4 Current Myths About the Real Estate Market
1. Real estate is still a great long-term investment. Sorry, but no. "In real terms (adjusted for inflation), house prices today are roughly where they've been since the 1950s, aside from a few booms that have come and gone," said Trulia chief economist Jed Kolko. This chart based on the methodology used to calculate the Case-Shiller Home Price Index shows how close today's home prices are to 1950s prices. You'll also notice that, outside of minor ups and downs (and, of course, excluding the most recent housing boom and bust, which was pretty dramatic), home values have remained pretty steady over time. Zillow chief economist Stan Humphries points out that, historically, home values have appreciated at an average of 3 percent a year -- that's pretty slow growth. "Typically, housing is more stable, so you don't make as much money over the long term," Humphries said.
2. People are giving up on the suburbs. Widely reported statistics from the U.S. Census Bureau last year had us all thinking that, for the first time in decades, cities were growing faster than the suburbs. So wait, people don't want to live in the suburbs anymore? Not so fast. The Washington Post found holes in the theory, noting that "urban cores are still much, much smaller than the suburbs, which means they can show higher growth rates even if they're adding far fewer people in absolute terms." Trulia did its own research, analyzing growth in "suburban" neighborhoods versus "urban" neighborhoods from September 2011 to September 2012 in the country's 50 biggest metros. (The site based "suburban" and "urban" on neighborhood density and analyzed U.S. Postal Service data on how many occupied homes were receiving mail.) Trulia found that the suburbs grew much faster than urban centers, 0.73 percent to 0.35 percent, respectively.
3. We're seeing a permanent shift to renting. That's not what recent studies show. A recent survey by Prudential Real Estate found that 96 percent of American consumers consider homeownership important. Most young people want to own a home, too, with 77 percent of people between the ages of 25 and 44 saying that it's "very important." Trulia did its own survey, finding that 93 percent of Millennials who rent plan to buy a home in the future. Additionally, a January survey by homebuilding company PulteGroup showed that 6 in 10 renters who want to own a home plan to buy in the next two years. But ...
4. Buying is again better than renting. It's true that buying has become more affordable than renting in most U.S. metros -- under certain circumstances. If you're willing to stay put for a while -- say, five years or more -- then buying makes more sense in many places. But if you're going to move after a year or two, don't buy. "It really depends on where you live and your personal situation," Humphries said. Zillow recently analyzed the "break-even horizon" for owning versus renting (how many years it takes before owning becomes more financially advantageous than renting), and it's not all good news. Though in more than 75 percent of metros it would take three years or less to break even, Humphries said to consider the case of two California towns. In Mill Valley, just north of San Francisco, it takes 8.8 years to break even; in Menlo Park, where home prices are about the same, it takes 14.1 years to break even. Unless you know that you'll live in a home for that long in those cities, stick to renting.
See also: Where Decrepit Homes Fetch Top Dollar, When They Have Mountain Views
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