Is real estate appreciation a myth? Adjusting for inflation
Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
Is real estate appreciation a myth? Adjusting for inflation
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
4y37% of the inflation index is a housing component, and the largest component of the index. So essentially rising real eatate prices are the definition of inflation.
Real estate isn't purchased at a steady position however. It is typically purchased at a leveraged position. So of you are at a 4-1 leveraged position (20% down, 80% LTV), then you out perform inflation by a factor of 4, before even counting in rent or debt pay down. If you bought in at 3% down, you are at a 33.33-1 leveraged position and you beat inflation by a factor of 33.33 times...or a return of 3,333% per year versus inflation.
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- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
When you look at appreciation as a "virtual" number...as in a number that doesn't really exist anywhere but on paper, until sometime in the future you "might" convert it to reality, this statement could be correct.
However, if you treat (as I do, and why I do) appreciation as your cash that is locked up until you sell the property and convert it, then whether or not this is true matters not.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes4y
37% of the inflation index is a housing component, and the largest component of the index. So essentially rising real eatate prices are the definition of inflation.
Real estate isn't purchased at a steady position however. It is typically purchased at a leveraged position. So of you are at a 4-1 leveraged position (20% down, 80% LTV), then you out perform inflation by a factor of 4, before even counting in rent or debt pay down. If you bought in at 3% down, you are at a 33.33-1 leveraged position and you beat inflation by a factor of 33.33 times...or a return of 3,333% per year versus inflation.
District Invest Group546 Reviews - 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesPerfectly stated. It still amazes me how often REI is compared to other investments using %%% straight up, forgetting (or ignoring) the leveraging impact and the exponential return that can (should) result from it.
Quote from @Russell Brazil:
37% of the inflation index is a housing component, and the largest component of the index So essentially rising real eatate prices are the definition of inflation.
Real estate isn't purchased at a steady position however. It is typically purchased at a leveraged position. So of you are at a 4-1 leveraged position (20% down, 80% LTV), then you oit perform inflation by a factor of 4, before even counting in rent or debt pay down. If you bought in at 3% down, you are at a 33.33-1 leveraged position and you beat inflation by a factor of 33.33 times...or a return of 3,333% per year versus inflation.
- 4yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Only if you buy and hold for a long time. If you buy a house for $200k and sell it for $400k in two years, you've made $200k profit (minus costs of course, but let's stick to round numbers). That would give you 50% per year profit which would vastly outpace inflation.
I assume you're talking about a long hold, and maybe you cannot keep up with inflation, but I doubt it even then....
- Rental Property Investor · Orlando, FL · Member since 2018 · 64 posts · 54 votes4y
I suppose the latter option is not investing in real estate or another similar form of investing which produces like returns, and placing the money in a savings account. In that case, rather than just keeping up with inflation, you'd be in the negatives. Plus, this is only looking at the value of the property and not considering the cash flow that is made and can be contributed towards another property.
- Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes4y
Quote from @Russell Brazil:
37% of the inflation index is a housing component, and the largest component of the index. So essentially rising real eatate prices are the definition of inflation.
Real estate isn't purchased at a steady position however. It is typically purchased at a leveraged position. So of you are at a 4-1 leveraged position (20% down, 80% LTV), then you out perform inflation by a factor of 4, before even counting in rent or debt pay down. If you bought in at 3% down, you are at a 33.33-1 leveraged position and you beat inflation by a factor of 33.33 times...or a return of 3,333% per year versus inflation.
That's correct. Except you're not including the cost of the financing. For example, if you're paying 5% interest on the financing. You're gain from leverage is only the difference between financing costs and the increased real estate value.
- Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes4y
There are two types of appreciation in real estate: market appreciation and forced appreciation. Market appreciation is out of our control, and is the type of appreciation you're referring to here. Market appreciation is nice to have, but since it's largely out of our control we can't put too much emphasis on it.
Real estate's advantage over Wall Street is that we have the ability to force appreciation of our properties. We can buy properties that are underperforming, fix them up, and sell for a higher value later. Only billionaire activist investors can do that on Wall Street, and even then they're rolling the dice (cough, Elon, cough).
- Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes4y
Quote from @Taylor L.:
There are two types of appreciation in real estate: market appreciation and forced appreciation. Market appreciation is out of our control, and is the type of appreciation you're referring to here. Market appreciation is nice to have, but since it's largely out of our control we can't put too much emphasis on it.
Real estate's advantage over Wall Street is that we have the ability to force appreciation of our properties. We can buy properties that are underperforming, fix them up, and sell for a higher value later. Only billionaire activist investors can do that on Wall Street, and even then they're rolling the dice (cough, Elon, cough).
Yes, that can be done with real estate. That's what makes real estate investing worthwhile to me. But that is also essentially what someone is doing when they buy any underperforming business (of any size) and increase the profitability.
- 4yKenneth RolfePro MemberBoise, ID · Member since 2018 · 57 posts · 39 votesAs long as you’re cash flow positive, the financing component should be offset. This could be applicable to your primary residence though, but then you could argue the need to compare those expenses to what your expenses would be if you didn’t own the property… which again would likely offset the financing cost.
Quote from @Eric James:
Quote from @Russell Brazil:
37% of the inflation index is a housing component, and the largest component of the index. So essentially rising real eatate prices are the definition of inflation.
Real estate isn't purchased at a steady position however. It is typically purchased at a leveraged position. So of you are at a 4-1 leveraged position (20% down, 80% LTV), then you out perform inflation by a factor of 4, before even counting in rent or debt pay down. If you bought in at 3% down, you are at a 33.33-1 leveraged position and you beat inflation by a factor of 33.33 times...or a return of 3,333% per year versus inflation.
That's correct. Except you're not including the cost of the financing. For example, if you're paying 5% interest on the financing. You're gain from leverage is only the difference between financing costs and inflation.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes4y
Quote from @Eric James:
Quote from @Russell Brazil:
37% of the inflation index is a housing component, and the largest component of the index. So essentially rising real eatate prices are the definition of inflation.
Real estate isn't purchased at a steady position however. It is typically purchased at a leveraged position. So of you are at a 4-1 leveraged position (20% down, 80% LTV), then you out perform inflation by a factor of 4, before even counting in rent or debt pay down. If you bought in at 3% down, you are at a 33.33-1 leveraged position and you beat inflation by a factor of 33.33 times...or a return of 3,333% per year versus inflation.
That's correct. Except you're not including the cost of the financing. For example, if you're paying 5% interest on the financing. You're gain from leverage is only the difference between financing costs and the increased real estate value.
That's only if the place is vacant. Most of us here have the tenants pay the debt.
District Invest Group546 Reviews - Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes4y
Quote from @Kenneth Rolfe:
As long as you’re cash flow positive, the financing component should be offset. This could be applicable to your primary residence though, but then you could argue the need to compare those expenses to what your expenses would be if you didn’t own the property… which again would likely offset the financing cost.Quote from @Eric James:
Quote from @Russell Brazil:
37% of the inflation index is a housing component, and the largest component of the index. So essentially rising real eatate prices are the definition of inflation.
Real estate isn't purchased at a steady position however. It is typically purchased at a leveraged position. So of you are at a 4-1 leveraged position (20% down, 80% LTV), then you out perform inflation by a factor of 4, before even counting in rent or debt pay down. If you bought in at 3% down, you are at a 33.33-1 leveraged position and you beat inflation by a factor of 33.33 times...or a return of 3,333% per year versus inflation.
That's correct. Except you're not including the cost of the financing. For example, if you're paying 5% interest on the financing. You're gain from leverage is only the difference between financing costs and inflation.
Yes, specifically with rental real estate your tenants will (hopefully) pay all costs associated with the property. But that isn't a characteristic of real estate in general. As you say, for those not renting out their real estate the financing costs reduce profit from increased value.
Property taxes can also be a high expense in some places. I knew a woman who sold her primary residence in NYS for $50k higher than her original purchase. When I pointed out she had paid $5k/year in property taxes each year, her reply was "I don't want to think about that."
- Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes4y
Quote from @Russell Brazil:
37% of the inflation index is a housing component, and the largest component of the index. So essentially rising real eatate prices are the definition of inflation.
Real estate isn't purchased at a steady position however. It is typically purchased at a leveraged position. So of you are at a 4-1 leveraged position (20% down, 80% LTV), then you out perform inflation by a factor of 4, before even counting in rent or debt pay down. If you bought in at 3% down, you are at a 33.33-1 leveraged position and you beat inflation by a factor of 33.33 times...or a return of 3,333% per year versus inflation.
And you have the strength to borrow against your inflated value without paying taxes (right now) on the money like you would with earned income.
If you use the tax-dodged money to reinvest vs. buy a Luxury Yacht, it creates even more power.
Although Luxury Yachts are nice.
Just my 2 cents.
- Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes4y
Quote from @Russell Brazil:
Quote from @Eric James:
Quote from @Russell Brazil:
37% of the inflation index is a housing component, and the largest component of the index. So essentially rising real eatate prices are the definition of inflation.
Real estate isn't purchased at a steady position however. It is typically purchased at a leveraged position. So of you are at a 4-1 leveraged position (20% down, 80% LTV), then you out perform inflation by a factor of 4, before even counting in rent or debt pay down. If you bought in at 3% down, you are at a 33.33-1 leveraged position and you beat inflation by a factor of 33.33 times...or a return of 3,333% per year versus inflation.
That's correct. Except you're not including the cost of the financing. For example, if you're paying 5% interest on the financing. You're gain from leverage is only the difference between financing costs and the increased real estate value.
That's only if the place is vacant. Most of us here have the tenants pay the debt.
You have pointed out possible benefits of using leverage and renting out an asset, both of which are not specific to real eatate. These possible benefits are separate from whether real estate itself appreciates at a higher rate than inflation.
- Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes4y
Standard purchase real estate (such as your home); if you consider it moving with inflation, you are probably close most of the time.
But in reality, your home is paid for approximately (x 3) when you figure in the mortgage payments, then you can add to that insurance over time, taxes, and wear and tear replacements over time.
So in reality because you want to own a home, and are too poor to pay cash for it, your total expenditure will probably lag inflation when you consider all of your costs (but not always in hot areas--depending on how long you own it).
(Mr. X looks at his purchase price vs his sales price--Mr. Y looks at his total cost of ownership vs sales price).
With rental real estate, the renter(s) (hopefully) over time pay down the mortgage and the principal, taxes, wear and tear, and all you need put up is the down payment and the risk (and work) of ownership.
Even if your rental lagged inflation, the free payoff aspect of it makes it desirable.
(although as many in here will tell you--it's not money for nothing--it requires, work, knowledge and risk)
There are also strategies that can be used such as Value Add, and etc...to force appreciation on rentals vs just waiting for prices to rise across the board.
So there is a skill in it.
And your question is like looking at what a tiny beam of light in a dark room lights up vs turning on the lights and seeing everything.
Is every real estate deal a home run for everyone, no--many lose money for a variety of reasons--but those who know how, can limit the risk of losing and grow.
And unlike stocks (which are pure speculation), real estate is never worth zero.
If you are interested in doing this, take the time to educate yourself about it, and make sure you are up to the WORK that it involves, especially with renters--because some can be very, lets just say "Draining".
Plus there is Risk in it--it's not money for nothing.
Good Luck!
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes4y
This is one of the better questions I have seen posted on the forums.
Inflation adjusted housing prices stayed even for forty years...from 1970 to 2010. And they have more than doubled in the past ten+ years. So, the answer to the question depends on the time period and location (and whether or not inflation adjusted prices from the past ten+ years will hold up long term).
As you stated, the benefit of using leverage to multiply the impact of appreciation by 2-4x is not isolated to real estate but many of us consider that benefit inseparable from the benefit of real estate appreciation because of the readily available financing, the small initial investment needed, the passive nature, and the resulting high multiples (10-20x) of real estate...all compared to other direct owned businesses that are achievable for the average citizen. There are few direct owned business that you can purchase with little down, no experience, get high LTV financing (or any at all), and be hands off.
Separately, housing prices are not part of inflation. The calculation uses rents and owner occupied equivalent rents.
- Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes4y
Are we talking about real estate on a micro, or macro level?
On a macro level given a long enough time span home prices will ultimately track inflation rates. This has been demonstrated by the Case-Schiller index for which the authors won a Nobel prize. But it also logically follows because if home prices were under inflation rates for a long enough period then homes would become trivially priced, and if home prices were significantly above inflation rates for long enough then everyone would be homeless as nobody could afford a home.
But nobody buys real estate on a macro level, we buy at a localized, micro level in our geographic area. Within that geographic area prices may or may not keep up with inflation depending on localized conditions. We are seeing a migratory shift on where populations choose to live. Thanks to technology, a farmer can now farm thousands of acres by himself. As a result, there are fewer and fewer people that actually farm because 1 person can farm the same acreage that used to require 20 farmers. As a result rural America is being decimated and these small towns are slowly dying and the real estate located in these locations will eventually become relatively worthless.
Transportation and manufacturing is being revolutionized. Major towns used to spring up based on key railroad intersections, waterways, or interstates. Now growth tends to be in areas that is aesthetically pleasing such as Colorado, or the coastlines, as well as areas where the weather is warm thanks to the invention of air conditioning. Northern cities like Cleveland that heavily relied on its geographic location for transporting goods are relatively flatlining in terms of population growth, while Texas, Florida, Arizona, and others are booming.
The bottom line is that while real estate on a whole will follow inflation rates, individual properties can significantly underperform or outperform the average inflation rate. There is only so much "prime" real estate, whether that be beachfront properties, properties sitting on a hill with a scenic view, or properties in cities that people naturally tend to want to move to. I'm sure Milwaukee is a fine city (I've never been there), but I've never met someone that was like "my dream is to someday move to Milwaukee." On the other hand people have dreamed about moving to California for decades. These types of properties will continue to meet or exceed the rates of national inflation for many years to come. So as with most things in real estate, its all about location, location, location. - 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesReal Estate Investing is all about moving, moving and moving.
Quote from @Ben Zimmerman:
Are we talking about real estate on a micro, or macro level?
On a macro level given a long enough time span home prices will ultimately track inflation rates. This has been demonstrated by the Case-Schiller index for which the authors won a Nobel prize. But it also logically follows because if home prices were under inflation rates for a long enough period then homes would become trivially priced, and if home prices were significantly above inflation rates for long enough then everyone would be homeless as nobody could afford a home.
But nobody buys real estate on a macro level, we buy at a localized, micro level in our geographic area. Within that geographic area prices may or may not keep up with inflation depending on localized conditions. We are seeing a migratory shift on where populations choose to live. Thanks to technology, a farmer can now farm thousands of acres by himself. As a result, there are fewer and fewer people that actually farm because 1 person can farm the same acreage that used to require 20 farmers. As a result rural America is being decimated and these small towns are slowly dying and the real estate located in these locations will eventually become relatively worthless.
Transportation and manufacturing is being revolutionized. Major towns used to spring up based on key railroad intersections, waterways, or interstates. Now growth tends to be in areas that is aesthetically pleasing such as Colorado, or the coastlines, as well as areas where the weather is warm thanks to the invention of air conditioning. Northern cities like Cleveland that heavily relied on its geographic location for transporting goods are relatively flatlining in terms of population growth, while Texas, Florida, Arizona, and others are booming.
The bottom line is that while real estate on a whole will follow inflation rates, individual properties can significantly underperform or outperform the average inflation rate. There is only so much "prime" real estate, whether that be beachfront properties, properties sitting on a hill with a scenic view, or properties in cities that people naturally tend to want to move to. I'm sure Milwaukee is a fine city (I've never been there), but I've never met someone that was like "my dream is to someday move to Milwaukee." On the other hand people have dreamed about moving to California for decades. These types of properties will continue to meet or exceed the rates of national inflation for many years to come. So as with most things in real estate, its all about location, location, location. - Specialist · Dallas, TX · Member since 2010 · 511 posts · 252 votes4y
As @Russell Brazil said...Leverage is the key here
Example...
Purchase price = 100K
Your Down Payment = 25K
Appreciation = 5%
New price of property = 105K
Your gain 5K on 25K = 20%...
on top of this if you are getting.... Tax depreciation + Cash Flow + Amortization etc... Overall RE is great passive investment.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesNo, that's not how it works.
Quote from @Bruce Woodruff:
Only if you buy and hold for a long time. If you buy a house for $200k and sell it for $400k in two years, you've made $200k profit (minus costs of course, but let's stick to round numbers). That would give you 50% per year profit which would vastly outpace inflation.
I assume you're talking about a long hold, and maybe you cannot keep up with inflation, but I doubt it even then....
If you buy a house for $200k, at 20% DP, you only paid $40k for that house. If that property was sold 2 years later (your example) for $400k, your equity would have been $240k. Assuming $10k for CC (in addition include the paydown equity in your CC), you could walk away with $230k in cash. Invest that cash at 20% DP, and the new property value is $1.15M. - Lender · rate.bid · Member since 2022 · 324 posts · 62 votes4y
Quote from @Eric James:
One stated benefit of investing in real estate is price appreciation. However, if you look at inflation adjusted real estate prices for the most part there isn't much appreciation. There are specific points in time like 2006 (we know what followed that) and right now when real estate exceeds inflation adjusted prices. However, over the long term it doesn't really appear that real estate appreciates much beyond inflation. Is real estate appreciation a myth?
So the historic housing price index is actually a tracked indicator or variable for many metropolitan areas. There is also a version that attempts to track the US housing price as an index.
Depending on which specific source you utilize, between 1987 and 2021, the US HPI grew from about 66 to 260 which reflects a yearly unadjusted growth rate of about 8% per year. But this is before adjusting for inflation of about 3% per year or other maintenance cost.
There is however an issue with overgeneralizing or attempting to extrapolate returns to represent all market areas as there are many areas across the country that do not necessarily grow at the rate of 8% per year. Some (actually a majority of the areas) barely track inflation on a yearly basis and some could often experience prolonged periods of stagnation and occasional declines.Its not necessarily a myth per se but 8% per year, some might consider boring. Unless of course you acquired a $5 million or $10 million property 20 or 30 years ago.
- Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes4y
Quote from @Eric James:
One stated benefit of investing in real estate is price appreciation. However, if you look at inflation adjusted real estate prices for the most part there isn't much appreciation. There are specific points in time like 2006 (we know what followed that) and right now when real estate exceeds inflation adjusted prices. However, over the long term it doesn't really appear that real estate appreciates much beyond inflation. Is real estate appreciation a myth?
Agreed. I consider the past ten or so years an anomaly, but across the country, I would say RE prices do not outperform inflation, especially when you consider costs to maintain the property and the massive capital expenses that will need to be paid every 30 or so years. I think a case could be made that certain markets such as NY, SF and LA outperform inflation, but it really isn't by much. Perhaps their outperformance goes hand in hand with the increased inflation in these areas.
However, I think there is a BIG difference between measuring home prices as done in the article vs measuring how your RE investment performed. As so many others here have mentioned, RE purchased as an investment is a whole different ballgame. Even if the property appreciates in tandem with inflation, one can generate tremendous wealth using leverage, while utilizing rental revenue to create positive holding costs and equity paydown. But I'm sure you knew that already. 😊
- Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes4y
Real estate investing is really investing in debt (another way to look at it is betting on the devaluation of the US dollar) the more irresponsible the government is the richer you get.
Real Estate Investing = Borrowing money you believe will be devalued against an asset that will increase its value compared to the money borrowed. All while creating a return to make your payment and a little extra. To find a better scam you have to be in congress. LOL
- Member since 2019 · 7k+ posts · 4k+ votes4y
You don't do the math like that. I have better data than that.
The actual "aggregated inflation" between 2010-2020/2021 is actually only 23%.
The average US home price appreciation is doubled in 10 years. This means the 99% of home appreciation
is actual gain. In some markets like Bay Area, the appreciation is 3x-4x between 12 years period (including debt payment).
To make it very precise:
if average appreciation percentage per month >= mortgage rate --> then it's actual appreciation gain.
The following could be correct: if you live in no appreciation market like Flint,Michigan, yes price increase is pretty much inflation-adjustment. But if you live in real appreciation area like Bay Area,Seattle,Colorado ( > 20% IRR) then your gain is actual appreciation. - 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Kenneth Rolfe:
As long as you’re cash flow positive, the financing component should be offset. This could be applicable to your primary residence though, but then you could argue the need to compare those expenses to what your expenses would be if you didn’t own the property… which again would likely offset the financing cost.Quote from @Eric James:
Quote from @Russell Brazil:
37% of the inflation index is a housing component, and the largest component of the index. So essentially rising real eatate prices are the definition of inflation.
Real estate isn't purchased at a steady position however. It is typically purchased at a leveraged position. So of you are at a 4-1 leveraged position (20% down, 80% LTV), then you out perform inflation by a factor of 4, before even counting in rent or debt pay down. If you bought in at 3% down, you are at a 33.33-1 leveraged position and you beat inflation by a factor of 33.33 times...or a return of 3,333% per year versus inflation.
That's correct. Except you're not including the cost of the financing. For example, if you're paying 5% interest on the financing. You're gain from leverage is only the difference between financing costs and inflation.
and on your personal resi have to include NO income tax at all up to 250k for single person or 500k for married.. this is huge and largely not talked about.. tax free equity in high appreciating markets has changed many lives. when your on the rental hamster wheel you have to either keep going or pay back your deprection etc etc.. but still all in all RE has many financial benefits - Lender · rate.bid · Member since 2022 · 324 posts · 62 votes4y
Quote from @Carlos Ptriawan:
You don't do the math like that. I have better data than that.
The actual "aggregated inflation" between 2010-2020/2021 is actually only 23%.
The average US home price appreciation is doubled in 10 years. This means the 99% of home appreciation
is actual gain. In some markets like Bay Area, the appreciation is 3x-4x between 12 years period (including debt payment).
To make it very precise:
if average appreciation percentage per month >= mortgage rate --> then it's actual appreciation gain.
The following could be correct: if you live in no appreciation market like Flint,Michigan, yes price increase is pretty much inflation-adjustment. But if you live in real appreciation area like Bay Area,Seattle,Colorado ( > 20% IRR) then your gain is actual appreciation.
You have better data than the federal reserve?
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