When you look at investments, you have to consider the alternatives to gauge whether buying is attractive or not. By all means make certain to include the tax ramifications. It’s the alternatives that the writer of the commentary below leads to conclusion that foreclosed housing is the way to go.
One of the big issues today is a return that has any headroom above inflation. Just look at the US Constant-Maturity Treasury yields from August 18, 2010. An investor buying a five year Treasury today will receive 1.46 percent per year effective yield. And that yield will be taxable for some individuals at more than 39 percent commencing 2011 (assuming that Congress does nothing to extend the tax cuts currently in place). So what is the probability that inflation exceeds 1.46 percent in the coming 60 months? Almost 100 percent, I believe.
Historically since 1970, the CPI (and let’s exclude food and energy—and be ultra conservative) totaled 458 percent, with the lowest annualized inflation rate per year for any five-year interval of 2.0175 percent. Yep—I’m sticking with my opinion that US Treasury yields today will be negative for many investors.
So what about long-term housing prices? While they indeed have been negative for many buyers that purchased from 2004 to 2007 (and severely negative for some depending on where you live and when you bought), the prospect is pretty attractive today to beat the 1.46 percent five-year Treasury yield. The most recent Case-Shiller Home Price Index indicated a 4.6 percent year-over-year gain as of May (20-City Composite Index).
Historical existing home price (and I’m using the 12-Month moving average of median prices to both eliminate any noise from month to month and known seasonality) is currently $173,050. The last time prices were less than this (other recent months) was August 2003 when the 12-month average of the median prices was $172,592.
Another recent study in Massachusetts (see my post on July 30, 2010) found that the typical foreclosure sold for 27 percent less than similar non-foreclosure properties.
Given the alternative investments today, foreclosed housing looks like a bargain. Add in all-time record low interest rates and it gets even better.
House rich Commentary: Why your best investment is a foreclosed home- MarketWatch.com