Is Real Estate Still A Good Investment Vehicle?

This economy has many of us wondering what is the best way to invest our hard-earned dollar bills. So naturally, this path of exploration will eventually lead us to the question of whether or not real estate is something that we should be investing in, for the time being.

The answer to this will depend on whom you ask. Just about any old-timer will tell you that real estate is something that will always be there. Even if the value of the dollar is soon outranked by the peso, you’ll have land that you can call your own and live on. Also, land doesn’t just disappear… and you can’t manufacture it. (Well, maybe you can, but you know what I mean.) The law of supply and demand guarantees that eventually your investment will increase in value.

The fact is, you can’t just make a blanket statement that, yes, all real estate is a good investment, because the accurate answer is always: it depends.

Conventional wisdom says that buying real estate is a long-term investment that will always pay off and that the real estate bubble burst is merely speedbump on the road to wealth. But is that always the case?

When you own a house outright, there are still HOA, maintenance, insurance, and taxes to account for. Depending on where you live, these expenses may be pretty hefty. By the time you sell your place, you may have already spent most of your profit from the sale. According to some numbers from the Office of Federal Housing Enterprise Oversight, if you bought a $290,000 home in 2007 at the average 2006 rate of 6.41%, by the time you were done paying the mortgage over 30 years, as well as taxes, insurance, maintenance, repairs, improvements, etc., you would have to sell that same house for $1,073,000 just to break even. (That doesn’t even include utilities.) Generally, plan on spending at least three times the amount you paid for your home over the thirty years, plus the taxes, insurance, maintenance, and so on. Still think that real estate is automatically a good investment?

Let’s also remember that most people don’t stick around for 30 years before they sell their house. Plus, your initial entry costs (down payment, mortgage points, closing costs, perhaps some maintenance or remodeling) are substantial. Spread over 30 years, these upfront costs even out. But most people are gone within seven years.  One who is renting and invests what would have been the down payment into stocks instead is much more likely to come out ahead with much more.

Despite more government programs to assist in mortgage modifications, industry people in the know state that “mods” are down nearly 67%, due primarily to complexities in the new regulatory requirements.  The delays have only created longer lines for those able to request a much-needed change, but the economy has yet to create a more favorable environment for refinancing.  Per capita disposable income has been flat for the past decade and shows no signs of increasing across the board.  The impacts of years of outsourcing and lax immigration standards will be felt for years to come.

Stock values for real estate industry firms may have appreciated to a degree, but a full recovery in the real estate market is a premature notion.  A “perfect storm” of foreclosures is looming on the horizon, threatening another 20% reduction in prices.  Until basic fundamentals return, the outlook for the real estate market is still grim. It is important to always approach investment in a diversified manner, and never put all your eggs in one basket (or house).

Bi line: Chris Marchalleck is a market analyst for Forex Traders, an online resource for news and information on the forex market.

 

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