It always feels good to hear someone else saying something I have been saying for decades. I this case the someone is Charles Musick and he says it in a piece at RealClearMarkets:
Based on data from the Federal Reserve, the median price of a home has risen from $30,200 to $429,000 over this period. While this is significant, there are several other considerations. First, overall prices have also increased significantly as shown by the Consumer Price Index. Next, there are ongoing costs for a home for insurance, maintenance and taxes of about 2.4% per year. Finally, median home prices over time do not represent the home purchased in 1973 as the median size of homes has increased. Unless someone makes a significant remodel expense, the square footage of a house purchased in 1973 is still the same in 2023. To correct for this in the data, the home prices were converted to dollars per square foot.
As the graph shows, while home prices have risen by a factor of 14, once you account for ongoing fees, the overall rise in prices, and the change in median square footage, the median value of the home lost about 25% over the past 50 years.
The real value of a home purchased in 1973 was the avoidance of paying rent over the past 50 years. Even after inflation, this value is triple the initial purchase price of the home. Understanding this changes how one views home prices. If we view housing as a cost or cost avoidance instead of an investment, it changes our mindset. Our desire is for lower home prices (lower costs) rather than higher home prices (investment). Higher home prices lead to higher out of pocket expenses – specifically with home insurance and property taxes. Locally, it was time for a property tax reassessment this year. My property tax rose 94% in 2024 (no, I did not leave out a decimal). Likewise, home insurance rates have been rising sharply as the insured value of homes have increased. Higher home prices with their higher costs do not improve the experience of living in the home.
Over the last 30 years I have paid significantly more in property taxes than we paid to buy the house, indeed, in just the last 10 years our taxes have exceeded the original purchase price.
The one thing I think is missing from Mr. Musick’s analysis is that the price per square foot of housing is not the same and has not risen uniformly across the country. For example, in Chicago housing prices peaked about 20 years ago. Needless to say, we were paying a lot less in property tax 20 years ago. In contrast houses in Los Angeles, San Jose, and San Francisco haven’t peaked. They keep rising.
My point is that it is possible that some homes have been investments while others have not. And that doesn’t even start considering the problem of the relation between the price of the median house and median income.
Flippers and own to rent can look at it like an investment. Although flippers might be closer to traders.
Otherwise it’s a cost of living.
The first rule of Real Estate – location, location, location.
Most anywhere on the Front Range of Colorado has been a great investment. My cousins moved to the LA area in the early 1980s. They recently sold (another great investment) their ranch house in Redondo Beach and bought an actual (small) ranch in Oregon.
Meanwhile, my MIL lives in the suburbs of Cleveland on a great property, but there is almost no appreciation since it’s the suburbs of Cleveland. If you transported that house and piece of land (almost 2 acres) here to Colorado to an equivalent location, it would be worth four times as much at least.
Then there is Detroit, where my relatives live in a blighted neighborhood where the city is “selling” abandoned homes for very little if people promise to fix them up and live in them. Their house is worth very little, but it’s paid for, and their taxes and expenses are low, and they have no reason to move.
You have to pay to live somewhere and owning a house is usually cheaper in the long run than renting. If you are renting it’s not like property taxes and insurance wont affect the rent.
In our area the price differential is huge once you get up into coal country. Lots of houses in fairly good condition for $40k-$60k. Good heating but no central air, but you can add one of those ductless systems pretty easily. They are smaller and mostly row homes. However, few jobs in the area and the schools suck.
Steve
Once again, the chart starts at 1973. Overlay this with M2, and see how it lines up. CPI-adjusted might be close, but it is not the same.
The “investment” is in the community. I know it it is a cliche, but it is true. Owning something is different than renting. I think this extends to more than housing.
The interest tax deduction is/was a large incentive, also.
The Case-Shiller Index goes back over 100 years, and on average house prices track the inflation index. Some time ago either Case or Shiller discussed home ownership, and concluded that it was a lifestyle choice, not an investment.
Central Ohio, the region within about 50 miles of Columbus, has been showing very rapid population growth and rising house prices ever since the interstates came in around 1960. The new Intel chip plant in New Albany is about 20 to 30 miles from downtown Columbus, and housing prices there have almost doubled. But the rest of the State is dying.
I just found your blog. Thanks for the shout out on this article.