Tags: Home | prices | rebound | buy

Smart Money: Home Prices Won’t Rebound Sharply, but Buy Anyway

By    |   Monday, 14 May 2012 08:58 AM

The housing market is highly unlikely to sustain steep price increases in coming years, but that’s no reason to shy away from buying homes, says Smart Money’s Jack Hough.

Home prices have slumped to 2002 levels, he writes. Subtracting for inflation, they have slipped to 1998 levels – and 1955 levels and 1895 levels.

Why, you may ask?

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

“Because the natural rate of price appreciation for houses is zero after inflation,” Hough writes. “Prices will eventually stop falling. They'll resume rising. But over the long term, they're unlikely to resume rising faster than inflation.”

That’s because their value essentially represents the cost of goods used to make them.

So why buy a home?

Houses have functional value, and right now there’s plenty of it, Hough writes.

That value comes from either living in a home or renting it. To measure value he uses “rent yield,” the yearly rent that can be charged for a home divided by its purchase price.

“Landlords literally collect rent yields,” Hough notes. And owner-occupants essentially receive the same value, as they don’t have to pay rent.

In more than half of U.S. housing markets, the rent yield stands above 10 percent before taxes and maintenance, he says. That’s quite an attractive return in this investment environment.

Many financial advisers advise buying a home only as something to live in and sticking with real estate investments trusts (REITs) if you want to invest in property.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

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