“The American dream of building wealth through homeownership is a fallacy …. home prices in real terms didn’t increase from 1890 to 1990.”
Robert Shiller, Economist, Yale University, co-inventor of the Case-Shiller Home Price Index, as quoted in Forbes, June 24, 2013
As evidence of that bold assertion, Shiller graphed American home prices from 1890 to today. After adjusting for inflation, he finds home prices have barely budged over the past 120 years. The lowest point for home prices was in 1919, the high point in December 2005 (no surprise there).
Shiller argues that, contrary to popular belief, home prices haven’t appreciated in real terms over the decades and are no higher now than they were in 1890.
If home prices appear to be rising, it’s only because they climb in tandem with inflation. But in real terms (with inflation stripped away), prices rose only from 0.2% to 0.5% each year on average, according to Shiller’s data.
Of course, that doesn’t jibe with the average homeowner’s perception of events. Many homeowners believe real estate has been a much better “investment” than the facts suggest.
That doesn’t take away from all the many valid reasons to want to buy a home. But some say this distorted perception of reality helped fuel the bubble in real estate, as home buyers felt that real estate was a “can’t lose” proposition and, as a result, put far too much money, much of it borrowed, into bricks and mortar. Unfortunately, recent events have shown that real estate is no more immune from market cycles than any other type of investment.
How does the growth in residential real estate prices compare to the growth in stock prices over the same time span?
According to Shiller’s online data, a dollar invested in housing in 1890 would be worth about $1.26 in 2013, after accounting for inflation, clocking in at a growth rate of about 0.2% per year.
In contrast, a dollar invested in a U.S. stock index in 1890 would be worth roughly $1,817 by 2013, after accounting for inflation and assuming dividends reinvested, for a growth rate of just over 6% per year.
The Takeaway: During some time periods homes are knock-out investments. During other time periods they are the proverbial money pits. Your home can give you great personal enjoyment. Bottom line, your home is a “use” asset that provides you with shelter, offers significant tax benefits, and offers a mechanism for long-term disciplined savings. But while your home is undoubtedly a major investment, it is also an ongoing expense. Remind yourself that your home is primarily a place to live, but not necessarily the best way to grow your assets over the long-haul.