Housing: No Longer a Sure-Fire Wealth Builder

I spoke with David Streitfeld of the NYT last week about the future prospects for Homes as an investment (I have a short quote in today’s Housing Fades as a Means to Build Wealth, Analysts Say):   

“Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.

The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.

More than likely, that era is gone for good.”

I don’t disagree much with any of the others quoted in the article. (Stan Humphries, chief economist for Zillow; Yale’s Bob Shiller; Dean Baker of Center for Economic and Policy Research). I find our variances are mostly matters of nuance.

The chat I had with Mr. Streitfeld ranged far and wide, and tried to put some context on the entire Housing problem, which remains poorly understood by many. The rest of the conversation was rather intriguing. Some of the ideas batted about include:

• Housing over the past century managed to just outpace inflation (by 1.1%, according to Shiller);

• The bond bull market that began in the late 1970s has driven mortgage rates down from the peak by as much as two/thirds — as high as 15% down to ~5%.

• The three decade long decrease in the cost of credit was an enormous source of Real Estate appreciation over that same period (1980-2005);

• Bull Markets eventually end with a blowoff top; In doing so, they pull forward a decade or more of future returns;

• We remain 5-15% overvalued n home prices nationally; That could be worked off by a big drop tomorrow, or by a 7-15 year period of no appreciation, depending upon inflation and wage gains;

• Housing has problems with both too much supply and not enough demand. Bring in 3 million qualified home buyers from abroad and the Housing issue goes away.

A few other thoughts worth sharing:

It is safe to buy 2 kinds of properties right now: The first is simply math: If you are planning on living in a specific location for at least 10 years , then the calculus of rent vs own likely favors the buyer once you figure in mortgage tax deduction. The numbers are obviously determinative, so do the math of your income, tax situation, and alternative rental options. Renting might put you into a less desirable school district in parts of the country; that is a non-monetary factor that needs to be considered.

Second, I would not be afraid to buy a “unique” or vacation property. By unique, I mean not a tract home or development, but a something special: Beach front, lake side, mountain view, etc. kind of place that cannot easily be replaced or reproduced. The kind that 10 years from now, you kick yourself for not buying. A truly unique purchase avoid Real Estate regret.

I was surprised when he mentioned I was one of the more bullish housing analysts he spoke with! My answer to that was the time to be an über-bear on Housing (or anything, really) is before the collapse — not afterwards.

Lastly, I must always remind people that there are no such things as toxic assets — only toxic prices.


Housing Fades as a Means to Build Wealth, Analysts Say David Streitfeld NYT, August 22, 2010   http://www.nytimes.com/2010/08/23/business/economy/23decline.html

See also: Housing Diagnosis: Still Weak (WSJ)

Housing Slide in U.S. Threatens to Drag Economy Into Recession (Bloomberg)

Originally published at The Big Picture and reproduced here with the author’s permission.
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