Why your home was probably worth more a hundred years ago

It will surprise you.

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Homes usually don’t appreciate in real value, at least on average. Home prices rise and fall in cycles. Specific houses  and neighborhoods can become more attractive, but the average of all homes hasn’t increased. The exceptions to this rule (1980, 1987, 2007, 2013) are housing bubbles.

buying-rental-property-amazon-thumb-cover-240I explain how you can learn to predict which homes will increase in my book, Before You Buy Rental Property: The ethical investor’s guide to buying a rental home.

Investing in rental property is about growing equity and earning a monthly income once the house is paid off. You needn’t require the home to appreciate in value to succeed.

Thinking of property as an Investment

  • rental property income is a monthly dividend for owning a “stock”
  • the “stock” is the actual house, and a “stock portfolio” is a collection of properties.
  • stock price” is the potential sale price of that home.
  • renters paying a mortgage into equity is like an investor acquiring more shares of a stock each month.

How do property dividends compare with stock dividends? Look at the average quarterly dividend  for stocks since 1980 as a percent of return on investment:

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Every dollar invested in stock in 2010 yielded 2 cents back each quarter of the year. Rental income tends to yield a similar percent to the owner after expenses. The yield is rarely better than stocks, but tends to be more reliable.

Stocks vs real estate: this isn’t a perfect apples to apples comparison. With stocks the amount of dividend cash you get depends on how many shares you own and how much per share the company pays out – typically in the $0.25 to $4.00 range quarterly. And stock prices range from $20 to $200 per share. But after all the math, property income yields a similar return.

So if houses are worth about as much as they were a century ago, after adjusting for inflation, what’s the advantage of buying property?

Equity. 

That’s the value of the property itself. Your house is a vault that your renter fills up each month by paying rent. And any improvements to the house are deductible “business expenses!”

It isn’t just homes – both income and property values have been pretty flat for decades. Did you know that if you earn under $50,000 per year, your real household income has been flat since the 1967?[i]

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Paying a mortgage is really no different than putting your money into a non-interest bearing bank account, except that you get to deduct what you pay in interest from your tax bill. And there’s the benefit of putting that money into an account in the first place. If you rent, you’re putting that money into someone else’s bank account.

That wiggly red line at the bottom of the chart is the inflation adjusted value of the average American home from 1967 to 2015. It never rises more than 20 percent. Likewise, income for the bottom 50 percent of Americans has increased 20 percent at most.

How does real estate compare with stocks and mutual funds? It’s not as lucrative, but it is more reliable. Investments in the stock market have been quite a roller coaster:

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Side by side, the stock market has grown 200% over the same time frame that homes grew 20%. Most of this growth really started in the 1990s when companies abandoned pensions in favor of 401k plans (which forces all employees to buy stocks), so it may not be sustainable indefinitely.

[i] Source: http://www.advisorperspectives.com/dshort/charts/census/adjusting-median-household-income-for-inflation-1967-chain.gif

See also: Gentrification: Solve for X

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2 thoughts on “Why your home was probably worth more a hundred years ago

  1. From a Facebook conversation I had about this post:

    Scott: “Housing. Again, “what Everybody Knows” is wrong. “Specific houses and neighborhoods can become more attractive, but the average of all homes hasn’t increased. The exceptions to this rule (1980, 1987, 2007, 2013) are housing bubbles.” Smart friends of mine who happen to enjoy a consistent appreciation of home prices in America’s priciest zip codes will either deny or forget this.”

    Marc: Remember, I might not know what I’m talking about. But the data do seem to show that the value of a home is found in everything but the sticker price.

    Scott: Stock market truisms are riddled with falsehoods that only apply to market entry/exit at specific years. But, a great discrepancy in returns between capital invested in a home vs. the general stock market (higher returns) seems one of the more consistent truisms. The saying goes, “your residence is a purchase, not an investment.” Oh, some term a home purchase as “forced savings,” which is pretty faint praise and doesn’t sound very “economically empowering.”

    Marc: I was shocked to find that most of the stock market’s returns have happened in my lifetime, and especially have ramped up in conjuction with the “forced savings” of 401ks in America. So if you took away the 401k effect, our market is really flat in our lifetime.

    Scott: Yup. The nonsense underwriting our citizens current survival plans is horrifying. I’d advocate teaching basic personal finance in schools, but it would just calcify ridiculous habits and false truisms based on nonsense smile emoticon Still, China and India are the worlds largest, oldest civilizations. If they don’t go totally tits up (hint, they probably won’t; if they do, we’ll likely go tits up with them), I think a long term bet on long term corporate earnings growth there is a pretty damn good one right now, even if they never devolve into wholly financialized post-colonial paper-profit extraction machines – which I hope they don’t. If they do so devolve, current investors will make even more money.

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