The era of get-rich-quick real estate is dead.
The era of increasing long-term wealth in your home is back.
Since 1968 home prices exceed inflation
Based on data since 1968, nominal U.S. home prices have risen 5.5 percent annually and outpaced inflation by about 1 to 2 percent, says Lawrence Yun, NAR’s chief economist. Why? According to Yun, the main reasons housing has grown faster than inflation are that, 1) more people wanted to buy in places with a finite supply of developable land (think Seattle), which drove up prices, and, 2) owners increased the value of their properties through home improvements.
Home prices followed this pattern through most the 1990s but started shooting up in the early 2000s. Between 2000 and 2006, nominal prices rose 89 percent, according to data from Moody’s Economy.com and Fiserv, a financial service company in Brookfield, Wis.
Interviewed economists from NAR, Fiserv, and Moody’s Analytics expect home prices to continue to grow slightly more than inflation in the long term. Still, at least in the near future, buyers are not likely to see prices skyrocket the way they did in the early 2000s.
Home values higher than in 1990
That’s definitely cold comfort for the many Americans whose homes have lost more than $1.7 trillion in value in 2010. Yet, according to a new report by Zillow.com, homeowners who buy for the long term have historically seen the value of their investment increase over the years. In inflation-adjusted terms, the median U.S. home sale price in the third quarter remains approximately 9.5 percent higher than in 1990, despite falling 26 percent from peak levels, according to calculations based on NAR data.
Says Greg Hebner, chief operating officer at Sorrento Capital, an Irvine (Calif.) asset management firm:
“You should at least be looking at housing now, especially as interest rates are low and homeowners can deduct mortgage interest from their income taxes. ‘It’s still a good game’ if a buyer understands the risks, has consistent income, and purchases a house he can afford.”