There was a cool chart that caught my eye from visualeconomics.com where they adjusted home values for inflation back to 1890.
Ignoring the log-scale nominal trajectory, note in terms of inflation-adjusted dollars (REAL dollars), housing is flat – for over a century. There were some good buying and selling signals along the way, but each time, housing reverts to the mean. While this is common knowledge amongst many in the finance world, Americans that saw their home prices double during the prior decade and then sold prior to the crash may find this hard to fathom. If anything, it demonstrates the simple mantra that personal residential real estate isn’t a great “investment”. It’s about a break-even proposition when considering inflation. There are always factors like having a place to call your own, being able to replace a carpet or hang a painting, or getting a mortgage interest tax deduction, but if you’re buying a home with dreams of striking it rich, reversion to the mean like this undeniable silver arbitrage play will bring you back to earth eventually.
It’s tough to ignore the massive divergence from the trendline in both the Real and Nominal terms, but like many market mirages, people tend to reinforce their false sense of bravado with “this time is different”, kind of like how US equities are headed off a cliff if and when P/E ratios revert to the long-term mean.
For disclosure, I’m a homeowner and I wouldn’t have it any other way. I can’t imagine renting with a family my size and not being able to do what I want to my home. But I don’t consider it to be an “investment”, a nest-egg or a college fund. It’s a living expense. When factoring in upkeep, taxes and the mortgage, it’s not guaranteed to be a good investment by any means. So, if you want to be a homeowner, buy a home. If you want to be an investor, invest in rental real estate over personal residential real estate.