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.