5 Reasons It's Good News When Increases in Home Value Slow Down - TheStreet

NEW YORK (MainStreet) — There's good news in the housing market: Price gains are slowing down. The latest S&P/Case-Shiller Home Price Indices show that the average home value gained just 5.1% in the year ended in August, compared with nearly 11% in 2013.

That's good news? Don't homeowners make more money when prices rise as fast as possible?

They can. But, over time, owners and prospective owners are best served by a calm, orderly market that doesn't offer many surprises, and that's what we're seeing now as gains get closer to the long-term average of 3% to 4% a year. Let's count the ways the homeowner benefits.

First, homes, unlike many other investments, are illiquid holdings. You can't sell one with a few clicks of a mouse the way you can sell a stock or mutual fund. That makes it nearly impossible to profit from sharp, short-term changes in home prices. Since you can't bail out quickly, high volatility makes investing in a home very risky. Just ask any of the millions of homeowners who bought at the peak in the mid-'00s and are still underwater.

Second, since the home provides one of life's essentials — shelter — you couldn't buy and sell every time market conditions change even if you could do it with a click of a mouse. And even if quick purchases and sales were possible, transaction costs such as Realtor's commission, transfer taxes and title insurance make it impossible to profit unless a home's price rises by 10% or more. With a stock or fund, transaction costs are tiny, allowing a savvy investor to move in an out of the market at will. 

Third, price volatility is bad for homeowners because of leverage. Most people take out a loan to buy a home. If you make a down payment of just 10%, a 5% loss in the home's value would wipe out half of your equity, which is the difference between the home's current value and your remaining mortgage debt. So steady, dependable but not-too-dramatic gains are generally safer than price spikes, which are likely to be followed by quick declines. 

Fourth, the market remains healthy only if young people are able to buy, replacing older folks who leave the market. If home prices rise faster than wages, would-be first-time buyers find it harder to get into the market. 

Finally, money you appear to make as your home grows in value may not be the killing it appears to be. That's because gains on the current home are likely to be spent on your next home, which will have gone up in price at the same time. Because of this, a big price gain on both homes won't necessarily put you any further ahead than you'd be with small gains. 

Big gains can indeed turn into money in your pocket if your next home is cheaper. But many people find they don't save much through downsizing because the new two-bedroom condo in a hot retirement area is just as expensive as the four-bedroom place they sold somewhere else.

Modest price gains, because they are more dependable than oversized ones, make homeownership less risky. And because the home is both a necessity and the household's biggest expenditure, playing it safe is usually smarter that swinging for the fences. There are plenty of ways to take big investment risks in hopes of outsized returns — with stocks, options, sow bellies and so forth. But it's always good to know that when your bets turn sour you still have an affordable, low-risk home to come back to.

By Jeff Brown for MainStreet