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.
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:
#1. 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.
#2. 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.
#3. 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.
#4. 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.