Why U.S. Home Prices Will NOT Recover. Taking Inflation Into Account, Home Prices Are DOWN To 1895 Levels.
Why U.S. House Prices Won't Recover
Hough: Taking inflation into account, U.S. home prices are down to 1895 levels
By JACK HOUGH
When will U.S. house prices recover? Likely never. But that's no reason not to buy.
The latest S&P; / Case-Shiller numbers, reported last week, show that prices in 20 major markets declined 3.5% over the year through February. They're now back to 2002 levels. If we subtract for inflation, they're back to 1998 levels.
But consider: After subtracting for inflation, prices are also back to 1986 levels. And 1955 levels. And 1895 levels (see chart).
That's because the natural rate of price appreciation for houses is zero after inflation. Prices will eventually stop falling. They'll resume rising. But over the long term, they're unlikely to resume rising faster than inflation.
That's why prospective buyers should stop focusing on the vague hope that house prices will jump from here and focus instead on the functional value houses provide for the money. In most markets, they provide enough of that to make buying a good deal.
To see why house prices and inflation are linked, consider that inflation is a general rise in the price of consumable goods and services. We measure it as a nation just as you might think: pollsters collect prices on thousands of items and statisticians turn those prices into an index, called the Consumer Price Index.
The inflation rate over the year through March was 2.6%. Behind that number is a lot of variation; dairy products got 6.3% more expensive, while utility gas service got 9.1% cheaper.
That's because inflation isn't the only thing that drives individual prices. Short-term supply and demand factors drive them, too. For example, the U.S. has a severe glut of natural gas at the moment. But prices have a way of self-correcting over time. Power companies have already sharply increased their electricity production from natural gas while pulling back on coal.
Few things escape the gravitational pull of the inflation rate forever. Even healthcare and college tuition are showing signs of slowing price growth. U.S. housing had spectacular booms and busts in the 1920s and mid-2000s, but smoothing out the swings and adjusting for inflation, prices have gone nowhere for more than a century.
Houses are ordinary consumable goods: wood, stone and metal bound pieced together through labor. There's no reason to believe they should enjoy a special rate of return distinct from those for, say, apples and shoes. My best guess for the rate of price increase of all three is 2.2% a year over the next 10 years--equal to the rate of inflation.
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