Dangers of Homes -- or Homebuilders -- as Investments

Posted by: Ben Steverman on April 8, 2010

On the New York Times’ Economix blog, Harvard economics professor Edward Glaeser points out that home values don’t necessarily increase. Like stocks,

Houses are assets, too, but it’s a mistake to expect them to offer a regular rise in price. Houses pay hefty dividends to their owners in the form of living space — that’s the real return on housing investment — and the basic economics of housing doesn’t point to perpetual price growth.

It’s a good analysis of a complex issue. Of course, your house — like any investment — has the potential to increase in value. There’s just no guarantee.

As on other assets, the return on a home depends on the details, especially local demographics, how much it costs you to maintain it, and what your renting alternatives are. Some contend that real estate can serve as a hedge against inflation.

If you would rather rent but are still looking for a way to invest in a housing sector rebound, you might buy homebuilder stocks.

Listen to the warnings of Stifel Nicolaus (SF) homebuilder analyst Michael Widner before you do so. In a sobering Apr. 6 report, he says:

• The hope that homebuilders will benefit in the future by buying up cheap land now is largely a pipe dream. There’s not enough cheap land, and there’s lots of competition from other buyers, he says.

• Builder won’t “return to normalized earnings levels” before 2014.

• Homebuilder stocks will be volatile, yet they are likely to provide an annual return of just 3% through 2013. “At current prices, we see little appeal for buy-and-hold investing,” he says.

If you “buy and hold” a house, at least you get to live in it.

Reader Comments

Lynda L. Costen

April 9, 2010 9:39 AM


04/09/2010

Like any investment there is a need for market analysis, appraisal, engineering and structural evaluation. It the price is less than the value of the investment, buy. People always need a place to live. Be the owner of the real estate and day over renting to someone else who owns it. Buy it, get the minor repairs done and collect the rents.

Squeezebox

April 9, 2010 11:33 AM

There are reasons other than price appreciation for buying a home. For one thing, you don't have to ask the landlord's permission to put a hole in your wall. You can decorate your owned home any way you like (subject to zoning ordinances).

Devaraja Swami

April 11, 2010 2:05 AM

Human population continues to increase.
Earth square footage continues to remain the same.

So price / sq foot will continue to increase *in the long term* to accomodate an increasing number of people in the same square foot.

This will be partly offset by increasing square footage of living space by going into the third dimension [high rises and underground buildings], but again there is a limit to how high/deep we can go, as well as how much of earth can practically be covered in 3D living structures.

In the short term, more people are cramming into same living area, so price / square foot is reducing, or at least not increasing. But again, there is a limit to how densely people will be willing to stuff themselves, and how long.

So buy land where land is scarce [coastal areas, metro areas], and be prepared to hold on for 10 years or more.

Daniel

April 12, 2010 2:18 PM

Devaraja Swami-

Your logic is flawed. We're not looking at the population of Earth, rather the scope is limited to US housing market. So we need to look at the population growth within US, which has a decreasing rate of growth (as do nearly all developed nations).

Secondly, yes there is an increase in what's deemed "urbanization" where masses huddle to metropolis, but this is a separate issue to homes as investment and again you fail to support your argument.

Ironically, you failed to mention any meaningful analytic to support your argument, such as ROI, Real rate of return (inflation adjusted), etc.

www.madhedgefundtrader.com

April 14, 2010 4:05 PM

Please do not listen to your local real estate agent tell you how wonderful the market is now, about how home affordability is at 50 year highs, and the bargains of a lifetime to be had. This is what they tell you just before they hang themselves from the shower head in the open house they are holding. If there was ever a broken market, it is this one. With a relentless tide of ALT-A and option arm resets ever rising, the number of foreclosures hitting the market continues to soar. Some analysts calculate that there are 12 million foreclosures in a multiyear pipeline headed our way. More than 25% of home owners are underwater on their mortgages. If you tally up bank held properties, the downsizing prompted by retiring baby boomers, and those who would sell if they could, there are probably 25 million homes for sale in the US today. With unemployment staying stubbornly high, real credit worthy buyers are going to stay as scarce as a Sarah Palin bumper sticker on a Prius. The negative equity city (Miami, Las Vegas) has grown into the negative equity state (Florida, Nevada). If you do buy, expect to put up your first born child up as collateral, bring in your entire extended family in as cosigners, and live there for at least ten years if you want to sell for a profit. Rent, don’t own, and invest that down payment in commodities, commodity producing currencies and stock markets precious metals, and emerging markets. www.madhedgefundtrader.com

theoharis

April 18, 2010 1:35 PM

in Greece housing prices have declined and the real estate has crisis
http://www.businessdevelopment.gr/en/realestate.html

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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