The fundamental value of real estate

When will you know that home prices are likely to stop their decline?

When people stop talking about real estate as an investment, the chief offenders being the staff at the National Association of Realtors who continue to stand by the party line that housing is the typical American's best and most important asset.

While home prices may have appreciated a percentage point or two over the rate of inflation over very long periods of time, like stocks, there are no guarantees over shorter time frames, a reality that is hitting home for an increasing number of homeowners.

Plus, real estate has huge upkeep costs and tax liabilities that are too easily forgotten when prices are going up. When home prices go down, these costs just make a bad situation worse.

The real value in real estate is in its function as shelter - a place to live, a place to raise a family - a point nicely made by Steve Kersch in this column at MarketWatch today.

For most Americans, their home is their biggest investment. So when we read about record declines in U.S. home values, we naturally think our investment is in the tank.

But just because buying a house represents the biggest financial commitment most of us will ever make does not mean that its value is in its price and that if that price does not go up year after year we are somehow an investment failure.
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At its core, a house is a shelter. Unless the roof caves in, there is always some economic value in that.

But most people when they dream about a house or start looking for a house or actually buy one think about value in a whole different way: they think about the fireplace they can gather around with their families, the kitchen where they can show off their culinary skills, the bathroom that they won't have to share, the schools they will be able to send their kids to, the neighbors they will be able to entertain in the backyard, the parks they can bike and hike and the community events they will be able to attend.

Yes, you have to make a price decision. And that can come back to haunt you if you're forced to sell in a market like this. But that doesn't mean you value any of those other things any less.

That's a nice holiday sentiment for all the struggling homeowners around the world, for whom things look decidedly different today than they did just a year or two ago.