Even if one would classify a house “use pleasure” as wealth –– a consumption item –– the problem is that pleasure is not itself a marketable good or service, that is, a consumption item. It can be why we consume that item, but it is not itself the item. I cannot sell or convey to you by gift the pleasure I feel. You might take pleasure in the fact that I am feeling pleasure, but that is your pleasure, not mine.
Dwelling in a house can give pleasure. A house is not itself pleasure. Pleasure is the result of using something. It is not itself the thing.
One must not confuse two slightly different definitions of “usufruct,” the fruits of ownership, or “use.” In everyday speech, “use” and “consumption” are synonymous. A “consumer” when he or she purchases and drives an automobile, is consuming the automobile in the sense that he or she is putting it to its proper use.
There is, however, another meaning of “consume.” This is in the sense of “use up” rather than simply “use.”
There are thus two classes of consumption items. There are those that are “consumed by their use,” such as food and drink. There are also items that are not consumed by their use, and for which the wearing out or “using up” is incidental to the item’s proper use, such as clothing, cars, and houses.
You cannot rent food and drink if the food and drink are put to their proper use. This is because you cannot separate the item from the use of the item. You can only rent something when the item itself can be returned, that is, you can separate the use of the item from the item itself; you can purchase the use of the item without purchasing the item.
Thus, a house can only be classified as a capital good if it is rented and rental income is returned to its owner(s).
On the country, there is no income generation in a personal residence from either the living space or the pleasure the owner takes in its use. You cannot go to the mortgage lender and tell him or her that he or she can accept your use, or pleasure in that use in settlement of the debt.
Only a capital good will earn the costs of its own formation or purchase. A capital good produces marketable goods and services which, when sold, meet the cost of forming that same capital. This cost is recovered — not met — through depreciation, tax credits, subsidies, and so on.
In contrast, a consumer good does not produce a marketable good or service. It is the good or service. In order to satisfy the debt — incurred by acquiring the good in the first place –– the money to satisfy the debt must come from some other source.
Thus, because a house used as a primary residence does not in and by itself generate the income to pay for itself, a home is, therefore, not a capital asset. Moreover, with today’s still high rates of official unemployment, underemployment, and millions more who have left the labor force, any single family who purchases a home on credit is exposed to a high risk of default before repaying the lender.
Bottom line: Seek to purchase a home to enjoy in daily use, and financially benefit, if possible through value appreciation, when you sell it.
http://www.latimes.com/business/realestate/la-fi-home-wealth-20130622,0,3549351.story
http://www.latimes.com/business/realestate/la-fi-mortgage-credit-20130622,0,6373202.story
