"Home prices in real terms didn't increase"
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
"Home prices in real terms didn't increase"
Most Popular Reply
Roy N.Pro Member
Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votesDavid Krulac
This announcement really comes as little surprise and I do not think it means "investing" in real estate is a waste of time ... 'speculating' over the long term ... perhaps.
I see it as a reenforcement of why I evaluate properties based on their cash flow and model them using either a flat price or slight depreciation {inflation adjusted}.
After all, you wouldn't buy a business on the expectation you will sell it for more 10 - 20 years down the road. You would expect it to be cash-flow positive and make a certain return.
35 Replies
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes13y
So, David Krulac, what's you're thinking on this? I've posted the same though numerous times. You simply have to look at the Case-Shiller data and adjust for inflation and you will see this is indeed the case.
All too often, someone compares the value today for a house to its purchase price 30 or more years ago. They think "wow, great investment". If you do the math, though, the actual return is often quite low. A half million dollar house that was purchased 50 years ago is only a 3.25% annual return. Its the long time periods and compounding that produces the impressive results.
Further, that comparison neglects all the interest, taxes, insurance, routine maintenance and significant upgrades that have to be done to actually have a half million dollar house. There's a word for a house that was bought 50 years ago that has had minimal maintenance and no upgrades. That word is "dump."
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
@Jon Holdman
On one level, its a bit discouraging. I've been investing in real estate for a long time. Was it wasted time? Is everybody at BP misguided and wasting their time. efforts and money on real estate?
Inflation is very misunderstood and distorts values. Professor Shiller has cut through the inflation and measures and compared prices in real dollar terms.
One of the shortcomings of the Case-Shiller Index is that it is only 20 cities, albeit the 20 largest cities. I don't happen to invest in any of the C-S top 20.
The other shortcoming is C-S Index is looking at averages. If a real estate investor is buying at true bargain prices, and sometimes that it hard to nail down what is a bargain and what is not, then there can be gains in real dollars.
Value is the key to success in real estate, but many don't know what value really is. I've heard an investor say that he bought a property at 16 cent on the dollar, because he bought it at 16% of its highest price sold historically. That was a different time and a different market, and the property was in different condition also. What a property sold for at the peak of the market has little to do with the value today. I recently sold a property for which I sold the identical property right next door 5 years ago at the peak of the market. The one I sold this year was at a 60% discount. Did the buyer buy this property at 40 cents on the dollar? I think not, I think that they bought it at today's market price. Oh, how I wish I could have sold without the 60% discount...
Shiller is saying even with the long term even 50 years or 100 years there is no gain in real dollars (accounting for inflation)
I think Shiller is right, but they are only looking at 20 markets and don't account for bargain purchases.
- Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes13y
David Krulac I don't think RE is a waste of time just because of this. A few things that aren't taken into account is, if it is a truly cashflowing property then all of those expenses are being paid for by your tenant. Also the increase in value doesn't account for leverage, so if you had paid cash you would have realized 3.25% and just kept up with inflation but if you leveraged you would have realized a higher return since every dollar in value increase goes directly to you.
The other thing I am more aware of now as I continue to learn is "investing" in RE somewhat like you invest in other markets. If you truly study the economics and what is going on in a macro sense, you can buy/sell in the appropriate portions of the cycle and then obviously have the opportunity to do much better than 3.25%/yr. All in all I completely agree with the C-S quote, but I see it applying more to "casual" investors those that buy a single investment property off the MLS and think cashflow is Rent-PITI=profit.
- Rehabber · Yuma , AZ · Member since 2013 · 36 posts · 2 votes13y
Generally speaking, the strategy for investing in commodities is to preserve wealth. Anything over and above is a bonus. Today the options are limited: leave the cash in the bank at .00000001 or invest in the stock market and pray for a 4-5% pretax dividend yield. Even if you accept the current CPI numbers (which anyone who purchases groceries, knows better) does not leave much in terms of net capital appreciation.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
@Matt Devincenzo
Professor Shiller is not considering cash flow or expenses. And leverage is irrelevant to the discussion of value. A $100,000 house is worth a $100,000 whether you have 100% financing or zero% financing. The value is the value independent of the financing involved. (We're not discussing seller financing, below market financing or assumable financing here, that's a whole another discussion vis-a-vis the relationship of value to below market financing.)
What the Professor is saying is that real estate values have NOT increased in "real dollar", when you exclude inflation from that equation.
Once upon a time, a long time ago in a distant land, the distance measured in a few miles, before the current real estate crash; I discovered several pockets of real estate that were somewhat isolated from market fluctuations in value. Home prices were not rising, the population was stable or only holding its own, there were few employment opportunities there and many young people were moving out to places where there were better job opportunities. So while there should be no expectations of home prices rising there; there were what I perceived to be excellent cash flow opportunities. What Shiller would say is that these communities were not anomalies, but rather the norm example, though in reality they were losing value in real terms because of the erosion of inflation. But as long as the cash flow was good, the inflation caused value erosion was acceptable and acknowledged.
I shared this research with some other investors, but very few could wrap their heads around buying a property and fully expecting no appreciation in value. It was anti-the American dream of buying a house and having it increase in value, sometimes slowly, sometimes much faster.
- 13yRobert AdamsBusiness MemberReal Estate Broker · Henderson, NV · Member since 2009 · 1k+ posts · 373 votes
@Jon Holdman good points.
Do you guys have a link to his top 20?
Or a link to these values after accounting for inflation?
The Adams Team at Rothwell Gornt Companies4.970 Reviews - Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
- Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes13y
David Krulac I think I made the jump mentally but didn't write it out the same way.
I was responding to your question of "is RE a waste of time".
The point about the leverage was I understand a 100K house in today's dollars will be worth 100K adjusted for inflation 50 years from now. My point about leverage was you have the ability to control that 100K asset for only 20K today, and your tenant will pay for the extra 80K in value you receive. The point about expenses was in support of the fact that the asset is self supporting so you aren't paying for things like management and taxes since your tenant is paying all of those indirectly.
And as you said that study is looking at a single variable in the investment equation, if we were to say it's a waste of time based on that one variable we could show that any investment vehicle is a waste of time based on a single variable
- Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes13y
David Krulac - I disagree with your comment on leverage being irrelevant, mainly because it allows the buyer to control an asset that will increase in value (typically in line with inflation) for a fraction of what it is worth at the time of purchase.
I also disagree with the original quote from the perspective of a homeowner and ABSOLUTELY disagree with it from the perspective of a rental property owner (at which point leverage is even more valuable).
"from 1890 to 1990. The American dream of building wealth through homeownership is a FALLACY. That was the bubble thinking but its still fresh in our minds."
The reason I disagree with this quote from the homeowner's perspective is because people have a handful of choices for their primary residence (i.e. rent, buy a home, live on the streets, go to jail, mooch off friends/family, etc.). Of the possibilities, buying a house is the only one that will significantly increase an individual's net worth, all other things being equal.
If you have a net worth of $20K today and use that to buy a $100K house with 20% down your net worth in 30 years (assuming you just pay off your mortgage w/ no refi or additional leverage) will be 100K*1.0325^30 = $261K. If you decided instead to invest the $20K in a reasonably "safe" investment which would yield about the same 3.25% after taxes (if you're lucky) you'd turn your $20K into $52K after 30 years.
I'd say buying the house is a very significant wealth builder as long as you account for the fact that it is a necessity and the only real alternative is renting which typically costs more than owning and leaves you with absolutely nothing at the end of the day.
Now if you decide to purchase a home with cash, you're not going to "build" much wealth, if any. However you will be preserving your existing wealth. So basically the only way I agree with the posted quote is if you've already got wealth (enough to pay cash at least)...in which case, purchasing unleveraged, non-investment real estate will not build any additional wealth.
- 13yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
David Krulac
This announcement really comes as little surprise and I do not think it means "investing" in real estate is a waste of time ... 'speculating' over the long term ... perhaps.
I see it as a reenforcement of why I evaluate properties based on their cash flow and model them using either a flat price or slight depreciation {inflation adjusted}.
After all, you wouldn't buy a business on the expectation you will sell it for more 10 - 20 years down the road. You would expect it to be cash-flow positive and make a certain return.
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes13y
When your average Boomer inherits a free and clear house from their parents (or sells it to pay for care for the parents), they'll think it created "wealth". They will not analyze the holding costs or inflation during the holding period. They say Mom and Dad bought it in 1952 for $35K and now it's worth $500K. End of discussion.
Maybe because I grew up in the Rust Belt in the 60s and 70s when it was starting to corrode a bit, but no one in my family believed that my grandparents' homes bought in the 50s and sold in the 80s-90s created anything but a place to live.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
@Matt Devincenzo
I mostly agree. But leverage doesn't change the value except in a rare situation.
The part I disagree with is that while value is only one item in the cosmic equation, it is a major one.
The only thing that is more misunderstood than value is inflation. Candy bars, pack of gum and the daily newspaper used to be $0.05. Today they are $1 to $1.50. Does the $1 Hershey bar of today taste better than the $0.05 cent Hershey bar of the past?
Inflation makes you think that things are more valuable.
The first house that I bought costs $27,000; and I years later sold it for $100,000, but it really wasn't worth any more, because to replace that house with a similar house would cost $100,000. If I could buy $27,000 houses, sell them for $100,000 and them buy the same type house back for $27,000, I'd be doing real good. I just bought a $120,000 house that wasn't as good condition as the $27,000 when I bought it, similar house, similar neighborhood, not too far apart.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
@Michael Siekerka
I didn't say leverage was irrelevant. I said it is irrelevant in Professor Shiller's presentation on value. Leverage is VERY relevant. If if were not for leverage, I could not have bought the real estate that I bought, especially in the beginning. At least the 5 or 6 first properties were bought 100% financed in one form or another.
We're spoiled here with our 30 year fixed mortgages. In some other countries where I've seen 50% down, five year fixed or even one year fixed. The callable 1 year mortgages were one of the fixtures of the Great depression, that one in the 1930s. As a reaction to that we created FHA and 30 year fixed full amortized mortgages. If I had to put 50% down on every property, I probably would not have bought any.
The historic low interest rates have distorted the spread between costs of buying a house and renting a house. But if you accept Shiller's premise, which you obviously don't, then since the value is not increasing in real dollars, they there would be examples where the rent would be less than the cost of ownership and therefore it would be a bargain to rent over buying some properties.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
@Roy N.
And that's why its so difficult to sell small businesses. Goodwill and blue sky are worth little or nothing. Many small businesses are nothing more than a low paying job with long hours for their owners. i think the figures are 90% of small business fail in the first 5 years and 90% of the remainder fail in the second 5 years. If you're in small business more 10 year, you're a real survivor.
There was this great lunch eating place. I would go there often. The owner besides the basic menu would always have fresh daily specials of some different home made soups and sandwiches. Her extensive cook book was great, but what made the business so good was the personable owner who went above and beyond. She became ill and had to sell the business. A new owner bought the business (rented facilities) and of course the cook book. Same recipes, same location, same menu... the new owner went out of business in less than 1 year.
Small businesses are tough and often times the value of the business is between the owner's ears.
- Investor · Midwest, USA · Member since 2012 · 204 posts · 33 votes13y
David Krulac,
If you have been investing for so long, you should have plenty of data to review - purchase price, income, expenses, sale price...calculate your return; is it better than inflation? Let us know what you learn...
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
@Larry Flanagan
Return and value are not the same. I've given several examples here, above. $27,000 sold for $100,000, but to replace would cost the same $100,000. The areas were values are not increasing, but generate positive cash flow.
Value could be the same as Shiller says, and you could have a nice positive return. A $100,000 building could be generating a nice return, but a $100,000 vacant lot could be generating no return, but the two properties still have the same value.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
K. Marie Poe,
By jove, I think you got it.
Inflation does not create more value. And according to Shiller when you take out the inflation, the value is the same.
- Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes13y
Haha I think we've all agreed to the value not truly increasing after you account for inflation, but what does any of this have to do with the original question after the C-S statement.
Originally posted by David Krulac:
On one level, its a bit discouraging. I've been investing in real estate for a long time. Was it wasted time? Is everybody at BP misguided and wasting their time. efforts and money on real estate?Again; No. Your value will have been preserved in line with inflation, and assuming you invest in cash flow you will also have received a return over that time period. Most here are not investing solely for the value increase, and those that are do so calculatingly so I doubt they fit the C-S statement.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes13y
Busy day and I've not read through this. Here are some links, though:
Case Shiller Data. Look under the "Additional Info" box and then the "Home Price Index Levels" selection. That will give you an Excel file of the raw data.
Here's one chart of the long term, inflation adjusted data. Appears to have been last updated in 2011, though:
- 13yJean BolgerPro MemberAurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
"from 1890 to 1990. The American dream of building wealth through homeownership is a FALLACY. That was the bubble thinking but its still fresh in our minds."
This makes me think of a couple of things.1. 1890 is an odd place to start. At that time the ownership of a home (at least in the cities) was something possible only for the wealthy. As David has already brought up, the "invention" of the modern mortgage in the 1930's changed this, and caused a lot of lower/middle income families to be able to buy a home over time. This might not increase the value of the building, per se, but it certainly added to the wealth of those families. Compare it to paying an increasing rent over those 30 or so years; at the end of the mortgage you have an asset that can be sold, if needed, or enjoyed without the outlay of rent.
Unfortunately the public perception in the last 30 years changed from building security through home ownership to building wealth, and that wealth was not what it seemed. So I think he's partially right.
2. Homeownership and real estate investment are two separate spheres. I like Frank Gallinelli's books, and I have drilled into my head his statement "You're not buying a building, you're buying an income stream". So the building itself may not make you money, but hopefully the ownership/control of the building will make you money.
Interesting thread!
- Investor · Midwest, USA · Member since 2012 · 204 posts · 33 votes13y
I'm confused...were people here expecting values to increase > inflation? Why should they?
- 13yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
Originally posted by David Krulac:
@Roy N.
And that's why its so difficult to sell small businesses. Goodwill and blue sky are worth little or nothing. Many small businesses are nothing more than a low paying job with long hours for their owners. i think the figures are 90% of small business fail in the first 5 years and 90% of the remainder fail in the second 5 years. If you're in small business more 10 year, you're a real survivor.
David,
Over the years, I've sold one, had one "stolen", still have one (12 years old), and have just started another. They do have long hours and low pay when you are getting them off the ground, but if you are still toiling for existence 10-yrs in, there is a problem with your model.
I grew-up in a family business ... it's just second nature.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes13y
The Case Shiller methodology involves comparing sales of the same property over time. That's very different than metrics like the median sales price because it factors out changes in overall housing. I don't think there's anything magical about 1890. Its just as far back as they could go and find any significant data.
If you mean a rental, yes, I'd agree. More broadly, saving money and investing it in anything at least has the potential to increase your wealth.
if you mean buying a residence, I strongly disagree. A residence is nothing but an expensive doo-dad. If you include all the taxes, etc that I listed in my first post, you almost always find a residence is a net expense. Now, for many people, it is a form of forced savings. They have a payment. They stay there, keep up with the payments and maintenance and 30 years later they have a nice asset.
And some people get very lucky and buy at a low point in that graph and sell at a high one.
OTOH, they can just as easily buy at the top of one of those bubbles, like many folks did during this boom. Or lots of folks did in the early 1980's when I first moved to Houston. "Jingle mail" and "cramdowns" (meaning a short sale) were common terms then. Tell the person who bought a house in a booming area in 2006 and ended up being unable to sell and unable to move when the jobs dried up and see what they say. Many folks lives were totally devastated by buying a house.
I recall reading John Talbott's "Sell Now", written in 2006. He argued you owed it to yourself and your family to sell your house ASAP and buy it back after the coming crash. Of course its easy to look back and pick the writers who were correct. But he was spot on.
Nevertheless, you need a place to live. And if the choice is to pay a landlord or pay for your own house, then owning may be fine.
Rentals, OTOH, can be good wealth builders. If they're at least cash flow positive, and initial investment can grow over the years without more input from you.
- Rehabber · Yuma , AZ · Member since 2013 · 36 posts · 2 votes13y
Jon Holdman a home is a bundle of commodities and generally speaking the price of those commodities increase with inflation. Now there are other factors that can increase and decrease the price of the home which may distort the impact that inflation has on the home. But when the government puts money into the economy either through QE or buying bonds there is definitely an impact on commodities.
I think the issue here lies with the definition of inflation. Most people believe that the inflation rate is defined by the CPI (just wait the rules have changed again, see "Chain CPI") and that "inflation" occurs when the price of commodities increase. "Inflation" just as the word implies, is the inflating of the currency, period.
Many people say that the inflation rate in the US is nonexistent and considering the trillions of dollars that have been added to the system it is surprising that we do not have corresponding price increases in commodities. But when the rest of the world stops purchasing our bonds and all those dollars come back to the US, those who own commodities and are not over leveraged will benefit.
Thoughts?
- Durham, NC · Member since 2012 · 498 posts · 48 votes13y
Home is an income producing investment instrument. Even if it is for your own use, for correct evaluation, the implicit income equal to the rent value based on the market should be considered. This "implicit income" is even tax free.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.