New Homes & Lifestyles
The Resiliency of Home Values - Homes With an Intrinsic Value
As director of Arizona State University’s Master of Real Estate Development program, it’s my job to keep a finger on the pulse of real estate development. It is true that throughout the Southwest, home values are down from historic highs reached during the recent boom market. But it is also true that homes have an intrinsic value that never goes down.
For that reason, I take exception to the way the residential real estate market has recently been described in the media. Some reports have even equated the current residential market value adjustments to the stock market collapse in the 1930s. The two are not equal. Single-family homes, in addition to their market value, have something stocks do not have: a factor known as “utility.”
Utility is what makes a home worth more than its market value to the owner occupant. A stock purchase confirmation comes to you via email. You can’t get under it if it rains; you can’t raise your children in it; can’t cook dinner or throw a birthday party in it. It has no utility. Homeowners don’t discard a home when its market value fluctuates because its utility is the prime reason they own it.
The U.S. as a whole has realized reductions in home values over the past several months, however, many of these values were up 80 percent or more since 2000. Unless a homeowner bought a house with no down payment just before the market adjusted downward, he or she is likely still ahead of the game—and most people are significantly ahead of the game.
Why? Standard & Poor’s Case-Shiller index, which tracks the value of single-family homes within 20 metro areas in the United States, indicates that the typical single-family home in the Phoenix metro area has, as of the first quarter in 2008, a value 80 percent greater than in 2000.
People don’t leverage their mortgages the way they do stock purchases; there are no margin calls on mortgages, so there’s little risk in hanging on to a home. Be timely and send in your principle and interest or even interest only depending on what type of loan you take out, and you will benefit from all the utility the house offers plus whatever appreciation will occur. That’s unlike a stock purchase, which can go to zero overnight.
Houses in America have been a wonderful investment, historically appreciating faster than inflation and doing better than most stock market investments. In fact, home ownership has been the wealth anchor of the middle class. When you take “utility” into account, it seems less wise to be troubled over the pessimistic prognostications of some media outlets.
