Why the tanking market makes real estate a good investment

HomeWith home prices in the toilet, more than a few financial journalists and pundits have lined up to write the eulogy for single family homes as an investment.

In the Wall Street Journal, M.P. McQueen writes (subscription required) "While sales of low-cost housing are picking up, for many, a house is back to what it traditionally was: a long-term financial commitment, a sturdy shelter and a place to hang your hat." According to McQueen, "housing prices have turned homes into shelters, not investments."
Meanwhile, over at CBS MoneyWatch, Barbara Bedway writes that "Real estate is illiquid, and unlike a stock and bond portfolio, which can be sold piecemeal to raise a little cash, you can't sell half a house. Historically, real estate was an income generator - if the rental revenue exceeded the carrying cost, it was a good investment; if not, it wasn't. Once prices started rising 20 percent a year, the old rules were forgotten, and it seemed as if capital gains would go on forever."

Bedway's point is a good one: Real estate is most viable as an investment when carrying costs (mortgage, taxes, maintenance, and insurance) are less than the amount the property could be rented for. But here's the thing: The rate of decline in home values compared with flat rental prices in most areas and low interest rates has made homes better from a cash flow perspective than they have been in a long time. A recent Associated Press analysis of 45 metro areas found that the difference between the median rent and the median mortgage payment has fallen by a stunning $556 over the past three years: from $777 to $221. When you consider that most owner-occupied homes are bigger than most rental properties, it's clear that in many areas owning is actually cheaper than renting on lower-end, well-selected properties.

But what of McQueen's warning that a home is no longer an investment? It's total bull. Real estate and the stock market are two of the only products that most people find less attractive when they go on sale. The decline in real estate values makes a house a better investment than it's been in a long time.
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