I had a conversation on Friday with a client about house prices and how the market "feels" like such a good value. My client remarked: "Houses are a better value than they were in 1999 when I got in the business!"
This comment caused me to reflect on market dynamics for a moment. The housing market in Utah peaked in 1999 but the peak we experienced in 2007 was leaps and bounds better. Time has a way of distorting perceptions because of economic changes and inflation. So, to verify if my client's gut feeling was correct, I decided to do some heavy analysis and compare sticker prices with Consumer Price Index "Inflation-Adjusted" prices.
The findings are shocking in my opinion:
First, lets review the above market history since 1979. Let's follow the brown line for a moment. If you purchased a home in 1979 worth $100,000, that home today would be worth approximately $340,000. Between then and now, your home would have declined in value five separate times from five separate market peaks. However, each successive market peak exceeds the previous one which brings you to today's price point.
Now lets look at the blue line. In real "inflation-adjusted" terms, your home would have declined in value for 12 years even though its sticker price was increasing during that same time. Your home's value lagged abnormally behind inflation quite a bit from 1979 to 1992. Then, in the early nineties, this distortion corrected and there was a tectonic increase (both real and nominal) in the value of your home. After peaking in 1999, the real price plateaued and stabilized again until our most recent housing bubble .
The lesson to take away from this is that, when adjusted for inflation, housing is a fairly stable and predictable store of value. Is it any wonder then that it has been such an excellent tool for creating and maintaining wealth?
Now lets look at the latest housing bubble to measure the local market's progress in finding equilibrium.
This chart is the same as the first except we zoom in on the years 1997-2011. Again, here we are looking at inflation adjusted prices. A quick glance at the chart confirms my client's assertion that homes today are indeed a better bargain than they were in 1999. In fact, we are very close to the market trough of 2004. Keep in mind that this data is six months old. Today we may already be at parity with the previous inflation adjusted market trough. We won't know until a few months when today's data is finally released.
Regardless, what we are seeing is that we are at or very near the natural equilibrium point for housing. There are a couple questions now that need answering:
1. Will the market over-correct?
If it does, that will set up the market for another scenario like the early 1990's when real and sticker price values vaulted after lagging behind inflation. I don't know anyone who bought real estate in the early nineties who is doing poorly. It may be wise to watch this metric. An over-correction is a boon for investors and new home owners.
2. If the market does not over-correct, what's next?
Once the market hits its natural equilibrium point, which on this inflation adjusted chart is around the $100,000 mark, will it hit bottom and plod sideways again? If it does, with inflation increasing, that means that house prices will have to increase with it to maintain that equilibrium. This very well might be the case.
Either way, we are at an important junction. We will either enter a super-bargain phase of the market. Prices hold. And it becomes nearly impossible to go wrong purchasing investment real estate because of its relative value to the dollar. Or, the market will start to see rising sticker prices as nominal values try to keep up with inflation.
Whatever happens, it appears that brighter days are just around the corner.
I like your point, but to me therevis no boom around the corner. Future real estate value comes down to jobs, household formation, population growth, an home ownership desire. High unemployment and lack of ownership desire spell for a long slog that spells sluggish growth.
ReplyDeleteBuy apartments instead!
ReplyDeleteJeff,
ReplyDeleteI agree. We will not see a "boom", as defined by frantic construction of new homes, anytime in the near future. Of the factors that you described, two of the four are positive: population growth and household formation. As long as new homes are not built at the same rate as household formation, pent up demand bodes well for an increase in either rents or house prices...or both. Not the increases of the boom, but perhaps the slow march of appreciation we saw from 2000-2004 would be analogous. Unemployment is holding steady, although at elevated levels, and desire to own is down accordingly. Hence, like you said. "Buy apartments instead!" Single family homes are a great bet as well in these market conditions, plus they are highly liquid when the market bounces back.