During the housing bubble (approximately 2001-2006) in some 'bubble areas' house prices rose much faster than salaries. Adjusted for inflation, salaries have actually gone down. Since then house prices have fallen, in those bubble areas up to 20%, in some isolated cases as much as 50%.
The US government reports inflation using a formula that excludes the cost of food and energy. The real inflation figure is several percent higher than reported by the government. This means that the house prices are not as inflated as you may think.
Example: if a house cost $100k in 1999, went up to $300k in 2006, and dropped then to $200k in 2008, then that is 100% increase over 9 years or 8% annually (on average). The government's CPI index would say that $100k in 1999 are $130k in 2008 (http://www.westegg.com/inflation/), because they tell you inflation is 4%. If you include food and energy, inflation is higher. Maybe 8%? Suddenly an annual gain of 8% of that house does not look reasonable!
In fact, if bought at a reasonable price, real estate is an excellent hedge against inflation: Over the past 50 years, on average real estate appreciated one percent above inflation.
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3 comments:
nice take on housing prices vs inflation, however, even inflation-adjusted house prices are in a declining phase at the moment. or aren' they? inflation is still positive, even if its closer to zero, but house prices are declining.
I wrote a short article on how to profit from this. Although unconventional in its advice, it is just food for thought.
check it out, and let me know what you think...
http://simmering-pot.blogspot.com/2009/04/make-money-on-your-house.html
i would also like to ask: what is the normal growth rate of salaries as compared to normal growth of home prices (long term trend).
should there be a convergence in their rates of growth? if so, what would that implicate for house prices, going forward?
thanks again
This has happened because of ongoing slump in real estate market and worldwide economic crisis. I believe this would continue to mid of next year. So not relief for people for now.
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