Prior to 2007 it was somewhat difficult to persuade clients that real estate was not immune to the universal laws of physics. That is, many believed that real estate simply increased in value each and every year often at multiples of the inflation rate and never declined. Yes, there have been periods where that appeared to be the case but for the main real estate has been only a moderately attractive storehouse of value over the years. Real estate has utility, a function, and that indeed is valuable but we should not confuse investment and utility for they are totally separate.

One of our most valuable functions as unbiased advisors is to help clients change the way they think about finances. We try to lead clients in their understanding about what it is that they are trying to achieve with their money and how the various parts of their financial life should fit together. Trying to think about real estate mostly as a personal asset and not an investment asset is a beginning.

By some measures, residential real estate values have re-traced their values back to 2000-2002 levels. Some areas of the country have fared better and some worse but overall values today are about 35% off their highs a few years ago. Many economists think it could be 5-10 years into the future before we see the peak levels again.  

A personal example might help illustrate the point. My wife and I bought our home about 23 years ago. I recently did a back of the envelope type analysis of the rate of return that we have generated using the original purchase price, improvements made and the current estimated value. I ignored routine upkeep (painting, carpeting etc) as well as property taxes, insurance and mortgage payments since all those represent "carrying costs" attributable to the "utility" derived from living in the house. . Without these costs, the raw value in and value out calculation came to about 3% per year. The CPI for that timeframe fairly closely matches that annual return percentage.  I suspect that many others would find similar conclusions if a reasonable analysis were undertaken. From a rate of return perspective, real estate usually doesn't qualify as "the most amazing investment ever", despite some folks wishing it so. 

Real estate, of course, does provide us with a roof over our head and a place for gathering family and friends. Those functions have intrinsic value and are worth something, either a mortgage payment or rent. That is distinct from a decision to buy or build a home with the expectation for out-sized real returns.  When one combines reasonable inflation protection over the long term with the utility perhaps a good case can be made for buying versus renting. One the other hand, owing a home can decrease mobility in a period where this can be helpful in job/career development.

As tends to be the case with major life decisions, most folks decide to buy a house emotionally rather than intellectually. That can have particularly negative consequences when leverage is introduced into the equation as so often is the case in purchasing real estate. Leverage (using borrowed money) can make something good turn into something very good and vice versa.

Most of our clients that have multiple houses wish they had at least one less. Regardless of income or net worth, we all have only so much time. A mountain or beach house that we use a few weeks a year becomes very expensive when viewed from the perspective of a cost/benefit analysis.  Most wedding ceremonies contain some verbiage relating to not entering into the married state "unadvisedly". That would be a good way to think about real estate as well. Seek advice and follow it.