You better believe real estate is a good investment and it is definitely a good investment in early 2014.
I know making a statement like that just opens me up to all the pundits, but it must be said. All things considered, and judging the investment on a risk vs reward basis, single family housing beats all the other investment competitors: stocks, bonds, commodities, fine art, etc. Those all have their place in your portfolio, but I still think real estate is king for 2014. And by 2014, I’m not saying that is your investment horizon for real estate. I’m saying 2014 is your entry year for a long term investment. And in fact, if your time horizon is short, a couple of years or so, I would argue no matter what you are putting your money into, you aren’t investing. By the nature of investing, the timeframe is many years. An investment is made because you believe the value of your investment will increase over the long run. And that long run can be 10,20,30, or more years.
Now lets look at why real estate is a great long term investment, contrary to what guys like Robert Shiller will have you believe.
To be honest, when writing this article I really struggled on deciding whether to disprove the reasons not to invest in real estate versus just outlining all the reasons to invest in real estate in 2014. In the end, I decided to list the reasons you should invest and discuss the opposing views along with those points.
Demand Far Exceeds Supply
The fact that demand for housing is incredibly high and the supply of housing (housing inventory) is at historic lows is powerful. In fact, it is the primary driver in housing prices. It outweighs all other forces at work. The good old Supply and Demand curve is the driver of housing prices. The last time I heard a home buyer tell me, “Wow, there are just so many options out there to choose from,” was back in 2009. The typical statement is, “… there just isn’t anything to buy.” A typical sight in Houston, TX is the foundation of a house with a “Sold” sign in front of it, sellers really work about their “for sale” sign. But you don’t need to drive down the streets to see that, you can see it in the national data. There will be continued pent up demand ( from the low purchasing levels during the recession ) for real estate in 2014. A guy like Schoenberger points to September pending home sale activity dropping 5.6% but fails to mention two key caveats. First, the market has been climbing since 2010 and been on fire for 12 months. No market is a linear march to the top, not one single bull market, ever. Second, the 5.6% decline is from the prior month. September is one of the worst, if not the worst month of the year for housing. If you compare the pending home sales data to September of 2012, the decline is 1.2% which is hardly a major drop. You can’t ignore the larger trends when faced with short term data.
The reason for the drop in pending home sales is that due to housing inventory catching up to home sales, many buyers are choosing to wait out the slow (and culturally inconvenient time of the year to move) Fall season until next year to purchase in hopes that there will be more supply.
Home Mortgage Rates are Still Near All Time Lows
You’ve heard it for years, but yes, while not at their insanely low rates over the summer of 2013, mortgage interest rates are still very low! Look at the chart. 30 year conventional mortgage rates are below 5%, for anyone to say that that rate is too high for homes to sell needs only look at the graph …
If anything, I believe slightly increased mortgage rates will help housing sales and housing prices. While one can argue that increased mortgage rates will make housing more expensive and thus cause purchasing to go down, I think it will actually stimulate investor purchasing. First, due to the quantitative easing, there is a lot of cash out there. A lot more than normal. And that cash is just looking to go where there are returns. Those investors don’t necessarily need to borrow to purchase real estate. When interest rates go up, rents will rise, as well, and investors will continue to jump into real estate driving prices higher.
Real Estate is an Inflation Hedge
So if you buy that real estate prices are going higher, you might still question how people are going to afford housing at even higher prices. Many experts say that affordability is stretched already. Well, let’s face it, no government has ever dumped as much money in the economy as the United State has done with it’s seemingly endless quantitative easing policy adding up at $85 billion-a-month pace (see chart below of the historical United States Money supply). Increased inflation is inevitable. And I can’t think of a better hedge against it that a real estate. The cost of materials and labor will increase with inflation and a homeowner locked in that cost the day they purchased their home. If you can even see a small amount of inflation headed to the US, you have to imagine that wages will increase with that inflation. Increased wages will support the higher housing prices, thus making housing more affordable.
I’ve painted a rosy picture, haven’t I? You’re house is going to increase in price and you are going to get a pay raise. That’s my prediction. If we can get the politicians to cooperate, the country could really have a bright future.
Real Estate is the best investment in 2014
No one has a crystal ball but if you are faced with the decision of where to put your money in 2014 real estate is very compelling. It’s human nature to be short-sighted. You look at how far house prices have run in 2013, and they seem expensive relative to just 1 year ago. However, I believe it is just the start of the housing price rise. If your time horizon is at least 5 years, I think you will be very happy with your 2014 real estate purchase. (Note: Just make sure you pay attention to things like location and quality of construction when you make your real estate purchase – but that’s another article.)