Interesting real estate article in today's WSJ

[Howard]

There's the usual talk about what the latest Case-Shiller house price data mean for the next short term move in the real estate market. Has housing bottomed? If not, has the rate of decline slowed? And when will we see an upturn?

Human nature likes the short term. Which is why so little attention is paid to something that is probably more important, if less urgent: What the latest data show about the long-term of the real estate market.

And it's startling.

We have just been through the biggest boom in real estate in American history. The subsequent bust surely hasn't finished.


Dropping home prices are only one of the factors that keep the annual returns on homes low.
.Yet look at the numbers. Since 1987, when the Case-Shiller index of 10 major cities begins, it's risen from an index value of 63 to 151. Annual return: Just 4.1% a year. During that period, according to the Bureau of Labor Statistics, consumer prices rose by 3% a year. Net result: Home prices produced a real return of just 1.15% a year over inflation over that time.

Critics may point out that the analysis is unfair -- after all, it starts counting near the peak of the 1980s housing boom. Fair enough. Look at the performance since, say, early 1994, when home prices were near a historic trough. Surely someone who bought then has made a bundle.

Not necessarily. Since then the ten-city index has risen from a value of 76 to 151. Annual return: 4.7%. Inflation over that period: 2.5%. That's still only a real return of 2.2% a year above inflation.

You can often do better on long-term inflation protected government bonds.

And real estate often costs 2% or more a year in property taxes, condo fees, maintenance, insurance and the like.

Journal Communitydiscuss..“ I really think that owning a home is a terrible investment monetarily. Although if you have the cash the benefits are worth it.
”
.— Jonah Oscam
Conventional wisdom long held that home ownership was a route to wealth, and the imputed rent -- in other words, the right to live in your home -- was just part of the value you got from it. Under that widespread view, the recent housing bust was simply a temporary, though deep, pothole.

Yet for very many people, even over the past 15 or 20 years, the imputed rent may have been all, or nearly all, the real value they actually got from their home.

Yes, it's only recent data. And it's only ten cities. But there's some reason to suspect these numbers may, if anything, flatter real estate performance. After all, it's hard to look at the data and figure the bust is now over. And if they fall further, those long-term return figures will fall too.

Prices weren't just down 19% over the past year. They fell 2% just between February and March. And it's not the worst-hit markets that worry me the most -- Phoenix is down 53% from its peak, Miami 47%. That smells of capitulation. It's the other markets. New York and Boston are only down 20%. Denver's only down 14%.

Overall the ten- and 20-city Case-Shiller indices are merely back to mid-2003 levels. After the biggest boom and bust on record, history suggests things don't stop getting worse until they've gotten a lot worse than that.

[Bizman]

They keep telling us the recession is over. I don't think so. I haven't seen any improvement.

[petefritz]

You can't possibly be suggesting it is better to rent then buy, particularly in todays' market? I just bought a second home in vegas thanks to fire sale pricing from a bank. They get thier TARP money I get a deal. And got 4.62% 30 yr mortgage. Wish I was a first time home buyer and could have scored another 8k in credits.

[AlanR]

A national report is just that. National. Just in my local area I see cities that seem to have pulled out of the slump while adjacent cities continue the downward spiral. With that said, a national report is mostly useless to most of us who are interested in a specific area.

[Howard]

[ QUOTE ]
You can't possibly be suggesting it is better to rent then buy, particularly in todays' market? I just bought a second home in vegas thanks to fire sale pricing from a bank. They get thier TARP money I get a deal. And got 4.62% 30 yr mortgage. Wish I was a first time home buyer and could have scored another 8k in credits.

[/ QUOTE ]

Exactly. This analysis has been done a few times over several years by the journal and every time it comes out that you are better to rent and invest the difference elsewhere. If you factor in the taxes, maintenance and over consumption for the average homeowner the return down the road adjusted for inflation is much less than they would make in other investments. Sure its a big number when you sell but when you adjust it then the return is not that good. I own a huge home, but I own it because I want to not as an investment.

[nycwash]

Howard,

I think New York metro has at least another 20% to fall. The ratio of income to home prices and rents to home prices still does not add up.

Not sure if you saw, residential rents in Manhattan are down 20%.

Here is a link to probably the best rent vs buy calculator from NY Times

http://www.nytimes.com/2007/04/10/bu...HIC.html?_r=1#

[petefritz]

OK, fair enough, but .. most ( retiring) homeowners have thier house as thier biggest asset. Over time it may not add up in your numbers, but overall real estate keeps up with inflation and you HAVE to pay something to live somewhere!

[Bluestreak]

[ QUOTE ]

Exactly. This analysis has been done a few times over several years by the journal and every time it comes out that you are better to rent and invest the difference elsewhere. If you factor in the taxes, maintenance and over consumption for the average homeowner the return down the road adjusted for inflation is much less than they would make in other investments. Sure its a big number when you sell but when you adjust it then the return is not that good. I own a huge home, but I own it because I want to not as an investment.

[/ QUOTE ]

This analysis would suggest that everyone who is a landlord on a single-family home is losing money, or at least not making as much as he could be. It suggests that owning property is losing proposition, which I wholeheartedly disagree with. I have done pretty well in my real estate investments, and my father told me once that he made more money in real estate, than he ever did working for a living. All the extremely rich people I have ever met put a substantial portion of their investments in real estate. Something doesn't ring true to me here.

Buy land, they ain't making any more of the stuff - Will Rogers

[SoooperDave]

Howard,
I'm with you to the point that I don't even consider your view an opinion - i consider it a fact.
It's like saying the sky being blue is an opinion. As you say, Housing is generally a very poor investment. In fact, I consider the house a financial liability.....but (financially) a necessry evil.
And of course i agree, there are many periods of time when it has been FAR better to rent than to own a house.
However, due to our countries inflationary bias....housing should follow inflation over the long term and over decades of time, it is virtually guaranteed to be better to own than rent.

[Howard]

Not so sure it is a great investment during high inflation either. In the early 80's everyone was telling me to buy a house when mortgage rates were 18% and I was earning 15-16% on money in a money market fund. Sure there are times where if you buy at point "A" and sell at point "B" you make a lot of money, but for most people it is not the bonanza they think. They are fooled because of the large dollar numbers. For those that don't know how to save and invest it is a form of forced savings which too many people need these days.