Is Housing Still a Good Bet?

In the aftermath of the housing bubble and the widespread decline in home values over the last three or so years, the question on everyone’s mind is: is housing still a good investment? The New York Times’ David Streitfeld weighed in this weekend with a piece that has caused sparked considerable debate across the blogosphere.

A quote from the article (which I suggest reading in its entirety):

“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”  Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.

According to Dean Baker, co-director of the Center for Economic and Policy Research, it will be 20 years before the housing market regains the $6 trillion it has lost since 2005.  After taking inflation into consideration, housing may never get back to where it was, much of that wealth is permanently lost.

Housing prices got a short-term boost because of the first time home buyer tax credit, and now appear to be falling again.  Further complicating issues are increased foreclosures and a massive supply of distressed and REO properties that will soon hit the market.  This situation seems to be a textbook argument for price declines.

Shockingly, a survey conducted by the Robert Schiller and Karl Case of the Case-Schiller Home Price Index shows that consumers believed prices would rise 10 percent a year for the next decade.  (I would like to play poker with these people.  I suspect they are the same crowd that consistently bet the over on NFL games, but I digress).  The lessons of the last 20 years have lead people to believe home prices will continuously escalate, but this experience may be a historical aberration.

“The experience we had from the late 1970s to the late 1990s was an aberration,” said Barry Ritholtz of the equity research firm Fusion IQ. “People shouldn’t be holding their breath waiting for it to happen again.”

I’m inclined to believe that housing will rebound in some areas of the country and not in others.  Housing will likely be a good bet versus renting for many people, but not as many as in the past.  People need to adjust their expectations of the housing market to be more in line with reality.  What do you think?  Will housing remain a good investment in years to come?  Let me know in the comments section below.

Some other opinions on this topic:

Barry Ritholz

The Fourteenth Banker

Calculated Risk