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Housing Market: No Bottom in Sight


Time to invest in residential real estate still years away.

Dear Professor Zucchi,

So far as I can tell, there's a problem with buying residential real estate: No one is happy about the prospect of paying $5,000 a month for 10 years (for a $600,000 home) and still finding themselves negative.

1. Will the US be able to duplicate the growth in real-estate values it saw from the end of World War II to 2000?

2. If the traditional method of 20% down and a 30-year mortgage is used, will the value of a home be worth more than all the principal and interest paid over 30 years?

For real-estate investors, they'll be able to take advantage of the market by having a tenant subsidizing their principal and interest, giving them the upside on the home appreciation. It seems you'll need a larger down payment, or have to pay cash for your primary home to be positive. The other option is to rent and invest your money into other assets.

My question: Is there a long-term upside of home ownership?

Minyan JT

Dear Minyan JT,

If one believes that home values will appreciate over the next 15 years, then naturally homeowners will have a nice equity build. But if home values were to return to 2000-2001 levels over the next 3 years, it would mean that today's buyers in most major metropolitan areas would find themselves in the hole by 20%-30%. Assuming a return to the historical 4% annual appreciation, today's buyers will be lucky to break even in 15 yeard. And this, in my opinion, is the best-case scenario.

I wrote these words, almost verbatim, in an article I wrote just about 3 years ago. Oddly enough, they seem just as true today.

But I'll go further: I submit to you that the purchase of one's home is almost never a good financial investment.

Over the last 50 years, the residential value increases of about 4% per year has barely kept up with the 3.2% rate of inflation. And that assumes a particular homeowner didn't get caught in the buzzsaw of value collapses endemic to this business.

Why anyone would even question whether owning a home is a good investment can only be explained by the masterful work of the real-estate-marketing machinery: It's successfully confused the concepts of "forced savings" versus "investment."
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