A House Is A Smart Investment

In La Plata County, our year to date real estate statistics through July show that real estate transactions are up over last year and, in many categories of property, days on the market are down.  Below I am going to reprint some recent opinions by people outside the real estate market about the housing recovery.  We realize that because we are in real estate, i.e. we have "a horse in the race," that some folks might think we say the housing market is getting better because we want to encourage transactions.  But, I give you all the recent opinions just to reinforce for you what we think, but also what many others think as well:

“Home price trends provided further evidence that housing has turned the corner, with the momentum of the recovery picking up speed… right now the market is the strongest it’s been since the start of the downturn, and barring a major economic meltdown, we expect to see this organic growth sustain and strengthen through the end of the year.”

Dr. Alex Villacorta, Director of Research and Analytics at Clear Capita

Clear Capital 7/10/2012

“In terms of its contribution to real GDP, residential fixed investment has been a positive - albeit modest - force over the most recent four quarters, marking its longest span of back to-back positive results since 2005.” Morgan Stanley 7/2012

“The [overall] resumption in residential activity cannot be understated as the long awaited housing recovery should help buoy consumer confidence and provide a mild lift to second half economic output.”

Joseph LaVorgna Housing Analyst at Deutsche Bank

HousingWire 7/25/2012

“Housing continues to be a bright spot as news from the housing market has been relatively upbeat, presenting a rare upside boost to the economy.”

Doug Duncan Fannie Mae Chief Economist

Fannie Mae 7/23/2012

“As we look back at previous major housing recoveries, 1975 and 1991 began with negative jobs growth...In each case, the home sales recovery was fueled by home price improvement, driving new job growth and those jobs creating a fresh wave of demand that supported a multi-year recovery in housing.”

Goldman Sachs 7/23/2012

Goldman Sachs

With those thoughts in mind, we'd also like to share the following article from USA Today regarding home ownership.

If you can pull it off, a house is a smart investment

By John Waggoner, USA TODAY

Investment opinions are like, um, noses: Everyone has one. Buy stocks, sell bonds? Go long steel and short copper? Buy sheep, sell deer?

It's pretty easy to see both sides of an investment argument. But it's hard to argue against buying a house now, assuming you can get a loan.

The housing cycle is a long one, in part because buying a house moves at a glacial pace, at least compared with the time it takes to buy a stock or bond. If you're not pre-approved for a mortgage, you have to submit to a credit check, which, these days, is only slightly less intrusive than a CIA background check. You have to get the home inspected. You have to figure out the various fees your bank charges, including the one marked "Just because we can."

How long is a housing cycle? Pretty long. A relatively modest housing bubble, by today's standards, occurred in Boston in the late 1980s. Average home prices, adjusted for inflation, hit $310,000 in October 1987. Home prices didn't hit that level again until May of 2000. Someone who bought at the high had a long wait to get even — particularly in light of the standard broker's commission of 6%.

Home prices bottomed, however, in March 1993 — roughly six years after the top. History doesn't repeat itself precisely, but it's interesting to note that the top of the last housing bubble was six years ago, in 2006.

Why be bullish on housing?

•Prices. You can always buy low and watch prices go lower. But by many measures, home prices are still cheap. The median single-family home price — half higher, half lower — hit its nadir in January, dropping to $154,600, the lowest since October 2001, according to the National Association of Realtors. That's down from a high of $230,900 in July 2006.

Existing-home prices rose in June to a median $190,100, up 8% from June 2011. Those are still 2003 levels.

•Supply. The good news is that the enormous supply on the market is shrinking. It takes a wearisome amount of time for supply to shrink, in part because there are people who have been wanting to sell their homes for many years, but haven't been able to get the price they want. As prices rise, more homes come on the market.

Nevertheless, Ned Davis Research, a respected institutional research firm, estimates that excess supply of houses on the market should be eliminated by the end of 2013. When excess supply dries up, people start building more new houses, which has the virtuous effect of reducing the unemployment rate and increasing the economy generally.

•Mortgage rates. The average 30-year fixed-rate mortgage rate is 3.59%, according to mortgage giant Freddie Mac. That's above the all-time low of 3.49% the week of July 26, but close enough. It's conceivable that at some point in the next 30 years, your interest rate would be less than the rate of inflation.

Assuming you financed 80% of the median single-family home, or $152,080, your mortgage payment would be about $691, excluding taxes and other irritations. About $5,589 of your first year's payments would be tax-deductible mortgage interest.

Thanks mainly to low home prices and interest rates, the NAR's housing affordability index rose to its highest level on record. (The higher the index, the more affordable the average home. The index also takes into account average family income, which has been falling since 2008.)

What could go wrong? All sorts of things. You may not be able get a loan. Bankers are insisting on checking things that seemed far too troublesome during the housing bubble, like whether you have a decent credit rating, a down payment, or a job.

The other problem is that houses are leveraged investments — that is, you borrow money to buy them. Let's consider the example above, where someone buys a $190,100 house and finances $152,080. Your investment is $38,020. Let's say that the worst happens: home prices fall, and you have to sell the house for $175,000. 

Unfortunately, the bank won't split the loss with you. You'll get back $22,920 from the sale, and wave goodbye to $15,100 of your down payment. That's a 40% loss, even though your house has fallen 8% in value.

There are other risks with homeownership, ranging from termites to ghosts in the hall closet. But if you're planning to live in your home for a long time, you have the money, and you can get financing, it's a fine time to buy.

John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays.