"Well, actually, it's a good business down here," said our friend at dinner. 

"People buy a lot with a house on it. They want to build a new house. So they give away the house to anyone who will take it away. A friend of ours got one, loaded it on a barge and floated it up the intra-coastal waterway and put it down on another lot. It was beautiful. And she saved a lot of money."

"But she got the house for nothing, right?"

"Right."

Isn't it true, then, that it is not just the appliances, the furniture, the furnishings, and the building materials that lose value over time....but the entire house itself? And isn't that what you would expect? Over time, all physical things wear out. Metal corrodes, plastics warp and fade, fabrics weaken. Even granite turns to sand and dust....worn by wind, rain, sun, and cold...eventually.

And we, dear reader. We are no exceptions. We turn to dust too, don't we? And wouldn't it be an affront to all the world if we didn't? 

But before we move on to our next point, we would like to call our first surprise witness: the célèbre architect Le Corbusier.

It will be a surprise to us if the man actually comes to the witness stand, for he has been dead for over half a century. But we would like ask him some questions anyway.

"Please just answer yes or no," we begin. "Isn't it true that you are...or were...one of the world's most famous architects?"

"Yes," answers Le Corbusier's ghost.

"And isn't it also true that you designed many houses during your career."

"Yes."

"And so it might be said that you were an expert on domestic architecture.

"Yes, that is right."

"And in your expert opinion, which you expressed whenever you had the chance, a house really was nothing more...and here we quote your exact words...than 'a machine for living?'"

"Yes."

"In other words, in your opinion, a house is just like a dishwasher, or a refrigerator...or an automobile...isn't that right...?"

"Yes."

"And since a house is no different from any other machine...isn't it logical and correct to think that it will wear out..."

"Yes."

"And since it will wear out like any other machine...isn't it logical and correct to think that its price will fall....JUST LIKE ANY OTHER HOUSEHOLD APPLIANCE OR MACHINE....?!"

At this point in the proceeding, the opposing attorney rises from his chair...

"Counsel is asking the witness to speculate about things he knows nothing about..."

We take the point. Neither the world's most famous architect, nor even we, can say what will happen. So, we content ourselves to direct your attention, dear reader, to what has always happened: Over time, almost all things man creates depreciates. Even the tax code recognizes it...allowing a taxpayer to write off the value of a new building, even a house, over a few decades. At the end of the period, the building is presumed to be worthless.

But let us move along. Next witness! We call Mr. Hubert Homeowner.

"Mr. Homeowner," we commence, "you are the owner of an averagish house, wouldn't you say? Well, just stop us if we're wrong...we're just reading from the dossier...

"Your house has risen at nearly double-digit rates for about the last 8 years, isn't that right? And you have cleverly taken advantage of that, isn't that right? Isn't it true that you've refinanced your house 3 times in the last 5 years, partly to get a lower interest rate and partly to get some extra cash? And isn't it true that you used some of that cash to build a new sunroom on the house and upgrade the kitchen?

"Now, you consider yourself a smart man. Those improvements to the house certainly improved your enjoyment of the property. But would you describe them as good investments?

"You would. Because the house itself has been a very good investment for you, hasn't it? You only put down $15,000 when you bought it 8 years ago. The return on that investment has been spectacular. And so, you feel that improving the quality of the asset is a good investment too, right?

"But you've listened to the testimony so far. In light of what has been said about the normal depreciation of a house and its contents, how do you reconcile the two points of view? Isn't it perhaps more true to say that the new kitchen was a lifestyle improvement...which you could afford because the house itself has gained value?

"Okay...yes...maybe that is a better way to put it. And, yes...of course, these things make the house easier to sell. But then, isn't it also true that if you don't make these sorts of upgrades, your house will be harder to sell? So, in fact, you really have to make them, don't you...if you want to maintain the house's value?

"Wait, I can see you're struggling with that idea...because all houses have gone up in price, haven't they? Even some of your neighbors who didn't make these improvements have been able to sell at higher prices, isn't that correct? So, at least in this market, the improvement may not be necessary. If property prices were stable, on the other hand, do you think you could get away without making improvements? Hard to say, isn't it? But certainly you'd have to replace the roof from time to time. And paint. And put in new carpets. And, yes, probably upgrade the kitchen and so forth.

"So, isn't it safe to say that owning a home actually imposes some costs on its proprietor? Even if the house is not going up in value?

"Yes? 

"Still, you consider your house your major asset, are we right about that?

"Yes?

"But it is a funny asset, isn't it? You get to live in it, which is a bit like a dividend or interest coupon. But you also have to take care of it...and spend money on it...if you want it to hold its value. And, all things considered, the physical thing - the house itself...if you could separate it from the ground that it is on....would naturally lose value over time, right?

"Strange asset, isn't it.

"And yet, you say that your house has gone up in value - dramatically - over the past 8 years. Not only that, but almost every house you know about has done the same. That is real money, isn't it? We mean, you can take the equity out if you want. You refinance your house to get it. And then you can take it and spend it just like any other dollars you get. We see here in your dossier that you bought all kinds of things, including a new bicycle for your boy, Huey.

"Can you tell us where that bicycle was made?

"China? 

"How about that. You were able to take out this 'equity' from your house and trade it for a bicycle that came all the way from China. It's a remarkable world, isn't it? We mean, you didn't have to work an extra minute for that bike, did you? You didn't win it...no one gave it to you...you didn't have to save for it or start a business or make a profit. It came almost like magic from the 'equity' buildup in your house.

"Amazing.

"Well, what do you think about this stuff called 'equity?' What do you think it really is? Where does it come from? How come the Chinese guy didn't take the equity out of his house and buy the bike himself? 

"Your house is worth about $200,000 if we have our information correct. Let's see, if prices in your area were rising at about 10% per year, that would be an increase in your wealth - tax free, we might add - of about $20,000 per year. Not bad. That's about 10 times the average income in China. And you get it without lifting a finger. 

"And...let's see...your household income is about $80,000 per year. Or, about $60,000 after you've paid taxes. And, well...don't you think it is remarkable that you get another $20,000 to spend...equal to a third of your disposable income...without doing anything for it? How is that possible? Where does the money come from? 

"Yes, it comes from an increase in the value of your house...but how? How is it possible, that after all we've heard about the depreciating value of your house and all its contents...that YOUR house seems to go in the opposite direction? Everything else - even natural stone - deteriorates, degrades, deflates, depreciates...but your house! Your house gets better...more valuable...more desirable...more fetching and more appealing every blooming day. Your wife doesn't get better looking every day, does she? We mean...looking at the matter objectively, of course. But, somehow, your house does. How is that possible? It seems almost to violate a law of nature...it almost seems an affront to God himself, doesn't it? He made the world and everything in it to decline with time...and your house stands like a beacon out of time and space...out of this world, almost...somehow resisting all His efforts to take it down...to reduce it...to make it bend to His laws. HOW IS IT POSSIBLE?"

"Objection, counsel is badgering the witness."

"May I be excused?" asks the homeowner.

Yes. And so may you, dear reader. At least for now. Tune in next week, when we call our star witness: you.

More to come...