With the housing market’s resurgence – single-family home prices increased in 88 percent of U.S. cities in the fourth quarter – the idea of purchasing a house to use as as a nest egg appears to be coming back in fashion.

The most recent national median price for an existing single-family home, according to the National Association of Realtors, is approximately $179,000. This is a 10 percent rise from last year, which was the biggest gain since 2005.

Yale professor Robert Shiller, however, says not so fast. Real estate is still a relatively risky, if not downright crummy, investment over time. Shiller calculated that home-price appreciation after inflation from 1890 to 1990 was approximately zero percent. “Housing,” he told Bloomberg TV, “takes maintenance. It depreciates, it goes out of style. All of those are problems. And there’s technical progress in housing. So new ones are better.”

Shiller went on to say that housing as an investment was nothing more than a fad. “(Housing market investment) was an idea that took hold in the early 2000s,” he said. “And I don’t expect it to come back. Not with the same force.”

Leverage Key to Real Estate Investing, Experts SayTime to Invest in Real Estate Image

There are a number of real estate professionals that do not share Shiller’s opinion, arguing that in order to properly evaluate housing from an investment standpoint, one needs to first understand what gives real estate its value.

Homes for sale in San Diego, and all real estate for that matter, provide investors with the potential to create cash flow, whereas other similar investments, like cars, do not. “The value of a property is derived from what multiple the market assigns this cash flow, which is based on a variety of factors, from location to property type and tenant profile,” real estate expert, Andrew Jefferey, told Bloomberg Businessweek.

Jefferey added that many homeowners simply view their property as an asset, the price of which rises and falls along with market conditions, ignoring their key potential to throw off cash. He said that it is critical that potential real estate investors grasp leverage and how it works in the housing market.

For example, let’s say you’ve searched they myriad San Diego homes for sale and finally found the one to buy. You put down $110,000 on your new $540,000 home. Then, when you’re ready to sell, let’s say its value has increased to $650,000. You’ve essentially doubled your initial investment through debt.

Of course, interest payments and upkeep eat into that profit, and too many people know the pain of owing more on their mortgages than their homes are worth. But the tax deductibility of mortgages mitigates the risks.

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This is filed under National Markets.


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