Since the end of World War II it’s been an article of financial faith that homeownership is a pillar of economic stability if not outright wealth. Owning your own home is good, owning several is likely to be better.
“Owning a home is a part of that dream, it just is,” said former President George Bush in 2002. “Right here in America if you own your own home, you’re realizing the American Dream.”
Such faith is not without merit. Home prices rose consistently year after year until in the past decade the string was broken. Given such recent results it’s easy to understand why a Time magazine cover story says “the dark side of homeownership is now all too apparent: foreclosures and walkaways, neighborhoods plagued by abandoned properties and plummeting home values, a nation in which families have $6 trillion less in housing wealth than they did just three years ago.”
What are we to think of this? Is real estate ownership dead and done as a financial opportunity, or is there more value to be extracted from housing? Indeed, is now a good time to buy real estate — or not good at all?
If we are to think of real estate as an investment then all the usual caveats apply. There’s no assurance whatsoever that prices will always rise or that they will rise at all. There’s no guarantee that vacancies can be avoided or that the need for repairs will not create losses. As the lawyers say, the list of risks associated with investment real estate “include but are not limited to” a lengthy roster of potential downers.
But so what.
All forms of investment represent some level of risk. Would Time also recommend staying away from securities given that the stock market crash of 2008 resulted in losses worth $7 trillion?
Not only do all forms of investing represent risk, not investing also represents risk, the possibility of missing benefits as a result of inaction, what economists call an opportunity cost. While it might somehow be comforting, hiding in a financial rubber room is not a likely path toward economic advancement.
The Contrarian View
It’s absolutely true that property prices have flopped in most markets during the past few years. Even now we could have a false bottom, meaning prices might go lower. But the current situation may not be a bad thing if you’re on the buying and investing side of the equation — and you believe that real estate should be held for the long term.
While much is dark and gloomy, a number of fundamentals remain in place which greatly favors real estate:
• Mortgage rates are now at or near historic lows. Loans around 4.5 percent are currently available. With inflation and tax write-offs and the real cost of capital is around 1.5 percent for many investors.
• Property prices have taken a beating. The typical U.S. home was valued at $196,000 at the end of May — that’s 12.3 percent lower than the value of the same property in April 2007. In most communities, foreclosures and short sales produce even larger discounts.
• Real estate investment continues to enjoy substantial tax write-offs for mortgage interest, property taxes, insurance, depreciation, repairs and other ownership costs. While there is rumbling against such write-offs, the political reality is that home owners represent one of the largest “special interests” in the country, a reality which politicians cannot ignore.
• The population is growing while at the same time homeownership is down. Figures from the Census Bureau show that we had a 66.9 percent ownership rate in the second quarter, a rate that fell from 69.2 percent in 2004. We’ve lost more than 1.5 million owner-occupied properties.
• Reis.Inc., a leading provider of commercial real estate information, says in the second quarter that occupancy improved in 67 out of 82 markets. Fewer vacancies translate into higher rentals: Reis says rents rose .4 percent in the first quarter and .7 percent in the second quarter.
• There’s some evidence that public views have become more positive. Fannie Mae just released a study which shows that 47 percent of us believe home prices will hold steady while 31 percent think prices will actually rise. That means 78 percent of the public at least believes home values will not fall further. Whether such optimism is justified, realistic or will continue is something we won’t know for some time.
The Case for Investing
If you look at the investment factors outlined above you can see that interest rates are near historic lows. The nation is flooded with foreclosures and short sales, a flood which pushes down local home values but a flood which will one day recede. Home prices are down but rents are up. Tax benefits remain in place. The demand for rental housing is strong, in part because millions of people no longer have down-payment money or an interest in buying — or they’ve lost their home to foreclosure or a short sale.
“There are marketplace trends which suggest that now is a reasonable time to look at real estate rather than back away,” says James J. Saccacio, chief executive officer at RealtyTrac.com. “Many local markets seem to be stabilizing if not showing some signs of improvement. You have to wonder how many people in 2015 will look back and say ‘I wish we would have bought a few years ago in the good old days when mortgage rates hovered around record lows and home prices were down.’”
Will home values rise in the future? Will rental rates increase in selected markets? No one knows for sure, but it seems logical to believe that values are most likely to go up if you don’t buy at the top of the market — and we haven’t been at the top of the market for better than three years.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.