Is This the Right Time to "Invest" in a House?

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Is This the Right Time to "Invest" in a House?
A look at why people think of a consumption item as an investment.

By Bob Stokes
Fri, 17 Feb 2012 17:45:00 ET

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Are houses good investments?

As any homeowner knows, one unexpected repair can run into the thousands of dollars. Then there's the maintenance (and other costs) you do expect, which add up to a pretty penny by the end of a given year.

On the other hand, homeowners do get tax breaks. But even considering that, is a house or condominium a good investment?

A wealth manager and finance professor recently spoke to that question, and his conclusion may surprise you:

Examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it...an adjunct professor in personal finance at the University of California at Berkeley, found that, "100 percent of the time it was better to rent, rather than own.

...The reason is simple. While a home is the main repository of wealth for many Americans, it comes with numerous hefty expenses. The carrying costs — what's needed to hold and maintain the asset — range from property taxes and home insurance to emergency repairs and renovations.

Reuters, Feb. 16

This study supports what Robert Prechter has long said to subscribers. The November 2008 Elliott Wave Theorist put it in a nutshell:

...a home is a consumption item, not an investment item. Government laws goosing home purchasing through many privileged lending agencies and homeownership through tax breaks created the temporary, though prolonged, illusion that a home is an investment.

In fact, real home prices (factoring out inflation) stayed within a range for over a century until breaking out of that range in 1997. That's when the government and commercial lenders alike started lowering borrowing standards, and when potential buyers started thinking of homes as an investment. Please see the chart below:

In the January 2012 Theorist, Prechter cites another revealing study:

...real home prices don’t rise over the long term. Dr. Piet M.A. Eichholtz of the Limburg Institute of Financial Economics studied over 300 years of real home prices on the Herengracht, one of the earliest canals in the medieval city center of Amsterdam. Eichholtz’s data showed that real prices in the early 2000s were much the same as they were as early as 1740, over 2½ centuries earlier. Houses are just houses...They deteriorate with age and use. The idea that houses were an investment was absurd...

House prices today, in real terms, are right back in the range they inhabited for 200 years prior to 1997. No big deal net-net, right? Yet home buyers who got caught up in the mania have been ruined.

Even so, optimism appears to be returning on some fronts.

Bloomberg reports (2/16) that "Consumer confidence in the U.S. increased for a fourth straight week to reach the highest level in a year as more households believe the economy is improving" and that "Builders began work on more houses in January..." Moreover, CNNMoney reports (2/16) that "Buying a home is now more affordable than it has been in the last twenty years." As a result, whiffs of the old mania are back.

Mom and pop investors...are snapping up homes and condominiums to rent out all over the country...A typical plan? Buy cheap. Collect rents to cover costs. Cash out — one day — when home prices recover.

USAToday, Feb. 15

So is now the time to buy a house? Is the economy headed for a sustained upswing?

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Tags: foreclosures, home sales, housing prices, Robert Prechter

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