As Dr. Reisman has pointed out in Capitalism and in his recent post, houses should not be regarded as investments. Houses are depreciating consumer goods although the rate of depreciation is slower than many consumer goods. So why do people regard houses as investments and often see equity in their home as a primary savings vehicle? Quoting Dr. Reisman:
Only decades of inflation and credit expansion could make it possible for people to think of the houses they occupy as an investment. In reality, a house is a consumers’ good, just like an automobile or a refrigerator. The only difference is that it depreciates more slowly than they do. Only a long string of years in which inflation took place more rapidly than houses depreciated enabled their prices to rise every year and people to come to regard them as a source of financial gain. If not for inflation and the rise in prices that it produces, it would be very clear that housing is a wasting asset, a slowly wasting asset to be sure, but a wasting asset nonetheless.
As this chart shows, when you express the price of a house in terms of another real asset like gold (as opposed to government dollars), you can see that the price of houses is currently the same price as it was in 1900. The house itself depreciates and the land should stay about even with gold so this chart is about what you would expect.
Another way in which the government fuels the illusion that housing is an investment is by effectively subsidizing the real estate market. It does this in two primary ways.
One way it does this is through FNMA, FHLMA, and GNMA (Fannie Mae, Freddie Mac and Ginnie Mae as they are popularly called) which underwrite pools of mortgage loans. In other words, mortgage banks can sell pools of mortgages to these companies who are tacitly supported by the federal government. This means that mortgage banks are more likely to lend than they otherwise would be if they were on the hook.
The second way is through the mortgage tax deduction. This deduction allows one to deduct mortgage interest against their taxable income. This creates the illusion that the home owner is getting a discount on their mortgage. However, I would argue that all it does is raise home prices so that you are no better off. For example, imagine that the government gave everyone a pizza subsidy. At first, you might pay $2 for pizza that originally cost $3. However, this subsidy would increase aggregate demand for pizza and ultimately the cost of pizza would rise to say $4. Then with your $1 subsidy, pizza would again cost $3 so that you are no better off. In housing, this tax deduction enables people to buy more house than otherwise so it increases aggregate demand for housing. I believe this generally has increased the price level of houses more than otherwise so that the mortgage deduction is actually a facade in terms of real savings.
In all, the government policy of inflation and housing subsidies has created a situation in which a large portion of our nations' savings has been poured into the equivalent of refrigerators. The world is now beginning to realize the consequences of this mistake.