Housing as an Investment

Housing is a key driver of the economy and continues to be a solid investment for the majority of American households. Housing provides steady returns largely unaffected by volatile movements in the stock market, and will be driven by a strong fundamental demand into the future.

Housing wealth has a more immediate impact on consumer spending than stock wealth and has sustained the U.S. economy since the beginning of this decade.

Home ownership is the traditional starting point for American families to accumulate wealth, according studies by the National Association of Realtors®, America’s leading advocate for home ownership.

NAR reports that the national median existing-home price increased 12.7 percent in 2005 and is projected to rise at a more normal rate of 5.0 percent this year. Since record keeping began in 1968, the national median home price has risen every year, even during recessions and periods of sales decline. Typically, in a balanced market, home values rise at the general rate of inflation plus 1.5 percentage points.

Buying a home should be approached as a long-term investment, providing both equity accumulation and tax benefits over time. Despite some high profile media reports, it’s important to note that most of the country has never experienced even a temporary downturn in home prices since modern record keeping began.

Low mortgage interest rates, a growing number of households, strong demographic factors, economic growth, and an improved labor market have been driving Americans in record numbers to purchase a home. In addition, over the last few years, Americans have shown a readiness to pull their money out of stocks and put it into real estate, often as a second home – a wise and practical move that provides safer returns in a tangible asset. In fact, one out of three of homes purchased are a second home – about a third of those are vacation homes and the rest are for investment purposes, generally to provide rental income.

Demographic demand also favors housing over the long term. The children of the baby boom generation, often called echo boomers, are the second largest generation in U.S. history. They total about 75 million people born from 1982 to 1995, and are just entering the years in which people typically buy a first home. In addition, the boomers themselves remain in peak earnings years, there is a strong immigration impact, and minority home ownership rates have been trending up.

The sharp changes in the financial markets over the last few years underscore the stability of residential real estate as a safe choice for consumers. Although it’s possible for local housing markets to experience temporary price corrections, most of the peaks and valleys in home prices that deviate from a normal, gradual increase tend to smooth themselves out during the typical period of home ownership.

Dollar for dollar, the rate of return on an individual’s cash down payment on a house is substantial. Home buyers typically use their own money to cover only a small portion of the purchase price, yet the home appreciation they realize is based on the total value of the property.

First-time home buyers make a median down payment of 2 percent, while repeat buyers put 21 percent down – thanks to the equity they’ve build in their previous home.

According to Harvard University’s Joint Center for Housing Studies, there is a dramatic increase in the rate of return on housing the longer it is held. For instance, the typical homeowner who experiences an annual home appreciation rate of 5 percent and who made a cash down payment of 10 percent will generally receive a 94 percent return on that cash after owning the home only three years. After owning for five years, a homeowner can expect a rate of return on the down payment to increase to 225 percent; after 10 years, the rate of return jumps to 623 percent.

The stock market has experienced wide swings in value over the past 20 years. During that time, overall home values have continued to rise steadily and contribute significantly to household wealth and spending patterns.

Housing is not a quick-in, quick-out investment. When purchased for the long term, housing is one of the safest investments a consumer can make. In addition to the savings accumulated through a buildup of equity and tax advantages, a home provides shelter. No paper investment provides this benefit.

Homeowners accumulate significantly more wealth than renters. According to the Federal Reserve Survey of Consumer Finances, the median net wealth of a renter household is $4,800, while the median net wealth of a homeowner household is $171,700. Clearly, owning a home is the best way for most families to build a nest egg.

Homeowners use their home equity to get cash for emergencies as well as for the purchase of big-ticket items, and have more confidence in housing wealth gains than stock gains that could prove to be unsustainable. In addition, the capital gain people realize from the sale of their home is a significant source of down payment funds for most repeat buyers; those funds are also used for other purposes that stimulate the economy through consumer spending.

The above information and statistics are from the N.A.R. National Association of REALTORS