Home Values by the Numbers, by Metro

Posted on August 15, 2012 at 12:12 PM PST by

Is there anything more difficult to figure out these days than home values? Do they even matter, all things considered? In one key way, absolutely yes.

We’ve written in the past about real estate as an investment. And our fundamental view of home values remains the same: Buy a house where you want to live, at a reasonable price, and take the tax breaks. But don’t expect to sell it to fund your retirement. That didn’t work out for many of the Baby Boomers, and it won’t work out for you either.

Home values by metro

Nevertheless, we are strong believers in what Warren Buffett calls the “margin of safety.” Simply enough, an investment is more than buying the right stocks and bonds. It’s about buying at the right prices. After all, investing is both selling high and buying low. Home values work exactly the same way.

If you are in the market to buy a home — and current interest rates suggest that you should consider it — there are plenty of ways to research home values. Research matters, of course. For most Americans, a home is by far the most expensive thing that they will ever buy. It’s an important part of your investment life, too, in the sense that if you buy too much house, you constrain your ability to save and invest for years, even decades.

But is that house on the corner, the one with the rolling backyard and two-car garage, a bargain — or an albatross looking for a new neck to wring? A couple of fascinating new charts can help you start to get a grip on home values numbers.

One interesting new interactive map from the folks at Zillow, for instance, shows you the break-even horizon on real estate in dozens of metros and their close-by “sister” cities. The idea is to help you understand how long you will pay on a mortgage before that mortgage turns out to be a better deal than renting.

Currently, the worst city is Loyola, Calif., where it would take 27.2 years to be better off owning vs. renting. A long list of cities shares the “best” home values designation of 1 year flat. Interestingly, many of them are in the Florida suburbs.

Understanding true home values

That doesn’t mean any home in any metro is a good deal for you. The chart simply compares rental prices against your likely mortgage payment. There are, obviously, a lot of presumptions about your creditworthiness and the property in question, the neighborhood, schools, and the like.

Nevertheless, if you are poised to sign a lease and think maybe buying is a better move, take a look at the Zillow ranking first.

Another, more global, view of real estate can be found at The Economist, where they have taken data from various sources to build an interactive chart showing exactly what has happened to housing prices in 21 countries.

Curious about rents, we adjusted it to show how U.S. home values have done against the cost of rent, and it really proved the point of the Zillow charts: U.S. home values as an index fell sharply below rental costs starting in mid-2006 (or, arguably, rental costs rose) and have fallen in relation ever since.

Time to buy? A highly personal question, of course. But if you’re keen on saving for retirement, it might well be a good time to consider the long-term advantages of getting your “housing margin of safety” locked into place, then setting aside some money in a true investment well outside of your housing plans.