Mortgage News

You have heard this decree time and time again in the media: “Real estate as an investment is doomed.” Despite such negative connotations which make good news stories but are not scientifically based, the American Dream continues to be aligned with home ownership. We have come to realize that not everyone has the financial wherewithal to own a home. However, more than 60% of American’s own their own home and the latest statistics released by the National Association of Realtors shows that the average homeowners net worth is forty times that of renters.

Today we will present data about the future that is based in real evidence instead of hype one way or the other. We will start with a historical view of home prices. According to the census bureau, the median value of homes adjusted for inflation quadrupled in the 60-year period from 1940 to 2000.

Here are the numbers:

Adjusted for Inflation:

1940: $30,600

2000: $119,600

Not Adjusted for Inflation:

1940: $2,938

2000: $119,600

It should be noted that even though home values have dropped precipitously in the 2nd half of the past decade, this happened after a significant run-up during the 1st half of the decade. Thus, prices are still significantly higher today than they were in the year 2000.

Now the important question. Are enough people going to purchase homes in the future in order to support the price of housing? There is no doubt that several factors have slowed housing sales. Some of these factors include:

¨ Lower household formulation. Part of this factor is due to slower population growth and part is due to families “doubling” up. Less Americans are having babies, more children are living with their parents and even divorces are being postponed because of the present economic situation.

¨ Over-supply. With a “shadow inventory” of somewhere between three million to eight million homes being held by banks in the process of foreclosure, there is no doubt that there is presently an over-supply in the market. This has provided many with great buying opportunities.

These are very real concerns. However, we must point out that real estate is not a short-term investment. That is why we provided such a long term historical perspective. True, homes may not appreciate in the next year or perhaps for the next few years. But what about two decades from now? To answer this question, we must review the most significant demographics.

Population Growth. Despite the recession, the Census Bureau reports that the population of America grew almost 10% in the past decade. That was an increase of over 26 million people. The Census Bureau also has released population projections that show the population reaching almost 430 million by the middle of this Century. That is an addition of almost 130 million people, which was almost the size of our whole country in the 1940s. Will this cause the need for 40% more homes? Perhaps not, as much of this growth will come from immigration and immigrants do not tend to purchase homes, at least for some years after arriving. Even if the need is for 25% more homes, this is a staggering number which does not include replacement of the housing stock which becomes outdated.

Back to household formulation. The growth rates today are projected to be lower because of the slow economy. For example, growth is projected to be “only” from 12-14 million in this decade, according to the State of the Nation’s Housing by Harvard’s Joint Center for Housing Studies.

The economy is a temporary factor. As growth picks up, birth rates and immigration should increase and more children will leave the nest and form households. Even those who are foreclosed upon (the shadow inventory) will need homes to live in as renters. They will not all live in apartments. This means that lower homeownership rates may not translate into lower housing demand.

Finally, one should not discount the true benefits of owning a home which are not governed by the finances. A home gives a family security and a sense of permanence. If you keep up the payments, no one can tell you to move. You are able to pick the neighborhood and the best places to live are where people own their own homes. In other words, the American Dream is not tied only to the investment of dollars but to emotion as well.