The Future for Home Prices

The WSJ has “a good article on real estate prices”: and includes three gems that show how Americans make bad decisions when investing:

bq. In a poll of 2,000 adults, real-estate-data provider found that 61% believed the value of their home would either remain level or rise over the next six months.

6 months! Americans are nothing if not optimistic. Housing prices have fallen every year for the last few years, 10% in the last year alone. But 61% of those surveyed believe that the next 6 months will reverse all of that. What are they thinking will ignite a surge in home prices? Houses, like all things, are priced by supply and demand. Right now, there is excess supply and very little demand so prices will continue to fall until they reach a point where they are so low that demand picks up. That’s not likely to happen by May 2009.

bq. Another survey of more than 1,000 homeowners, sponsored by real-estate-services firm Realogy Corp., found that 91% thought that owning a home was the best long-term investment they could make.

Real estate values are not great investments, especially not long-term investments. A house is a wise purchase because you have to have a roof over your head and putting money into something that you own and can even grow and beat inflation is better than throwing it away in rent. Plus, the tax breaks make owning even cheaper. Real estate is relatively safe, but not a great investment (and not without risk).

bq. And an online survey of 5,000 people commissioned by Citigroup found that just 32% believed it was a good time to invest in stocks — but 51% said it was a good time to buy a home.

Stocks are still the best long-term investment. Real estate barely beats inflation (2.5%) but stocks average 10% or more per year. People don’t believe that because they invest emotionally. People seem to think that buying stock when the prices are low is dumb, yet they flock to Wal-mart to get low prices on everything but their investments. Do people think that if you buy stock in a bear market that they’re getting lower-quality stock that is less likely to rise? It’s very weird.

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