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Over long periods, the inflation-adjusted price of homes in the U.S. has tended to
increase by a little more than 1% per year. However, this doesn’t mean that owning a home is a good way to make a 1% real return on your money.[Let me explain.]
The comments above and below are excerpts from an article by Scott Grannis (Calafia Beach Pundit) which may have been enhanced – edited ([ ]) and abridged (…) – by munKNEE.com (Your Key to Making Money!)
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According to the Census Bureau, new homes have been getting bigger and bigger: since 1973, the average new house increased from 1660 square feet to 2687 square feet, for an annualized increase of 1.15%. New homes today are 1,000 square feet larger than they were in 1973, and living space per person has nearly doubled.
Bigger and better houses explain why inflation-adjusted home prices have increased by a little more than 1% per year. On balance, and over long periods, homes maintain their value, relative to other goods and services. They are a thus a decent inflation hedge, nothing more.
Conclusions
1. The first of the charts above shows indices of real and nominal national home prices since 1987, according to Case Shiller.
- Over that period, the annualized real rate of increase in home prices was 1.4%, only slightly faster than the long-term increase in the size of homes.
2. The second of the charts above shows real existing single-family home prices since 1968.
- Over that period its annualized increase was about 1.1% per year, very much in line with the increasing size and quality of homes.
In short, housing has been a decent inflation hedge, holding its value over long periods – nothing more.
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