Thursday, May 4, 2017

The Truth About Housing Prices

Ten years ago, this blog predicted that housing prices, which had fallen sharply in the mortgage crisis of the mid-2000s, would not recover until 2024.  That prediction may have seemed preposterously negative to many.  But real estate prices have meandered and stagnated since then.  Although some markets have recently enjoyed brisk gains, many others remain sluggish and below their earlier peaks.  Trulia, the real estate website, yesterday released a study that predicted real estate prices nationwide would not recover until 2025.  Looks like my prediction of ten years ago was pretty accurate.  While my analysis and Trulia's aren't directly comparable (I focused on nationwide average prices adjusted for inflation and Trulia used nominal prices unadjusted for inflation while measuring recovery in all housing markets nationwide), the basic conclusion is similar.  It will take a shipload of time for housing prices to fully recover, and the mid-2020's may be when the housing market as a whole could once again start to accentuate the positive. 

Housing historically has increased in value about 1% faster than inflation.  Stocks have tended to average around 3% above inflation.  Buy a house if you need shelter and can afford it.  But pay off the mortgage, don't borrow against the equity, and save and invest in retirement and other accounts for your golden years.  Some people who can't save money end up relying on their homes to finance retirement.  But that's a much poorer choice (pun intended) than taking advantage of the greater potential of stocks and other financial investments.  Your house is your castle.  But it's not your best option for financing retirement.