The REAL Real Estate Appreciation Rate

[gryffindor]

I think the core issue is to think about appreciation in inflation adjusted (real) or nominal rates going forward. So inflation matters just as much (if not more) than total appreciation if you have a big loan on the house.

Even if appreciation just keeps up with inflation in the future, it will be a good financial return to keep real estate with 30 year loans.

Since the government will benefit massively by decreasing the value of its debt through inflation I'm going to be anticipating long term that this is going to happen. The odds are stacked in favor of this.

 

[calmloki]

I think the core issue is to think about appreciation in inflation adjusted (real) or nominal rates going forward. So inflation matters just as much (if not more) than total appreciation if you have a big loan on the house.

Even if appreciation just keeps up with inflation in the future, it will be a good financial return to keep real estate with 30 year loans.

Since the government will benefit massively by decreasing the value of its debt through inflation I'm going to be anticipating long term that this is going to happen. The odds are stacked in favor of this.

Just so. Figure massive inflation will also "cure" the housing market malaise - debt will be paid off on homes with dollars worth some fraction of what they are worth now. If houses are currently overvalued then inflation will make their value rise to meet and exceed that overvaluation. For example, people with $400k homes they can't currently sell for $300k might see the values rise to $500k - of course that might only be $250k in today dollars, but the homeowners make a hundred k in then dollars, the government taxes the profit, and the only losers are the ones holding the debt. Gee. One would think that would mean that lenders wouldn't want to make loans right now.... or carry the paper. Also means it might be a good time to own stuff. like property. And for those feeling really ballsy, carrying as much debt as they possibly can.

 

[kumquat]

.... and the only losers are the ones holding the debt. Gee. One would think that would mean that lenders wouldn't want to make loans right now.... or carry the paper. Also means it might be a good time to own stuff. like property. And for those feeling really ballsy, carrying as much debt as they possibly can.

I can't really see housing increase at a rate greater than inflation (in the long run). In the short run, anything can happen. House prices have to be geared toward the incomes of those who buy them.

I bought my first house in 1975, paid 28K, made 9K. Let's call it a 3/1 ratio. Over the next 3 years, inflation was high. I got lucky and sold it for 50K (to a self styled 'developer') and bought a much nicer place in the same neighbourhood for 58K, my income had increased to 35K but entry level salary in my job was ~20K, still around 3/1. 22 years later, I sold that house for 135K. My income had increased to 90K, entry level in my field was ~40K. Not too far from 3/1. Note that the 1st house doubled in 3 years, the 2nd in 22. I can't be bothered to graph it against inflation, but general trend lines would have to be nearly the same.

Housing prices will always be tied to income and can't inflate (for any reasonable length of time) at a rate greater than wage inflation. If they do, there are no people who can afford them.

Note that in 1975 I had a 12% mortgage (with 8K down). shortly thereafter inflation (this was Canada) exceeded 15% so my real rate was negative. I was lucky, if you take on a lot of debt YMMV.

 

[free4now]

I can't really see housing increase at a rate greater than inflation (in the long run). In the short run, anything can happen. House prices have to be geared toward the incomes of those who buy them.

I agree completely, but unfortunately knowing that doesn't really help to predict home values in my lifetime. As the saying goes, in the long term we'll all be dead.

Water costs must also be tied to the incomes of water consumers; otherwise people won't be able to buy water. But that doesn't stop water costs from varying from a fraction of a percent of a US citizen's income, to a majority of the income of many people in the developing world.

As the middle class gets squeezed out and our country divides into the haves and have nots, it seems completely possible that in my lifetime only the ultrarich will be able to afford to buy homes. The rest of the population may be squeezed into bunkhouses owned by big business

Or new developments in construction, transportation, and/or telework could mean that the vast majority of land which is now undevelopable is suddenly developable, causing housing prices to crash.

I suppose I'm being somewhat hyperbolic; in fact I do agree that inflation plus a small risk premium is the best guesstimate for housing values.

 

[dixonge]

I dont' know where NeighrhoodScout is getting their data, but they are showing similar rosy numbers for my zip code (76227), and we got a $180K appraisal early last year for a forced refi, but comp sales have been at $125K for the last several months. I know because we started planning on selling our home right as the values tanked. New home construction has almost completely halted, foreclosures are rampant. We've been kicking ourselves for not renting......

 

[FUEGO]

I just checked my hood. 94% appreciation since 1990. That is with a headwind of inflation amounting to 65.5% since May 1990. In other words, the average house in my neighborhood returned 0.8% real return after inflation. Yippeee!!! 4% my a55...

Clearly if I would have known which neighborhoods would go from urban blight to gentrified high dolla areas, I could have obtained 300% returns on my house if I were in a different neighborhood right down the road in my same zipcode. But in 1990, you would have expected to get shot had you live in those neighborhoods, not receive a 300% return on your house purchase.

The best part about owning a house? You usually don't get wet when it rains if you are inside it.

 

[tryan]

This discussion wouldn't be any different with any other asset ... Index fund owners hype long term returns - and look what's happened in the last 2 years.

Individual stock pickers can brag about hitting a home run or 2 .... but could also tell some horror stories.

 

[HFWR]

I dont' know where NeighrhoodScout is getting their data, but they are showing similar rosy numbers for my zip code (76227), and we got a $180K appraisal early last year for a forced refi, but comp sales have been at $125K for the last several months. I know because we started planning on selling our home right as the values tanked. New home construction has almost completely halted, foreclosures are rampant. We've been kicking ourselves for not renting......

I'd bet there are lots of foreclosures in those mega-developments on 380...

 

[dixonge]

I'd bet there are lots of foreclosures in those mega-developments on 380...

You got that right - almost all of these low-ball sales are on foreclosed homes. Who wants brand new when you can get slightly-used at 30% off?