After a year where we felt housing prices drop precipitously, the previous decade of strong real estate appreciation seems forgone. The credit crunch has drained the pool of home buyers to mostly families with impressive credit scores and the ability to make large down payments (as it should have been for the past two decades!).
While the good old days of high returns on real estate investments seems fleeting, today the Wall Street Journal debated the subject with real estate bulls and bears..
Karl Case, an economics professor at Wellesley College whose name adorns the S&P Case-Shiller home-price indexes, has studied U.S. house prices going back to the 1890s. Over the long run, he says, home prices tend to increase on average at an inflation-adjusted rate of 2.5% to 3% a year, about the same as per capita income. He thinks that long-run pattern is likely to continue, despite the recent choppiness.
On the bull side was Kenneth Rosen from the University of California at Berkeley…
People should think of their own homes mainly as places to live, not as investments. Sure, home mortgages provide tax benefits, and most homes appreciate in value over the long run, he says, but there is always risk.
Although I agree Mr. Rosen has an argument that housing prices may continue to fall a bit in the near term, especially with a remaining 35% real price growth for houses since 1989, houses have always been considered most families biggest investment. For him to propose that homes will no longer be an investment is to propose a major paradigm shift.
Paradigm shifts in the investment world consitently prove fallacious. Recently, consider the dot-com bubble when people believed that the way companies grow profit had changed forever with the advent of the internet. Investors believed that high initial growth in internet companies meant that those firms deserved marketcaps in the hundreds of millions or billions with meager income statements and balance sheets.
I believe in Karl Case’s assessment that housing prices will continue to grow at about a 2.5% to 3% adjusted rate. The latest numbers from the U.S. Department of Housing and Urban Development affirm that we have not hit a real estate bottom – in October 433,000 one-family homes were sold, a 5% drop from the 457,000 homes sold in September of this year (the data is seasonally adjusted).
However, I do believe a housing bottom is due in the next 10 to 24 months. Housing prices have already taken into account much of the return of responsibile lending by banks and when the economic cycle returns to a bull market, unemployment will reverse course, individuals investors portfolios will appreciate and they will be in a considerably better position to purchase homes.