Your home a path to wealth? Experts say no

Housing eventually will recover from its great swoon. But many real-estate experts believe homeownership never again will yield the rewards enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.

Wealth generated by housing in those decades, particularly on the coasts, did more than assure owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping cruise ships and golf courses full and restaurants humming.

That era probably is gone for good.

"There is no iron law that real estate must appreciate," said Stan Humphries, chief economist for the real-estate site Zillow. "All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn't hold up."

Instead, Humphries and other economists say, housing values merely will keep up with inflation. A home will return the money an owner puts in each month but will not multiply the investment.

Dean Baker, co-director of the Center for Economic and Policy Research, estimates it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values never will catch up.

"People shouldn't look at a home as a way to make money, because it won't," Baker said.

If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year.

The supply of homes on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as those sellers compete to secure a buyer, adding to a slide that already has chopped off as much as 30 percent in values.

Set against this dismal present and a bleak future, buying a home is a willful act of optimism. That explains why Adam and Allison Lyons are waiting to close on a $417,500 house in Deerfield, Ill.

"We're trying not to think too far ahead," said Allison Lyons, 35, an information-technology manager.

The couple's first venture into real estate came in 2003 when they bought a condo in a 17-unit building under construction in Chicago. By the time they moved in two years later, it already was worth $50,000 more than they had paid. "We were thinking, great!" said Adam Lyons, 34.

That quick appreciation started them on the same track as their parents, who watched the value of their houses ascend for decades. The real-estate crash interrupted that pleasant dream. The couple cannot sell their condo. Unwillingly, they are becoming landlords.

"I don't think we're ever going to see the prosperity our parents did, but I don't think it's all doom and gloom, either," said Allison Lyons, a manager at IBM. "At some point, you just have to say what the heck and go for it."

Other buyers have grand and even grander expectations.

In an annual survey conducted by economists Robert Shiller and Karl Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — again said they believed prices would rise about 10 percent a year for the next decade.

With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom's peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.

"People think it's a law of nature," said Shiller, who teaches at Yale.

Expectations followed the opposite path for the first half of the 20th century, he said. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.

The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.

Despite all these tail winds, prices increased modestly for much of the period. Real home prices increased 1.1 percent a year after inflation, according to Shiller's research.

By the late 1990s, however, the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times.

"The experience we had from the late 1970s to the late 1990s was an aberration," said Barry Ritholtz of the equity research firm Fusion IQ. "People shouldn't be holding their breath waiting for it to happen again."

Not everyone views the notion of real appreciation in real estate as a lost cause.

Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges the recent collapse will create a "mind scar" just as the Great Depression did. He argues that housing remains unique.

"You have to live somewhere," he said. "In three or four years, people will resume a normal course, and home values will continue to increase."

All homes are different, and some neighborhoods and regions will rebound more quickly. On the other hand, areas where there was intense overbuilding, such as Arizona, will be extremely slow to show any sign of renewal.

"It's entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame," said Humphries of Zillow. "The demand doesn't exist."