Her Two Cents

A pretty picture, no?

If recent events have taught me anything, it’s that real estate appreciation isn’t a sure thing. And that buying a home as an investment is kind of a silly move. You should buy a home because you want to live in it, because it’s in a good school district, because you can imagine growing tomatoes in the backyard. And yes, it’s sometimes a reasonable way to build up a little equity, because some percentage of the money you’re paying every month goes toward the mortgage principal. If you buy a $300,000 house and make your payments for 30 years, eventually you might own property worth something like $300,000 (give or take some inflation, appreciation or depreciation).

But it’s no longer a reasonable way to build up a LOT of equity, as people used to do. Buying a $300,000 home and expecting it to be worth $450,000 in four years is a thing of the past.

Unless you’re a new home buyer in Boston, I guess. In the latest round of a survey by economists who ask new home buyers what they think will happen to housing prices over the next 10 years, Boston buyers said they expect prices to rise by 12 percent. Per year. Over the next decade.

Let’s think about that for a second. That means that Boston home buyers believe that their $300,000 home will be worth something like $660,000 in ten years. That seems reasonable enough.

Oh wait. NO IT DOESN’T. Are these people high? Home sales dropped 27 percent between June and July this year, and Boston homeowners think they’re still sitting on the real estate market of 2004.

The good news (I suppose) is that buyers have somewhat more realistic expectations about next year’s price growth, but they evidently still dream of real estate days gone by when it comes to the future.

The New York Times had an interesting article recently about the idea that housing is fading as a means to build wealth. In fact, until the 1950s or later, houses used to be viewed like cars—“as a consumer durable that the buyer eventually used up,” the article says. The idea of housing as an investment didn’t occur until after the second World War, and decade after decade, houses began to appreciate faster and faster.

By the late 1990s… the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times.

“The experience we had from the late 1970s to the late 1990s was an aberration,” said Barry Ritholtz of the equity research firm Fusion IQ. “People shouldn’t be holding their breath waiting for it to happen again.”

Unfortunately, I think Americans are still holding their breath. How long will it take us to recognize that buying a house is no longer about building superhuman wealth?

(Drawing, “Sold,” from moonape on Flickr.)