Is housing a good investment now?

Posted by  on Feb 14, 2013

Q: I like to get in on an investment when it's down, but I prefer to invest when it is showing signs that the worst is over. Home prices have started to move upward, but still are nowhere near where they were at the peak. Does this make it a good time to buy a house as an investment?

A: You are right about the turn in the housing market. According to the S&P/Case-Shiller Home Price Index, residential property values have now been rising for ten straight months, and yet are still some 30 percent below the peak.

Does that make housing a good investment right now? The devil's in the details. Home price indices are useful for getting a big picture view of real estate trends, but they aren't as relevant for making individual investment decisions. The reason is that there is no way to buy a representative sample of houses from across the country, the way you can buy a diversified portfolio of stocks to replicate the stock market. In other words, you could be right about your view of the housing market as a whole, but still be wrong in your choice of individual property.

Ironically, one risk in today's housing market is low interest rates. Today's mortgage rates are at record lows, which allows buyers to pay more for houses. What you have to ask is how sustainable current mortgage rates are, and whether the housing rally could survive a rise in rates.

If you have an opportunity to buy a house as a residence, or as income property in an area you know will support the rent you plan to charge, then low interest rates and reasonable housing prices make this a good time to buy -- at least in most of the country. However, if you are looking to make a gain on a quick flip of the house, then your local market and the individual property matter more than the national housing trend.

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