Should A Home Be An Investment As The Housing Market Rebounds?

As the housing market looks to be on the rebound, our guests Karl Case and Christopher Mayer worked out what higher housing numbers really mean for the economy, homeowners, and Americans on the lookout for their dream home.

Columbia Business School professor of real estate, finance and economics Christopher Mayer spoke with caller Bruce from Clarksville, Tennessee – who said that higher home prices are bad news:

BRUCE: I disagree with everyone when it comes to higher real-estate prices. They lead to higher rental prices which lead to more people being homeless. I’m lucky – I’m a homeowner and my income is from thirty years of working at the same occupation. I would hate to know that selling my home would be my only way to support myself, because (laugh) it wouldn’t last very long.

CHRISTOPHER MAYER: So let me – let me say, my wife’s family lives in Redding, Pennsylvania. They live in houses that are worth no more than $100,000 a year. Both of them are at retirement age and I think what you’re saying is absolutely important to understand, which is most commentators and many callers come from places that are very very different from where most Americans live. And I would say house prices going up is not a pattern everywhere, it is a predominately coastal pattern, and other parts of the country where the economy has not recovered, including in places like Tennessee, but I can promise you also in Redding, Pennsylvania, the pattern has been very different  – people don’t buy homes for appreciation they buy them to live in them. And you’re absolutely right if my in-laws had not been able to pay off their home with thirty-year mortgages and have that paid off they wouldn’t be in retirement. So I think people do loose track of the value of housing because so many commentators come from places which have a really different experience than where many Americans live.

Karl Case — professor emeritus of economics at Wellesley College — and Professor Mayer also spoke to a 34-year-old caller’s concern that home-ownership as an investment goes against the central tenants that guide retirement investing: “diversity” and “reduce fees:”

KARL CASE: it is the largest asset class where you’re parking a whole lot of your net worth in one asset and it’s undiversified and you’re over leveraged to do it …

CHRISTOPHER MAYER: Let me jump in because I really disagree and you know Karl and I are very good friends, we’re going to agree on almost everything but not on this subject. I think buying a home has traditionally been the major way Americans have saved for retirement. And if you think about taking out a thirty year mortgage, unlike what people did In the recent boom, but what Americans have historically done is pay that mortgage down over thirty years and when they hit 65 they actually do what many economist think they should do which is annuitize. Owning a home is annuitizing. Why? Because no matter how long you live you can live in that home and only have to pay property tax and insurance.

Some wonder exactly what role foreign investors have played in this rebound – especially as buyers paying in cash. Professor Case explained why it’s hard to nail down what percentage of purchases foreign buyers represent:

KARL CASE: It’s hard to know, I’ve sent my students out to find out what percentage of the properties changing hands around here are bought by foreigners – you cant find it out. You can look up the name of the person that bought the house, but often times the name is the name of a lawyer, in particular the Chinese who are buying a lot of property in this country, are doing it very very quietly. And even in a way that makes it impossible to find out who the ultimate buyer is. So it’s a tough question to answer but we know it’s a big number.

Christopher Mayer also made some predictions for the future health of the housing market:

CHRISTOPHER MAYER: I think home prices on coastal markets are likely to grow after inflation, 1-2%. I think house prices in midwest and southern markets and in lower income communities are likely to mostly be flat maybe even fall after inflation basis. So I think Chip (KARL)’s point is exactly right for the bulk of people – which is if you’re thinking of buying a home buy a home you really want to live in, where you love the community. Don’t buy a home with the expectation of getting a very large capital gain because historically most of the return over your lifetime in a home is going to come from living in it. And that’s the biggest return and that’s the stability associated with home-ownership.


You can listen here to the full hour.

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