Is real estate appreciation a myth? Adjusting for inflation

Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes

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?

https://www.supermoney.com/inf...

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Russell BrazilBusiness Member

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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

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.

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Harish V.
Investor · Fremont, CA · Member since 2015 · 211 posts · 125 votes
4y
Quote from @Joe Villeneuve:

Quote from @Harish V.:

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?
https://www.supermoney.com/inf...

Look at long term studies 100yr+ you will see
Inflation is 3% range. Bonds are in same 3% range
Real estate is 6-7% range.
Stocks are in 10% range.
There are periods of divergence from this and there will be catchup. Here is bigger pockets article on this:

Bonds vs. Stocks vs. Real Estate: Which One Wins? | Blog (biggerpockets.com)
This is offcourse favoring real estate, however you can look up other indpendent sources and find that stocks normally get 10% total returns considering dividends are reinvested.
In my opinion stocks are best for passive strategies that are long term.
When you buy a stock worth $100k, how much does it cost the investor?
When you buy REI with a PV of $100k, how much does it cost the REI?
You can have Margin on stocks, just like financing on REI. Besides options use can make your returns far greater.

For 30-35 yrs, rates went only down, so wind was on back of REI. Even then I have seen people loose houses and REi being untouchable for years. Let's see what future holds.

There will always be opportunities in both real estate and stocks in any environment. What I am talking about is returns for strictly hands off passive investors over long run.

0 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
4y
Quote from @Harish V.:

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?
https://www.supermoney.com/inf...

Look at long term studies 100yr+ you will see
Inflation is 3% range. Bonds are in same 3% range
Real estate is 6-7% range.
Stocks are in 10% range.
There are periods of divergence from this and there will be catchup. Here is bigger pockets article on this:

Bonds vs. Stocks vs. Real Estate: Which One Wins? | Blog (biggerpockets.com)
This is offcourse favoring real estate, however you can look up other indpendent sources and find that stocks normally get 10% total returns considering dividends are reinvested.
In my opinion stocks are best for passive strategies that are long term.

If an investor can only get a 6-7% total return on real estate, they definitely should invest in something else. Direct owned real estate is too much work to not achieve outpaced returns. Most of us have 20-25+% minimum IRR hurdles. Otherwise, could just invest passively with others and get returns in the teens.
1 Reply
Harish V.
Investor · Fremont, CA · Member since 2015 · 211 posts · 125 votes
4y
Quote from @Mike Dymski:

Quote from @Harish V.:

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?
https://www.supermoney.com/inf...

Look at long term studies 100yr+ you will see
Inflation is 3% range. Bonds are in same 3% range
Real estate is 6-7% range.
Stocks are in 10% range.
There are periods of divergence from this and there will be catchup. Here is bigger pockets article on this:

Bonds vs. Stocks vs. Real Estate: Which One Wins? | Blog (biggerpockets.com)
This is offcourse favoring real estate, however you can look up other indpendent sources and find that stocks normally get 10% total returns considering dividends are reinvested.
In my opinion stocks are best for passive strategies that are long term.

If an investor can only get a 6-7% total return on real estate, they definitely should invest in something else. Direct owned real estate is too much work to not achieve outpaced returns. Most of us have 20-25+% minimum IRR hurdles. Otherwise, could just invest passively with others and get returns in the teens.

The numbers I quoted are compound annual returns. If you are saying that compound annual returns of 20% are easily achieved then anyone who started with 25k in 2000 should have turned it to a 1m. Without adding any more money to it.
Also by extension, what you are saying is that govt pension funds etc which are modeling in 7.5% return and not able to achieve are fools. I sure hope CalPERs etc can adopt your model. They may be able to support all pension and even reduce taxes.
0 Reply
Nicholas MischPro Member
Investor · Broadview Hts, OH · Member since 2016 · 310 posts · 280 votes
4y
I buy property. The value goes up. I refinance and then buy more property. Not sure if it’s a myth or not but the money I make doing this isn’t a myth.
5 Reply
Gregory Chadwell
Real Estate Broker · Milwaukee, WI · Member since 2015 · 299 posts · 90 votes
4y
From early on i was told to buy real estate as a HEDGE against inflation. The dollar seems to be chasing the peso right now. Look at the cost of everything!
1 Reply
Shafi Noss
Lender · Nationwide · Member since 2018 · 571 posts · 310 votes
4y
Quote from @Shafi Noss:

@Eric James This is a great discussion.

I think @Russell Brazil makes a good point that real estate prices are a big component of inflation, so the key question is how does real estate appreciate compared to other goods?

It might be useful to look at the Case-Schiller Index, the S&P 500 of real estate, and adjust for inflation. This graph goes a step further and adjusts for M2 inflation, as well as median income. It's at least a start at tackling the question.

Source: https://adjusted-for-inflation...

The other part of this discussion is whether leverage changes thing. I think it's fairly obvious that the answer depends on how expensive the interest is and how much appreciation is enjoyed. If you assume RE matches other goods in appreciation, and an interest only loan (to stay simple for now), then the change in buying power is:

Change in Buying Power as a Result of Leverage = { [(A+DP)/(A+1)] - [(1-DP)x(IY)/(1+A)] } / DP
Where,
A = Total % Appreciation from purchase to time Y
DP = Downpayment at Purchase
Y = # Years to
I = Interest rate of debt

Looks confusing in the BP format, but it yields some surprising results.

Assuming 20% down, 15% appreciation in 5 years, and 4% interest on debt, there is actually an 18% loss of buying power for this investor.
It's true also that rental payments may offset the reduced buying power. But if the rental payments created positive buying power, it would be despite the influence of leverage, and not because of it.

It's not that leverage always hurts buying power, but it would require cheaper debt, or faster appreciation than this scenario. It all depends on the down payment, rate of appreciation, and cost of debt.

1 Reply
Harish V.
Investor · Fremont, CA · Member since 2015 · 211 posts · 125 votes
4y
Quote from @Gregory Chadwell:

From early on i was told to buy real estate as a HEDGE against inflation. The dollar seems to be chasing the peso right now. Look at the cost of everything!

Yes but hedge works due to increasing rents, values are not likely to go up. Listen to recent podcast by Ashwath Dhamodharan on this and see if you agree.
0 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Shafi Noss:

Quote from @Shafi Noss:

@Eric James This is a great discussion.

I think @Russell Brazil makes a good point that real estate prices are a big component of inflation, so the key question is how does real estate appreciate compared to other goods?

It might be useful to look at the Case-Schiller Index, the S&P 500 of real estate, and adjust for inflation. This graph goes a step further and adjusts for M2 inflation, as well as median income. It's at least a start at tackling the question.

Source: https://adjusted-for-inflation...

The other part of this discussion is whether leverage changes thing. I think it's fairly obvious that the answer depends on how expensive the interest is and how much appreciation is enjoyed. If you assume RE matches other goods in appreciation, and an interest only loan (to stay simple for now), then the change in buying power is:

Change in Buying Power as a Result of Leverage = { [(A+DP)/(A+1)] - [(1-DP)x(IY)/(1+A)] } / DP
Where,
A = Total % Appreciation from purchase to time Y
DP = Downpayment at Purchase
Y = # Years to
I = Interest rate of debt

Looks confusing in the BP format, but it yields some surprising results.

Assuming 20% down, 15% appreciation in 5 years, and 4% interest on debt, there is actually an 18% loss of buying power for this investor.
It's true also that rental payments may offset the reduced buying power. But if the rental payments created positive buying power, it would be despite the influence of leverage, and not because of it.

It's not that leverage always hurts buying power, but it would require cheaper debt, or faster appreciation than this scenario. It all depends on the down payment, rate of appreciation, and cost of debt.

Another example of how focusing on percentages tells us nothing of value, and lies in the process. What does what was written here mean in the only numbers that matter? Nothing. I don't see a dollar sign anywhere in the above statement. Isn't that, in the end (middle and beginning for that matter) what the goals are (should be) when we invest in anything?

The property must have positive CF, and what I wrote below explains why that's so critical:
1 - The only thing that the interest rate impacts is the CF. That's it. The higher the interest rate, the lower the CF, and the longer it takes to recover your cost (cash). Any added cash (debt paydown out of pocket or from CF, rehab paid for in cash, higher than needed DP, etc...) just adds to the cost and adds to the length of time it takes to recover that cost.
2 - The only cost that the REI pays is whatever cash comes out of their pocket. That's it. The tenant (rent) pays for the rest. See #1 above.
3 - Equity is the cost of the property in terms of future dollars. As the equity builds, so does the cost of the property...indirectly. This is based on the true value of that deal in terms of what the actual value of the equity is...as opposed to the face value of the equity. When you put 20% DP on a property, you're buying a property worth 5 times what you paid for it. As the equity grows through appreciation, the equity grows at the same value...for every $1 increase of PV, the equity goes up that same $1. So, the equity growth is now equal to the PV growth...in dollars. This means, that as the property value, and equity goes up, the value of that equity goes down. It's simple math. If the equity grew to twice the DP (that's the equity you paid for at the start), and the DP was 20%, the equity is no only buying a PV worth 3 times its face value. This means the equity is actually losing value/money, not gaining it.
Now, sell that same property, and that equity is now back to 5 times its face value...which means that same original DP/equity is now worth twice what it was when the original property was bought...not 3 times. Repeat this process every time the appreciation doubles the original equity, and you have an exponential return...in dollars.
Try it. It's simple math.
Oh, and if you want to put it on steroids, every time the accumulated CF equals the DP for the next property (just like the first one), use that too to buy another property. See how fast your net worth, total PV, and CF goes up.
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Harish V.
Investor · Fremont, CA · Member since 2015 · 211 posts · 125 votes
4y
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 Value add is a totally different business. It's work not just passive investing.
1 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
4y
Quote from @Harish V.:

Quote from @Mike Dymski:

Quote from @Harish V.:

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?
https://www.supermoney.com/inf...

Look at long term studies 100yr+ you will see
Inflation is 3% range. Bonds are in same 3% range
Real estate is 6-7% range.
Stocks are in 10% range.
There are periods of divergence from this and there will be catchup. Here is bigger pockets article on this:

Bonds vs. Stocks vs. Real Estate: Which One Wins? | Blog (biggerpockets.com)
This is offcourse favoring real estate, however you can look up other indpendent sources and find that stocks normally get 10% total returns considering dividends are reinvested.
In my opinion stocks are best for passive strategies that are long term.

If an investor can only get a 6-7% total return on real estate, they definitely should invest in something else. Direct owned real estate is too much work to not achieve outpaced returns. Most of us have 20-25+% minimum IRR hurdles. Otherwise, could just invest passively with others and get returns in the teens.

The numbers I quoted are compound annual returns. If you are saying that compound annual returns of 20% are easily achieved then anyone who started with 25k in 2000 should have turned it to a 1m. Without adding any more money to it.
Also by extension, what you are saying is that govt pension funds etc which are modeling in 7.5% return and not able to achieve are fools. I sure hope CalPERs etc can adopt your model. They may be able to support all pension and even reduce taxes.

Harish, yes, 20-25+% IRR threshold. Do you invest in real estate? If so, I'm interested in your IRR experience and threshold return. Your profile says syndication experience. We can passively invest in syndications and achieve returns in the teens. So, there is no sense in investing in active direct owned real estate without a premium to that return. Incidentally, the 20-25% is about what it takes for the total return in a syndication to split returns and provide LPs with returns in the teens. It's not my model...it's most investors' models. None of us would invest in real estate for a 6-7% return...can get that with index funds/ETFs.
1 Reply
Harish V.
Investor · Fremont, CA · Member since 2015 · 211 posts · 125 votes
4y
Quote from @Mike Dymski:

Quote from @Harish V.:

Quote from @Mike Dymski:

Quote from @Harish V.:

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?
https://www.supermoney.com/inf...

Look at long term studies 100yr+ you will see
Inflation is 3% range. Bonds are in same 3% range
Real estate is 6-7% range.
Stocks are in 10% range.
There are periods of divergence from this and there will be catchup. Here is bigger pockets article on this:

Bonds vs. Stocks vs. Real Estate: Which One Wins? | Blog (biggerpockets.com)
This is offcourse favoring real estate, however you can look up other indpendent sources and find that stocks normally get 10% total returns considering dividends are reinvested.
In my opinion stocks are best for passive strategies that are long term.

If an investor can only get a 6-7% total return on real estate, they definitely should invest in something else. Direct owned real estate is too much work to not achieve outpaced returns. Most of us have 20-25+% minimum IRR hurdles. Otherwise, could just invest passively with others and get returns in the teens.

The numbers I quoted are compound annual returns. If you are saying that compound annual returns of 20% are easily achieved then anyone who started with 25k in 2000 should have turned it to a 1m. Without adding any more money to it.
Also by extension, what you are saying is that govt pension funds etc which are modeling in 7.5% return and not able to achieve are fools. I sure hope CalPERs etc can adopt your model. They may be able to support all pension and even reduce taxes.

Harish, yes, 20-25+% IRR threshold. Do you invest in real estate? If so, I'm interested in your IRR experience and threshold return. Your profile says syndication experience. We can passively invest in syndications and achieve returns in the teens. So, there is no sense in investing in active direct owned real estate without a premium to that return. Incidentally, the 20-25% is about what it takes for the total return in a syndication to split returns and provide LPs with returns in the teens. It's not my model...it's most investors' models. None of us would invest in real estate for a 6-7% return...can get that with index funds/ETFs.

For my personal investments made in 2005, return is 7-8%. Anything after 2012/13 is 20% plus. Which highlights the fact that returns can be higher than trend sometimes. Other times they may br lower than trend.
i personally expect most of future return for next 10+ yrs to come from rental increases rather than appriciation. I do hope i am wrong and you are right, it only benefits me :-)
1 Reply
Todd Dexheimer
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
4y
Quote from @Harish V.:

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?
https://www.supermoney.com/inf...

Look at long term studies 100yr+ you will see
Inflation is 3% range. Bonds are in same 3% range
Real estate is 6-7% range.
Stocks are in 10% range.
There are periods of divergence from this and there will be catchup. Here is bigger pockets article on this:

Bonds vs. Stocks vs. Real Estate: Which One Wins? | Blog (biggerpockets.com)
This is offcourse favoring real estate, however you can look up other indpendent sources and find that stocks normally get 10% total returns considering dividends are reinvested.
In my opinion stocks are best for passive strategies that are long term.

Passive RE is able to be leveraged, is less risky and makes greater returns than stocks, which is why on the Sharpe Ratio it's rated better. Oh and it has way better tax advantages. Why are stocks better for passive investors?
1 Reply
Todd Dexheimer
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
4y
@Eric James there is no one size fits all answer to your post. It depends on the exact location of the property, type of real estate in that location and many other factors. If you buy in an area with hyper growth, then it will far exceed inflation. It you buy in a dying area, then it will be much worse than inflation. At the same time, if you buy a shopping center in an area that is transitioning, where that type of shopping center in no longer desirable, its worth less - even in the case of a growing sub-market.
Anyone buying real estate for the appreciation value alone is a fool. Real estate is a great investment due to it's stability, appreciation, ability to leverage and have someone else pay down the debt, cash-flow and tax advantages. It's not a great investment because of just one of those things, but because of all of those things.
5 Reply
Luka Milicevic
Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
4y
Quote from @Joe Villeneuve:

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.
Perfectly 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.

+ tax benefit of depreciation
0 Reply
Mike Klarman
Specialist · NJ · Member since 2022 · 1k+ posts · 663 votes
4y
A Real estate investors have tenants who pay their loans and build their equity back up. I know investors that have cashed out the same property more than once. Real Estate appreciation/depreciation is an ebb and flow just like everything else. The one perk is that the loan payments are not really paid by the borrower. In any small business loan or margin call the expense is on the borrower.
1 Reply
James Hamling
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
4y
Quote from @Eric James:

A lot of posts have essentially stated "Real estate is a good investment because.... " I agree. But that isn't my question. My question is specifically: "Does real estate appreciate faster than inflation?" That's it.

I hear ya 100% Eric, the question is one of a very specific singular part/portion of Real Estate Investing and not an argument on the merits OF REI.
The answer is, YES, Real Estate Investing DOES out-pace the rate of inflation ALTHOUGH the very mechanism of this is also why the rate of such is so variable property too property, and that reasoning is SCARCITY of location.
When digging through the date and trying to answer such, one is going to have to look at a compilation of markets/ states/ regions and such over vary long time scales to get past impactors of time be it market variations like '08' collapse or various wars etc., to get too the data to answer such. And what is seen is real estate is at a pace with inflation rather reliably ALTHOUGH one will not market after market breaking upward over time on that trend-line and when overlayed with population density the answer becomes clear, less and less land, as areas develop, scarcity of property options is a forced appreciation in and of itself.
Interestingly enough the same trend can be seen in Ag land also, and it's the same force-factor reasoning, a diminishing supply.
0 Reply
Justin Colletti
Keene, NH · Member since 2015 · 22 posts · 22 votes
4y
Real estate often does outpace increases in the CPI yes, but that's not the same thing as "inflation", at least by the better, classical definitions of the term.

For an improved view of the picture, compare the cost of the median US home to other assets. For example, the price of gold, the price of stock indexes, the price of commodities and so on, and you will find that despite the recent nominal increases, US real estate is actually closer to its historic lows than its historic highs.

Here's a chart that is particularly telling in my view: The Case/Shiller housing index relative to gold. It tells a similar story to the chart shared earlier of the Shiller index relative to M2 and income, but even better in my opinion, as average wages can also fluctuate in real value:

Here's a closeup of the past 60 years or so:

A confounding factor here is that although home prices are actually down in real terms, rents and wages are also down in real terms compared to historic highs.
2 Reply
Eric James
OP
Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
4y
Quote from @Todd Dexheimer:

@Eric James there is no one size fits all answer to your post. It depends on the exact location of the property, type of real estate in that location and many other factors. If you buy in an area with hyper growth, then it will far exceed inflation. It you buy in a dying area, then it will be much worse than inflation. At the same time, if you buy a shopping center in an area that is transitioning, where that type of shopping center in no longer desirable, its worth less - even in the case of a growing sub-market.
Anyone buying real estate for the appreciation value alone is a fool. Real estate is a great investment due to it's stability, appreciation, ability to leverage and have someone else pay down the debt, cash-flow and tax advantages. It's not a great investment because of just one of those things, but because of all of those things.

But will property in growth areas really have much faster appreciation than inflation? Someone earlier in yhe thread posted about a particular property in Marin County CA. According to the info he gave the property increased in value less than 8% per year over 62 years. That is nice, but is it really much higher than inflation there?
0 Reply
Harish V.
Investor · Fremont, CA · Member since 2015 · 211 posts · 125 votes
4y
Quote from @Darius Ogloza:

@Joe Villeneuve I truly do not understand your comments regarding measuring value/equity. All I know is it feels nice to hold real estate worth millions. In any event, I agree you cannot know in advance how a particular market is going to move but sufficient demographic data exists to allow you to make educated guesses about where growth is going to happen. We are invested in Northern California, Gulf Coast Florida and sunbelt (largely Las Vegas). So far, these bets have played out quite well. We sold our midwestern bets in 2014 once we fully digested the above principle and realized that capital costs were certain to outpace gains over the long run in those places.
Absolutely agree.
0 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Harish V.:

Quote from @Darius Ogloza:

@Joe Villeneuve I truly do not understand your comments regarding measuring value/equity. All I know is it feels nice to hold real estate worth millions. In any event, I agree you cannot know in advance how a particular market is going to move but sufficient demographic data exists to allow you to make educated guesses about where growth is going to happen. We are invested in Northern California, Gulf Coast Florida and sunbelt (largely Las Vegas). So far, these bets have played out quite well. We sold our midwestern bets in 2014 once we fully digested the above principle and realized that capital costs were certain to outpace gains over the long run in those places.
Absolutely agree.
You can't predict more than 5 to 7 years in advance.
0 Reply
Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
4y
Quote from @Eric James:

Quote from @Todd Dexheimer:

@Eric James there is no one size fits all answer to your post. It depends on the exact location of the property, type of real estate in that location and many other factors. If you buy in an area with hyper growth, then it will far exceed inflation. It you buy in a dying area, then it will be much worse than inflation. At the same time, if you buy a shopping center in an area that is transitioning, where that type of shopping center in no longer desirable, its worth less - even in the case of a growing sub-market.
Anyone buying real estate for the appreciation value alone is a fool. Real estate is a great investment due to it's stability, appreciation, ability to leverage and have someone else pay down the debt, cash-flow and tax advantages. It's not a great investment because of just one of those things, but because of all of those things.

But will property in growth areas really have much faster appreciation than inflation? Someone earlier in yhe thread posted about a particular property in Marin County CA. According to the info he gave the property increased in value less than 8% per year over 62 years. That is nice, but is it really much higher than inflation there?

Yes, it is quite easy to predict areas where real estate will outperform it's sector. Major metro areas with high population growth and restrictive zoning and building will outpace the sector by several multiples.
[email protected]301-893-4635 Podcast Guest on Show #192
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2 Reply
Account Closed
Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
4y
Quote from @Justin Colletti:

Real estate often does outpace increases in the CPI yes, but that's not the same thing as "inflation", at least by the better, classical definitions of the term.

For an improved view of the picture, compare the cost of the median US home to other assets. For example, the price of gold, the price of stock indexes, the price of commodities and so on, and you will find that despite the recent nominal increases, US real estate is actually closer to its historic lows than its historic highs.

Here's a chart that is particularly telling in my view: The Case/Shiller housing index relative to gold. It tells a similar story to the chart shared earlier of the Shiller index relative to M2 and income, but even better in my opinion, as average wages can also fluctuate in real value:

Here's a closeup of the past 60 years or so:

A confounding factor here is that although home prices are actually down in real terms, rents and wages are also down in real terms compared to historic highs.

Another way to look at things is that the dollar has lost so much value, compared to gold, that it appears prices have gone up. It's true that it takes more "dollars" but is simply screaming that the dollar is now worth so much less.
Real estate takes maintenance, replacements, property taxes, insurance and other costs. Physical gold does not.
When we bought our first house in Seattle in 1986 it cost the equivalent of 242 ounces of gold. Interest rate was 8% by the way. Today it is valued at 781 ounces of gold. That my friend, is actual appreciation . . . or a gigantic bubble.
It doesn't take into account the total remodels, taxes, payments and improvements over that period and cost of sale if you liquidate. And, if Amazon & so on, had moved to Kokomo Indiana instead of Seattle, the property would be worth far less. That is something you can't control and can't plan for.

1 Reply
Matthew McNeil
Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes
4y
Quote from @Eric James:

A lot of posts have essentially stated "Real estate is a good investment because.... " I agree. But that isn't my question. My question is specifically: "Does real estate appreciate faster than inflation?" That's it.
Great question and to the point. I'll answer to the point:

I bought a SFH in 2020 for $285K. Today its worth $485K
I bought a SFH in 2017 for $240K. Today its worth $515
I bought a SFH in 2016 for $206K. Today its worth $520

I could keep going, but you tell me. Has my RE appreciated faster than inflation?
0 Reply
Rodney Sums
Laveen, AZ · Member since 2016 · 584 posts · 528 votes
4y
Quote from @Matthew McNeil:

Quote from @Eric James:

A lot of posts have essentially stated "Real estate is a good investment because.... " I agree. But that isn't my question. My question is specifically: "Does real estate appreciate faster than inflation?" That's it.
Great question and to the point. I'll answer to the point:

I bought a SFH in 2020 for $285K. Today its worth $485K
I bought a SFH in 2017 for $240K. Today its worth $515
I bought a SFH in 2016 for $206K. Today its worth $520

I could keep going, but you tell me. Has my RE appreciated faster than inflation?

Not to be dismissive of the topic but your post is a concise way of demonstrating that inflation matters but not so much as to argue about the pace of it against REI.
Each of us that bought a property are likely better off today than we would have been just holding on to the cash used for the down payments.
0 Reply
Rodney Sums
Laveen, AZ · Member since 2016 · 584 posts · 528 votes
4y
Quote from @Joe Villeneuve:

Quote from @Darius Ogloza:

In many markets (including those most popular for "cash flow" these days), appreciation is in fact a myth. A house in Toledo Ohio (a market I know a bit about) that sold for about $12,000 in 1960 would likely sell for about $100,000-$120,000 today. $12,000 in 2022 dollars is $117,206. You essentially broke even if you bought that house 62 years ago. The same is not true in growth markets. A house that sold in Marin County California for $18,000 in 1960 (an exorbitant sum compared to what you would get in Ohio at the time) amounted to $175,809 in 2022 dollars. That house is likely worth $1,800,000 - $2,500,000 today.

This is where I have to laugh...and why I always say that the most important books every REI should be more than just familiar with, are Algebra...and especially Geometry.
Your opening statement said "...appreciation is in fact a myth"...followed by two examples of appreciation, to prove it was a myth. HUH!??!
The two sets of numbers you proceeded to pull out of (pick your source), mean absolutely nothing, and just confuse the issue.
In any case, unless you have a crystal ball, or your name is Nostradamus, I highly doubt anyone could have predicted either of the "appreciated" values you gave your two examples, 62 years into the future. However, in both cases, if you held either property for those 62 years, whether it was in Ohio or California, you would have lost more money than you think that fictitious "appreciation" would have gained through the loss of potential exponential gains, as the "appreciation" increased the equity the same dollars as it did the PV. This reduces the buying power of the equity because it decreases the relationship between the equity (what the property is actually costing you), and the PV (which is what you are actually buying). Remember, you originally paid only 20% of the purchase price. As the equity/PV increases, it does so on a 1 to 1 ratio,...not 1 to 5, so it's actually diluting the value of your equity.
Equity most certainly does exist, and like CF (not instead of), is crucial what makes a good deal. The true value of that appreciation is how fast it can duplicate the DP (the original equity you paid for). This, along with the accumulated CF equally your DP (this means you no longer have skin in the game...or risk), tells you it's time to sell and take full advantage of the maximum this property will be worth to you.
See, the value of the property is what that equity buys you. Leaving that equity in the same property until it is paid off loses you money...not makes it.

The answer to your original question: It doesn't matter, as long as you keep your cash (equity) moving. This means your returns are exponential, which is something even the highest inflation can't keep up with.

If you don't already have a podcast, you gotta get you one!
(raspy movie trailer guy voice)
Tonight on an all new episode of:
"No, it doesn't work that way" ft Joe Villenueve.
Yea you can have thunder playing in the background, then your face would fade in from the darkness to the center of the screen with lightening bolts flashing as you smite real estate investors and their perspectives. Papers start flying off the desk, somebody's laptop with a cash flow analysis spreadsheet catches fire, while you tell them how wrong they are.
Don't take that as an insult. As someone that likes to debate I get a kick out of your counterarguments 😁
1 Reply

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