Why Real Estate Is a Good Investment Now

I just read a great piece by Dave Kansas over at SmartMoney called, Real Estate: Finally a Good Investment? (Editor: The article has since been removed) where he admitted that while the real estate market as a whole has a lot of problems, buying residential real estate makes sense.

Chart of Louisville Home Sales 1994-2010
Here you can see a chart of Louisville home sales by year from 1994-2010. This includes all of Louisville and surrounding counties and is taken from the Greater Louisville Association of Realtors (GLAR) data source.

First, the hard reality about the United States market as a whole.

There were a record one million foreclosures last year, home prices are still falling in many regions and the number of “underwater” properties is at a record high.

And things don’t look much better in other areas of real estate. The number of construction jobs continues to decline, even as other parts of the economy have added jobs. And mortgage rates have moved higher as long-term Treasury yields have backed up during the past few months.

Mr. Kansas then follows that up by citing four reasons why residential real estate is currently a bargain. (I’ll follow this up with specific data on Louisville real estate.)

  • Everyone hates homes.
  • Smart people are buying real estate.
  • Real estate performs well during inflation.
  • Demand may be coming back.

Read the article for a full explanation of why real estate is a good investment now. The only thing in the author’s mind (and mine as well) that is keeping our current market from a drastic upswing is uncertainty about the future, in particular jobs. That important caveat should factor into each person’s situation.

Is Louisville real estate also a good investment?

Here in Louisville, home prices have remained primarily level for the past 2-3 years. Going back 40 years, Louisville homes typically appreciate 4%-5% each year. We’re likely to be moving back to that standard perhaps this year but likely next year. Home prices aren’t likely to drop much further than their current levels.

Also, due to the relative lack of home sales (see below), the inventory of Louisville homes for sale is actually quite high. There are currently 8,834 active listings on our MLS. More choices mean greater competition and a better opportunity to get a good price on your next home.

So even though buying a new home is often a very emotional decision, it’s important to keep in mind that this decision is also one of the biggest financial decisions most people ever make. With interest rates likely heading higher through the course of 2011, now may be the time to purchase your next Louisville home.