Is Residential Real Estate a Good Investment?

It is hard for many people to think so at this moment in time.  Home values have fallen across all markets on average about 20% in the last two years, foreclosures have been rampant and press extremely negative.  But let's look back at owning a home as an investment over the last 10, plus years and see if it hasn't been a great deal for most Americans.  It has for most.  It is just that those who purchased homes in a hot market in 2005 through 2007 and leveraged up to the ying-yang got burned.  They bought high and the dip put them under.  Home prices have increased steadily over every decade I can remember. 

The secret is to buy low (like maybe right now) and sell high.  While some investors saw increases in value at 5% per month in some markets in parts of the 90's, that should never be the expectation.  The rules:  1) buy low and be patient, 2) finance only what you are convinced you can afford over the long-run, and 3) don't expect fast valuation increases to bail you out of a deal that is not sound to begin with.

In his newsletter, Steve Murray of RealTrends raises another issue about housing values as an investment and government intervention.  He says, "... you have at least one key federal housing official saying that housing is a 'lousy' investment because of the high cost of transactions, low relative returns and high degrees of illiquidity."

Hmmm!  Listening to that argument you might want to dump what you have or never buy another home.       Hold-on!  Look at the last 20 years and the wealth that has been created.  Steve Murray's concerns (and mine) have to do with government intervention versus allowing free markets to rule.  Steve says, "Federal, State and Local governments warp housing markets through misdirected policies that both constrain the housing market while allowing explosive access to credit."

What are consumers, investors and analysts to think?  Low interest rates help sales and stimulus programs like the current tax credits help in the short-run, but are these measures good for stable investment in residential real estate?  When the tax credits cease, sales fall dramatically like they did this December.

Steve Murray concludes that "a majority of homeowners still think real estate is a good investment."  But he asks, "when will the government get out of the way?"

I agree.  These panaceas seem to help in the short-run, but they blur how true market forces value real estate.  I hope that the end of the new tax credit program doesn't kill the market in late spring when it should naturally heat-up.

I believe in the long-term value of residential real estate for the individual home owner and for investors, but I also believe that government needs to stop randomly heating things up and then complaining about people over-extending themselves.  It is time for politicians to stop medalling and then blaming "the market."

We need to believe in the value of real estate as an investment and we need to let our elected officials know that we want true markets to determine value.