An article with an LA Times byline appeared in today’s Austin American-Statesman:
“Days of using homes as wealth generators is over, experts say,” http://www.statesman.com/business/content/business/stories/realestate/2009/10/04/1004homevalues.html
Robert Reich is quoted as saying, “We can expect a gradual rise (in home values), but not the bonanza we’ve become accustomed to between the end of World War II and 2006, and especially the last 20 years.”
For my money, that’s good news. Much of the run-up in home values over the past 10-plus years was focused in four states suffering from a gold-rush mentality — California, Nevada, Arizona, and Florida. Not surprisingly, that’s where the bottom really fell out, and that’s where the news media has been drawn over the past two or three years. However, the run-up was fantasy land, and the downturn has been every property owner’s nightmare. Even there, though, almost anybody who had owned their home for 5 to 7 years before the crash is still okay. The exceptions did indeed treat their homes as ATMs, borrowing equity to support extravagant lifestyles or to purchase more overpriced property.
The fact is that modest, sustainable growth is healthier for everyone concerned, and with the power of leverage returns on real estate are still quite attractive. Median Price Growth shows that in the Austin metro area, for example, has averaged more than 6.5% annual appreciation over the past twenty years. In two of those twenty years, the median home price declined, and in three other years growth was less than 1%. On the other hand, in eight of those years, the median price gained more than 10%.
As I tell my clients, though, your home should not be considered a short-term investment. Over the same twenty year period discussed above, the lowest 5-year appreciation rate was 23.4% (4.6% per year). Okay, but not spectacular. But not many of us pay cash for a house. To keep the math simple, consider a $100,000 property. With an FHA loan you can gain all of the appreciation on that property with just a $3,500 down payment. Using even the minimum Austin-area growth rate since 1990, that $100,000 property would be worth $123,400 at the end of five years. A $23,400 gain on a $3,500 investment — more than 100% annual return!!!! There is no bank account or CD that offers that kind of return. And unless you got lucky during the dot-com bubble, you never had that opportunity in the stock market.
A house is not an ATM, and buying a home should be a very different mental process than buying investment real estate, but don’t let our doom-and-gloom focused news media stop you from seeing this side of reality, too.