Home Buying for the Long Haul Pays Off

BusinessWeek

Despite the slump, housing remains a good long-term investment—in the right markets

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The era of get-rich-quick real estate is dead. The era of increasing long-term wealth in your home is back.

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Historical data from the National Association of Realtors (and adjusted for inflation by Businessweek.com) show that in 18 of the 25 largest metro areas in the U.S., the value of homes purchased in 1990 had increased by 2010, often by double digits. And this in a year when real estate prices around the country have softened since their peak in 2006. These houses would have been worth even more a few years ago.

While that's cold comfort for the many Americans whose homes have lost more than $1.7 trillion in value in 2010, according to a new report by Zillow.com, it underscores the fact that homeowners who buy for the long term have historically seen the value of their investment increase over the years. In inflation-adjusted terms, the median U.S. home sale price in the third quarter remains approximately 9.5 percent higher than in 1990, despite falling 26 percent from peak levels, according to calculations based on NAR data.

Says Greg Hebner, chief operating officer at Sorrento Capital, an Irvine (Calif.) asset management firm: "You should at least be looking at housing now," especially as interest rates are low and homeowners can deduct mortgage interest from their income taxes. "It's still a good game" if a buyer understands the risks, has consistent income, and purchases a house he can afford, Hebner says.

[See Buying Your First Home]

When Supply Is Limited

Based on data since 1968, nominal U.S. home prices have risen 5.5 percent annually and outpaced inflation by about 1 percent to 2 percent, says Lawrence Yun, NAR's chief economist. The main reasons housing has grown faster than inflation, he says, are that more people wanted to buy in places with a finite supply of developable land, which drove up prices, and owners increased the value of their properties through home improvements.

Home prices followed this pattern through most the 1990s but started shooting up in the early 2000s. Between 2000 and 2006, nominal prices rose 89 percent, according to data from Moody's Economy.com and Fiserv (NasdaqGS: FISV - News), a financial service company in Brookfield, Wis.

Economists from NAR, Fiserv, and Moody's Analytics interviewed for this story expect home prices to continue to grow slightly more than inflation in the long term. Still, buyers are not likely to see prices skyrocket the way they did in the early 2000s, at least in the near future.

Up by Half, or More

In an analysis of the country's 25 largest metro areas, Businessweek.com found that the Portland, Ore. area had the largest real price gain since 1990, with the median sale price in this year's third quarter ($242,100) up about 85 percent over 1990, in inflation-adjusted terms. Home prices in the Denver, Baltimore, and Seattle areas also made gains of more than 50 percent in that period.

Yet in some other markets where homeownership skyrocketed during the housing boom, inflation-adjusted prices have fallen so dramatically that they are now below 1990 levels. Real prices in the Atlanta metro, for instance, are down about 21 percent compared with 20 years ago, and in Sacramento they are down 19 percent.

After recovery from the housing bust, "we expect house prices to settle into a price-growth trend that's slightly higher than inflation over the long term. So in that sense, housing is still a long-term investment with a positive yield," says Andres Carbacho-Burgos, an economist at Moody's Analytics.

Securities Look Better

After accounting for the time and money put in for property taxes, home insurance, security, and maintenance, "investing in a home doesn't have the rate of return of a diversified, well-managed portfolio in stocks and bonds," adds Carbacho-Burgos. Securities potentially offer greater returns, but buyers are wary.

A national housing survey by Fannie Mae shows that in the third quarter this year, 66 percent of consumers believed buying a home is a safe investment, compared with 16 percent who believe stocks are safe. That does not mean confidence in real estate has not been shaken in recent years: In 2003, 83 percent considered a home a safe investment.

Fannie Mae's survey also showed that 59 percent of respondents still believe owning a home is a good way to build wealth, and 84 percent believe buying makes more sense than renting.

[See Towns Where You Can Get Land for Free]

Assuming home prices continue to increase 1 percent to 2 percent better than inflation, a buyer needs to own the property for at least five years to break even and cover selling costs, says Sorrento Capital's Hebner.

How 2011 Shapes Up

According to the latest forecast by Moody's Economy.com and Fiserv, nominal home prices in the U.S. will decline 4.8 percent from the fourth quarter of 2010 to the third quarter of 2011, when they are forecast to reach their trough.

NAR estimates that in 2010, 4.8 million homes will be sold in the U.S.—less than the 5.2 million sold in 2000, which is regarded as a "normal" year, says Yun, as the market had not yet overheated.

As the market normalizes, Yun expects sales volume to rise 6 percent year-on-year in 2011—assuming GDP grows 1.9 percent, 1.5 million jobs are created (bringing the unemployment rate to about 9.5 percent), and mortgage rates stay near 5 percent. Markets with high foreclosure rates, such as Nevada, Arizona, and Florida, will remain volatile.

[See Boldest Predictions for 2011]

David Stiff, chief economist at Fiserv, says despite hopes that we can avoid another housing bubble, there likely will be upswings again in the future. "In general, people are optimistic" and get caught up when times are good, he says. "When you see the next cyclical upswing in housing, try not to get carried away."

Biggest Metros With the Best Long-Term Real Estate

Best Performers

For many U.S. residents burned by the housing bust, the notion that real estate can not only tread water but actually increase in value might seem a fairy tale. It's not. A Businessweek.com analysis of home sales data from the National Association of Realtors shows that in 18 of the nation's 25 biggest metro areas, home prices grew in value between 1990 and 2010. In one area the change in real dollar price was as much as 85 percent, a return applying only to those who bought homes as a long-term investment, not for easy money flipping real estate. Seven of these metros lost value—generally the result of overbuilding during the real estate boom. Despite recent housing woes, real estate remains one of the best investments the average American can make. And unlike a stock certificate, it provides a place to live.

1. Portland-Vancouver-Beaverton, Ore.-Wash.

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1990 Price: $130,590 ($78,200 in 1990 dollars)
2010 Price: $242,100
Change in Real Dollars: +85.4 percent

Population: 2,241,841
Year Home Prices Peaked: 2007

Notwithstanding recent declines, Portland area home prices (adjusted for inflation) remain significantly higher than 1990 levels. The median price rose quickly from 2004 through 2007, peaked at about $311,000 (in 2010 dollars) in 2007, and has since dropped by about 22 percent. Moody's Economy.com and Fiserv predict prices will reach their trough in fourth-quarter 2011.

2. Baltimore-Towson, Md.

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1990 Price: $152,300 ($91,200 in 1990 dollars)
2010 Price: $257,100
Change in Real Dollars: +68.8 percent

Population: 2,690,886
Year Home Prices Peaked: 2007

From 2000 through 2005, Baltimore area home prices skyrocketed. The growth rate in nominal prices increased from 3.4 percent year-on-year in 2001 to 20.6 percent in 2004 and 22.3 percent in 2005, according to price data from the National Association of Realtors. In 2007, the median home price peaked at $301,412 (in 2010 dollars). Since then, prices have fallen about 14.7 percent. While well above 1990 levels, prices are expected to continue falling and should bottom in third-quarter 2011, predict Fiserv and Moody's Economy.com.

3. Denver-Aurora-Broomfield, Colo.

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1990 Price: $144,290 ($86,400 in 1990 dollars)
2010 Price: $238,500
Change in Real Dollars: +65.3 percent

Population: 2,552,195
Year Home Prices Peaked: 2006

Metro Denver housing prices grew fastest from 1999 through 2001, when nominal prices increased at double-digit rates, according to a report by the Metro Denver Economic Development Corp., a regional economic development group. Since reaching a peak in 2006 at $270,340 (in 2010 dollars), the median home price has fallen nearly 11.8 percent in real terms. Moody's Economy.com and Fiserv expect prices in Denver to reach a trough in third-quarter 2011.

4. Seattle-Tacoma-Bellevue, Wash.

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1990 Price: $204,240 ($122,300 in 1990 dollars)
2010 Price: $308,200
Change in Real Dollars: +50.9 percent

Population: 3,407,848
Year Home Prices Peaked: 2007

Home prices in Seattle have grown significantly over the last 20 years. The metro area's housing market exploded in the late 1990s as the population grew. Nominal price increases slowed in 2002 and 2003, but jumped to 19 percent in 2004, 11 percent in 2005, and 14 percent in 2006, show NAR data. Prices peaked in 2007 at $407,607 (in 2010 dollars). Adjusted for inflation, prices are now about 24.4 percent below that level.

5. New York-Northern New Jersey-Long Island, N.Y.-N.J.-Pa.

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1990 Price: $285,070 ($170,700 in 1990 dollars)
2010 Price: $404,100
Change in Real Dollars: +41.8 percent

Population: 19,069,796
Year Home Prices Peaked: 2007

Inflation-adjusted home prices in metro New York were stable through most of the 1990s and started rising rapidly in the early 2000s. The median sale price peaked in 2007 at $494,840 (in 2010 dollars)—about 73.6 percent above 1990 levels in real terms—and has since dropped by about 18.3 percent. Fiserv and Moody's Economy.com expect prices in the area to bottom in 2011.

6. Miami-Fort Lauderdale-Pompano Beach, Fla.

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1990 Price: $152,140 ($91,100 in 1990 dollars)
2010 Price: $214,800
Change in Real Dollars: +41.2 percent

Population: 5,547,051
Year Home Prices Peaked: 2006

Metro Miami home sale prices soared for years, growing by 164.4 percent from 1990 through 2006 in real dollars. In recent years, however, nominal prices dropped quickly, coming down 22 percent year-on-year in 2008 and 25.9 percent in 2009. In third-quarter 2010, Miami had the country's seventh-highest metro foreclosure rate, at 2.42, according to RealtyTrac. Fiserv and Moody's Economy.com do not expect the Miami market to reach its trough until 2012.

7. Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.Va.

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1990 Price: $246,160 ($147,400 in 1990 dollars)
2010 Price: $338,600
Change in Real Dollars: +37.6 percent

Population: 5,476,241
Year Home Prices Peaked: 2006

Washington area home sale prices grew by nearly 90 percent in real terms between 1990 and 2006, when they peaked at $467,000 (in 2010 dollars). They have since fallen 27.5 percent and Fiserv and Moody's Economy.com expect continued decreases in 2011. Still, the area remains one of the country's strongest metro economies because government staffing demand keeps unemployment low.

8. Boston-Cambridge-Quincy, Mass.-N.H.

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1990 Price: $267,030 ($159,900 in 1990 dollars)
2010 Price: $366,500
Change in Real Dollars: +37.2 percent

Population: 4,588,680
Year Home Prices Peaked: 2005

"Metro Boston's housing market was affected by the real estate bubble earlier—and less severely— than other metro areas around the country" and sale price declines have brought homes to historic affordability levels, according to a 2009 paper by the Concord Group, a real estate consultancy. Prices peaked in 2005 at $462,160 (in 2010 dollars) and have since dropped a total of 20.7 percent. Despite the fall, home sale prices have still increased in real dollars over the last 20 years.

9. San Francisco-Oakland-Fremont, Calif.

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1990 Price: $433,030 ($259,300 in 1990 dollars)
2010 Price: $588,900
Change in Real Dollars: +36 percent

Population: 4,317,853
Year Home Prices Peaked: 2007

San Francisco housing prices rose in the 1990s during the tech boom. In the past decade, the fastest growth occurred in 2004 and 2005, when nominal prices increased by 15 percent and 11.5 percent, respectively. In 2007, prices peaked at $847,873 (in 2010 dollars). While prices are now 30.5 percent below peak, they remain well above 1990 rates and have been increasing recently. In third-quarter 2010, the nominal median sale price was up 9.4 percent year-on-year, according to data from the NAR.

10. Houston-Sugar Land-Baytown, Tex.

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1990 Price: $118,070 ($70,700 in 1990 dollars)
2010 Price: $158,900
Change in Real Dollars: +34.6 percent

Population: 5,867,489
Year Home Prices Peaked: 2007

While home prices shot up and then plunged over the last decade in most parts of the country, the Houston market has been stable: The greatest fluctuation in the last decade was an 8.5 percent year-on-year nominal price increase in 2002. A recent survey by the Brookings Institution and the London School of Economics and Political Science ranks Houston fifteenth among U.S. metros for recovery from the recession, reported the Houston Chronicle.

Click here to see the full list of Biggest Metros With the Best Long-Term Real Estate

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