The Housing Price Myth
It has been widely stated that housing prices are at all-time lows and getting worse. The reality is that this is not true.
Absolutely, compared to the artificially inflated prices of 2005 – 2007 created by the irrational interest rate behavior of the Federal Reserve, housing prices have dropped precipitously. This has of course hurt those who invested at the time, but those who buy high and then sell low, always end up on the wrong side of the investment ledger.
The reality is that over the last ten years, through the first quarter of 2009, housing prices have risen nicely in all major markets. Real estate has always been considered a long term, reasonable return investment. From 1999 to 2009, it has been just that.
In Los Angeles, where housing prices have fallen almost 25% in the last two years, they are up a net 23% in the last five years and a net 116% in the last ten. That is a respectable 4.5+% in the last five and 11.6% per annum return over ten years. I think most of us would take that.
Midwestern cities such as Chicago, St. Louis, Indianapolis, where the two year drop has been mild, all showed typical gains over the last five and ten years.
What that means is that prices are now back to what they should have been had not unreasonably low interest rates, caused by the Federal Reserve, driven home prices through the roof in the middle of this decade.
Homeowners, it is time to get back in the game.
Lesson to be learned – buy low and sell high.
2 Responses to “The Housing Price Myth”
It is unclear what “myth” you are referring to. If you are talking about people that bought back 10 years ago, then yes, they are in fine shape. If you're talking about disparity across regions, again that adds a lot of detail. However, the mortgage problem is still far larger than commonly appreciated. Indeed, if prices decrease as much as anticipated over the next two years, then the nation in aggregate will have negative equity on homes that have mortgages!! The nation in general may get close to zero (10-20%) equity for all homes, including the 31.6% of houses without mortgages.
These are mind boggling statistics.
In general over large periods of time housing tends to track inflation perfectly, as shown by Shiller.
You're right. The downturn in the housing market isn't anything out of the ordinary as far as investment goes. The problem, however, is that Americans were sold the myth that renting is “throwing your money away” and that buying a house was the key to achieving the American dream. If you look at it as an investment, however, you realize that buying a home is like investing in a highly leveraged and badly diversified portfolio. Not only are you investing in just one sector of the economy (real estate), but you are investing in just one house. That's like taking out a $300,000 loan and using the money to buy just one stock. If that stock goes down even 30%, you're in trouble.
This is just one more example of how the good intentions of public policy often have unintended consequences. I'm written more about this issue here: http://sovereignmind.wordpress.com/2009/02/06/t…
Unfortunately it seems we haven't learned our lesson. What is the government's response to the housing crisis? Give first-time home buyers a big fat tax credit.