The New York Times has an interesting article about the housing market, speculating that it may no longer be a way of building wealth. Here’s the (link) to the article.
The gist of the article says many real estate experts believe that while the U.S. will eventually recover from the current downturn in the real estate market, home ownership will never again yield the nest-egg type appreciation seen in the second half of the 20th century. In the coming years, housing values will only keep up with inflation, according to several experts, including Stan Humphries, chief economist for Zillow.
The article also paints a picture of how the notion of using housing as an investment came about after World War II.
What do you think? Will we ever seen the “home is an investment” mentality in the coming decades? I was told (quite often) that dirt (or property) is something we’re not making any more of, so it’ll go up in value in the long run. Is that still the case?
Bubbles are created by government subsidies and their “injection effect,” which Richard Maybury defines as “the change that occurs on Wall Street and Main Street when the government injects new money into the economy.”
If and when the government injects new money into real estate, a new bubble will be created and yields will exceed inflation, perhaps by a wide margin. When real estate yields (including “homes” and “dirt”) dramatically exceed inflation, people will flock to real estate an an investment… again.
Richard Maybury’s book, “The Clipper Ship Strategy” has an excellent discussion of Business Cycle Management.
Good point, Bubbles, that’s something the Times article didn’t address. It’ll be tempting for the government to inject new money into real estate to jump-start the economy. I wonder how long before that happens?
I’ll check out Maybury’s book, too. Thanks for the insights.
Injecting new money into real estate at this time is like trying to push on a string. Rates are at historic lows but the demand is so low, there are few takers. It’ll take awhile before the excess of the recent over-building is absorbed and before government attempts to over-stimulate the real estate economy are successful.
When the injection effect is felt, another bubble will be created… for sure.
I agree with the fact that we may never seen home prices outrun inflation again in our lifetimes. However, I still see real estate as an excellent vehicle for building wealth. Don’t forget that there is still substantial tax benefits and potential for passive income in commercial real estate. There are even benefits to owning multiple single family residences as rental properties. Hopefully we will see less leverage of these investments in the future. That is what one of the fundamental problems that caused our current crisis.
I also agree with Bubbles. I was watching the Seattle news this morning that the reporters seemed shocked that home sales reached a record low in July this year. As we discussed in a previous post, we knew or at least should have known that housing demand would decrease once the government incentives were removed. I