If you bought land in California in the 1970s, you’d probably opine that land is a good investment. If you bought it in 2006, and now it’s worth a fraction of what you paid, your opinion would probably differ. Most knowledgeable real estate investors will agree that buying land is not a good idea, and this includes buying small parcels of land and/or potentially investing in a large land deal. There’s just way too much risk.

Land is speculative

Here is the issue with land: It’s a 100 percent speculative investment. You are 100 percent hoping that the value will go up to provide you a fair rate of return. And it might. But will it go up enough to provide you a fair rate of return for the extreme risk that you are taking holding that land?

Here’s the risk

Let’s say you buy $100,000 worth of land, and you pay cash. It’s still going to cost you money each month to cover property taxes and insurance. And, here’s the kicker: It’s also costing you the opportunity cost of capital.

You probably took $100,000 out of your mutual fund account, or other financial asset, to buy the land. And when that money was in the financial account, it was probably earning interest — let’s say 5 percent — but now it’s not earning anything because you took it out of your account to buy some dirt. So you’re really effectively losing 5 percent in wealth each year because you’re not earning that return. Unless, of course, the land goes up that much in value plus compensating for property taxes, insurance and other annual costs.

As an example, if you have $100,000 and put it into a mutual fund, you’d earn 5 percent, or $5,000, per year. That’s cash in the bank that you can reinvest to earn even more money. After 10 years you’d have your original $100,000, plus $50,000 to $70,000 additional cash/financial asset earnings.

On the other hand, if you bought land, you’d earn no interest or dividends, and after 10 years you’d have a piece of dirt that you’ve been paying taxes on. Will your land have gone up enough in value to match the returns you would have earned on a financial asset?

In addition to those significant financial issues, land also can be contaminated, undevelopable or have significant development restrictions, among other issues.

Who might consider land?

Land may be a good investment for home building companies and long-term corporate land investors with extensive development and entitlement skills and experience, and significantly diversified portfolios of land to reduce their overall risk. But for small investors, it’s a high-risk gamble with little chance of earning a fair rate of return. There are much better investment opportunities, such as stocks, bonds, mutual funds, rental properties or, quite frankly, heading to Las Vegas for the weekend (where, by the way, many an investor has learned some tough land investment lessons in the past decade!).

Mortgage rates remained at or near record lows this week as investors — including the Federal Reserve — continued pouring money into mortgage-backed securities that fund nine out of 10 U.S. home loans.

Rates on 30-year fixed-rate mortgages averaged 3.37 percent with an average 0.7 point for the week ending Oct. 18, down from 3.39 percent last week and 4.11 percent a year ago, Freddie Mac said in releasing the results of its latest Primary Mortgage Market Survey. Rates for 30-year fixed-rate loans hit an all-time low in Freddie Mac records dating to 1971 of 3.36 percent during the week ending Oct. 4.

For 15-year fixed-rate mortgages, which are popular with homeowners refinancing, rates averaged 2.66 percent with an average 0.6 point, down from 2.7 percent last week and 3.38 percent a year ago. That’s a new low in records dating to 1991.

Rates on five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) loans averaged 2.75 percent with an average 0.6 point, up from 2.73 percent last week but down from 3.01 percent a year ago. Rates on five-year ARM loans hit a low in records dating to 2005 of 2.69 percent during the week ending July 19.

For one-year Treasury-indexed ARMs, rates averaged 2.6 percent with an average 0.4 point, up from 2.59 percent last week but down from 2.94 percent a year ago. Rates on one-year ARM loans hit an all-time low in records dating to 1984 of 2.57 percent during the week ending Oct. 4.

The $40 billion-per-month increase in government purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac announced by the Federal Reserve on Sept. 13 is expected to help keep mortgage rates low for an indefinite period.

Looking back a week, a separate survey by the Mortgage Bankers Association showed demand for purchase loans at its highest level since June. The survey showed demand for purchase loans during the week ending Oct. 12 up a seasonally adjusted 1 percent compared to the week before, and up 12 percent from a year ago

More good news on the home front.  The latest S&P/Case-Shiller Home Price Index indicates that home prices gained 1.6% in July compared to a year earlier. Every city tracked in the 20-City Composite has seen prices rise for three straight months and 16 of the 20 cities saw year-over-year increases. “The positive news in both the monthly and annual rates of change in home prices over the past few months signals a possible recovery in the housing market,” noted David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices, in a statement.

Blitzer is the latest housing expert to toss around the “r” word.  Last week, for example, the National Association of Realtors reported that existing home sales climbed about 9%  nationally in August from a year earlier. “The housing market is steadily recovering with consistent increases in both home sales and median prices,” explained Lawrence Yun, chief economist of NAR.

A growing pile of data indicates that that national-level recovery is solidifying into a reality (albeit one taking dramatically different shape on a more local level across the country). In addition to the Case-Shiller index and NAR’s sales report, new home construction — a forward-looking indicator of housing market activity — is making a comeback.

August single family home starts are up a hefty 29% since last year, according to the Census Bureau, despite missing analysts’ estimates. Home-builders’ confidence hit its highest level in more than six years this month, according to the National Association of Home Builders. Companies like Lennar, the second-largest home builder in the U.S., have been reporting surprisingly positive quarterly earnings thanks to an uptick in both orders and selling prices, according to my colleague Abram Brown. And Fannie Mae economists estimate that residential investment in 2012 will positively contribute to gross domestic product for the first time since 2005.

All that good news begs the question: what can we expect from housing in the coming months?

“We got to the point where housing couldn’t fall any farther,” notes John Canally, an investment strategist for LPL Financial. “Seven years into it and we are finally seeing a turnaround — but it will be modest at best.”

Canally likens the national-level housing market recovery to a “crooked U” in shape: home prices fell dramatically from 2006 through 2009, then bounced along an uneven bottom (falling a bit more following the expiration of the 2010 home buyer tax credits) for three years before finally beginning to turn upward in recent months.

Lauren Pressman, director of real estate at Aspiriant, also believes housing is making a U-shaped rebound. “It does seem that we are on solid ground for a recovery, or least no more continued depreciation in home prices in most markets,” says Pressman. Yet she doesn’t expect prices to rise dramatically any time soon, thanks to the lackluster jobs market, an overhang of distressed shadow inventory, and ongoing credit issues.

Stan Humphries, chief economist at Zillow.com, has expectations that echo Pressman’s. “We think the bottom is going to be a long flat affair where home value appreciation over the next two to four years, depending on the market, will be in the 1-3%  range,” explains Humphries. Zillow’s formal home value projection (which includes all homes, listed for sale and off the market) entails a 1.1% rate of appreciation from June 2012 through June 2013. Humphries believes a healthy (non-bubble) 2.5-5% rate of appreciation won’t kick in until sometime between 2014 and 2016.

Yet housing inventory levels are down and new construction will take years to move through the development pipeline. Realtors in some markets, like Phoenix, Miami and San Francisco, even report bidding wars. The rapidly diminishing supply of sought-after inventory has some analysts making larger projections. NAR estimates prices of existing homes will rise 10% cumulatively over the next two years. Barclays equity research division warns that a possible shortage of quality inventory could even fuel a “dramatic, multi-year recovery in home prices that could drive prices up 5% to 7% per year through 2015,” according to my colleague Agustino Fontevecchia.

Still, a handful of factors arguably stand in the way. Down payments and tight lending standards remain huge hurdles for aspiring home buyers right now. So does job certainty.

And while the Federal Reserve’s recently announced plan to buy mortgage-backed securities will likely push mortgage rates lower, inspiring some prospective buyers to take the plunge into home ownership, other large policy issues still loom. If the so-called fiscal cliff, in which the Bush tax cuts expire and automatic spending cuts kick in, is realized at the end of this year, it could hamper home sales and new construction starts.  If economic woes worsen in Europe, the consequent downward pressure to the U.S. economy could impact housing similarly. The same could be said of spikes in inflation or energy prices

So how will this housing recovery take shape? It will be a localized recovery in which some markets clock bigger gains than others.  Markets like Phoenix and Miami will continue to log notable gains; markets like Chicago and Atlanta will continue to struggle as distressed inventory filters out into the market. Overall, however, many markets are stabilizing and beginning to reflect positive growth. That growth will translate into a humble increase in the annualized rate of national home price appreciation for 2012. In other words, the very worst of the housing recession is finally behind us but the recovery ahead is likely a long one.