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Historically low interest rates — the lowest in over 40 years — have been key to the strength of home sales and house prices. These low rates have triggered a demand, spurred also by relatively low unemployment and tight housing stocks, that has boosted house prices.
Every year, more than a million new households are being formed. For the foreseeable future, builders will have to construct about 1.6 million new homes annually just to meet the needs generated by population growth and new household formations.
Housing Markets Are Local
Like politics, the housing market is really a local phenomenon. The high housing values in certain metropolitan areas are a result of the imbalances between supply and demand caused by growth restrictions that have limited the availability of developable land.
Eventually, interest rates will begin to gradually rise. This will have an effect on housing value, but nothing dramatic. The increase in home prices may slow, but the housing market will not undergo anything remotely like the volatility that the stock market is currently experiencing.
Prices for construction labor and materials continue to increase, and growth and land use restraints are driving up the prices of building lots — with little relief in sight. For the so-called housing “bubble” to burst, for home values to decline dramatically, the cost of building a home would have to decline dramatically. And given building costs and land use restraints, that is very unlikely.
Housing's Tax Benefits
The tax benefits that apply only to housing make it a very good, long-term investment, even if values increase only slowly. Mortgage interest and property taxes are deductible, the value of housing services generated by homes is not taxable, and profits of up to $500,000 on the sale of a principal residence are excluded from tax on capital gains. These benefits favor keeping a home rather than buying and selling homes quickly and often.
Unlike stocks — which can be purchased and sold in minutes — a home is a purchase that typically takes careful deliberation and a significant amount of time.
People buying homes examine all of the alternatives, everything from the style of house available to the test scores of local schools, before making a decision.
A Place to Live
And once they have made the commitment to a home and neighborhood and moved into the home of their choice, buyers are unlikely to turn around and repeat the process immediately, or repeatedly.
This is not to say that home prices cannot decline.
Occasionally, local markets may experience stagnant home prices — or even declines — if a severe economic setback causes housing demand to weaken in a particular area or region.
On a national basis, home values have never once shown an annual decrease. For this to occur, the country would have to be in very dire economic straits indeed.
For most people, a home is a solid investment. Its value will likely increase steadily over time, without the extreme ups and downs associated with many other investments, and it enjoys exceptional tax benefits. But a home cannot be completely valued in monetary terms, because it is so much more than just a solid investment. It is a place to live.
R. Randy Lee is the chief executive officer of Leewood Real Estate Group. He is a member of the NAHB Executive Committee and chairman of its Legal Action Committee. He is a managing partner of Lee & Amtzis, LLP, a New York law firm representing home builders and developers.
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