Why buy a dumb house?

A good question, according to Karen Pence, who runs the Federal Reserve's household and real estate finance research group. She says home ownership is a terrible investment - and not just because prices have fallen so sharply. Jon Hilsenrath at Real Time Economics outlined some of the problems mentioned by Pence during a meeting this week of the American Economic Association:

--It is an indivisible asset. If you own stocks and bonds and suddenly need a little cash, you can sell some of your stocks or bonds but not all. With a home, on the other hand, "you can't just slice off your bathroom and sell it on the market."

--It is undiversified. You can buy stocks or bonds in industries or countries all over the world. A home is a bet on one single neighborhood.

--It is asymmetrically liquid, meaning it's easy to get money out when home prices are going up. (You just take out a bigger mortgage.) But it's hard to take money out when prices are going down because refinancing becomes more difficult. Put another way, the leverage that you have in your house with a large mortgage means your investment does well in good times but could be lousy in bad times.

--It is highly correlated to the job market, meaning that home prices in a neighborhood tend to rise when the job market is improving in the area and fall when the job market is worsening. This means that your main financial asset provides the smallest cushion to you when you might need it most.

The disadvantages of home ownership have come up a lot in the wake of the mortgage meltdown, though it would have been nice for Federal Reserve officials to be a bit more demonstrative on the subject before matters got out of hand. Maybe they were and no one paid attention. The whole rent vs. buy debate isn't going away, and in some ways that's a good thing. Meanwhile, today's big news is an unexpectedly sharp drop in the number of houses placed under contract in November, a worrisome sign that the real estate slump is not over.