This post illustrates the rise in US housing prices since 1900. However, considering the price alone is a misleading way to evaluate the performance of residential real estate. Investors who fail to perform additional analyzes tend to overestimate the appeal of housing as an investment.
100 Year Housing Price Index Chart
The diagram above (click to expand) shows the history of 100 years of residential real estate prices in the US chart is based on the history of Robert Shiller housing index, which I have summarized annual data. As he readily admits, his data
not perfect. However, it is the best source of long-term housing data that I am aware.
Note that he has been trying to adjust a significant increase in the size and quality of homes over the last 100 years. As a result, he has tried to estimate home prices constant size and quality; if not, we will be comparing apples and oranges.
In addition, note that this is an index, not the actual price. The index value relative to 2000, which have been assigned an index value of 100. Using the values of the index, we can convert the price from year to any other year. For example, we can calculate that a house that cost $ 100,000 in 2000 will cost slightly more than $ 10,000 in 1950, and approximately $ 125,000 in 2012.
Graph is Consistent With The Way That Many People Think About Residential Real Estate Investments
The graph is, representative of how many people think about investments in real estate. That is, their view is shaped primarily by the change in the price of specific properties often over several decades. For example, in 2005, you'd hear stories like "my parents paid $50,000 for this house in 1975, and now it's worth $300,000."
However, A $50,000 Home Sold for $300,000 Does Not Produce a $250,000 Profit
fa $ 50,000 house sold for $ 300,000 30 years later, many people see this as a profit of $ 250,000. However, little thought should convince you that this is not the case. To do a thorough analysis, you will need to consider the total impact that finance the purchase of the house was the buyer. That is, we need to see all the net additional expenses associated with the purchase. If not, we will be misled.
Housing as an Investment: A More Complete Cost Picture
Here is a sample of some of the most significant additional expenditures -- i.e., beyond "purchase price" -- that need to be factored into a more thorough analysis of residential real estate investments.
- Miscellaneous purchasing costs: In addition to the sales price, the initial cost typically includes application fees, appraisals, inspections, legal fees, and possibly other closing costs. In my experience, this adds thousands of dollars to the initial outlay.
- Interest: With a 5.25% mortgage, for every $100,000 in mortgage principal the buyer will pay another $100,000 in interest over 30 years. Higher interest rates produce even higher total interest payments. In the days when rates were more than 10%, total interest payments were often more than twice as much as the principal amount. (Note: Interest payments are currently tax deductible, so the net impact on the buyer is reduced somewhat.)
- Taxes and insurance: Real estate taxes can be thousands of dollars each year. (Note: these are also currently tax deductible.) In addition, mortgage holders require that homes be insured.
- Maintenance & improvements: These costs never seem to end. From repairing/replacing air conditioners, furnaces, appliances and the roof, to interior & external painting, to .... In addition, longer-term owners typically spend significant amounts on "improvements." These can range from a minor bathroom update to adding a new bedroom or patio, to completely redoing a bath or kitchen. A major improvement can cost as much as a small house! These costs are all part of the cost of owning a home.
As you can see, the purchase price is just the beginning of the total cost of the house. However, too often, many or all of the additional costs listed above is left of the house mental calculation investor.
The 100-Year Housing Price Increase
Finally, most people underestimate the impact of time on the return on their housing investment. That huge increase from $50,000 to $300,000 represents a growth rate of only 6.2%/year when spread over 30 years. (Remember, this is price increase only.
You might be interested to know that the house price increases annual average for the US during the entire 1900 - 2012 period only 3.1% / year - just a shade better than the inflation rate of 3.0% / yes
Evaluating a home purchase is not as simple as reducing the purchase price from the sale price. To evaluate the way that overlooks the factors I've listed above - all of which tend to make the purchase less attractive.
To be fair, there are additional factors that tend to make the purchase more attractive - especially the fact that a) the purchase price is not all paid at the time of purchase, but in installments, and b) the cost of which is usually offset by the abolition of some other costs (eg, rent) ,
100 Years of History Housing Price Index
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Oleh
rama olshop blogger
