How to Think About Home Price Appreciation

By Charlie Bilello

09 Jul 2020


Your home is your castle, and if you’re like most Americans, it is also the largest component of your net worth.

Source: U.S. Census

Naturally, you would like to see your home appreciate in value over time. But how much would be a reasonable expectation?

Let’s take a look at history…

Since 1891, U.S. home prices have increased 3.2% per year before inflation (nominal) and 0.3% after inflation (real).

Over long periods of time, there is a strong correlation between inflation and home prices, with the two variables generally moving together in tandem.

From 1891 through 1996, U.S. national home prices only outpaced inflation by 15% on a cumulative basis. Few considered their primary residence to be “an investment” equivalent to stocks or commercial real estate.

That thinking changed during the housing bubble when prices would exceed the inflation rate by a wide margin (76% from 1997-2005), leading many to believe that housing was the new-and-improved stock market, better because it “never went down.”

And then, of course, it went down, falling every year from 2007 through 2011 (-5%, -12%, -4%, -4%, -4%). Since then, national home prices have recovered all of their losses on a nominal basis, but remain below their inflation-adjusted peak in 2006.

What does all of this information tell us about future home prices?

Not much in the short-run, as the tables above clearly indicate. Anything can happen in any given year or 5-10 year period for that matter.

Why?

There are a myriad of factors that can impact the housing market, including: the supply/demand for housing, affordability, inflation, economic/wage growth, availability of credit, mortgage rates, unemployment, demographics, location, etc., etc.

The culmination of these factors can lead to wide differences in appreciation rates from one city to the next, particularly over shorter time periods.

Data via YCharts

But for most homeowners who plan on staying in their house for 30 years or more, what they’ll likely find is an appreciation rate that doesn’t deviate all that much from the rate of inflation.

In the best 30 years for the housing market (1976-2005), real price appreciation averaged 2.2% per year. In the worst 30 years for housing (1895-1924), real price appreciation averaged -2.0% per year.

The last two decades have outpaced historical growth on both a nominal and real basis, but there is no reason to believe there has been a paradigm shift. When housing prices deviate too much from the rate of inflation, there is a natural correcting mechanism in that either supply increases (more homes are built keeping prices in check) or demand decreases (less people buy homes as they become unaffordable and divorced from growth in income/inflation).

So if you just bought a house, how much should you expect it to appreciate? If you plan to stay for a while (30 years), a little bit more than the rate of inflation, with the understanding that it could very well be less.

Importantly, we’ve only focused here on price appreciation, which completely ignores the many costs associated with home ownership (mortgage interest, taxes, repairs, maintenance, capital improvements, etc.). A true rate of return on a home purchase would need to include these factors as well, making the analysis much more difficult.

Which is why buying a home should viewed differently than passive investments like stocks and bonds. Your home is your castle and should confer benefits beyond just the numbers. Price appreciation is only one part of the equation.

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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For our full disclosures, click here.

About the author

Charlie Bilello

Charlie is the founder and CEO of Compound Capital Advisors.

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