Real Estate: The Better Inflation Hedge

In my previous post, I discussed having a healthy dose of skepticism when one sees a correlation between two variables. The relationship may not hold very well out of sample (such as future performance).

But I also discussed gold as an inflation hedge and I suggested that gold was a lousy inflation hedge in spite of what most people seem to believe.

Today I want to discuss another asset class which, although may or may not be a good inflation hedge, is nonetheless a better inflation hedge than gold. Furthermore, this asset class has many other attractive features that suggest it should be pursued before gold if you're looking for a hedge against inflation.

What is a Financial Bubble? Part I

The idea that drives this metaphor is blowing a bubble. One can blow it larger and larger but eventually it pops. Some economists have denied the existence of bubbles while others have expressed skepticism that the concept is well-defined enough to be scientifically meaningful. Eugene Fama, a prominent supporter of the Efficient Markets Hypothesis, stated as much in an interview in The New Yorker.

I share these reservations over defining a bubble but I still suspect it's a useful concept. As a result, I'd like to explore the issue a bit. I'll be doing so in a series looking at various examples and aspects of financial bubbles in order to get a better grip on whether or not we can give it a meaningful definition.

Is Housing an Investment?

The conventional wisdom says that it is. I'd like to suggest it's a little more complicated than that. Rather than suggesting that housing is an investment, I will argue that housing can be an investment and spell out under what conditions it is.

To some extent I will be relying on the Graham & Dodd definition of an investment. According to Graham & Dodd (from Security Analysis):

An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.

 Regarding speculation, two types of speculation are classified (Graham & Dodd):

1. Intelligent Speculation - The taking of a risk that appears justified after careful weighing of the pros and cons.
2. Unintelligent Speculation - Risk taking without adequate study of the situation.

Most home buyers would classify as not giving "adequate study of the situation".

So when is a house an investment?