Millionaires are Investing in Real Estate

Low real estate prices are attracting wealthy investors seeking rental income, appreciation and a hedge against inflation. Many investors are wondering whether it’s time for them to be investing in real estate, too.

Bargain prices are just one of a complicated set of factors to consider before investing in real estate. The market, weighed down by an excess supply of foreclosed homes, has not stabilized from the Recession. Experts predict a further decline in prices as a “shadow inventory” of nearly 2 million houses with distressed mortgages make their way onto the market. Real estate professionals surveyed in March are predicting further declines in prices through 2011 and 2012 and a weak recovery beginning at the end of 2013.

“This uninspiring view must be influenced by the persistently weak market fundamentals – high unemployment, supply overhang, an unabated foreclosure crisis, and constrained mortgage credit,” said Robert Shiller, chief economist at Macro Markets, which produces the Home Price Expectations Survey.

Opinion is divided among the 111 respondents, and an increasing number – 50 percent –are predicting a double-dip in home prices.

The potential for prices to fall further must be weighed against the probability that interest rates – now at historic lows – will begin to rise in the near future. A homebuyer who sits down with a mortgage calculator might find he would save money over time by locking in a relatively low-interest mortgage now, rather than paying less for a home but more for financing in the future.

Homeownership rates have fallen 3.3 percent from their highs in the fourth quarter of 2004 to 66.9 percent in the third quarter of 2010, according to a survey of more than 3,500 Americans conducted in December by FannieMae.

Changing demographics are also affecting the demand for housing. Married couples with children make up the bulk of homeowners in America, but there are 6 percent fewer married couples and 4 percent fewer families with children today than in 1990. The trends are expected to continue as the population ages and divorce rates rise.

Though a home is the single biggest investment most Americans make, it may be wiser for homebuyers to look at a house in terms of affordability and quality of life, rather than quick profits. The current market does not seem likely to appreciate rapidly, so buyers who plan to live in their home for less than five years might not recover their buying costs. Quality-of-life considerations, in the end, factor more heavily in consumer satisfaction when it comes to buying a home, according to Fannie Mae, which found that more than two-thirds of homeowners feel “having a good place to raise children and provide them with a good education” is a major reason to buy a home.