Wednesday, October 26, 2016

Housing as an inflation hedge

Over long periods, the inflation-adjusted price of homes in the U.S. has tended to increase by a little more than 1% per year. However, this doesn't mean that owning a home is a good way to make a 1% real return on your money. 

According to the Census Bureau, new homes have been getting bigger and bigger: since 1973, the average new house increased from 1660 square feet to 2687 square feet, for an annualized increase of 1.15%. New homes today are 1,000 square feet larger than they were in 1973, and living space per person has nearly doubled. Bigger and better houses explain why inflation-adjusted home prices have increased by a little more than 1% per year. On balance, and over long periods, homes maintain their value, relative to other goods and services. They are a thus a decent inflation hedge, nothing more.

The first of the charts above shows indices of real and nominal national home prices since 1987, according to Case Shiller. Over that period, the annualized real rate of increase in home prices was 1.4%, only slightly faster than the long-term increase in the size of homes. The second of the the charts above shows real existing single-family home prices since 1968; its annualized increase is about 1.1% per year, very much in line with the increasing size and quality of homes.

In short, housing has been a decent inflation hedge, holding its value over long periods.


Benjamin Cole said...

Well you know what I am going to say. House prices are artificially inflated by property zoning, especially along the West Coast.

It makes sense that in free markets, housing should become cheaper as better building technologies or practices evolve.

Property zoning is the largest structural impediment is the US economy and is throttling West Coast business development.

steve said...

Agreed Benjamin PLUS buying a house is very location and specific. We lost $ on our house held for over 25 years in suburban Albany, NY primarily because local taxes increased 4X over that period from just over $5K to over $20K/yr on a house assessed at $730K that ultimately sold for under $600K!