American Real Estate: A Depreciating Asset

During the end of last week housing once again came into focus.  The housing data were not as glorious as the bulls had expected.  The price of homes was a key data point, and was not positive for the housing story.  With home prices at the lowest they have been in 10 years the housing recovery lacks a key component.  With the endless depreciation of the real estate market, investors and consumers alike must ask; Why would I buy a house if it will continually to loose value?

No investor, no competent consumer would buy an asset with a declining value.  This is not only a basic investment policy, it is mere common sense.  Not only were the home prices low last week, but existing home sales were also revised negative for January as referenced in my previous housing article.  Treating declining home prices as an asset; would you purchase real estate?  Evaluating home prices in an equity sense, they are not at the point in which a purchase would be wise.  We all have heard the saying, “don’t try to catch a falling knife.”  This quote references that idea that if you try to pick a bottom in a market you will likely get financially hurt (in this case it looks as though you might knick an artery).  This undefined bottom results in a housing market that does not support a recovery and instead supports continual economic turmoil.For those more economically minded readers, the housing market can be broken down into a simple supply and demand explanation.  With the value of homes decreasing into the future, consumers will buy less of this product, decreasing demand (becasue even the average american knows not to loose money.  Builders are beginning to produce more houses (as references in multiple news sources) and that along with the current supply will cause an increase or stagnant supply.  With demand decreasing and supply fluctuating minimally prices will decrease or remain stagnant in the future.

“Americans now know that housing prices can go down and they can go down by 10, 20, 30 and in some cases, 40 or 50 percent.  We know they can go down. But for five years, we thought they could only go up.” – Bill Gross

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