Home & Real Estate

How to Profit in Today's Economy: Rentals Surge, Homes Shrink

As the housing market resets, families take another look at whether they should buy.

What it's all about. For years, owning a home has been the centerpiece of the American dream. In the ten years leading up to the housing-market bust, the median home price in the U.S. grew by an average of 9% annually, according to Fiserv Case Shiller, a research firm in Cambridge, Mass. That beat inflation by 6.5 percentage points a year and led to the belief that a home is an investment.

How it's different this time. Home prices have been sliced by almost one-fourth from their 2006 peak, according to Fiserv, which expects prices to increase by an average of 3% to 4% annually for the next decade. Many homeowners are shunning McMansions and moving closer to city centers. Meanwhile, the number of renters will swell because of a bulge in the ranks of less-wealthy Generation Yers, slow income growth, high debt and tight lending standards.

How you can profit. Home buyers should expect to own for at least five years to recoup any lost equity and cover transaction costs. Buy the home you can afford on today's income, while still fully funding your retirement accounts, says Rick Kahler, a financial planner in Rapid City, S.D. At today's rates, it's smart to get a 30-year fixed-rate mortgage.

If you can't afford to own, or you plan to move within five years, renting probably makes more sense. But note that over the next few years demand for rental units will rise, the vacancy rate will fall, and rents will head up. Lock in the longest lease that fits your plans.

The rising tide of renters bodes well for owners of apartment buildings. But you don't have to buy one of your own -- instead, invest in a real estate investment trust that owns apartment buildings concentrated in areas where people want to live and job prospects are strong. For example, AvalonBay Communities (symbol AVB) gets nearly 80% of its rental revenues from units in the Boston, Los Angeles, San Francisco and New York City metro areas. At $107, the stock yields 3.3%. Mid-America Apartment Communities (MAA), at $57, yields 4.3%. It specializes in Sunbelt properties, which should thrive as retiring baby-boomers flock to warmer climates.

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