When the housing market crashed, fingers were pointed in every direction possible.
But one common recipient of the blame was the home-as-an-investment concept. Homeowners spent more than they could reasonably afford on monthly payments and upkeep, while others used their home equity to borrow frivolously-spent money.
Time has passed and strict regulations have slackened once again, causing some to fear or predict that the idea is starting up once again.
Have consumers learned nothing from history, or is there a way to approach a home as a positive investment source?
Paul LeJoy, CEO and founder of Pacific Realty Partners, said the idea of a house as an investment is not a fad.
“Your home, if it has equity, it can be the best source of investment,” he told loans.org.
And the potential for investment is only growing.
According to Federal Reserve statistics released on March 7, household net worth was about $66 trillion at the end of Q4 2012. Household net worth, the difference between the value of households’ assets and liabilities, was $1.1 trillion more than Q3 2012. This was the highest level since the beginning of the 2008-09 recession.
Recovery, in some form, is at hand, according to CEO of OwnAmerica, Greg Rand.
“The general consensus is that every market was better in 2012 than in 2011 and better in 2013 than in 2012,” the 20-year real estate veteran said.
He continued explaining that even with the recession, the boom and correction still left the housing economy ahead.
Rand said that throughout history, homes were viewed as a “forced savings plan” which created wealth. During the recent housing crisis, the country recently experienced the dot-com wave and subsequent stock market crash.
Consumer faith in the stock market was low, so people turned to supposedly safer options. Rick Sharga, executive vice president of Carrington Mortgage Holdings, said real estate was a popular option.
But something changed, and consumers began using their homes as ATM machines.
Rand said to prevent a crash from occurring again, home buying is being treated differently.
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“We are getting back to the home as a conservative, forced savings plan, similar to a life insurance policy,” Rand said. “This is different than treating a home purchases like a tech stock or a day trade.”
A Changed Market
Chuck Iverson, broker associate for Coldwell Banker Previews, said due to extensive media coverage of foreclosures and short sales, people think more carefully about the home they decide to purchase and live in.
Although consumers are cautious now, in the past, decisions were made quickly and without thought for the future. Iverson said consumers took more out for home improvement or luxury items, thinking that rapid appreciation would continue for a long period, only to find out the opposite.
Conversely, Sharga isn’t sure if homeowners are truly making better decisions or if the market is simply forcing them to make prudent decisions.
“The reality today is that there is far less risk allowed by lenders, so only borrowers who can absolutely prove they’re capable of making their payments are getting the financing they need to purchase a home,” he said.
LeJoy believes heavier regulation, as well as low interest rates, are the driving factors for the economy.
“It’s good to be regulated,” he said. “You don’t want to buy something you’re not going to be able to afford. If they had those rules back in 2006 and 2007, we wouldn’t have had that crash that we had.”
Increased regulation such as extensively scrutinized appraisals and eliminating the idea of no-money-down financing has practically disappeared, Sharga said.
“There’s always very limited home equity lending going on, which means that borrowers are less likely to get themselves into financial trouble by using their house as an ATM,” he said.
Car and Home Values
The amount that a person or company can or should invest in a property is highly disputed among real estate professionals, economists, and homeowners.
In a February 2013 video interview with Bloomberg TV, Robert Shiller, a Yale University economist and a part of the industry-wide Case-Shiller index, said that the idea of housing as an investment was merely a fad and he even compared home values to car values. He said most consumers would not attempt to re-sell a 20-year-old car.
Sharga said that although he understands the comparison, he doesn’t believe the theory stands up after closer scrutiny. He said people have different expectations when buying a car or when buying a home.
“We know that a car loses value the minute drive it off the lot, and will continue to lose value until the day we sell it or trade it in. Cars are purchased with the understanding that they are fundamentally going to be obsolete after a period of years,” Sharga said. “Most people who buy a home anticipate that it will go up in value over time, or at least not lose value.”
Sharga said in some instances, a car can become a collector’s item. But this is rare. The potential for a home to appreciate in value is much more likely.
Homeowner vs. Investor
According to a recent survey by OwnAmerica, 84 percent of respondents believe that real estate is still the best long-term investment. Among respondents who have invested in real estate, almost 82 percent state they made money, and the same percentage expect real estate values to appreciate over the next 10 years.
Rand said the most significant outcome of the survey is the vast confidence in a long-term recovery.
“People understand now, more than ever, that building wealth in real estate takes time,” Rand told loans.org.
Sharga said if homeowners want to approach their home as an investment, they need to take a long-term view and set realistic financial expectations that “will not deliver outrageously high returns.”
“A homeowner should be looking at a property first as a place to live and raise a family, and second as an opportunity to build equity over time, along with some amount of price appreciation on the home,” Sharga said. “Investors, on the other hand, are typically looking at shorter durations and treating the properties like any other investment asset.”
LeJoy said homeowners approach the buying process with emotion, whereas investors approach a new deal with mainly money in mind.
“I don’t care where the house is, I just want the figures. I buy homes in the hills, in the ghetto. It’s not a home, it’s a house,” LeJoy said. “If an investment equals profit, then price is paramount.”
Beyond a differing mentality, investors are able to make quicker decisions such as “buy and sell,” whereas for a family homeowner, moving frequently and changing schools for their children, all cause a disruptive streak in the family balance.
In addition, using a home as an investment property does not tend to offer as much return on investment potential as others. Homes require regular maintenance, unforeseen repairs, as well as additional property taxes and utilities that renters do not experience. Monthly bills, as well as unexpected costs, are typically underestimated by homeowners.
“They may be one water heater malfunction away from financial insolvency,” Sharga said.
In order for a positive outcome to occur, homeowners need to make smarter decisions, according to Texas-based real estate expert Cathy Guasque.
“A home is a living breathing entity and must be maintained in order to increase in value over time,” she said.
But a lack of financial literacy is not just a downside for homeowners. It can strike for novice investors as well.
Sharga said that even though buying property can be an incredible risk, it can still be a good investment if the owners view it in the correct manner.
“If you view the house as a place to live — as a place to raise your family — and assume that your monthly cost of housing expense is roughly equivalent to what you’d pay as a renter, whatever positive return you get from the property is a bonus,” Sharga said.