Friday, January 08, 2010

Housing Prices Not Likely to Rise for Years or Even Decades?

Harvard economist buyers_remorse Ed Glaeser:

There is no reason to expect a big post-slump jump, and every reason to expect that prices and construction levels will continue to muddle along for quite some time. Don’t expect prices to return to their boom levels for years, if not decades…

Dismayed analysts seem to have been hoping and expecting that prices would come roaring back after they hit bottom last spring, but that optimism seems at odds with both past housing history and with good housing economics. We should expect prices to stay flat for quite some time, and that isn’t a bad thing…

There is, after all, nothing particularly wrong with price stability and nothing particularly good about price increases.

Americans appropriately cheer when computers and cars get cheaper. We should also see the upside in cheaper homes. Indeed, we should hope that technological improvements in the building industry are passed along to consumers in the form of lower prices.

So stop thinking of your home as an investment that will yield comparable returns to the stock market. Housing is a form of consumption that yields benefits in the form of a more pleasant life, not a bigger balance sheet.

As David Friedman writes:

[E]very time a house is sold, it is also bought, and that while a lower price is bad news for the seller, it is good news for the buyer.

Readers of this blog will know that I’ve been a big fan of renting for a long time now (long before the decline in housing prices), believing many people underestimate the true cost of owning a home and mistakenly think renting is “throwing your money away.”  James Altucher seems to agree.  Megan McArdle counters with benefits of buying a home.

At the end of the day, I think my personal finance prof had it right when he said:  “whether you decide to rent or own should not be an investment decision, but a lifestyle decision.”  As a single guy currently in school, I gladly make the trade-offs of renting a small space in a very convenient location.  (Eight blocks from school and two blocks from the subway.)  My time costs for commuting and maintenance are close to zero, leaving more time for studying and having fun, not to mention giving me easy access to most of DC.  I’m sure my priorities and trade-offs would change if I were married and raising a family, but for my current situation, the renting lifestyle seems ideal.

P.S. – A reader e-mailed me this WSJ article about why housing is a lousy investment:

  1. It is an indivisible asset. If you own stocks and bonds and suddenly need a little cash, you can sell some of your stocks or bonds but not all. With a home, on the other hand, “you can’t just slice off your bathroom and sell it on the market.”
  2. It is undiversified. You can buy stocks or bonds in industries or countries all over the world. A home is a bet on one single neighborhood.
  3. Transaction costs are very high when you buy or sell a home because of real estate agent fees, mortgage fees and moving costs.
  4. It is asymmetrically liquid, meaning it’s easy to get money out when home prices are going up. (You just take out a bigger mortgage.) But it’s hard to take money out when prices are going down because refinancing becomes more difficult. Put another way, the leverage that you have in your house with a large mortgage means your investment does well in good times but could be lousy in bad times.
  5. It is highly correlated to the job market, meaning that home prices in a neighborhood tend to rise when the job market is improving in the area and fall when the job market is worsening. This means that your main financial asset provides the smallest cushion to you when you might need it most.


Kevin said...

Houses are not a lousy investment!

That said, people should remember what housing is an investment in and not to use that investment for something it is not.

Housing prices are ALWAYS tied to rents and wage prices! If there is no or little inflation, than housing prices should also remain steady (fallacy #1 of the bubble, if inflation were ~3%, then housing prices SHOULD NOT have risen ~6%, a basic definition of an unsustainable).

Second, houses are NOT a liquid asset, the idea of a mortgage is to pay it off! If you need an investment that you need to take out bit of it over time, invest in stocks or something, a house really is one share, you can not off load 10% of a house. Refinancing only helps the bank, first due to closing cost, second the amortization is always front loaded, so even if one never "cashes out equity," resetting the amortization on a loan is generally a bad deal (banks think it a great deal if you keep paying interest and don't touch principle).

If one is able to purchase and rent to Brian, then you have an inflation hedge, locked in at purchase price, let Brian pay for the loan and maintenance overhead, then one transferred Brian's money from him to the bank also into hard asset. Good deal.

Brian's desire to remain free in his choices of shelter and not be tied down or deal with maintenance or other hassles can now be quantified by looking at the money he spent for services of housing instead of owning housing (which we know is greater, else no one would have an economic insentive to rent to him).

I'd say problem with real estate is the population had forgotten what it is for and what it does not do.

Philippines properties for sale said...

Why rent if you can afford to buy?

Paula M