There’s a convincing argument that real estate is today’s
best long-term buy.

July 11, 2011

Archive Holdings / Getty Images

Archive Holdings / Getty Images

No one knows what the economy or the stock market will do over the next six
months. But when your time horizon is 20 years, the outlook is actually a lot
clearer. And right now, all the trends are lining up to make real estate a
fantastic long-term buy.

Of course, if you look at recent real estate
statistics, the picture is a total catastrophe. Home prices are down by a third,
and the decline recently exceeded that of the Great Depression. Across the country, 2
million homes are in foreclosure and another 2 million are more than 90 days
behind in their payments. The backlog of foreclosures could last two or three years.

Falling home prices plus the foreclosure backlog probably mean a flat-to-down
market over the next couple of years. But beyond the current desolation, the
outlook is exactly the opposite. In fact, three different trends are aligning
that figure to produce a major home-price boom over the next 20 years.

1. The Economic Cycle. Admittedly, the current recession is
far worse than a typical cyclical downturn. Nonetheless, the economy has grown
for seven straight quarters. It is possible that there could be a double-dip
recession – triggered perhaps by the default of Greece or Portugal. But the
worst damage to the U.S. economy appears to be behind us. Home prices are
largely driven by demand, which depends on the number of people working, their
prospects for salary increases and the availability of credit for mortgages. All
three of those things are bad right now, but they typically lag the economic
cycle for GDP. Once the economy finally recovers, the factors that drive housing
demand will follow.

2. The Real Estate Bust. The collapse in housing prices has
destroyed confidence among home buyers and left perhaps a quarter of all
properties worth less than the mortgages they carry. But the experts see prices
within 5% to 10% of a bottom. Once the process is done, prices
will have been knocked all the way down. As a general rule, the worse the crash
in a market, the longer the subsequent recovery can last, because there is
nowhere to go but up.

3. The Inflation Outlook. The combination of a cyclical
economic recovery and the end of the housing bust is by itself reason enough to buy real estate. But in my view, there is an
even more compelling long-term argument – the near-inevitability of higher
inflation, as I have argued before. Basically, if the U.S. continued
building up debt at its present rate, the country would eventually end up where
Greece is today. The reason that won’t happen is that while Greece’s debt is in
euros, a currency it can’t control, U.S. debt is in dollars. The U.S. will
always be able to pay its debts because the Federal Reserve and the Treasury can
simply work together to create more dollars (what people used to call “printing
money” in the days before electronic funds).

The catch is that creating money that way would eventually lead to inflation
and the devaluation of the U.S. dollar. In such an environment, any kind of
tangible property appreciates rapidly. The last time such a pattern occurred was
in the 1970s as inflation soared into double digits. Of course, ’70s-style
inflation might not recur if federal spending is slashed, taxes are raised and
oil prices fall. But that’s not how I would bet.

The real estate market may not quite have bottomed out yet. And the boom I’m
talking about will probably take more than a decade to unfold. It also may not
apply as directly to real estate stocks. Home builders have more complex
problems and real estate investment trusts often depend on commercial properties
that are sensitive to business conditions. But the next two or three years
should offer exceptional opportunities for buying actual real estate – primary
residences and vacation homes – preferably somewhere that’s

Read more: