Wikinvest Wire

The fundamental value of real estate

Tuesday, November 25, 2008

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.
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.


Anonymous said...

Your point is correct, unless you're like me and countless others who were forced into smaller homes or condos in less desirable neighborhoods due to bubble unaffordability. Instead of taking out an exotic loan, we bought less house. And so those parks aren't in my neighborhood, my yard isn't big enough to entertain, and a fireplace? please.

Anthony Alfidi said...

Value is a function of cash flow generation. No cash flow comes OUT of a house you've bought as a residence, unless you rent out the room above the garage.

Commercial real estate is another story.

Aaron Shechet said...

You can rent a house and use it for shelter....

Along the lines of what Anthony said, the true value in real estate is the leverage you get, and the tax deductions. But that's only helpful in an appreciating market.

Tim said...

I think the point here is that the "value" being discussed is not the "monetary value", but other forms of value.

Anonymous said...

Don't be goin' all soft on us now Tim...... really......

Anonymous said...

Put another way: a house is not a home. You can't buy a home.

Greyhair said...

Tim, even an appreciation rate that is slightly above inflation would mean that housing as an asset is a good hedge. That's better than what bonds have been paying when you factor in the tax advantages and when you look at the "paying off the mortgage" portion of savings.

And yes, it is a home too. Can't say that about a lot of investment vehicles!


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