Housing Investment Still Sweet? Think Long Term

For all the fate and desolation surrounding the housing market, it still generally pays to own a home. That could be a tough fact to consider right now, especially to the 16 million homeowners who owe a higher amount on their mortgage than their house is valued at. But the record suggests the American Dream is a pretty secure bet. Homes have increased in value by an average of 4 percent annually since World War II. Homes serve as hedges against inflation and bestow distinctive tax benefits. Real Property is a leveraged investment; a 10 percent investment produces a 1,000 percent return if the cost of a home merely doubles. Plus there are intangibles: Owning a home provides a sense of freedom, security and community. And you get to reside in your investment. You can't do that with a stock.
Of course, historical trends don't actually make payments on the mortgage. People who wade in and out of the housing market too often, or who purchase at the wrong time or price and must sell quickly, can get burned. But if you own for a decade or longer, price appreciation usually overcomes even downward slumps.
Tony and Liz Iacobelli, who are far under water on the home they bought in the Phoenix suburb of Buckeye a few years ago, aren't panicking. They owe about $177,000 on their mortgage on the house that is only valued at $132,000, which is about 40 percent of what they paid. "Houses generally increase in price, and this one will go up again, too," says Tony, 51, a retired New York City policeman. Several booms and busts have happened in the modern era of housing, which began when 30-year loans became widely available after World War II. This bust has been severe: Nationally, home prices are decreased an average 30 percent from their peak in 2006.
The collapse of the housing market may have put a hault to the notion of using a household as a speculative investment akin to a hot stock. And that may not be a bad thing, economists say. "People should recognize that value is derived from a lot of other things besides a possible return on the investment," says Joel Naroff, chief economist at Naroff Economic Advisors. Economists say household prices have risen by about half a percent a year above inflation, or roughly 4 percent, since the 1940s. That number, which is based on the median cost of homes sold each year, was inflated a bit by baby boomers starting families and buying bigger houses. Since the National Association of Realtors began compiling statistics in 1968, the median sales cost has climbed 6 percent annually, from $20,100 that year to $195,200 this past August.
In the late 1990s, home values started growing similar to stocks. For the next five years, they appreciated at 8 to 9 percent a year, or about 5 percentage points ahead of inflation. You won't find many skeptics among people who bought homes in the '90s and still live in them. Their homes may be worth tens of thousands of dollars less than at the peak, but they're still frequently valued at double what the buyers paid. For example, a house in Ewing, N.J., that sold for $160,000 in 1996 was worth about $410,000 a few years ago. It's still worth $375,000 today.
Home buyer beware, however: Price declines do occur with some regularity. Besides the 30 percent price meltdown of the previous three years, the Standard & Poor's/Case-Shiller index of house prices in 10 cities shows four declines lasting six months or more since 1990. The declines averaged 3 percent. And whether large or small, a drop can be followed by several years of flat prices. After the 1990-1991 market depression ended a housing boom, prices didn't start increasing nationally until 1997. Yet housing has proved a reasonable investment if you stick with it. And with prices already having fallen so far, buying now could make it an even better one.

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