Houses merely maintain purchasing power, due to inflation.

17 Replies

People don't seem to understand the difference between nominal and real house prices. Real prices are inflation adjusted. The basically cost the same as they always have, adjusted for inflation. 

With real estate sure we get someone to pay off our property, but the reality is we are working for that money. And in the end we merely own a house that has maintained it's purchasing power. If you want to sell the house you live in, sure it tripled in value, great! But so did the other houses...and you still need a place to live, so you didn't really increase but merely maintain your purchasing power. So what's the point of appreciation? It's not as good and meaningful as one thinks. Leverage and inflation adjusted cash flow with eventual pay off are the keys to it being a decent investment. But the value going up alone is merely a hedge against inflation. This is not buying Microsoft at .02 cents a share and making 10 billion off it in 30 years.

I have seen this chart and similar discussion before. I will mention some other factors:

1. This is all US housing, so it includes areas with less appreciation and areas with higher appreciation. If you were buying in Michigan versus California, the chart would look different. Realistically that makes some midwest areas worse and coastal areas much better. 

2. Housing makes up one third of the Consumer Price Index (CPI) which is the measure of inflation. Being that housing is such a huge chunk of the number, of course CPI is going to be in sync with housing.

3. CPI uses rental equivalent for the housing portion, so it technically doesn't even include house values. Housing is also not reported as often, so there is some lag time in realizing increases.

4. Housing standards and the typical "median house" have changed substantially over time. In 1960 the average house size was 1289 square feet and in 2000 it was 2366. Changing quality standards is a huge issue with measuring inflation in general. In 1960 you could spend over $1000 on a small color television. Today you couldn't even get a TV that low quality but you could buy something better second hand for $10. The CPI keeps evolving to higher quality items today cost the same or less. A 60" 4K TV is $1000, which is still major negative price movement on a far superior item. The point is if you flattened CPI to account for similar standard of living, it would reveal the cost of living has plummeted. Our standards have just increased.

5. Appreciation is only one factor in a housing investment. Most houses are purchased with leverage, so if you buy a $100,000 house, you may have spent $25,000. You rent it out 30 years and collect cash flow every month. The payment is fixed, but cash flow is inflation adjusted with rents. The whole time you are paying down the loan and increasing principal. At the end of 30 years, you may have a house worth $400,000 and you invested $25,000. Your rents have increased from $1000 a month to $4000 per month and you have collected an additional $200,000 in rents. 

6. The fact that house prices and rent are in sync with inflation is exactly the reason it makes housing a good investment. With any investment, beating inflation is critical and rental housing does it most every time, because just the underlying asset tracks inflation. 

7. It is a great point that when your house triples, that so does another house you may buy. However, if you move markets or down size, you can cash out profits. There are people who sold a house in California for $3M and bought a bigger house in the south for $300,000. 

Love the points that @Joe Splitrock makes!

Median housing price is a terrible metric for home appreciation in America that the media loves to wag a stick at and say the housing market is slowing down or speeding up. The mean home price in America is still very affordable for Americans, because you live in the monthly payment, not the loan amount or purchase price. People's purchase price might be $100k higher than 3 years ago, yet because of low interests rates, the payment is the same if not lower. The monthly payment is what really impacts affordability. 

The higher priced homes in CA and other higher priced market pull the Median Price of homes up in America, and the media points to that as an indicator for the housing market, yet the majority of homes are bought below the median price since the Millionaire dollar homes are dragging the median price up and creating a poor metric for the strength of the current housing market.

And this is all very location specific as Joe and others have pointed out.

Originally posted by Grant Schroeder:

Love the points that @Joe Splitrock makes!

Median housing price is a terrible metric for home appreciation in America that the media loves to wag a stick at and say the housing market is slowing down or speeding up. The mean home price in America is still very affordable for Americans, because you live in the monthly payment, not the loan amount or purchase price. People's purchase price might be $100k higher than 3 years ago, yet because of low interests rates, the payment is the same if not lower. The monthly payment is what really impacts affordability. 

The higher priced homes in CA and other higher priced market pull the Median Price of homes up in America, and the media points to that as an indicator for the housing market, yet the majority of homes are bought below the median price since the Millionaire dollar homes are dragging the median price up and creating a poor metric for the strength of the current housing market.

And this is all very location specific as Joe and others have pointed out.

@Grant Schroeder that is an important point that payment for most people is more important than value. Lower interest rates can allow you to afford greater value. I purchased a rental in 2018 for $200,000 and another one earlier this year for $230,000. Both were on 30 year fixed mortgages, but due to lower interest rates today, my payment on the $230,000 house was lower. I have refinanced five houses in the last year and freed up $1600 in cash flow each month, while also decreasing my pay off term on those properties. 

When you add rental properties to the mix, payment and rent value both become more important than purchase price. I don't care what a house sold for ten years ago, I care what my payment is today and what I can get for rents.

I doubt @Jack B. believes this.  Just keeping up with inflation may be for average Daryl and Karen that pays retail for their one house with all cash, but not an experienced investor in an appreciating market that used leverage.

 First of all, the example graph assumes you paid retail for the RE.  Not.  A 2018 cash purchase I made on a little sfr that needed too many repairs to be bankable more than doubled when I sold in March of this year. Others from 2015 have tripled in value. Buy from a seller with a problem.  Add value 5x-20x.  

The graph also doesn't account for leverage, right?  While the median home value in the nation may increase 3% annually, the purchaser mostly only puts 5%-25% into it as a down payment.    75-95% of the growth did not come from invested dollars, they came from low rate borrowed dollars.

A long time ago I gave an example of the 15yr growth difference a $25k down payment in a 10-unit I made vs if I invested it into an s&p 500 index fund or reit etf instead.   The leveraged RE increased 23x plus gave cf along the way, blowing the doors off of the paper equity investments by more than 4 times, not including cash-flow or tax advantages.    When purchasing below market value and using responsible leverage it is easy to outpace inflation by many times.  

If this was a real post…yes we all know it wasn’t. 

This is where OP would post, “Oh, cool. Now I understand my entire premise was wrong and I’m smarter because of the great community of members/experts who took their personal time to educate me for free….”

I never quite understood the “fake” posts. Whether it’s a here’s an obviously wrong premise post or which should I do post when the OP is already set on doing a specific thing. 
@Joe Splitrock @Grant Schroeder basically held a fee seminar on what my 5 second post was going to be. 

if you earn 3% inflation appreciation but only put 20% down, you’re earning 15%. Not too shabby. Now imagine you put down 5% as an owner occupant for a year before renting it out. Now you’re earning 60% annually on your down payment. 

@Jack B. that's a reasonable argument for a primary residence.

But the several (very) wealthy people on this thread are amassing it from rentals. I sure would've loved to buy Microsoft at .02 but that doesn't mean real estate doesn't work. Especially with long a term mindset and conservative, low-interest rate leverage. 

Originally posted by @Will Gaston :

@Jack B. that's a reasonable argument for a primary residence.

But the several (very) wealthy people on this thread are amassing it from rentals. I sur
e would've loved to buy Microsoft at .02 but that doesn't mean real estate doesn't work. Especially with long a term mindset and conservative, low-interest rate leverage. 

Yeah, I'm actually a multi millionaire. Few in this thread really are or understand microeconomics beyond their high school education. 

Originally posted by @Bill Brandt :

If this was a real post…yes we all know it wasn’t. 

This is where OP would post, “Oh, cool. Now I understand my entire premise was wrong and I’m smarter because of the great community of members/experts who took their personal time to educate me for free….”

I never quite understood the “fake” posts. Whether it’s a here’s an obviously wrong premise post or which should I do post when the OP is already set on doing a specific thing. 
@Joe Splitrock @Grant Schroeder basically held a fee seminar on what my 5 second post was going to be. 

if you earn 3% inflation appreciation but only put 20% down, you’re earning 15%. Not too shabby. Now imagine you put down 5% as an owner occupant for a year before renting it out. Now you’re earning 60% annually on your down payment. 

 What a great argument with numbers and facts instead of personal attacks. You're the troll, nor do you you know what education means. I'm a multi-millionaire. I also have advanced degrees with a focus on microeconomics. Not one person in your "free education" rambling nonsense had a valid point. Let me educate YOU. Real estate keeps pace with inflation. Ivy league educated economists and professors at ivy league schools have documented this for decades, go actually read instead of thumping your chest about what you think is the case with nothing to back it up. That trumps your rambling post with absolutely no facts...

Saying to cherry pick a market and leverage is like saying cherry pick a stock and invest on margin (that means with borrowed money...). Except stocks, even an index fund return an average of 10% a year vs 3% of real estate, and that's just investing in an index fund. Now if I invest in Tesla or similar hot stocks, I could have made 700% my money in a year. Real estate doesn't do that "smarty". Now if you borrow on margin your returns could be nearly 3,000%. Please "educate" us on what housing market can do that in a year since you're so educated...

You have ZERO clue what you're talking about on ANYTHING. You're comparing apples to peanuts. Stocks even without cherry picking and without margin will beat real estate. Mathematically with compound returns in time they will beat real estate even without leverage or cherry picking. Ivy league educated economists have PROVEN that, go look it up. If you want to talk about cherry picking stocks and leveraging, stocks blow ALL real estate on the planet out of the water, hence why Microsoft, Netflix, Amazon and Google have made so many billionaires...Go educate yourself before you open your mouth and act like you have any clue what you're talking about, because no one on this forum is a billionaire real estate investor....

But no, keep believing your poorly thought out examples of "education" where you only compare one asset that when cherry picked and leveraged will beat inflation. Index funds that are non leveraged will do that out of the gate. But to get a more accurate comparison, if you cherry pick stocks and buy on margin, the returns trump any real estate deal in the world....

Updated about 1 month ago

Oh yeah, btw Mr. Educator, you can buy stocks with leverage too. It's called buying on margin. so your several thousand percent return on Google can be leveraged too. But unlike cherry picking a house, you make several thousand percent more....what a joke and a fool.

Updated about 1 month ago

This article shows the charts. The broad real estate market barely went up about 2.5 times. A fair comparison of that would be the broad stock market such as the S&P 500 index which went up 5.5 times during the same period. Now if you want to go with your child like house cherry picking, show me which housing market went up several thousand percent like Amazon, Google, Apple, etc....go on educate me genius.... https://www.forbes.com/sites/kristinmckenna/2020/02/21/is-it-just-a-myth-that-real-estate-is-a-better-investment-than-stocks/?sh=786554191808

Originally posted by @Jack B. :
Originally posted by @Bill Brandt:

If this was a real post…yes we all know it wasn’t. 

This is where OP would post, “Oh, cool. Now I understand my entire premise was wrong and I’m smarter because of the great community of members/experts who took their personal time to educate me for free….”

I never quite understood the “fake” posts. Whether it’s a here’s an obviously wrong premise post or which should I do post when the OP is already set on doing a specific thing. 
@Joe Splitrock @Grant Schroeder basically held a fee seminar on what my 5 second post was going to be. 

if you earn 3% inflation appreciation but only put 20% down, you’re earning 15%. Not too shabby. Now imagine you put down 5% as an owner occupant for a year before renting it out. Now you’re earning 60% annually on your down payment. 

 What a great argument with numbers and facts instead of personal attacks. You're the troll, nor do you you know what education means. I'm a multi-millionaire. I also have advanced degrees with a focus on microeconomics. Not one person in your "free education" rambling nonsense had a valid point. Let me educate YOU. Real estate keeps pace with inflation. Ivy league educated economists and professors at ivy league schools have documented this for decades, go actually read instead of thumping your chest about what you think is the case with nothing to back it up. That trumps your rambling post with absolutely no facts...

Saying to cherry pick a market and leverage is like saying cherry pick a stock and invest on margin (that means with borrowed money...). Except stocks, even an index fund return an average of 10% a year vs 3% of real estate, and that's just investing in an index fund. Now if I invest in Tesla or similar hot stocks, I could have made 700% my money in a year. Real estate doesn't do that "smarty". Now if you borrow on margin your returns could be nearly 3,000%. Please "educate" us on what housing market can do that in a year since you're so educated...

You have ZERO clue what you're talking about on ANYTHING. You're comparing apples to peanuts. Stocks even without cherry picking and without margin will beat real estate. Mathematically with compound returns in time they will beat real estate even without leverage or cherry picking. Ivy league educated economists have PROVEN that, go look it up. If you want to talk about cherry picking stocks and leveraging, stocks blow ALL real estate on the planet out of the water, hence why Microsoft, Netflix, Amazon and Google have made so many billionaires...Go educate yourself before you open your mouth and act like you have any clue what you're talking about, because no one on this forum is a billionaire real estate investor....

But no, keep believing your poorly thought out examples of "education" where you only compare one asset that when cherry picked and leveraged will beat inflation. Index funds that are non leveraged will do that out of the gate. But to get a more accurate comparison, if you cherry pick stocks and buy on margin, the returns trump any real estate deal in the world....

 1) Grant Cardone was on BP.  I believe he no longer has an account.  Depending on the source you believe, he is worth between $600M to $2B+.  I am not sure he is a billionaire as the $2B+ is his self reported worth, but he is at least close.

2) Margin is asset backed debt.  That differs from the leverage in RE that is not backed by any value other than the RE.

3) recognizing that most investment RE is at high LTV, the RE appreciation that you depict provides a return that is compounded for the LTV.

4) I am not impressed by multi millionaire.  That implies as low as $2M.  Where I live I suspect most people have net worth that makes them multi millionaire.  I have one of the 2nd cheapest houses in my housing area and it is fast approaching the $2m value.  In coastal So Cal, multi millionaires are everywhere.  100 millionaires are not that rare.

5) If you want to impress me, knock my socks off with how brilliant you were in obtaining the multi millionaire status.  My mom and step dad are the comparison.  I believe they never had a W2 above $50K between them and reached multi millionaire status while being outrageously generous at the same time.  If you want to impress me stop disparaging other posts.  I have nothing against you being proud of your accomplishments, but realize that stating you are a multi millionaire and have advanced degrees in economics does not impress me and I suspect many other users of BP.  Tell me the how you accomplished these accomplishments and maybe I will be impressed.

6) I have nothing against stocks.  I advocate diversified investments.  But to disparage RE as though stocks are the panacea, on a site dedicated to RE investing, is pretty much the definition of a troll.

Good luck

This is the 2nd post from this guy I’ve seen tonight, where he is bragging about being a multi-millionaire.

@Jack B. Nobody cares bro.

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