Thursday, August 26, 2010

Don't Count on Housing for Building Wealth

House Fades as Means to Build Wealth by David Streitfeld of The New York Times reports that housing should no longer be considered an investment. Housing has reverted to being a home, a place to live, as it has primarily been in the past. Only in the second half of the 20th century was housing used an investment, especially by inhabitants of both coasts. Since World War II, housing rose by 1.1% annually when adjusted for inflation. In the 1990's, housing rose by 4% a year over inflation.

According to the article, it is likely that housing will only keep up with inflation and that is a best case scenario. In the worst case, housing may actually depreciate but at a much slower rate than other goods, such as automobiles.

My parents and I benefited from the housing boom. My parents were able to sell their first two homes for a large gain. This contributed significantly to growing their wealth. On the other hand, their final home, which was purchased in 2000, will likely sell close the the price they paid. While we were able to sell our first house for 2.5 times what we paid, I expect we'll see little appreciation for the home that we've owned since 2003.

Overall, this is bad news for people who used their home as retirement savings. Many are probably close to or in retirement. The good news is for those just looking for a place to live; housing will be reasonably priced for quite a while. Housing may become very affordable again for those who are just graduating from college and younger.

For more on Crossing Generations, check back every Thursday for a new segment.

This is not financial or housing advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC


Anonymous said...

This is a ridiculous post only looking at one angle, which is now quite obvious after the housing bust. How about landlords who rent to payoff a mortgage, is that not using real estate for an investment? If anything we have now had the big bust and now is the time to get back in and start buying cheap property as an investment.

Super Saver said...

@ Anonymous,

There are two components to making money in real estate, a business part (rent income) and an investment part (property appreciation). I agree that money can still be made renting and paying off the mortgage. However, people that own a home can only depend on property appreciation to increase their wealth since they don't receive rent income. For both rental and personal homes, property appreciation will contribute much less to returns than in the past, unless, of course, one buys the property significantly below market.