I’m still surprised by the number of people who believe that home values will magically return to those of 5 years ago; and if you are one of those looking to recoup your home’s lost value, it’s not happening—ever. How can I be so certain? It’s pretty easy once you look at the facts.
Home values have historically appreciated at a rate near the rate of inflation—once you adjust for the differences in size and discount for geographic anomalies. However, that trend changed when we began the recovery from the “tech-bubble” of the last decade. As the Fed encouraged easy credit (an understatement) and the mortgage industry discovered they could package and market sub-prime loans at premium prices, we saw a housing boom unlike any we’ve ever experienced. Driven by increased demand, home prices skyrocketed, rising 10% or more per year in some of the hottest areas.
And now that prices have fallen by 30% or more (60% in the worst areas), owners want to know when they’ll recoup the value lost during the crash. Many, nearing retirement, had viewed their accumulated equity as a cushion to supplement their retirement income; others saw it as a fast track to “easy street,” and have already spent their “windfall.” However, all want to know when values are coming back, but unfortunately they are not—not next year or the year after—not ever.
To understand why I would say “not ever,” we must look at what drives home prices up. It’s not that homes somehow become more valuable over time or that ownership rates historically trend upwards. Disregarding the growth in the average home’s size over the past few decades and ignoring the geographic appeal of a few specific areas, home prices have increased because of inflation. As the dollar became worth less—some would say worthless—it was necessary for home prices, along with the prices of other goods and services to follow. When we look at the trend-line for home prices over the past fifty years, it has closely followed the rate of inflation.
What that means is that home prices WILL increase in the future, but the majority of that increase will be consumed by the corresponding increase in the rate of inflation. If we sell that home, those dollars received will have less value than those of today—given the likelihood that the U.S. will continue to experience some degree of inflation.
The home prices experienced during the housing bubble we’re artificially high—the GRAPH below from Calculated Risk demonstrates just how far out of line they were—and their fall was to be expected. The bubble prices were not based in an inherent increase in a home’s value, but were artificially driven by forces not directly related to housing; and, barring a direct attempt by the government to create another bubble, they cannot return.
What we’re left with is the natural progression of housing following inflation. Home prices will not equal those of the bubble for many years unless we experience—as some have predicted—a significant increase in the rate of inflation. But once again, such an increase will serve only to compensate for a loss in the value of the dollar; it cannot return the losses suffered following the crash, for those dollars have been lost forever.
A “recovery” in housing won’t feel like recovery at all. The best we can hope for is stabilization and a return to the natural trend of home prices following the rate of inflation. To anticipate a sudden and dramatic upwards movement is only wishful thinking, and it is wishing for a return to the very conditions that caused the collapse.
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Margaret Woda, REALTOR and Associate Broker