When adjusted for inflation. The graph (based on data from Robert Shiller) emphasizes the point that houses are consumable items composed of consumable items - "Houses are ordinary consumable goods: wood, stone and metal bound pieced together through labor. There's no reason to believe they should enjoy a special rate of return distinct from those for, say, apples and shoes."
The bottom line is that houses should be bought (or not bought) based on a individualized calculation of its utilitarian value - not as an "investment" to profit from.
Via Smart Money.
Houses are ordinary consumable goods: wood, stone and metal bound pieced together through labor. There's no reason to believe they should enjoy a special rate of return distinct from those for, say, apples and shoes.
ReplyDeleteI've said this since I was 18 or so and wondered why people looked at home buying as an investment. There's no reason to think that a house will appreciate in value.
That's true, provided the supply is not artificially distorted. Here in the UK we are short of housing because years of planning restrictions have made it hard to build. As it happens we bought a cheap house in a run down area and have seen it rise in value considerably above inflation - but that doesn't make us wealthy because near enough everywhere else has done the same - were we to move we'd be where we started.
DeleteBut if the market isn't too badly distorted, then yes - housing should be like other things - just something you pay for and use and there's an end of it.
Any appraisal of an investment's worthiness should be measured against the timescales of the expected return.
ReplyDeleteI suspect that most people want a 'return' on their home investment over a period somewhere between 5-25 years (though some will want longer term).
This chart is basically rubbish...I didn't buy my home in 1895...nobody alive did.
Why did they chose 1895? Had they chosen any period from 1920-1940 this graph would show a significant return on investment.
This is even before considering rental income for those that buy to let or the savings on rental costs for those that buy-to-use.
Just to clarify - they did not "choose" 1895 as a reference standard - I chose it for the title.
DeleteOops yep good point, though obviously a large portion of my point remains...
DeleteAs I think about this more, it actually gets more complicated to interpret.
DeleteWhat the graph shows is not the price change for a house built at a given time, but (I think) the average price-to-buy-a-house for a given year. Adjusted for inflation.
Obviously, a house a house built in 1920 could be worth a huge fortune if it has been kept up nicely - or be near worthless if allowed to decline for a century.
Out of curiosity, I dug through some old files re the house I grew up in, built by my parents in the 1950s, sold in the 1980s. The annualized gain was 3.2% per year (presumably in line with the inflation of the times). I also looked up what the house is listed for on Zillow now (2011 data), and punched that into a calculator = 3.0% for another 30 years. Overall 3.1% per year for 60 years.
But that's just one house, and depends on the neighborhood and upkeep by the new owners and the suburban sprawl around Mpls. So that can't be extrapolated. But I thought it was interesting.
I agree that HOMES should not be viewed as an investment, but I would assume that as there are more and more people, available LAND would be harder to come by, therefore making it appreciate in value. My grandmother always told me, "if you get your hands on some land, hang on to it, cause they don't make any more of that"
ReplyDelete"adjusted for inflation" - as currently calculated by the US government, inflation is a meaningless number. All of the things I spend my paycheck on are not included in the calculations. So, what exactly are house prices compared to in this chart????
ReplyDeleteYou don't spend money on any of this stuff?
Deletehttp://www.bls.gov/dolfaq/bls_ques3.htm
FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks);
HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture);
APPAREL (men's shirts and sweaters, women's dresses, jewelry);
TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance);
MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services);
RECREATION (televisions, cable television, pets and pet products, sports equipment, admissions);
EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
Yeah, houses aren't an investment. But, they're an enforced savings plan. Easier to save your bucks and keep at it consistently when you've got a bank standing over you. People who buy houses end up with more financial security, not because houses are good investments, but because the mortgage payment forces you to stick to a savings plan.
ReplyDeleteSame goes for having kids. Financially, having a little 'un is like taking on a 20-year, $200,000 loan at 7%. The kid might support you when you're old, but it doesn't really pencil out. What does happen is you put up with your job longer. Instead of quitting and moving around, you think of the kids, stick at the job and wind up with more seniority.
Theoretically it's best to be a DINK, rent, and plow your savings into a stock index fund. In reality it's best to get a job, get married, buy a house and have kids.
A mortgage is paid in nominal dollars not real dollars (one doesn't have to pay more for a mortgage due to inflation), one is not paying anything comparable to current rates for housing as a mortgage nears the end.
ReplyDeleteThe entire time one is paying a mortgage they are also spending funds on their own mortgage not losing them to rent. There is return it's simply not shockingly dramatic as prices elsewhere rise while one pays their mortgage.
"Adjusted for inflation"... hmm. How do you measure inflation? Look at the price of certain basket of commodities that are not expected to change with time ... I'm sure one of the biggest items in the "basket" is real estate.
ReplyDeleteI think the plot is by definition supposed to have zero net gain.
What would be more interesting is to divide the cost of housing by other interesting but orthogonal items, like food or healthcare or entertainment or labor wages.
Timing and location are critical factors in real estate investment. If one buys in the path of growth, and before a market gets overheated, it is not difficult to make money on a house. It's tough to sell if your wife and kids are in the house, though. I have the "This Old House" disease and am a serial renovator. I sold my house in 2005 not wanting to go through 1988 again (the savings and loan crash) and it was the best financial move of my life.
ReplyDeleteMany people are making very smart real estate investments RIGHT NOW. Bargains are a plenty and interest rates are crazy low. Just don't buy where the economy is going to die, and you should be alright. I guess that's the tricky bit though, isn't it?
It's not that housing won't recover. It's that housing DID recover... from excessive inflation. And yet there are still people out there, ranging in power from voters to financial regulators, who keep talking about how they can get house prices back up again.
ReplyDelete