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Housing Isn't Really Dead


To suggest that real estate as an asset class is gone forever is to grossly misunderstand not only housing, but the nature of human progress itself.

A piece in this weekend's New York Times contends that the golden era of real estate is over. The author, David Streitfeld, argues that for the foreseeable future (and possibly forever), a home will simply be four walls and a roof, ceasing to be the lucrative financial investment it's been since the end of World War II. The premise is mildly compelling, particularly given the dour housing data of the past couple months. But to argue that real estate as an asset class is dead is to grossly misunderstand not only housing, but the nature of human progress itself.

After five years of a housing depression that brought the entire global financial system to its knees, it's easy to get behind the argument that housing is dead: Shadow inventory is looming, government incentives are running their course, the employment outlook is cloudy at best, and people are thinking twice about plunking down a life's savings for the privilege of 30-years of indebtedness.

Moreover, according to Streitfeld and the housing economists he quotes, a shockingly large portion of Americans' disposable income over the past several decades was generated through real estate appreciation. Not only did banks like Wells Fargo (WFC) and JPMorgan Chase (JPM) get rich off originating, packaging, and selling mortgages, but cruise operators like Carnival Corp (CCL) and Royal Caribbean (RCL) and gadget-makers like Apple (AAPL) and Research in Motion (RIMM) cashed in as homeowners cashed out.

And while all this is true, to say that "real estate's gold rush seems gone for good," is to lump Silicon Valley in with the Wasatch Mountains, Daytona Beach with Huntington Beach. Articles like Streitfeld's make for interesting chatter at the water cooler and cocktail parties where being bearish on housing is all the rage, but they miss the larger point that progress and development are ongoing, and there are good long-term real estate investments out there if you know where to look -- even if you're just looking for a place to raise your family.

The bearish thesis breaks down when you look at what it means to actually buy a house, and what factors effect the future price of that particular home. Buying a house isn't the same as investing in the "housing market." Not even close. The argument relies on the naive, yet now-popular belief that the same factors that make taking a flier on a Vegas condo risky must, by extension, also make buying a starter home in Austin, Texas, a dicey proposition.

Rather, buying a home is investing in a neighborhood, a community which may or may not be squarely in the path of demographic patterns that were set in motion well before our country had ever heard the term "subprime." If done right, a happy medium can be found between finding a place you want to live and settling down in what may even turn out to be a good investment.

Population shifts evolve over decades, not years, and are based on fundamental factors that run deeper than short-term blips in the national, or even regional economy. Demographic movements, not short-sighted speculation, are behind the creation of real estate wealth in the long run. These shifts explain why rural towns with stagnant populations won't see appreciation for decades (if ever), while regions with expanding job markets and a growing population are ripe for smart investment (yes, such areas exist, even now).

At the same time, established, snobbish communities of aging baby boomers may see home prices flatline for years, while buyers in many gritty, neighborhoods on the fringe currently far outweigh sellers. In these markets, prices are creeping back up based on fundamentals, not government crutches.

So as stubborn housing bears drone on, spouting their frail generalities, the precious few of us with vision to see beyond next quarter's GDP data will be the landlords of the future.

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