Real Estate Is Still A Good Long-Term Investment-President's Message
Real estate is still a good long-term investment
President’s Message
Chris Sloan
A couple of weeks ago, I read an article from The Associated Press that detailed why, despite recent drops in home prices, “it still generally pays to own a home.” Although that may be hard to believe for the nearly 150,000 Utahan's who owe more on their homes than they are worth, AP writer Dave Carpenter says, “history suggests the American Dream is a pretty safe bet.”
That’s because home prices since World War II have appreciated about half a percent above inflation, or 4 percent a year, according to the AP article. Separate data from the National Association of Realtors show that home values rise at the general rate of inflation plus 1.7 percentage points in a balanced market. Even during recessionary periods and periods of sales declines, the national median home sales price rose every year from 1968 to 2006.
Of course, there’s volatility in the market and homes prices may go up or down depending on a variety of factors. But Carpenter’s point was that for those who own for more than a decade, the highs and lows will even out, and homeowners more than likely will come out ahead.
Take, for example, the Salt Lake home buyer who purchased a home in September 1999 for the median price of $144,000. Although the home would have lost value since the peak median price of $237,000 in August 2007, today’s median price is still $206,000, which is 43 percent more than the median purchase price in 1999.
Homeowners also reap the benefits of leveraging, which means you enjoy the entire amount of home price appreciation even though you have only used a small portion of your own money for the initial investment. For example, if the value of your home doubles and you only used 10 percent of your own money for the down payment, your cash investment will have increased 1,000 percent.
“Dollar for dollar, the rate of return on an individual’s cash down payment is substantial,” says the National Association of Realtors. “Home buyers typically use their own money to cover only a small portion of the purchase price, but the home appreciation they realize is based on the total value of the property.”
The rate of return on a housing investment also increases the longer it is held, according to Harvard University’s Joint Center for Housing Studies. For example, an owner with a 10 percent down payment whose home appreciates at an annual rate of 5 percent generally will receive a 94 percent return on that cash after owning the home only three years. After owning for five years, the return on the down payment increases to 225 percent. After 10 years, the rate of return jumps to 623 percent.
Holding a home for a long period also reduces a buyer’s risk of losing money. It evens out the ups and downs in the market and allows for appreciation to make up the transaction costs associated with buying and selling.
Home-ownership also acts as a hedge against inflation. While rent costs will inevitably rise over time, the mortgage payment for a home bought with a fixed-rate mortgage will remain the same. In fact, real estate has historically been a good hedge against inflation unlike paper financial assets, according to Lawrence Yun, chief economist of the National Association of Realtors.
“Inflation has been a big headache for the country,” Yun wrote in a 2008 article. “A way to assuage that pain, however, is to own commodities — and a simple, good way is to own real estate. If commodity prices further accelerate for some reason, you will automatically be in the game.”
And don’t forget the tax benefits of homeownership, which allow taxpayers to deduct the mortgage interest and property taxes from their taxable income.
Of course, homeownership provides a tangible shelter as well as an intangible sense of community and security, value greater than that of a possible return on your investment.
“For many, a house is back to what it traditionally was: a long-term financial commitment, a sturdy shelter and a place to hang your hat,” wrote Wall Street Journal columnist M.P. McQueen in a recent article.
For Americans who take that long-term view and are financially prepared, homeownership still makes sense. And in today’s buyer’s market, it may make more sense than ever. To learn more about real estate in your community, contact your local Realtor.