Despite the pandemic, homeowners see housing as a good investment
Fannie Mae says results from its fourth quarter 2020 National Housing Survey show that consumers continue to view homeownership as a good investment. Respondents were asked about various types of investments, including stocks, bonds, homes and savings accounts. Seventy-five percent of respondents rated homes as a “safe” investment, ranking just slightly below a savings / money market account. Additionally, 73 percent of consumers believe that investing in a home has “a lot of potential”. Only 63 percent thought of owning stocks this way.
The report, written for the company PerspectivesThe blog of Mark Palim, vice president and deputy chief economist and Rachel Zimmerman, market research advisor and head of the national housing survey, indicates that the recent single-family home market has been particularly strong. In Q4 2020, home prices were up double digits and existing home sales were up 20% year over year.
The authors attribute much of the strength of the housing to the response of policymakers and consumers to the unique circumstances of the COVID-19 pandemic. “So far, the pandemic has contributed to historically low mortgage rates, higher savings for many households, and even higher demand for housing relative to supply as many households sought housing.” equipped with additional features, including more space, home offices and the ability to “nest” safely with their families. Even in the years before the pandemic, consumers have indicated that they believe housing, as an asset class, is a safe investment with great potential, a perception that, if persisted, is likely to further support demand even as factors related to the pandemic decrease. “
They say Americans seem to have a strong belief that housing investments are almost as safe as a money market or savings account, but also that they have the growth potential of an investment in stocks. Demographic groups shared a high and positive perception of housing as an investment, but black and Hispanic consumers tend to be a little more convinced that housing has “a lot of potential” compared to white and Asian consumers. Meanwhile, White and Asian consumers are more likely to believe housing is a “safe” investment compared to Black and Hispanic respondents.
Of course, housing is not always a “safe” investment with “a lot of potential”. There may be sharp drops or fluctuations in prices depending on the holding period. When a person buys and sells their home is an important factor in overall performance, and transaction costs are generally higher for housing than for other assets. However, when comparing homeownership to other investments, consumers can factor in rent they no longer have to pay or tax breaks that are beneficial to some. Finally, the leverage available for a down payment by mortgaging the major part of a purchase is unique. A self-amortizing fixed rate mortgage also acts as a forced savings mechanism the principal balance of the loan being progressively reduced by funds that would otherwise have been used to pay rent.
The survey reminds consumers that consumers remain focused on the long-term potential of housing. In fact, 85% of consumers believe that homeownership leads to wealth creation and better financial health, and these numbers have remained consistent over time. Research supports this view. Two studies in particular, Homeownership and the American Dream and The rate of return on everything conclude that after “imputed rent” is included in a house’s financial performance (i.e., the rent one would have to pay if he or she did not own the house), The rate of return on owning a home has always been similar to that of other asset classes like stocks.
The authors state that consumers also appreciate homeownership for non-monetary reasons, perhaps contributing to the view that owning a home is an investment with “a lot of potential.” Other investments or continuing to rent may not provide the “feeling of privacy and security” that 90% of respondents say they want or the “right place to raise your family” that 89% want. The reasons may vary, say Palim and Zimmerman, but the experiential aspects of owning a home probably play a role in its high perceived value.
Attitudes regarding the benefits and investment value of homeownership have not changed much over the years despite the Great Recession and the current pandemic. It may take a large increase in the relative returns of other asset classes, or fewer financial incentives for homeownership, for consumers’ attitudes to housing as an investment to change. . For now, these long held beliefs in the benefits of homeownership are likely to continue to support demand in the housing market.