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How to Bring Investment Returns Back Home

(Updates to add housing-starts report from today.)

BOSTON ( TheStreet) -- How many times have you heard a real estate agent say: "It's a great time to buy."

Well, that's finally true, given the collapse in home prices, record low mortgage rates and the vagaries of investing in just about anything else these days. Buying a house or condo has been a lousy investment over the past few years, as prices nationally have plunged by a third since 2006, and are now where they were in 2003.

Meanwhile, investing in stocks has been futile. The S&P 500's return in the five years through 2010, adjusted for inflation, was zero, a performance that has extended into this year. Even what once was the most conservative investment, the 10-year Treasury note, is yielding about 2%, less than inflation.

And keeping up with inflation, in terms of locking in the cost of housing for a long-term hedge, is one of the top benefits of buying a home. The annual inflation rate this year is 3.8%, and housing is running at 1.6%. Home prices have risen an average of 4% historically.

Adding to the immediate appeal of home buying is the fact that 30-year mortgage rates are near historic lows, as they just bounced off the record 3.94% reached in the week ended Oct. 6.

On top of that, home prices are at eight-year lows. Although they may decline more, it's impossible to time the market to find an absolute low, so procrastinating may not pay off.

Celia Chen, a senior research director at Moody's Economy.com who specializes in housing economics, told TheStreet that "it's not a bad time to buy a house," even though she expects the housing market is a few months away from a bottom. She expects a bottoming in the first quarter, when prices will have fallen about 3% from the second quarter of this year.

A survey of 111 professional forecasters, including economists, real estate experts and investment and market strategists by MacroMarket in September, resulted in a consensus view that home prices, as measured by the S&P/Case-Shiller National Home Price Index, will grow at a 1.1% average annual rate from 2011 through 2015.

Although that sounds meager to people who witnessed the 10.4% annual increases in the bubble period of 2000 through mid-2006, a slim gain represents a welcome sign of market stability and a sense of progress after the 7.1% annual declines from the third quarter of 2006 through the second quarter of this year.

Jack Clark Francis, a professor of economics and a real estate expert at Bernard Baruch College, said in a research report that although housing returns trail those of the stock market, "real estate investing provides additional benefits from federal mortgage subsidies, tax deductibility of mortgage interest, and low correlations between stock market returns and real estate returns that can be valuable diversification opportunities."

There also may be a wildcard in the housing market mix that could goose prices. Barclay's Capital analyst Stephen Kim said in an Oct. 12 research note on the outlook for the homebuilding industry that there is big, pent-up demand for housing, even with a huge market overhang of pending foreclosures. "Our analysis shows that there is an equally large backlog of forestalled household formations that is likely to drive an unexpectedly rapid recovery in housing demand once Junior moves out of the basement."

The Commerce Department said today that housing starts rose to a seasonally adjusted annual rate of 658,000 in September, which is 10.2% above the September 2010 reading and the highest level since April 2010, the month the homebuyer tax credit expired. But most of September's increase was driven by demand for rental housing, as single-family starts rose only 1.7% to 425,000, a two-month high.

The alternative to home buying is renting, and investing the money that might have gone to a down payment on a home.

As for the issue of renting versus buying, Moody's Chen said the current ratio of home prices to yearly rents of 11 is close to its historical norm of 10 seen in a health housing market, and down sharply from the 17 or 18 at the peak of the housing bubble. A lower ratio means home buying is a better alternative to renting, when all factors in the decision are weighed.

The market for renters is going the other way as prices are on the rise. Several factors are contributing to that, including limited new construction, and rising demand from people who have had their homes foreclosed on and had to move out as well as tougher lending standards, which is keeping potential new buyers with sketchy credit out of the housing market.

As for the returns that would come from the money a renter saved in lieu of a down payment, it's anyone's guess. For one thing, there's the temptation that that money would be spent on something else, and not be saved or invested.

And then there's no guarantee of a stock market recovery any time soon because retail investors have stampeded out of the equities markets in droves over the past year or so, just as they did out of the housing market a few years before.

Given that the unemployment rate is expected to remain high and real wages aren't expect to rise much more than inflation, most individuals don't have much to invest, which means no or slow growth for the equities markets for some time to come.

There's no sure thing when it comes to investing, but housing looks like a better bet than anything else out there right now.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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