Over-optimistic homebuyers
How much do you think home prices rise in a typical year? Four out of every 10 prospective home buyers surveyed by real estate search site Zillow say "seven percent," which -- Zillow says -- is way out of sync with reality despite all the dour news about housing the last several years.
Housing bubbles and busts aside, home prices usually increase two to five percent a year, Zillow says. The company points to Yale economist Robert J. Shiller's index of housing prices from 1890 onward, which adjusts for inflation and shows a lot of up-and-down movement.
"It's troubling that we're still in the midst of one of the worst housing recessions in history, and yet prospective buyers continue to have such high expectations for home value appreciation," Stan Humphries, chief economist at Zillow, said in a statement. He added: "Over-estimation of the appreciation potential will lead many to buy real estate when the time in which they plan to live in the house may make renting a better strategy."
I wish we had more robust historical data on local home values. I came across this Census Bureau chart the other day that suggests median home values in Maryland actually did rise nearly 7 percent a year on average from 1940 through 2000 -- unless you account for the effect of inflation, in which case the story is markedly different.
The average annual increase was 4 percent in Maryland during that period, inflation-adjusted. From 1960 through 2000, it was just a bit over 2 percent. And 1990 through 2000? Negative appreciation -- down two-tenths of a percent in an average year.
I suspect most homeowners don't figure out their appreciation (or lack thereof) in "real" terms, knocking out the upward effect of inflation. It's a useful exercise. Here's one inflation calculator, in case you'd like to try it with your own home.
Categories: Housing stats, Survey says ...
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Comments
Jamie,
The question is a good one but it's a loaded question--for a house to appreciate there needs to be maintenance, if not improvements and updates. I'd say that the average home, with basic maintenance, should not appreciate relative to inflation. So the home's nominal price should rise 2-3% per year. Over a decade, that amounts to 30% or more, which makes people *think* that a house is an appreciating asset. In reality, if no money is spent on maintenance and updates, the natural course for a house is to depreciate relative to inflation.
Posted by: chappy10 | November 9, 2011 10:54 AM
Inflation has little to do with the value attribute of real estate, so the correlation in your article is wrong. Either the value of the home had an average of 7% per year increase or it didn't.
Comparing the increase in value to inflation is how the wall street criminals convinced people to use their homes as piggy-banks to buy furniture, groceries and other non-investment grade items.
Posted by: CommonSense | November 27, 2011 8:58 PM
CommonSense, are you suggesting that inflation affects the price of all life necessities except real estate? (Shiller's index adjusts for inflation, and he is decidedly not in the group of people who encouraged irrational exuberance -- rather the opposite.)
Posted by: Jamie Smith Hopkins | November 27, 2011 9:37 PM
Inflation is actually the biggest friend leveraged finance has. Of course, leveraged finance is the biggest enemy the average wage earner and consumer have.
If you knew with certainty that inflation was about to start running 7%, and you knew with certainty that the price of housing would appreciate exactly 7% in nominal terms, thereby exactly pacing the rate of inflation, you would still come out ahead buying a house using leveraged financing.
Posted by: Josh Dowlut | November 28, 2011 9:03 AM
All life necessities except real estate are either consumable items or clearly understood to be depreciating assets (like appliances and autos).
Homes, the structure and amenities themselves, are similarly depreciating assets unless maintained to the original condition... or they will become consumed by the elements and become derelicts.
That maintenance and upkeep and replenishment of the worn have well documented costs that must be born by the homeowner and will add up to 1-3% of original value per year; more if you prefer the fancier finishes and such.
On a nice enough suburban rancher purchased new in 1991 for $150,000... if the owners budget that $3000 per year (150K x2%) then tuck it away until needed that $60,000 might be just enough to cover their costs to replace the roof, furnace, refrigerator, washer, dryer etc not to mention the carpet, paints and blinds that wore out during the interim.
Doing this work and bearing this expense allows them to ask for someone else to pay $150,000 to buy their home... in 2011 but it doesn't allow them to ask $210,000 to recover what so many like to think of as "additional investment".
Posted by: MrRational | November 28, 2011 9:18 AM
"leveraged finance is the biggest enemy the average wage earner and consumer have."
I agree. Mortgage brokers are criminals and are the biggest enemies to average wage earners and consumers.
Posted by: mortgage broker | November 28, 2011 10:46 AM