Real Estate May Be the Best Investment

April 17, 2013 by Douglas A. McIntyre

Foreclosed home
Source: Thinkstock
The rise in real estate prices appears to have created a growing belief that, once again, real estate is a perfect investment. The same sentiment prevailed in 2005 and 2006 before the housing crash. The enthusiasm may not be as wrongheaded this time. Real estate prices have years to go to return to peak levels. In many markets that may never happen. In the meantime, there is much evidence that price appreciation already has begun with force.

According to a new Gallup poll, the population in general has turned positive about real estate values. In a new piece of research, the firm says of real estate as an investment:

Even prior to the recent plunge in the price of gold, fewer Americans rated gold as the best long-term investment — with 24% saying so in April, down from 28% a year ago and 34% in August 2011. Real estate now essentially ties gold as the best investment, with 25% choosing it, up from 20% in April 2012 and 19% in August 2011. Stocks/Mutual funds are the third-most-valued investment, at 22%.

The opinion about gold was prescient. And with the recent sharp sell-off in gold, people are bound to withdraw whatever confidence they had in the precious metal.

The data on a modest belief in stocks and mutual funds is probably linked to two things. The first is that the run in stock prices, which has been relentless, may reach a ceiling soon. There is too much evidence that the economy has not recovered fully. Also, several early earnings releases for the first quarter show improvements in public company results are spotty. There is not enough evidence to fuel a long-term rapid rise in equities.

Most research about real estate, on the other hand, shows that home starts, home sales and real estate prices have strengthen. At the same time the rate of foreclosures has leveled off, at least temporarily.

The danger about real estate value optimism is that prices will rise over time as the general economy, inventory and unemployment drive value. However, a wave of current foreclosures has not been completed. In the past, the belief in real estate value was driven by the ability to tap into increases in home equity. Most banks, badly burned by that trend, will not offer home owners similar deals. That by itself will put a temporary top on the rate at which real estate prices rise.

Many Americans may think that real estate is a superior way to build assets. Over a long period, that may be true. In the meantime, the downward forces on the market have not come even close to ending.

Caveat emptor.

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Methodology: Results for this Gallup poll are based on telephone interviews conducted April 4 to 7, 2013, with a random sample of 1,005 adults, aged 18 and older, living in all 50 U.S. states and the District of Columbia.