Conventional wisdom suggests that buying a home is a better long-term bet than renting:  Common arguments in favor of it include an opportunity to build equity, mortgage interest tax deductions and a chance to take advantage of rising home prices.

However, Jack Hough with Smart Money presents a compelling argument that it’s actually better to rent.  He presents an analysis done by Robert Shiller, the author of Irrational Exhuberance, that suggests that the real return on houses between 1890 and 2004 is zero.  And when compared to the long-term return for stocks (7%), it’s actually much better to invest in stocks instead of tying your capital up in a home.

And while he touches on the cost of upkeep; I would argue that the actual return is likely negative once you account for routine maintenance such as lawncare and periodic care such as painting and remodeling.  In addition, the real return drops even further once you account for the average drop in home values between 2004 and the present.

Jeffrey Gundlach, the chief investment officer for TCW recently told clients that the current credit and housing slump may not subside for several more years. 

His thesis is that mortgage default rates will continue to worsen as housing prices fall.  Due to this, the S&P 500 could fall another 30% and housing may not bottom until 2014.

Is this a likely outcome?  In thinking through this yesterday evening, I believe this scenario is possible.  Let me explain…

Over time, markets tend to revert to their long-term average return.  This is best illustrated with a graph:

This chart shows the NASDAQ over a 30 year period in dark blue and the light blue represents the long-term average return.  With this, it’s easy to see that the market tends to bounce up and down along the long-term average. 

However, take a look at the tech bubble, which can be seen toward the right-hand side of the graph.  The issue is this:  When markets correct, they tend to overshoot the long-term average in the opposite direction.  So, if the market is over-valued, it will go through period where it’s under-valued and vice-versa.

Back in June, I posted another chart that shows the degree to which houses were overvalued in select markets:

As you can see, in some cases, they were overvalued by a factor of 2 or more, which implies that housing prices may need to fall by as much as 50% or more in total.

So what does all this mean?  Simply stated, as the housing bubble deflates, we could go through a period where housing is actually undervalued relative to its long-term trend.  The degree to which housing prices slump will have a direct impact on the value of the financial instruments currently held by Bank of America, Washington Mutual and other banks.  As such, it’s possible that they may have to book losses associated with this under-valuation.  And this process could take some time.

While it is possible, however, I do not know how likely it is to happen.

If living space in your house is getting tight or if the interior reminds you of the 70’s, then it may be time for you to consider renovating or remodeling your home.  However, not all remodeling projects are alike, as some will provide more value to you at the time of sale than others.

Projects that provide the best return on your remodeling dollar include:

• Siding replacement – Freshens up the look of your home while easing homebuyer concerns about maintenance.  The best returns can be found with cement fiber-board products, such as Hardiboard.
• Window replacement – Replacing old windows can reduce leaks and energy efficiency, while improving the home’s curb appeal.
• Kitchen renovations – Here, the best bang for your buck can be found in kitchen remodeling projects that address cosmetic changes, such as replacing countertops or cabinet doors.  Avoid projects that require plumbing or major electical changes, as that can drive up the cost substantially.
• Attic bedrooms – An inexpensive way to increase living space, building out an attic or a portion of a basement can pay real dividends if your home is relatively small.
• Bathroom remodels  - Like kitchens, the key is to focus on cosmetic changes, such as new fixtures and to avoid costly renovations that requirement electical or plumbing changes.

And among the worst:

• Home Office Additions/Renovations – While useful to some people, home offices are typically regarded as single-use rooms.  You’re better off using a guest bedroom or other unused space for home office work.
• Swimming Pools – Costly to built and maintain, pools also require lots of water in a world that is becoming increasingly concerned about the availability of clean water supplies.
• Sunrooms – Useful to some people, but generally not used very often, as they tend to be either too cold or too warm.

With the housing market in a slump and household budgets tight, many individuals are taking on household projects on a more frequent basis.  If you’re thinking about doing a home repair or improvement project, you can use the following list of sites as resources for tips, ideas or guidance:

• eHow – Perhaps the best known of the DIY sites, eHow covers a large variety of topics, with home repair, gardening and related tasks thrown in as part of the mix.  They are a good starting point to consider when you are trying to answer a question that begins with “How do I…”
• HGTV – The website for Home & Garden Television, HGTV.com provides ideas, online tools, and guidance on how to tackle small projects around the house.
• GardenWeb – Focused predominantly on landscaping and plants, GardenWeb provides forums, online tools, and other resources that gardeners might find useful.
• DIY Network – Part of HGTV, the DIY Network covers a wide variety of home improvement projects and also features how-to videos and online discussion forums.
• DoItYourself.com – Covers a wide variety of do it yourself projects, ranging from home improvement to car repair to personal finance.  Also has online forums and a store.
• Better Homes and Gardens – Covers DIY projects including: decorating, home improvement, and gardening.  In addition, they cover other types of projects such as crafts and cooking.
• This Old House – Yet another DIY site, but has an obvious bias toward projects that you may encounter with an older home.  Recent features include “How to free a stuck window” and “How to Clean Up Mold”.
• RepairClinic.com – The place to visit if you’re looking for guidance and parts to help you fix household appliances such as air conditioners, washers, dryers, or refrigerators.
• BobVila.com – One of the original authorities on home improvement, Bob Vila’s website is currently visited by over 750k people a month.  Features videos, how-tos, design tools, home plans, and more.
• Ask the Builder – A site run by nationally syndicated columnist Tim Carter, Ask The Builder provides videos, project checklists, and access to Tim’s newspaper column.

And in the “Honorable Mention” category, both Lowes and Home Depot have DIY sections available on their websites. 

As you may recall, the US Government passed a landmark Housing Bill back in July that was intended to help prevent hundreds of thousands of families from losing their homes.  Part of the package includes a $7500 tax credit for first-time home buyers that purchase a home between April 9th, 2008 and July 1st, 2009. 

There is now a website up:  FederalHousingTaxCredit.com, that provides additional information on the credit.

If you are in the process of selling your house, don’t hesitate to bargain hard with your broker over their commission rate.  In a recent report released by Consumer Reports, they found that of the 46 percent of buyers who asked their broker for a lower fee, 71 percent of them were successful.

And it turns out that those who paid the lower rate were just as satisfied with their broker as those who had paid the higher fee.

The real estate market is soft right now, so don’t feel bad about asking your broker for concessions.

(via IndyStar.com)

On Saturday, the Senate voted overwhelmingly for final approval of legislation that includes an ambitious program to save hundreds of thousands of families from losing their homes.  Bush has already said that he will sign the bill; and that could be done as early as next week.

However, it turns out that troubled homeowners aren’t the only ones who stand to benefit.  According to this article in the New York times, there are also provisions that will benefit first-time homebuyers, longtime homeowners, veterans returning from war, as well as senior citizens.

First-time buyers will be eligible for what is effectively a no-interest loan from the government.  And veterans will be granted additional time before mortgage companies can start foreclosure proceedings.

What to learn more?  You can read the full article here.

RealtyTrac just released their Q2 2008 Foreclosure report and the numbers are bad:  foreclosures have risen by 121% on a year over year basis.  To date, the hardest hit areas have been places like California, Nevada, Arizona, and Florida.  However, the following comment from their announcement leaves one to wonder if the problem is spreading:

Forty-eight of 50 states and 95 out of the nation’s 100 largest metro areas experienced year-over-year increases in foreclosure activity in the second quarter.

There is reason for hope, however.  The article mentions some changes that Colorado has made to help alleviate the foreclosure problem in their state; and also alludes to the Housing Reform Bill that is currently making its way through Congress.

Source:  ForeclosurePulse:  Is Eight Enough?