Home Investment Still Sweet? Think Long Term

For all the doom and gloom about the housing market, it still is generally profitable to own a home. That might be a difficult fact to consider right now, especially to the 16 million homeowners who owe more on their mortgage than their house is worth. But history suggests the American Dream is a reasonably secure bet. Homes have appreciated by an average of 4 percent per year since World War II. Homes act as hedges against inflation and bestow distinctive tax benefits. Real Property is a leveraged investment; a 10 percent down payment produces a 1,000 percent return if the cost of a home merely doubles. Plus there are intangibles: Owning a house provides a sense of independence, safety and community. And you get to reside in your investment. You aren't able do that with a stock.

Of course, historical trends don't actually make payments on the mortgage. Consumers who wade in and out of the housing market too often, or who purchase at the wrong time or price, and need to sell quickly, can get burned. But if you own for a decade or longer, price appreciation usually overcomes the downward slumps.

Tony and Liz Iacobelli, who are deep under the water on the house they bought in the Phoenix suburb of Buckeye a few years ago, aren't alarmed. They owe about $177,000 on their loan on the house that is only valued at $132,000, which is about 40 percent of what they paid. "Houses generally increase in price, and this one will go up again, too," says Tony, 51, a retired New York City policeman. Several booms and busts have occurred in the modern era of housing, which began when 30-year loans became widely available after World War II. This bust has been severe: Nationally, household prices are decreased an average 30 percent from their peak in 2006.

The collapse of the housing market may have put a hault to the notion of using a home as a speculative investment akin to a hot stock. And that may not be a terrible thing, economists say. "People should recognize that value comes from a lot of other things besides a possible return on the investment," says Joel Naroff, chief economist at Naroff Economic Advisors. Economists say home prices have risen by about half a percent a year above inflation, or roughly 4 percent, since the 1940s. That number, which is based on the median price of homes sold each year, was inflated a little by baby boomers starting families and buying bigger houses. Since the National Association of Realtors began compiling statistics in 1968, the median sales cost has climbed 6 percent annually, from $20,100 that year to $195,200 this past August.

In the late 1990s, home values started growing like stocks. For the next five years, they appreciated at 8 to 9 percent a year, or about 5 percentage points ahead of inflation. You won't find many skeptics among people who bought homes in the '90s and still live in them. Their homes may be valued at tens of thousands of dollars less than at the peak, but they're still frequently valued at twice what the buyers paid. For example, a house in Ewing, N.J., that sold for $160,000 in 1996 was worth about $410,000 three years ago. It's still worth $375,000 today.

Home buyer beware, however: Price declines happen to occur with some regularity. Besides the 30 percent price meltdown of the previous three years, the Standard & Poor's/Case-Shiller index of house prices in 10 cities shows four declines lasting six months or more since 1990. The declines averaged 3 percent. And whether large or small, a reduction can be followed by several years of flat prices. After the 1990-1991 recession ended a housing boom, prices didn't start increasing nationally until 1997. Yet housing has proved a reasonable investment if you stick with it. And with prices already having fallen so far, buying now could make it an even better one.

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