Real estate a sound investment

To the Editor:

For the past few years, Rhode Island homeowners have watched in awe as the value of their properties skyrocketed. The place that was once dubbed “a pit stop on the way to the Cape” has come into its own and become a hot commodity in its own right.

As a Providence Business News Feb. 23 article stated, the Office of Federal Housing Enterprise Oversight recently announced that Rhode Island led the nation in 2002 with the highest home appreciation values and then continued the trend through the first three quarters of 2003. (Figures for the fourth quarter of 2003 are not yet available.)

The median sales price of $230,000 for an existing Rhode Island single-family home sold through State-Wide MLS in 2003 gained 22 percent, increasing nearly $42,000. This tops the previous year-end high mark of $188,150 set in 2002. And though average home prices have risen to a record high, options do exist for most first-time home buyers. Interest rates remain at record lows and flexible financing programs continue to lure buyers into the marketplace.

Despite all the positive indicators, I suppose it’s only human nature for people to look for the downside. “When’s the bubble going to burst?” seems to be the resounding question of the day. The answer to that may not be as elusive as it may seem. After all, a bubble that doesn’t exist can’t burst.

The fundamental reasons for a strong housing market prevail proving the bubble theory groundless. With a growing number of households; an improving job market; and generally good affordability conditions, real estate investments are destined to remain a good value.

In fact, according to data from the National Association of Realtors, real estate across the country has proven itself as one of the best investments around. Since the association began record keeping in 1968, the national median home price has risen every year, even during recessions and periods of sales decline. Typically, home values rise at the general rate of inflation, plus 1 to 2 percentage points.

And real estate is and will continue to be an investment in which investors can pay only a small percentage down, yet yield increases on the entire equity value.

According to a report from Harvard University’s Joint Center for Housing Studies, for example, the typical homeowner who experiences an annual home appreciation rate of 5 percent and who made a cash down payment of 10 percent will generally receive a 94 percent return on that cash after owning the home only three years. After owning five years, the homeowner’s rate of return on the down payment increases to 225 percent; after 10 years, the rate of return jumps to 623 percent.

So while the stock market has experienced wide swings in value over the past 20 years, bursting the bubbles of many an investor, Rhode Island property values overall have and should continue to rise steadily.