Here’s an item I wrote in response to a 400-plus comment thread at James Bednar’s excellent New Jersey Real Estate Report (www.njrereport.com). Much time is spent there fighting over whether the market will go up, down or nowhere. As informed as many particpants are, the back-and-forth- as you might imagine- is tinged with more than a little self-interest. Comments, please, on the following:

Has housing “permanently become a risk-charged, high-flying investment”

This massively long thread has gotten me to thinking about risk. More specifically, it’s gotten me thinking about how people define acceptable vs. unacceptable risk.

Back in our parents’ day (the end of WWII thru the 1970’s), a primary residence was desirable and important in the grand scheme of a family’s finances, but it was never the crown jewel. Families who possessed any significant degree of wealth held that wealth in traditional, liquid investments such as stocks, bonds and money market instruments. Housing was more about emotional security and keeping a roof over one’s head; any appreciation that came a homeowner’s way was considered “gravy”, and annual appreciation rates that barely tracked inflation were considered adequate. And, people hardly ever changed jobs or moved. I can remember going to “mortgage burning” parties of my parents’ friends, celebrating making the last payment on a traditional 30-yr note. RE in those days was a valuable, but not very risky investment.

Fast forward to now. After a gigantic asset bubble burst in the late ’90s; the rise of vehicles that allow owners to liquefy home equity; the spread of hot, cheap money worldwide; and the “nesting” of America spurred by the events of 9/11, the average American family now has over 70% of its wealth tied up in real estate.

So, the question is: now that RE is the preferred means of wealth creation for American families, how far have the stakes been raised? And, how has this elevated risk changed the game forever? Whether the market and home prices are up or down, the public wants and values RE. Even now, even here in permabearland, I don’t hear anyone saying “I don’t ever want to own a home.”. The overwhelming consensus opinion is that homeownership is a desirable thing. But the stakes are bigger, so the risks of ownership are, too.

I have no idea of what the long-term implications of this sea change are. However, I strongly suspect that the extraordinary risk that has been unleashed is a genie that cannot be put back in the bottle.

Anyway, many who post here are- by their own admissions- famously risk-averse. Their “wait things out” stance assumes that at some point of further market decline, the risk of homeownership will recede vs. the perceived benefits. However, what if that point comes…and our risk-averse friends STILL cannot pull the trigger, because falling housing prices are now accompanied by some other troubling external factors, like recession, credit collapse and/or runaway inflation? Even a slow, grinding unwinding of housing prices is bound to be woven into a fabric of some other very unpleasant economic stuff.

Here’s the ultimate question: are we all fighting about the wrong thing? Could it be that whether prices will go up or down isn’t really going to determine the future of housing in America? Could it be that the real problem has been that simply TOO MANY people own houses? And, finally, if housing has permanently become a risk-charged, high-flying investment, what constitutes an appropriate level of American homeownership, and what investment vehicles will replace homeownership for scores of risk-averse Americans?