Home Buying for the Long Haul Pays Off

Home Buying for the Long Haul Pays Off



Despite the slump, housing remains a good long-term investment—in the right markets





The era of get-rich-quick real estate is dead. The era of increasing long-term wealth in your home is back.



Historical data from the National Association of Realtors (and adjusted for inflation by Businessweek.com) show that in 18 of the 25 largest metro areas in the U.S., the value of homes purchased in 1990 had increased by 2010, often by double digits. And this in a year when real estate prices around the country have softened since their peak in 2006. These houses would have been worth even more a few years ago.

While that's cold comfort for the many Americans whose homes have lost more than $1.7 trillion in value in 2010, according to a new report by Zillow.com, it underscores the fact that homeowners who buy for the long term have historically seen the value of their investment increase over the years. In inflation-adjusted terms, the median U.S. home sale price in the third quarter remains approximately 9.5 percent higher than in 1990, despite falling 26 percent from peak levels, according to calculations based on NAR data.

Says Greg Hebner, chief operating officer at Sorrento Capital, an Irvine (Calif.) asset management firm: "You should at least be looking at housing now," especially as interest rates are low and homeowners can deduct mortgage interest from their income taxes. "It's still a good game" if a buyer understands the risks, has consistent income, and purchases a house he can afford, Hebner says.



When Supply Is Limited

Based on data since 1968, nominal U.S. home prices have risen 5.5 percent annually and outpaced inflation by about 1 percent to 2 percent, says Lawrence Yun, NAR's chief economist. The main reasons housing has grown faster than inflation, he says, are that more people wanted to buy in places with a finite supply of developable land, which drove up prices, and owners increased the value of their properties through home improvements.

Home prices followed this pattern through most the 1990s but started shooting up in the early 2000s. Between 2000 and 2006, nominal prices rose 89 percent, according to data from Moody's Economy.com and Fiserv (NasdaqGS: FISV - News), a financial service company in Brookfield, Wis.

Economists from NAR, Fiserv, and Moody's Analytics interviewed for this story expect home prices to continue to grow slightly more than inflation in the long term. Still, buyers are not likely to see prices skyrocket the way they did in the early 2000s, at least in the near future.

Up by Half, or More

In an analysis of the country's 25 largest metro areas, Businessweek.com found that the Portland, Ore. area had the largest real price gain since 1990, with the median sale price in this year's third quarter ($242,100) up about 85 percent over 1990, in inflation-adjusted terms. Home prices in the Denver, Baltimore, and Seattle areas also made gains of more than 50 percent in that period.

Yet in some other markets where homeownership skyrocketed during the housing boom, inflation-adjusted prices have fallen so dramatically that they are now below 1990 levels. Real prices in the Atlanta metro, for instance, are down about 21 percent compared with 20 years ago, and in Sacramento they are down 19 percent.

After recovery from the housing bust, "we expect house prices to settle into a price-growth trend that's slightly higher than inflation over the long term. So in that sense, housing is still a long-term investment with a positive yield," says Andres Carbacho-Burgos, an economist at Moody's Analytics.

Securities Look Better

After accounting for the time and money put in for property taxes, home insurance, security, and maintenance, "investing in a home doesn't have the rate of return of a diversified, well-managed portfolio in stocks and bonds," adds Carbacho-Burgos. Securities potentially offer greater returns, but buyers are wary.

A national housing survey by Fannie Mae shows that in the third quarter this year, 66 percent of consumers believed buying a home is a safe investment, compared with 16 percent who believe stocks are safe. That does not mean confidence in real estate has not been shaken in recent years: In 2003, 83 percent considered a home a safe investment.

Fannie Mae's survey also showed that 59 percent of respondents still believe owning a home is a good way to build wealth, and 84 percent believe buying makes more sense than renting.



Assuming home prices continue to increase 1 percent to 2 percent better than inflation, a buyer needs to own the property for at least five years to break even and cover selling costs, says Sorrento Capital's Hebner.

How 2011 Shapes Up

According to the latest forecast by Moody's Economy.com and Fiserv, nominal home prices in the U.S. will decline 4.8 percent from the fourth quarter of 2010 to the third quarter of 2011, when they are forecast to reach their trough.

NAR estimates that in 2010, 4.8 million homes will be sold in the U.S.—less than the 5.2 million sold in 2000, which is regarded as a "normal" year, says Yun, as the market had not yet overheated.

As the market normalizes, Yun expects sales volume to rise 6 percent year-on-year in 2011—assuming GDP grows 1.9 percent, 1.5 million jobs are created (bringing the unemployment rate to about 9.5 percent), and mortgage rates stay near 5 percent. Markets with high foreclosure rates, such as Nevada, Arizona, and Florida, will remain volatile.



David Stiff, chief economist at Fiserv, says despite hopes that we can avoid another housing bubble, there likely will be upswings again in the future. "In general, people are optimistic" and get caught up when times are good, he says. "When you see the next cyclical upswing in housing, try not to get carried away."