We talk quite a lot about investors and speculators in the housing world these days. People say that “investors” are buying up single-family homes and “speculators” are sitting on empty lots. But the terms are often used interchangeably, or at least imprecisely, with any private for-profit owner other than an individual called an investor, and anyone we really don’t like called a speculator.
But as someone who thinks precision in language is important, I’d like to make the argument that these two words mean something different, and that we would have a clearer view of the housing market if we used them more precisely.
If you are investing in a business, you are giving it some capital that it didn’t have, to get started, or grow, or change. This could be a loan or an equity investment. In exchange for providing this capital, over time you either get a predictable return (interest payments) or you share in the business’s success. Either way, by sharing some of the risk—they might fail and not be able to pay you back—and letting them use your capital, you materially helped the business along.
This also aligns with how we use the word “investing” in a non-financial sense—you invest in your career or in a relationship, for example, by putting in time, doing work, or making sacrifices that are necessary for them to grow and develop.
Contrast this with what usually happens in financial markets. When someone purchases stock, for example, unless it’s an IPO, the money doesn’t go to the company. It goes to the previous owner of the stock. You purchase it on the assumption it will become more valuable, from someone who thinks it won’t, or won’t as fast. Stocks are often held short term, and unless the purchase happens to be part of a big movement that causes stock prices to go up notably, it doesn’t help the business in any appreciable way.
Though stockholders are technically part owners, they are not really investing in the company. They are speculating, or gambling, on its value changing and the stockholder’s (or their broker’s) ability to spot the right time to sell to have made the most profit.
Given this, it’s not surprising that I first got my understanding of this distinction after reading economist Doug Henwood’s description of financial markets as speculation in his book Wall Street. Henwood quotes economist John Maynard Keynes, who defined investment, in contrast, as “the positive act of starting or maintaining some process of production . . . It is measured by the net addition to wealth whether in the form of fixed capital, working capital or liquid capital.” (Wall Street, 193)
Or, as Henwood said in an email to me, “An old-fashioned version of the distinction [is] that investors are in it for returns (profits, interest, dividends) and speculators are just hoping for a pop in the price of an asset.”
So, to recap:
Investing = using your capital to help make a material change that causes something to rise in value, and possibly getting a benefit from it, as well as accepting a risk that you might not.
Speculating = gambling that external factors will cause something you own to rise in value through no action of your own so you can profit from it, even if that reduces the positive social outcomes of that rise in value.
Much of what we call investment in homeownership is also really speculation, even if it’s of a less harmful variety than what corporate landlords do.”
Obviously we can apply these definitions to the realm of housing as well. Take someone who buys a home in poor condition, actually puts in substantial money and/or time to make it a decent place to live, and then rents it or sells it at a reasonable price in a responsible way. Over the long term, they earn back what they put in and get a commensurate return for the work and risk of having done so. I’d argue they could be called an investor. (Note: They do still need to accept the risks, and not assume they are owed profit, however. Risk is part of investing.)
And then there are housing speculators: Those who literally just buy a vacant property and sit on it for years, hoping that changes in the economy or neighborhood conditions (like a new transit line or park) will make it more valuable and they can sell it for a profit. Or those who buy a building full of low-income tenants with the assumption that they will leave (or can be encouraged, ethically or unethically, to leave) to make way for higher income tenants. Or those who buy up huge portfolios of single-family residences, knowing that the worsening housing crisis and their holding a significant market share will cause the houses’ value as rental properties to skyrocket.
Is there some gray area there? Do the companies buying up swaths of housing and raising its costs put some investment into material changes in those buildings? Yes, sometimes. But where is their profit coming from? Is it really coming from the work they are doing? Or is it coming from their ability to take advantage of external factors—a shortage of affordable housing, tenants with few choices or rights, and market processes that give unfair advantage to those who can pay cash—and turn that into substantial short-term profit for themselves with no commensurate benefit to the housing stock or the tenants? In too many cases, it’s the latter.
More controversially, much of what we call investment in homeownership is also really speculation, even if it’s of a less harmful variety than what corporate landlords do. A house itself doesn’t typically increase in value. But the value of a home in a specific location often does. And despite the exhortations of neighborhood associations about maintaining curb appeal, in the end it’s not what the homeowner puts into their home that will have the most effect on home values in their neighborhood, but external forces such as changing job markets or transportation patterns.
This is one of the reasons I’m thoroughly comfortable with shared-equity homeownership, which limits the value the homeowner gains to something closer to what they put in, rather than producing windfall gains related to factors outside their control. The problem isn’t so much that those homeowners aren’t getting speculative gains; it’s the fact that so many other property owners are (and have in the past, when one of the external factors causing some land to rise in value was legalized racism).
Even so, homeowners (at least ones who aren’t fighting to hoard opportunity in their neighborhoods and keep others out) are not the problem. Widespread speculative rental housing ownership is. And in that case, I think it would be a great thing if we reserved the more positive term “investor” for the smaller group of folks and organizations that actually invest, and called a speculator a speculator.
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4 thoughts on “What’s in a Name? Investors vs. Speculators”
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Thank you for this important distinction. Too often, we give speculators an air of respectability by calling them “investors.” Instead, they are merely gamblers. And what are they gambling on? Houses (like cars and other produced items) are a depreciating asset. Unless they are maintained and improved, they decline in value over time. The value of land, however, tends to rise over time (although it can go down also). But where does the value of land come from? If the local economy is doing well and businesses are thriving and hiring workers, the value of land in that community will rise. If schools, transportation or public safety are improved, land values will rise. In other words, land values rise NOT because of anything a landowner does, but because of the collective action of others, both private and public. Thus, land speculators are gambling that they will be able to appropriate value created by other people’s work. This is purely parasitic.
Fortunately, some communities differentiate between “real estate investment” and “land speculation.” They have reduced the property tax rate applied to privately created building values while increasing the rate applied to publicly created land values. The lower rate applied to buildings makes them cheaper to construct, improve and maintain over their useful lives. Surprisingly, the higher rate on land values helps keep land prices more affordable by reducing the profits from land speculation. Thus, without any new spending or any loss of revenue, this “Tax Shift” can make both buildings and land more affordable.
For more info, see https://www.shareable.net/land-value-return-and-building-a-more-equitable-economy/ .
This is a helpful distinction. The point about the blurry line of homeownership and speculation is also well taken. I live and work in a low-moderate income neighborhood that nonetheless has a “strong” real estate market, primarily because speculator landlords have driven up prices. Five years after I bought my home, a neighbor with a similar home sold for 60% more than my original purchase price – not because of any improvements made to the home, but simply because of market forces. This is a great windfall for sellers, but in a neighborhood already short on owner-occupants, it just puts first-time homeownership further out of reach for the working families who want to put down roots.
I appreciate this article. Especially from a tenant organizing/narrative building perspective, the distinctions are super useful.
I agree with everything but the last paragraph. Speculators aren’t “the problem”; they are merely taking advantage of supply shocks that exist in large part because homeowners and their elected officials have used zoning to limit supply (or, as the main article would say “fought to hoard opportunity”). End the opportunity hoarding, and you make speculation less attractive.