Beware Doom and Gloom Thinking about the Current Real Estate Market

The recent foreclosure crisis has caused some experts to say that this is a very bad time to invest in residential properties. The market is flat, they say, and sure to remain so for the foreseeable future.

Don't listen to them. Since World War II, home prices have frequently jumped by 10 or 20 percent a year. It is true that on occasion, prices have held steady for as long as three to five years. There have also been times when certain cities have experienced severe downturns in their local economies, causing prices to fall temporarily. During the early 1970s, for example, large layoffs at Boeing drove Seattle home prices down by 20 to 30 percent. Yet Seattle recovered and home prices there are eight times higher than they were in 1971.

So before you put faith in so-called experts, take a quick trip through their faulty predictions from years gone by:

• "The prices of houses seem to have reached a plateau, and there is reasonable expectancy that prices will decline." (Time, December 1, 1947)

• "The days when you couldn't lose on a house purchase are no longer with us." (House Beautiful, November 1948)

• "The goal of owning a home seems to be getting beyond the reach of more and more Americans. The typical new house today costs about $28,000." (Business Week, September 4, 1969)

• "The median price of a home today is approaching $50,000 . . . Housing experts predict that in the future price rises won't be that great." (Nations Business, June 1977)

• "The era of easy profits in real estate may be drawing to a close." (Money, January 1981)

• "In California . . . for example, it is not unusual to find families of average means buying $100,000 houses . . . I'm confident prices have passed their peak." (John Wesley English and Gray Emerson Cardiff, The Coming Real Estate Crash, 1980)

• "If you're looking to buy, be careful. Rising home values are not a sure thing anymore." (Miami Herald, October 25, 1985)

• "Most economists agree . . . [a home] will become little more than a roof and a tax deduction, certainly not the lucrative investment it was through much of the 1980s." (Money, April 1986)

• "The baby boomers are all housed now. They are being followed by the baby bust. By 2005,real housing prices will sit 40 percent below where they are today." (Harvard Economist, Gregory Mankiw, "The Baby Boom, the Baby Bust, and the Coming Collapse of Housing Prices," Journal of Regional Economics, Fall, 1989)

•  "Financial planners agree that houses will continue to be a poor in­vestment." (Kiplinger's Personal Financial Magazine, November 1993)

• "A home is where the bad investment is." (San Francisco Exam­ iner, November 17, 1996)

• "Your house is a roof over your head. It is not an investment." Ev­erything You Know About Money Is Wrong, 2000)

• "But the real question is, how will [housing prices] look longer term? As I've said in the past, I do not think that housing values will be higher five to ten years from now." (Yale Economist Rob­ ert Shiller, quoted in Newsweek, January 27, 2005)

Fortunately, the actual history of home prices and real estate invest­ment returns has differed greatly from those recurring claims of "the end of real estate" as an investment. During the past 60 years, average home prices have multiplied 5, 10, and, in some areas, 20 times or more.

As our new century continues to unfold, we will undoubtedly look back to today's "high" home prices in cities such as Miami, San Diego, Boston, and New York. We'll say, "Boy, those were the days. Can you be­lieve I could have picked up a three-bedroom, two-bath home in Clairemont for just $400,000?"

As always, today's a great time to invest in real estate - if you develop the right strategy. Foreclosures, REOs, distressed sellers, and of course, creating value remains a time-tested technique in down cycles. Just as promising, seek out those areas of the country (or the
 world) that are steering clear of the overbuilding (and over-lending) that has temporarily dampened some widely-publicized markets. How can you capitalize on these emerging opportunities? Education and market knowledge.

Certainly, prudence pays off. Whereas, fear of action never places you on the path to wealth.