Home ownership remains a good investment

updated 2:16 p.m. ET Oct. 9, 2009

CHICAGO - For all the doom and gloom about the housing market, it still generally pays to own a home.

That might be a tough case to make right now to the 16 million homeowners who owe more on their mortgage than their house is worth. But history suggests the American Dream is a pretty safe bet.

Homes have appreciated by an average of 4 percent a year since World War II. They act as hedges against inflation and bestow significant tax benefits. Real estate is a leveraged investment; a 10 percent down payment produces a 1,000 percent return if the price of a home merely doubles.

Plus there are intangibles: Owning a home provides a sense of independence, security and community. And you get to live in your investment. You can't do that with a stock.

Of course, historical trends don't pay the mortgage. People who wade in and out of the housing market too often, or who buy at the wrong time or price and need to sell quickly, can get burned.

But if you own for a decade or more, price appreciation usually overcomes even bad slumps.

Historical trends
Tony and Liz Iacobelli, who are far under water on the home they bought in the Phoenix suburb of Buckeye three years ago, aren't panicking. They owe about $177,000 on their mortgage on a house worth only $132,000, which is about 40 percent of what they paid.

"Houses generally go up in price, and this one will again, too," says Tony, 51, a retired New York City policeman.

Several booms and busts have occurred in the modern era of housing, which began when 30-year loans became widely available after World War II. This bust has been severe: Nationally, home prices are down an average 30 percent from their peak in 2006.

The collapse of the housing market may have put an end to the notion of using a home as a speculative investment akin to a hot stock. And that may not be a bad thing, economists say.

"People should recognize that value comes from a lot of other things besides a possible return on the investment," says Joel Naroff, chief economist at Naroff Economic Advisors.

Economists say home prices have risen by about half a percent a year above inflation, or roughly 4 percent, since the 1940s. That number, which is based on the median price of homes sold each year, was inflated a little by baby boomers starting families and building bigger houses. Since the National Association of Realtors began compiling statistics in 1968, the median sales price has climbed 6 percent annually, from $20,100 that year to $195,200 this past August.

In the late 1990s, home values started growing like stocks. For the next five years, they appreciated at 8 percent to 9 percent a year, or about 5 percentage points ahead of inflation.

You won't find many skeptics among people who bought homes in the '90s and still live in them. Their homes may be worth tens of thousands of dollars less than at the peak, but they're still frequently worth twice what the buyers paid. For example, a house in Ewing, N.J., that sold for $160,000 for in 1996 was worth about $410,000 three years ago. It's still worth $375,000 today.

MORE FROM REAL ESTATE

Real estate Section Front

Home sales rise to highest level in 2.5 years Real estate agents see return of foreign buyers Forbes: World's most expensive homes Replacing a real estate agent with a Web site Mortgage delinquencies hit record high Rates on 30-year loans still below 5 percent Housing starts drop 10.6 percent in October Beazer Homes CEO could face civil charges Pace of mortgage help rising but still slow Survey shows spike in 1st-time homebuyers Real estate Section Front   Add Real estate headlines to your news reader: