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Once Again, the Housing Naysayers Have Got It Wrong
By Jason Forrest
The naysayers and pessimists are out in full force with their doomsday proclamations that homes are no longer a solid investment.
The New York Times printed this headline in August: "Housing Fades as a Means to Build Wealth, Analysts Say." And the September issue of Time magazine has the cover story, “Rethinking Homeownership: Why Owning a Home May No Longer Make Economic Sense.”
People have been reading these articles and thinking that they shouldn’t buy a home, but historically, booms always follow busts and demand eventually catches up with supply. Add the basic human need for shelter and the United States is in position for the inevitable — another housing boom.
It’s not the first time we’ve seen dismal predictions from credible sources such as The New York Times and Time magazine. Here are a few others:
■“The prices of houses seem to have reached a plateau, and there is reasonable expectancy that prices will decline.” — Time
■“If you are looking to buy, be careful. Rising home values are not a sure thing anymore.” — The Miami Herald
■“Most economists agree a home will become little more than a roof and a tax deduction, certainly not the lucrative investment it was.” — Money
■“We’re starting to go back to the time when you bought a home not for its potential money-making abilities, but rather as a nesting spot.” — Los Angeles Times
■“Financial planners agree that houses will continue to be a poor investment.” — Kiplinger’s Personal Finance Magazine
But wait, I forgot to mention the dates. Each of the above quotes was printed between 1947 and 1993. And following each, the markets recovered and eventually boomed. That means they were all wrong. Demand caught up with supply and the economy improved.
Those last two quotes came from 1993, a low point for real estate values in Los Angeles. Median prices in L.A. reached $222,200 at their peak in 1990, and dropped to $178,300 in 1998. Selling during the bust would have cost home owners more than 20%. I’d be willing to bet that more than a few people heeded the advice not to buy a home in the L.A. area and then missed out on one of the biggest housing booms in history. As usual though, prices rose in the long term, with median values reaching $533,200 in 2005. In 2010, median prices in L.A. are at $345,000, according to John Burns Real Estate Consulting's August 2010 report, which still represents a gain of more than 55% from 1990.
Los Angeles is not alone. The median home price in Austin, Texas, reached $109,000 in 1988. Two years later, median prices had fallen 28.5%, to $81,200. Median home prices in Austin today have reached $202,800, according to Burns, more than an 86% increase since 1988. Similar trends have occurred in San Francisco, Phoenix, Denver, Honolulu and other markets.
(In his article, “Housing Is Good as Gold,” Paul Cardis, founder and CEO of AVID Ratings, includes a graph highlighting national boom and bust cycles in the last 49 years.)
Warren Buffett says, “Be greedy when others are fearful and fearful when others are greedy.” That means that the time to buy is when the masses are freaked out and prices are low.
History repeats itself. Land has been king for thousands of years — starting with Solomon and going all the way through Warren Buffett, who has recently taken on top economists himself by ruling out a double-dip recession.
My dad taught me that if you want to be the best at something, you should copy what the best do. So if you want to be wealthy and successful, you copy the top 10%. As one of the world’s richest people, Warren Buffett’s strategy seems to be working out all right for him.
Investors are buying land while it’s cheap to eventually make a profit on the re-sale, and they now make up 60% of the buyers, said Jeff Frieden, CEO of REDC, in July’s Investor’s Business Daily.
In the recent New York Times article cited above, Stan Humphries, chief economist for the real estate site Zillow, said “housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.” He’s wrong — demand will catch up with the surplus housing inventory and then outweigh the supply.
We have yet to figure out a way to produce more land, but people still need places to live. Plus, the population is growing. More than 4.3 million babies were born in the U.S. in 2007, and they will be looking for homes sometime in the late 2020s. The Census also estimates an average 888,000 immigrants entering the country annually and projects a U.S. population of 392 million by 2050, more than a 50% increase in size from 1990.
Housing opportunities will also continue to arise from people entering new stages of their lives. The Census counted more than 54.5 million Americans between the ages of 50 and 64 in 2008. Approaching retirement, many of these folks will downsize or move to active adult communities like The Villages in Florida, the largest, most successful retirement community in the nation.
Growing families will want more space; newlyweds (there were almost 2.2 million of them in 2008) will need homes and workers will be moving in response to new jobs, job relocations or raises. Add those entering the workforce from high school and college, and demand is bottling up, positioning the U.S. for another housing boom.
Beyond the historical elements and the logic of supply versus demand, people are driven to buy homes for emotional reasons. Psychologists say that buying a home is the third most emotional thing people go through, following birth and marriage. Shelter is a basic human need; in Maslow’s hierarchy of needs it is right up there with food, air and sleep. But buying a home is also an important step in improving your life. It can mean a better school district or a less stressful marriage and it’s at the core of the American dream. Homes are a sound financial investment, but if that alone doesn’t motivate people to buy, their emotions will.
People are bound to panic during busts, giving in to their fears and market anxiety. Even so, as always, housing remains a solid investment. Demand will catch up with the supply; historically, booms always follow busts; and people are emotional beings who will do whatever it takes to provide for their families.
Jason Forrest is a new home sales trainer and author of “Creating Urgency in a Non-Urgent Housing Market” and “40 Day Sales Dare.” Contact information is on his website: www.jasonforrestspeaker.com.