Housing: Residence or Investment?

Home prices have been rising for 28 consecutive months.

June 1, 2014


“Americans say real estate is the best long-term investment,” notes a recent Gallup survey, rating it ahead of gold or stocks.

“Americans are regaining faith that real estate is the best choice for long-term investments…” however, “this leaves groups with lower home ownership rates, such as lower income and younger Americans, still looking elsewhere....”

But, is a house an investment vehicle, as many believe, or is it a just a home?

Experts’ opinions vary, according to The Wall Street Journal.  

One expert notes: “If you own a rental property, then yes, you should consider that an investment.” 

Another believes that real estate holds the potential to be a good investment over the long term, but it “depends on whether you’re willing to wait and only buy when the price is right, and whether you’re prepared to sell if the prices rise too far too fast…” In other words, if consumers really look at their homes as investments, they must respond to the market with home ownership as they would any other investment.

Still others say a house is a “residence, not an investment,” noting further that homeowners have maintenance, insurance, upkeep, and other costs to consider.

“If you look at the history of the housing market, it hasn’t been a good provider of capital gains.  It is a provider of housing services,” notes Nobel Prize-winning economist Robert Shiller in “Economist Debunks Housing as Investment.”  

The article notes that because a home is most Americans’ biggest asset, it is easy to understand how this becomes problematic.  “When you have inflated expectations about the largest asset you own, you walk down the path of financial disappointment.”

Indeed, American home values plummeted by nearly $7 trillion from 2007 to 2011, a disappointment to many who hoped to fund their retirement via their domiciles.

Whether or not a house is favored as an investment, housing is certainly an important economic driver and indicator. 

Let’s examine the economic status of Americans’ favorite investment.

‘Never invest your money in anything that eats or needs repairing.’—Billy Rose, American showman

Negative Equity Continues to Fall, Concentrated in Bottom Tier” says Zillow. 

Nationally, the negative equity rate has fallen to 18.8%, down from the 2012 peak of 31.4% in the first quarter.  “However, more than 9.7 million homeowners with a mortgage still remain underwater.”

Further, “the effective negative equity rate nationally…is 36.9% of homeowners with a mortgage.  While not all of these homeowners are underwater, they have relatively little equity in their homes…” 

Consequently, it is difficult to buy or sell for these homeowners.

Mortgages Remain Cheap, But Shoppers Aren’t Splurging,” says MarketWatch.  Despite mortgage rates cutting the costs of borrowing to the slowest pace in nearly 14 years, consumers hold tight on housing expenditures.

“Memories of the financial meltdown may be haunting some…And then there’s the labor market, which is adding jobs too slowly to inspire much confidence….”

Homeowners refinancing in the first quarter slashed interest rates an average of 1.4 percentage points. That equates to interest savings of $2,800 over the next year on a $200,000 loan, cumulatively saving consumers in excess of $1 billion over the same time period.

Meanwhile, “about 133,000 homeowners received permanent loan modifications from mortgage servicers in the first quarter of 2014…” and of them, “about 91,500 homeowners received proprietary loan modifications and 41,363 homeowners received loan modifications completed under the Home Affordable Modification Program,” says Housingwire.  

About 55% of proprietary loan modifications done in March resulted in mortgage and interest payment reductions in excess of 10%. 

Short sales have also lessened since first quarter 2013, but “…the steady number of short sales…suggests that there are still some borrowers who prefer a graceful exit from the property as opposed to a retention option.”

‘Spend not on hopes.’  --George Herbert, English poet

There are “Three Major Things You Need to Know about the 2014 Housing Market,” says Housingwire.  These three trends are:

1.       2014 will be “the strongest year for housing activity since before the Great Recession”;

2.       Housing formations increase as more people live independently; and

3.       Mortgage credit availability will remain steady or improve.

And, “The fundamentals of the U.S. housing market remain sound, despite the recent slowdown in home sales,” says The Wall Street Journal.  Monetary policy is discussed in this article as Federal Reserve Board Philadelphia President Charles Plosser shares: “The crisis in the U.S. is long passed.  With a growing economy and the Fed’s long-term asset purchases coming to an end, now is the time to begin to contemplate restoring some semblance of normalcy to monetary policy.”

Plosser notes that because wage growth has accelerated, and as we approach inflation goals of 2%, policy adjustments must be considered.  “…That may well require us to begin raising interest rates sooner than some people seem to think.”

The majority of Fed officials believe short-term rates will remain near zero into 2015.

“Some express concern that the housing recovery in recent months is waning…” said Plosser.  “I’m actually more optimistic…fundamentals of housing are still sound, even though sales have leveled off…prices…are still rising…Now, if prices are rising and sales are falling, or at least stabilized, that suggests that it’s not just weak demand that’s causing the problem.  It could be restrictions in supply.”

Indeed, “Inventory Shortage Makes for Competitive 2014 Housing Market” concurs Mortgage News Daily.  Things remain difficult in the housing market, according to real estate brokerage Redfin, as potential move-up buyers find lack of inventory.

This in combination with rising rates and prices leads to “affordability challenges” and “the balance of power has recently shifted to the buyer side.”

Home prices have been rising for 28 consecutive months although the amount of increase is lessening from “the 20 percent annual gains that were happening in late 2012.”

Home pricing fluctuations can be challenging.  “When some cities have 25% price gains while other cities are flat or down in price, it can lead to difficulty for buyers, sellers, and even banks financing mortgages.  If all cities share stable and sustainable housing price appreciation, the whole economy stands to benefit.”

Perhaps complicating the question of “is a house a home or an investment?” is the emotional component that’s part of housing issues for many consumers.  Typically, memories and life experiences are not made in stock purchases as they are in housing choices.

The “when” and “what” in housing choices is very important.  Americans may want to keep in mind the sentiment of Dr. Daniel Kahner, 2002 Nobel Prize winner for economics, when they choose real estate as a favored investment: “The more emotional the event is, the less sensible people are.”

LORA BRAY is an information research analyst for CUNA’s economics and statistics department.