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.
#5. 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.
