Is Investing In Real Estate A Bust Going Forward?

Homes are most people’s largest investment so it’s not surprising NYT’s most read story the past 2 days is Housing Fades As A Means To Build Wealth. It cites 5 housing experts who all have similar bearish outlooks on housing. There will always be chatter about the demise of a certain asset class, so remember these two points: (1) Understand your own time horizon and objectives, and do your math accordingly before making investments, and (2) property is the least efficient asset class, so security selection is everything—in non-investor terms, this means that property prices are extremely localized, so there will always be higher-than-average returns on property investments for those who do their research.

As for the NYT piece, the only practicing investment professional among the sources cited was Barry Rithotlz, head of investment research firm Fusion IQ, who later expanded on his blog to say that it is safe to buy 2 kinds of properties right now—see below.

It is safe to buy 2 kinds of properties right now: The first is simply math: If you are planning on living in a specific location for at least 10 years , then the calculus of rent vs own likely favors the buyer once you figure in mortgage tax deduction. The numbers are obviously determinative, so do the math of your income, tax situation, and alternative rental options. Renting might put you into a less desirable school district in parts of the country; that is a non-monetary factor that needs to be considered.

Second, I would not be afraid to buy a “unique” or vacation property. By unique, I mean not a tract home or development, but a something special: Beach front, lake side, mountain view, etc. kind of place that cannot easily be replaced or reproduced. The kind that 10 years from now, you kick yourself for not buying. A truly unique purchase avoid Real Estate regret.

As for the macro picture, here are some more housing stats from Ritholtz that didn’t make it into the NYT piece:

Housing over the past century managed to just outpace inflation (by 1.1%, according to Shiller);

The bond bull market that began in the late 1970s has driven mortgage rates down from the peak by as much as two/thirds — as high as 15% down to ~5%.

The post WWII growth of suburbs and the subsequent baby-boom demographic surge created a massive demand for Housing unlikely to be equaled inthe next few decades;

The three decade long decrease in the cost of credit was an enormous source of Real Estate appreciation over that same period (1980-2005);

Bull Markets eventually end with a blowoff top; In doing so, they pull forward a decade or more of future returns;

We remain 5-15% overvalued n home prices nationally; That could be worked off by a big drop tomorrow, or by a 7-15 year period of no appreciation, depending upon inflation and wage gains;

Housing has problems with both too much supply and not enough demand. Bring in 3 million qualified home buyers from abroad and the Housing issue goes away.