REAL ESTATE AS AN INVESTMENT
Lawyers are not financial advisers but we do lots of real estate transactions and for most divorce clients, the largest asset in the portfolio is the family home. So in just about every matrimonial case, there is the inevitable question. Should we hold or is it time to fold?
It’s always good to study the data. And the news for our region for the second quarter of 2009 is relatively good. Prudential Fox and Roach reported the first region wide increase in housing prices in two years. The biggest increase was in the city (6.8%) while the suburban increase was less than half that (2.7%). There had been a sharp decrease in the first quarter of the year. We have also weathered the storm well compared to other large cities. Philadelphia prices have declined 12% from their peak while average declines in the ten largest cities was closer to 30%.
Inventories (homes listed for sale) are leveling off and there is an increase in the rate of sale of those houses in inventory. This has meant a reduction in the number of days it takes to sell a house.
So, does that mean the end of the downturn is over. Even the experts a Fox & Roach hasten to note: “Those expecting a near-term return of 2005’s peak prices will be sadly disappointed.” Within the region, the worst sales markets were Camden and South Jersey (down 10-11% in the past year) while Trenton area fared best (down 0.5%). The Philadelphia market fell 5.31%.
While the second quarter offered an uptick in the rate of sales, it still took 20% longer to sell a home in June 2009 than it did June, 2008. The average house sold was on the market more than three months. If no new homes were listed, the 2,500 homes on the market would still take almost a year to clear at the current rates of sale. That number has changed very little from last June.
Homes are not just places to dwell in. They are an investment. And since the collapse of the dot-com bubble of 2000 Americans have invested heavily in their homes. We have been taught and there is data to show that homes can be a good investment. What most of us tend to ignore is the fact that value is a moving target. And in markets like Phoenix and LasVegas, where prices have declined an average of 33% in the last 12 months the picture is especially clear.
Let’s use LasVegas as an example. Let us say that in April you owned a house in that market in which you had equity (price $300,000 –debt of $200,000) of $100,000. A buyer approaches you and offers you $300,000. But you bought the house for $450,000. So you decide to wait and turn down the offer. Between April and the end of July, the data show that you lost another 2.6% on average. Now suppose you took the offer and took your equity of $100,000 and put it in an S&P index fund, it would have risen to $130,000. So your decision to hold cost you $40,000 between the loss on what you had and the money you failed to make.
Home equity is an engine of potential wealth. We are not advocating irresponsible borrowing but home equity is trapped wealth except in times when home prices are rising. And with the inventory of homes still out there, it is going to be a long time before we see prices rise. Bear in mind also that the increases reported earlier in this piece come at a time when interest rates are at historic lows. As interest rates rise, price increases in homes will inevitably face the headwinds of increased interest rates. So, if you bought at the height of the market, realize that in your quest to recover your losses, you may be foregoing the opportunity make real money in other investments.
