Five Reasons It Could Be the Opportunity of a Lifetime to Buy a House

It's cheaper to buy than rent in almost every major U.S. housing market, and over the long term home prices appear likely to rise substantially.

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The oft-quoted investment advice to “buy when blood is running in the streets” is usually attributed to one of the members of the Rothschild banking family. The most plausible version of the story is that Baron Rothschild said it to a hesitant client in Paris shortly after France was defeated by Prussia in 1871. One important detail is that Rothschild was supposedly talking about buying real estate, an investment that would be around for a while – certainly long enough for the Paris property market to recover from deeply depressed wartime prices.

The recent recession may not have been quite as dramatic as the Franco-Prussian War, but it still had a devastating effect on real estate, which lost a third of its value, on average. Economic trends, however, have begun to suggest that prices could rise substantially over the coming decade or longer. Most recently, Federal Reserve Chairman Ben Bernanke’s decision to begin a third round of so-called quantitative easing (effectively printing money) has increased the odds of eventual inflation that would greatly boost the prices of tangible assets, especially houses.

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There’s no guarantee, of course, that home prices will escape another dip next year, especially if there’s a recession or any sort of economic slowdown. And it may take some time for real estate prices to recover fully. In addition, not everyone who might want to buy today will be able to get a mortgage. But for people who can afford to buy a home and expect to stay in it for at least a decade, there’s a compelling argument that the current housing market offers an exceptional opportunity. Consider these five factors:

Buying a home right now is cheaper than renting. Both home prices and rents have risen a little bit from their post-recession lows, but rents are up more. Mortgage rates are at their lowest levels in more than half a century. And given current prices and tax benefits, owning a home is cheaper than renting in almost every major U.S. housing market.

The mortgage interest deduction is unlikely to be eliminated. Comprehensive tax reform schemes often call for curtailing the income tax deduction for mortgage interest. That’s understandable, since the tax benefit costs the government $80 billion to $100 billion a year that could be used instead to reduce overall tax rates. The Republican party flirted with including language in their 2012 platform which advocated for reducing the tax benefit of owning a home, but Governor Romney has remained vague on the extent of any proposed limitation for primary residences. And most commentators say that the real estate lobby and the broad popularity of the deduction among homeowners greatly limit the extent to which the deduction can be modified. At most, the cap on the amount that can be deducted may be lowered, but probably not enough to affect middle-class homebuyers.

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Home prices are very cheap but appear to be past a bottom. On a national basis, home prices are down more than 30% from their 2007 peak. Moreover, in some particularly hard-hit cities – such as Las Vegas, Miami and Phoenix – prices are down more than 45%. Even more striking, since the recession ended prices have recovered only a bit – the best one can say is that they aren’t getting any worse.

Eventual economic recovery will almost certainly boost housing prices. Following the recessions of 1973-75 and 1981-82, home prices rose by about 20% in real terms (i.e., not counting price increases from inflation) within seven years or less. The drop in home prices in the most recent recession was at least four times as large as the declines in those two previous recessions. As a result, the recovery is taking longer to get going, but the eventual rebound could be proportionately greater. Price increases resulting from inflation would be on top of those real gains.

A substantial amount of inflation seems likely at some point. Since 2008, Fed policies aimed at revving up the economy have more than tripled the basic money supply (including currency but excluding checking and savings accounts). In a simplistic sense, that means the potential exists for the dollar to lose up to two-thirds of its value. The reality is more complex, of course, and inflation pressures won’t begin to build until people and businesses feel free to start spending the excess cash they have. But as the recovery proceeds and spending picks up, the recent increases in the amount of money outstanding could begin to cause quite substantial inflation. To prevent that, the Fed would have to drain much of money that it has added over the past three years. And that would be difficult to do quickly, because it would risk jacking up interest rates to a level high enough to cause another recession.

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In short, since owning a home is typically cheaper than renting after tax benefits are considered, today’s buyers would come out ahead unless housing prices fall substantially. In fact, though, prices figure to rise, either because of an economic recovery or because of inflation (or more likely, both). Yet while buying a home today is a safer bet than it was before the recession, most people are more hesitant to buy a home today than they were five years ago. So it’s worth remembering that Baron Rothschild was right back in 1871 – Paris real estate prices did indeed recover as France went on to enjoy the boom times known as the “Belle Epoque.”

14 comments
Jacques LaBranche
Jacques LaBranche

Finally the recovery is happening and a construction boom can't be far behind. Once everyone can sell their homes and a huge relocation trend is underway the economic boom will go into full swing.

sunriser22
sunriser22

If you think housing prices will go lower, you are dreaming. They are at the lowest prices and can be bought at the lowest interest rates  than at any time in the last 50 years. Mexican and Canadian real estate is more expensive for a comparable home .

Pronghorn
Pronghorn

There are still many, many foreclosures to come. Don't assume house prices have hit rock bottom yet.

Epiminondas
Epiminondas

It may be the "opportunity of a lifetime", but if you don't need a house, don't buy one.  You will instantly come onto the taxman's radar screen and you will have to continually pay for upkeep.  A house is not an investment...it's a shelter.  If you plan on gambling on real estate, better look at it from every angle. If you're wealthy enough to buy a house as a rental property, that is an entirely different matter.  Other than that, you'd be wise to ignore half of what you're being told by real estate shysters.  Many of them are desperate.  Also, though the Fed plans on inflating the housing balloon, keep in mind that ALL other costs will also go up.  What you can afford today my look different in another five years.

darbunk
darbunk

I disagree.  A house is an investment.  We recently moved to SF, where we're paying $3100 a month in rent for 3bd/1bath flat. We're looking to buy now, and talk about sticker shock. It's hard to believe that prices are down from their highs. But for a home that is about $750K (pretty typical price for the areas we are looking in), our payments (after considering tax deductions) will be comprable to what we pay in rent. I'd rather pay the money towards a mortgage and build equity, then sign a check over to a landlord with nothing to show for it. Even with upkeep, the equity we will gain is well worth it. 

RealtorChris
RealtorChris

Yes, keep renting. It's the smart thing to do.

jontalus
jontalus

The media has been running stories on what a great time it is to buy since 2009. So go ahead and buy! Don't worry that single household formation continues to rise  (worldwide) or that interest rates as low as 3% hasn't increased sales, or that interest rates have no place to go but up or that the country is broke. So go ahead and buy b/c the band's still playing!

JZimm09
JZimm09

You know what...short term maybe (only maybe) you're right.  Long term...you're dead wrong.

David Pulliam
David Pulliam

Two of your points contradict each other. Recovery will boost prices vs Inflation on the way soon. Inflation will actually deflate prices. People aren't buying the price of a house, they are buying a payment. Mortgage payments are cheaper than renting (short term!) but when interest rates rise, the $2500 monthly payment you signed up for becomes $2800-3100 for the next buyer. He can afford $2500, just like you. So home prices will lower to meet the payment people can actually afford for those neighborhoods. It's a reverse of the pricing runup, really. Tricky loans brought lower payments to higher priced homes, so homes in moderate neighborhoods started selling higher and higher, while the buyer still had his/her $2500 payment.

Short term the mortgage may be cheaper than rent, but when it's time to sell and it's been less than 10 years, that may not be the case anymore. Usually isn't.

Jay Sun
Jay Sun

 That only makes sense if you're using an ARM. Those with fixed rate mortgages will benefit greatly from inflation, as it reduces the real value of their debt.

Prakash Iyangar
Prakash Iyangar

could you please clarify how does inflation deflate asset prices? i am seriously missing something here!!? 

Talendria
Talendria

It's a great time to buy an existing house (new, not so much), but you still have to be smart about it.  If you're married, don't buy more than you can afford on one income, and always get a home inspection (after you've checked the inspector's references).  A good home inspection can save you thousands down the road.

rjs0
rjs0

everyone is ignoring the temporary distortion in home prices caused by the Fed induced record low interest rates, which effectively reduces the amount a buyer pays for a home even as the list price rises..the average interest rate on fixed rate 30 year mortgages in July was 3.55%, a full percentage point lower than Freddie Mac's had the 30 year mortgage rate at a year ago...a simple mortgage calculation shows that the monthly cost per $100,000 on a 30 year mortgage in july of 2012 was $451.84, compared to the $509.66 per $100K one would have paid monthly on a 30 year mortgage last July; that means to buy the same house a year ago would have cost a potential homeowner 12.8% more in payments monthly than it would cost under current interest rate regimes....the so-called housing recovery is merely a fiction of low interest rates, which will not stay this low forever...