The stock market is up, the stock market is down… the Federal Reserve is moving interest rates… but all you really want to know is what that means for your home. After all, your home is the likely most significant asset you own.
Reading CNN or Economist headlines about macro trends in global financial markets can quickly become confusing in terms of the impact on your real estate; but there is some good news, this gap is actually a GOOD thing. Of all the investments you can make, your home remains one of the safest assets.
Stomaching Economic Downturn
Of course, safety is all relative. The financial crisis of 2008 remains a poignant lesson that nothing is guaranteed – and you should be wary of anyone promising “a sure thing.” Hopefully most folks have learned that taking on risky, adjustable-rate loans is simply a type of leverage that an individual or single family should avoid. (If anything, the housing market crash should’ve raised the bar for America’s baseline understanding of mortgage rates and house prices). Yet upon examination of asset classes, especially in light of recent fluctuations (yes, including mortgage rates), the smart money continues to bet on your home.
Forbes recently published an article discussing a recession’s impact on the housing market, as last year’s hot real estate market has slowly cooled and other uncertainties have begun to ripple across the investing world. The primary takeaway is that any downturn in home prices will only last for the short term; home prices will ultimately continue to rise. The composition of buyers will likely evolve but there is no major cause for concern so long as your personal finances remain stable.
There could be a very simple explanation – the long-term value of your home is actually pretty insulated from shorter-term fluctuation via a housing market recession, larger financial market changes, and public policy.
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What Do Experts Predict?
But wait, you ask: what about the aforementioned debacle in 2008? Well, the takeaway is not that national home prices are going to plummet to zero – those same properties from ‘08 have since skyrocketed in value – but taking on a risky mortgage to finance the purchase should be avoided. If your individual finances are in order, then home values will continue to appreciate in the long run.
From that Forbes article:
It’s important to keep in mind that real estate needs to be considered a long term investment… The purchase shouldn’t be considered in terms of what might happen over the next six months, but rather what might happen over the next 10 or 20 years… If we look at every recession since the year 2000, even home buyers or investors who bought in at the peak right before the recession hit still made a profit after ten years. In some cases, this was a very healthy profit.
Always a Good Time to Own Something REAL
This makes sense at a practical level. First, residential property is a real, physical asset. It is not equity in a hypothetical operation nor is it an artificial currency. Your land is not directly anchored to intangibles; its fundamental utility is material and undisputed. At every level, modern society values actual space for living.
Fewer Options + Increasing Demand = Existing Home Sales Become More Valuable
Second, as the US population continues to grow, the housing demand will not diminish. People will always need somewhere to live. The types of buyers will vary – private equity and institutional offers become more common when mortgage rates rise and retail sales dwindle, but this could be offset by new, prospective buyers entering the market (different individual buyers, or even potentially foreign investors or government agencies). The ever increasing scarcity of inventory ensures that all potential buyers have one thing in common – they want to pay you money for your home.
Past Performance Is No Guarantee of Future Results? Well, Not So Fast...
Third, the market always goes up. As the brilliant JL Collins postulates about the stock market, if you can withstand the inevitable dips then there is a huge, lucrative return on your faith in the long-term market. Looking at historical sales prices of homes in the US, even the 2008 blip now seems a pretty toothless deterrent to investing in housing.
In fact, home prices are far more insulated from minor fluctuations than is the stock market, as exhibited by the short-term volatility seen in the historical Dow Jones Industrial Average.
Folks Still Need Roofs and Beds during Economic Uncertainty
And of course, the inherent utility of housing gives your home a distinct functional advantage – you cannot reside in a few shares of Microsoft. Even if the Fed raises interest rates to curb consumer spending and fight inflation, it can never diminish the need for roofs above Americans’ heads.
Real Estate Will Outlast a Housing Recession
You would be hard pressed to find another investment class that offers this mix of upside, functional value, at such low (medium-to-long-term) volatility. Individuals stocks and companies are a huge risk and require demonstration of market value. The same can be said for cryptocurrencies, only multiplied 1000x. Investing in your own education is an admirable idea, but the current student debt crisis and employment market indicate there remain so many conflating factors beyond an individual’s scope. Any “safer” investment class is arguably no genuine tool of wealth creation, but merely a hedge on your riskier bets.
The safest long-term investment remains the one in which you can live, regardless of any housing market recession. There is value, security, and peace of mind insulated within those four walls of your home.
Like this article? Curious what other people believe are the most insulated investments in the face of a potential recession? Share this with your friends who monitor the housing market and see what they say.
