Counting on a quick rebound in the housing market to resurrect your net worth and save your retirement? No? Thank goodness.
Unfortunately, other Americans still are.
WSJ: In survey after survey, people expect prices to bounce back — in some cases, as soon as six months from now.
Those hoping for a quick rebound are likely to be disappointed. Economists and other pros generally say home prices won’t bottom out before the second half of 2009, and some don’t see a bottom until 2011 or 2012. Even when they stop falling, prices may scrape along the bottom of the rut for years…
And longer term? Over the next 10 to 20 years, housing economists expect prices will rise again — but, on average, probably not nearly as much as they’ve averaged over the past decade. That isn’t to say that some places won’t experience booms (and busts). But, the experts say, you should generally expect house prices to rise just a bit more than inflation and roughly in line with household income.
Karl Case, an economics professor at Wellesley College whose name adorns the S&P Case-Shiller home-price indexes, has studied U.S. house prices going back to the 1890s. Over the long run, he says, home prices tend to increase on average at an inflation-adjusted rate of 2.5% to 3% a year, about the same as per capita income. He thinks that long-run pattern is likely to continue, despite the recent choppiness.
Let’s put some numbers on that.
Let’s say your house was worth $500,000 at the peak but has now fallen 23%, the average nationwide price drop. Your house is now worth $385,000. Let’s say Meredith Whitney, Nouriel Roubini, us, and other doomsayers are wrong, and your house does NOT fall another 20% over the next two years, but simply falls another 15% or so. Then your house will be worth about $325,000. Let’s say that, like many people, your original mortgage accounted for 80% of the value of the house, or $400,000.
Now, let’s assume that inflation is 3% and your house value will appreciate from the bottom at an inflation adjusted rate of 3%, for 6% total nominal appreciation per year. How long will it take you to get your money back?
If your house drops to $325,000 in 2010 and then bumps along the bottom for two years before appreciating at 6% a year, you’ll claw your way back to positive equity ($410,000) by 2016. And you’ll get back to even ($518,000) in 2021, 13 years after the house crash began.
Of course, those numbers will NOT be adjusted for inflation. So you’ll actually be under water for a lot longer.
So, sure, your house still might end up being an excellent investment. But only if you’re planning on living in it for another couple of decades.