THE BLOG

5 Reasons to Stop Worrying About Home Prices

08/26/2010 09:10 pm ET | Updated May 25, 2011

The New York Times more or less pronounced the single family home dead as an asset this week. Data from the National Association of Realtors and the Federal Home Financing Agency hammered some nails into the coffin. But come now, folks. Let's apply a little perspective:

  1. The pessimistic scenario isn't all that pessimistic One downbeat economist quoted by the Times predicted that housing will rise at the rate of inflation for the foreseeable future. The rate of inflation happens to be roughly the long-term return on residential real estate over the past century, according to Robert Shiller, the Yale economist and real estate historian. So the bubble of 2000 to 2006 was the anomaly, not the "grim" long-term future foreseen by the Times. (Speaking of anomalies, Shiller in this interview warns against over-reacting to the lousy housing numbers that came out this week since they were skewed by the expiration of Uncle Sam's homebuyer's credit.)
  2. You can still make money on a house, even if the pessimists are right. If you put 20% down on a home and it rises by the rate of inflation, your equity appreciates at five times the rate of inflation. There's no guarantee that there will be any appreciation at all--that's the risk--and maintenance and taxes will take away some of your return. But you don't need a bubble to be rewarded for taking the risk.
  3. You still get plenty of value from owning a home, even if you don't make a killing. As my colleague Charlie Farrell points out, paying down a mortgage allows you to accelerate your single biggest housing expense into your peak earning years when you can best afford it. Once you've paid it off-at retirement, presumably-you've significantly pared your living expenses. And as my colleague Linda Stern points out, you also get a place to call your own for all that time-which is really the point, after all.
  4. If history is any guide, the Times story is a buy signal. These are the kinds of stories that tend to appear on front pages at market bottoms. Yes, the weak economy is keeping home buyers off the market. Yes, foreclosures are clogging the market, and smart people like Barry Ritholtz believe that homes have further to fall. There are dozens of reasons no one will ever buy a home again. But that's how it always looks at a bottom.
  5. At some price, people will still buy. A house in a reasonably viable neighborhood is not an AIG bond or a share of Lehman Brothers. It has an intrinsic value. People need somewhere to live, and prices have been falling faster than rents. The National Association of Home Builders Affordability Index is near record levels. The CoreLogic home price to rental ratio, which compares prices and rents, shows that the rents and ownership costs are coming back into line, even if they're not historically cheap yet. But at some price, a home becomes so attractive compared to renting that it becomes foolish not to buy. That price may not be what you hoped. It may well be even lower than today's price. But your home's price now is far closer today to that intrinsic value than it was in 2007. Why wasn't the Times calling the housing market dead then?
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