I’m a fan of looking at life through the lens of context. Especially when we’re talking commodities. I think it’s very important to understand the price of items within the context of inflation. It makes for a much more level playing field. So with that, I undertook to find some information about the price of real estate adjusted for inflation. I came up one better!
Yale economist Robert J Shiller created an index of American housing prices going back to 1890. It is based on sales prices of standard existing houses, not new construction, to track the value of housing as an investment over time. It presents housing values in consistent terms over 116 years, factoring out the effects of inflation.
Take a look at the chart and you’ll see that we are nearing normalcy. But, we’ve still got a ways to go.
I continually hear comparisons to the great depression with our current economic situation. Yet, when you look at the index, you notice that we’re not in a depression. No, we’re in a correction back to normal. The real key is that real estate is not an effective investment tool. With a 0.59% inflation adjusted return since 1890, and a 1.24% inflation adjusted return since 1950 (and that assumes you sold at the peak), you can easily tell it’s not near the huge windfall we experienced in the past 10 years.
I’m not saying don’t buy real estate. There are many other reasons to own a home. Yet, the buy it, hold it, and make a 50% return in a year days are long gone. I’d like to think that we’re approaching normal, and that the markets will begin to stabilize shortly. The important thing to remember is we won’t be in a depression when viewed contextually – we’ll merely be returning to normalcy.