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Long-term
real estate appreciation rate in the
U.S.
Your
home is an investment!
Some bloggers are trying to use my
article to claim that buying a house isn't
an investment. That is absolutely
not a valid conclusion. Saying that
a home isn't an investment just because it
doesn't appreciate faster than inflation,
is like saying a bicycle isn't
transportation just because it doesn't
fly. A bicycle doesn't have to fly to be
transportation, and a house doesn't have
to appreciate faster than inflation to be
an investment. I have a separate article
explaining why
buying a home is indeed an
investment.
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Before we talk actual real estate appreciation
rates, let's talk about why you'd want to know what
they are in the first place.
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by Michael Bluejay
Last update: August 2009
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 Appreciation
matters because it can make the difference between
whether it's better to buy a home or continue
renting. And even small changes in the appreciation
rate can change the long-term value of buying
considerably. A $235k home becomes worth $485k
at 3% appreciation after 30 years, but it
becomes worth a whopping $649k at 4%
appreciation. One percentage point makes quite
a difference!
Another reason to know the rate is that you
might not want to be tied to your home for 30
years. You might want the option to move after
a few years. If the appreciation rate is high
enough, the extra value of the house in a few years
will offset the upfront costs of buying. If the
appreciation rate is too low then it won't.
Finally, if the appreciation rate is high
enough, you actually live for free! The
increase in value of your home can be greater than
what you pay out in taxes, insurance, maintenance
and interest. You can cash in that value when you
sell, or when you're old enough to qualify for a
reverse mortgage. And is there anything sweeter
than living for free? But you live for free only if
the appreciation rate is high enough, usually about
1.75 percentage points higher than the general rate
of inflation.
For these reasons, it behooves us to get the
appreciation rate right. Unfortunately, that's
easier said than done. Here's why.
- Trying to predict future appreciation
rates is like trying to predict anything.
Nobody can see the future. The best we can do is
to see what happened in the past, but that's no
guarantee that we'll see those kinds of returns
in the future.
- Homes are getting bigger. So when we
see the median price of homes go up each year,
what's hidden in those numbers is that part of
the increase is because the homes being sold
themselves are getting larger. Not all of the
increase is due to appreciation.
- Some figures show average prices, not
median prices. The median price is
the middle price, and it's generally more
meaningful when doing this kind of analysis. For
example, let's say we have five workers, who
make $15k, $20k, $30k, $40k, and $600k
respectively. The average income is
$141k, but that's not really very representative
of how much people actually make, is it? The
first four people don't make anywhere close to
that, and the last person makes considerably
more. But the median income is $30k,
which is much more meaningful. Average
home prices are higher than median home
prices because the mansions of the ultra-rich
pull the average figure higher. So we use the
median figure, which is more helpful. Here's
a
chart showing how the average price is
higher than the median price. So we need to make
sure we're looking at median prices, not average
prices.
- Local rates are different from national
rates. In this article I look at national
averages, because I can't easily cover each of
hundreds of different areas throughout the U.S.
But in reality, local rates can differ greatly
from the national average. They can even move in
opposite directions, with a local rate going up
while the national rate goes down, or
vice-versa.
- Once we figure an average historical
appreciation rate, even ignoring the flaws that
went into finding it, it can bear little
resemblance to the next few years. That's
because short-term real estate rates
fluctuate wildly. We might come up with a
long-term appreciation rate of 4.3%, but next
year prices could go up by 14% (like in 1979) or
down by 15% (like in 2009).
With all those caveats, you might be tempted
to give up! But I think it's better to have
some idea of what's happened in the past,
even if we know it might not be accurate for our
area in the near future. So with that in mind,
let's get to work.
Theory
When you think about it, it seems
that long-term appreciation rates would have to
be pretty close to the general rate of
inflation. Because if appreciation was much
higher than inflation, then it wouldn't be too
long before no one could afford to buy a house!
If workers make 3% more per year on average, but
the price of homes goes up by 6% per year, then
pretty soon homes become widely unaffordable.
I'll be keeping this in mind as we go through
the appreciation data below.
U.S. Census
data
The price of new homes increased by
5.4%
annually from 1963 to 2008, on average.
(U.S.
Census, PDF)
New homes aren't the best
yardstick -- we'd really prefer to see sales of
existing homes. But if new homes are all
the U.S. Census gives us, then that's all we
have to go on.
First, let's account for the fact that the
average new home size exploded from 983
s.f. to 2349 s.f. from 1950-2004, or
about 1.6% per year on average.
(NPR)
So a big chunk of the increase isn't inflation,
it's that bigger homes cost more money. Once we
factor that in, the price of new homes per
square foot went up by only
4.2%
annually from 1963 to 2008.
And now let's compare that rate to the
general rate of inflation, which was
4.4% for
the same period. (CPI,
BLS)
As predicted earlier, the rate of real
estate inflation and the general rate of
inflation are almost identical.
National Association of
Realtors
The price of existing homes
increased by
5.4%
annually from 1968 to 2009, on average.
(Natl. Assoc. of Realtors,
p.1,
p.2)
Notice that this is the same figure
as new homes by the Census Bureau for a
similar period. Once we adjust for the fact that
homes get bigger over time, the annual rate is
3.7%. The
general rate of inflation during this time was
4.5%. So
here again, homes didn't appreciate faster than
inflation.
Case-Schiller
Index
The price of existing homes
increased by
3.4%
annually from 1987 to 2009, on average.
(Wikipedia)
We don't adjust for houses getting
bigger, because the Case-Schiller Index tracks
repeat sales of the same homes. (They
might get a little bigger from remodeling, but
so few of them will get bigger, and by such a
small amount, that we can safely ignore that.)
The general rate of inflation during this time
was 2.9%. So
again, the appreciation rate for homes was very
similar to the general inflation rate.
Conclusion
I find the often-quoted idea that homes
appreciate faster than inflation to be a load of
B.S. Sure, local appreciation can be
higher, especially in the short-term, but
the average appreciation for the whole
country over the long-term is very much
tied to the general rate of inflation, as the
figures from three different sources above readily
show. This would have to be the case, because if
homes got more expensive faster than earnings went
up, pretty soon nobody would be able to afford to
buy a home.
Of course, you could get lucky. I once
enjoyed an average 16% appreciation rate each year
for five years in Austin, Texas. But by the same
token, homes can actually depreciate while
general inflation is going up, as happened all over
the U.S. in the late 2000's.
So when you're using a rent-vs.-buy
calculator, I strongly suggest you set
the rate of appreciation to be the same as the
inflation rate.
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