Home Prices Haven't Gone Up in 100 Years. Is RE a Bad Bet?

Question

From my experience as an entrepreneur, and more recently an investor, I'm surprised by how many people never really think about inflation. Here's the case schiller inflation adjusted housing chart going back to the year 1895. Notice the price difference in the average home in 1895 and 2011...zero. And on a apples to apples comparison home prices may be lower in 2011 due to the fact that the "average" home size has increased so much.

To be clear, I think real estate is a fantastic bet...one of the biggest reasons being inflation!

What does everyone else think? Does anyone have any good strategies to profit from inflation?

Thanks,

George

To be clear, I think real estate is a fantastic bet...one of the biggest reasons being inflation!

What does everyone else think? Does anyone have any good strategies to profit from inflation?

Thanks,

George

Zachary Curry · Answer

I agree to a certain extent.

The story goes there was two lumberjacks one older and one younger. The older had records of trees cut down and a reputation unchallenged. The younger finally reaching a point he felt confident to challenge proposed a test. They took one entire day to compare who could cut more trees.

The older lumberjack took a 15min break every hour, and the younger worked straight through and look over and saw the older taking breaks and thought for certain he would win.

At the end of the day they counted....

The older lumberjack had almost double the trees cut down. The younger couldn't understand and ask, "but how did you do so much more with taking breaks I worked so hard and never stopped?"

The older lumberjack said every hour I took 15 minutes to sharpen my axe.

Understanding markets, and learning new ways to leverage investments is never a bad idea.

Also the one who made the most money in the gold rush was not the miners rather the shop that sold shovels.

Account Closed

Account Closed · Answer

I can't see anything beating real estate over the long term, no matter what the economy does.

There will always be people that look for a reason that something can't work; like this inflation number.

Alternatively, there will always be people ( like me) that ignore numbers like this because we're   out chasing after deals.

I don't  claim to be smart enough, or have enough time, to understand the implications of that number.

Here's  what I do know.   If I make an intelligent house purchase today, it will subdue the effects of anything the economy does over the long run.

So, I'm  working  on getting my hands on as many as I can, as quickly and intelligently as I'm  able.

I recommend that strategy to everyone here.

Russell Brazil · Answer

People who quote Case/Schiller always ignore the fact that real estate is typically purchased with leverage. Even if you were to buy a property that only went up at the inflation rate (I prefer buying in hot neighborhoods to beat inflation) and the property only created enough income to cover the PITI and expenses (I prefer to have a cash on cash return of 10%), then real estate would still by far outpace the Case/Schiller index since it would have been purchased using someone elses money. There is a reason  that the vast majority of american millionaires made their money by owning real estate.

Chris Martin · Answer

Appreciation is just one piece of the 'value' equation. For rented property, the return acts like a dividend in the stock market. An unleveraged property, using the 50% rule of thumb for expenses and the 1% rule of thumb for rental rates, will return 6% on your asset. In addition, there have historically been favorable taxable benefits against current income (from depreciation allowance) and favorable recapture rates. So inflation adjusted 'raw' appreciation is only part of the equation... add leverage on well selected income property and returns on investment can be improved dramatically

Samuel Sedore · Answer

@Zachary Curry Love that story first time hearing it.

I would have to agree with the above though regarding your comparisons of national averages. At face value real estate is a great hedge against inflation in any market, but its the leverage that wins the day in most cases. Simply for the fact that you would have a hard time buying 300k worth of stocks for 60K.  While getting great tax benefits at the same time.

Also it looks like gold competes.

http://www.macrotrends.net/1333/historical-gold-pr....

Zachary Curry · Answer

George,

I love this question!

You are evaluating national average which is the equivelent of identifying shale to deep sea drilling. Costs and ROI vary, same as New York to Kansas. Supply and Demand.

Additionally when evaluating stocks from a 50 day average over 200 day average and seeing buy markers in reference to the VAR, RE has a more predictable trend.

If you really would like to maximise profits then use RE as copper. Once you purchase a cash flow positive property (commerical or otherwise) leverage to purchase additional commodities, evaluating the growth in equity conversly to debt servicing costs to increase your overall portfolio with non-correlated risks.

I am working on a VBA to aggregrate this comparision and to draft strategies.

Short answer: find a blending of both, while RE is has less liquidity it is much easier to encumber for lines of credit, etc, while maintaining your ownership, tax benefits, and income potentials.

Home Prices Haven't Gone Up in 100 Years. Is RE a Bad Bet?

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