All Forum Posts by: Justin Colletti

Hi Eric, I think the bigger question we keep coming back to is whether "inflation adjustment" actually adjusts for the full extent of monetary inflation. (Spoiler alert: It probably doesn't :-)

Further, homes in the areas with the greatest "appreciation" may often be the areas that are likely see the greatest declines in downturns, making such "appreciation" from their bubble dynamics relatively short lived.

Add to this that any renovation which leads to an increase in home value cannot necessarily be considered "appreciation". If you spent $30k to renovate a bathroom and it raised the home's value by $20k, it would be silly to call that "appreciation"—even if it was a wise choice from a cashflow, debt leverage or tax perspective.

In real terms, buildings and homes themselves are certainly depreciating assets. This is why they are and always have been treated as such in the tax code.

That said, the value of the property on which the building or home is built could become more desirable for a variety of reasons, thereby increasing its market price.

But strictly speaking, that's not the building or home itself "appreciating". The structure itself is always depreciating. It's the land on which it's built potentially becoming more desirable. (Which to your credit you do seem to acknowledge!)

However, this is not even to mention the larger point: A good portion of any nominal price "appreciation" may very well be from monetary inflation in excess of the small portion of monetary inflation that is captured by the CPI.

In real terms, it could very well be that the real estate that appears to "depreciate" or remain flat in so-called "inflation adjusted" terms is actually depreciating more rapidly in real terms, while in some cases, homes that appear to "appreciate" in so-called "inflation adjusted" terms are remaining flat or even depreciating slightly.

A whole bunch of charts and graphs to that effect have been shared in this very thread! On average, home prices are indeed lower today than they were decades ago in real terms. (Which to your credit you do seem to acknowledge as well!) And those few areas where this is not the case often have low to no cash flows, and are the most likely to be in bubble territory that will soon deflate in real terms.

With all that said, there are still very good deals to be had out there! Real estate can be a very good thing to invest in. But it's wise to be skeptical of "appreciation" for these reasons, and there's reasons that for long term investing, cash flow is king :-) (To your credit you seem to acknowledge this too!)

At the end of the day, getting into chasing appreciation can be very misleading, and often involves investing by looking in the rear view mirror, often trying to make sense of a property that doesn't actually make sense when you consider it from a nuts and bolts profit-and-loss perspective. In many cases, the properties that appreciate the least can even be the best investments if your idea is to buy and hold and collect yield!

It's also worth remembering that even if you do have real appreciation, you have to sell to realize it :-) So goodbye cashflows. (Extracting equity by taking on more debt isn't the same thing as realizing a profit... Thought it can certainly be wise in some cases.)

Anyway I hope some of that makes sense! I'm probably rambling on too much in this thread. It's just a topic I've become a bit too interested in as of late!

Quote from @Darius Ogloza:

Gold's value is built on the fiction that it is scarce.  Once this balloon gets punctured, all of the air comes out.  In the mean time, no rent, no dividend, value based on market whim (i.e. fear).  Nope.  Not gonna fall for that one.   

Hi Darius, it's not clear from your response that you really read what what written. Your idea of gold being "non scarce" was addressed here:

"6. The gold asteroid thing is just silly. It completely ignores the cost to extract the gold and bring it back from space. Right now there is enough gold sitting on the deep ocean floor to change the gold price. Unfortunately, the cost to extract it is so incredibly prohibitive as to make it uneconomical to do so. So there it sits. The same goes for asteroids.

"Remember: A future world where it is easy and cheap to get gold from outer space or from the ocean floor is a world where literally every other thing people make is even easier and cheaper to produce still. Even in such a world, gold holds it relative value and relative stability."

Gold is indeed scarce relative to other goods, and does indeed have the most stable supply and demand characteristics of any commodity or financial asset on earth—empirically speaking. You can confirm this for yourself.

This is due in great part to the physical realities of extracting or producing gold relative to other resources, whether that's on earth, in outer space, or on the deep sea floor. It's just baked into the physics of it. I'd recommend studying this area a bit further. Everything written here you should be able to independently verify for yourself.

The idea of gold's value being based on "whim" is equally as ungrounded in reality. If that were the case, then the simple fact listed under #5 earlier couldn't be true either:

"...whatever the dollar price of oil is, it keeps on trading in a shockingly stable range against gold for literally 150+ years. (As long as we have records.) This is true for not only gold, but basically everything we have data for: houses, stocks, wheat, pork bellies, copper, iron, a college education, grand pianos, etc."

The reason that literally everything else trades in such a stable range against gold is because gold's market price—more than almost anything else on the market—is determined by persistent underlying economics realities, not by "whim".

If it were priced by "whim" you simply could not get these kinds of dynamics. If anything, this actually shows that it would be more accurate to say that the dollar is priced by "whim", as it is far less stable than gold relative to everything else. (And that indeed is much closer to the truth!)

You are getting one thing absolutely right though! Gold doesn't have a yield. But... It's not supposed to have a yield.

If an asset has a yield, it's not "money" and can't be "money". Assets with yields require counterparties and risk and uncertainty. They can't and don't serve as "money", or as a reasonable unit of account.

Gold should not be viewed as an alternative "investment" to real estate, stocks or bonds. It should be views as a superior alternative to holding your excess liquidity in dollars and as an a superior alternative to measuring long term value in dollars.

That's the role of gold. It's not supposed to have a yield. If it did, it wouldn't work in either of those capacities :-)

Hope that makes sense!

Quote from @Darius Ogloza:

@Justin Colletti  I have never understood the fascination with gold.  If you bought an ounce at market in 2011 you paid $1,500.  You'd pay about $1,000 today.  How is it different than any other commodity?  No dividends.  No rents.  Questionable capital gain.  You might as well be holding rocks.

I like to think there will one day Musk's rocket will discover a planet made entirely of gold.  So much so intrinsic value; gold will be handed out as a loss leader.

Apologies Darius, but most of that is a bit off.

1. Your numbers are wrong on the gold price. Gold is about $1900 the last I checked. But you are picking the top of the prior peak as your starting point. If you go by the gold's most recent bottom—around $1050 just before the start of 2016—then it's up nearly 100% in the past 6 years. Not bad. But it's still incredibly undervalued compared to paper assets by any reasonable historical measure. And it is now on the rise again.

2. Gold has arguably been the best performing asset of the 21st century for most of the 21st century. You have to remember that is started at more like $200-$300 at the turn of the millennium. It shot up to nearly $2,000, not too far from a 600%-900% increase in 10 years, before retracting back halfway, which is not uncommon after such a spectacular run. And now, it's clearly on the move "up" again.

3. Gold is a commodity, but it is distinctly different than other commodities in that it is the most stable commodity in value on planet earth. Due to its unique supply and demand fundamentals, it is more stable in long term value than any other physical good or financial asset on earth. (Yes, including dollars.)

4. This means that in reality, gold doesn't actually go "up" or "down". Since it is the most stable asset in value on earth, it is more reasonable to view gold as the denominator. By any reasonable analysis, gold stays relatively static in value, and everything else moves in value around it. If you try to do this kind of analysis with every single asset on earth (dollars included) it quickly becomes clear that using gold as the unit of account is the most sensible option available.

5. If you believe that the gold price is "volatile" because you see it moving up and down in dollar terms, you are like a man on a rowboat on a choppy sea, looking at the shore, wondering why the lighthouse is bobbing up and down. (In this analogy, the dollar is the rowboat, the lighthouse is gold.) 

Obviously, this is silly. Empirically speaking, the lighthouse is more stable than the boat, and gold is more stable than the dollar.

For example, whatever the dollar price of oil is, it keeps on trading in a shockingly stable range against gold for literally 150+ years. (As long as we have records.) This is true for not only gold, but basically everything we have data for: houses, stocks, wheat, pork bellies, copper, iron, a college education, grand pianos, etc.

6. The gold asteroid thing is just silly. It completely ignores the cost to extract the gold and bring it back from space. Right now there is enough gold sitting on the deep ocean floor to change the gold price. Unfortunately, the cost to extract it is so incredibly prohibitive as to make it uneconomical to do so. So there it sits. The same goes for asteroids.

Remember: A future world where it is easy and cheap to get gold from outer space or from the ocean floor is a world where literally every other thing people make is even easier and cheaper to produce still. Even in such a world, gold holds it relative value and relative stability.

That's what's interesting about gold to someone interested in finance: The physics of it, the math of it, and the completely unique supply and demand characteristics. It's unlike anything else in that regard.

7. If you don't "get" gold, that's fine. But try this: Give your wife some. She'll "get it" immediately. And that should be enough for any man to "get" gold.

At the end of the day, is gold a dumb thing to use as money? Absolutely. Yes. It's just less dumb than literally everything else.

Quote from @Igor Avratiner:

In our financial system, monetary inflation and asset appreciation are related. Assets purchased at one point in time appreciate over time compared to the value of money over the same time period. Since nothing exists in a vacuum, it's hard to look at RE appreciation without comparing that to the appreciation of something else. 

 Kind of. But it's slightly different if you really look under the hood of what's going on.

What's actually happening underneath it all is that the house itself is still a depreciating asset... It's just that the dollars are depreciating faster than the house! :-)

I think that's important to recognize. When you look through the lens of seeing things in "real terms" rather than "dollar terms" everything that occurs in the economy starts to make a lot more sense.

Quote from @Eric James:

Quote from @Justin Colletti:

Quote from @Eric James:

One stated benefit of investing in real estate is price appreciation.  However, if you look at inflation adjusted real estate prices for the most part there isn't much appreciation.  There are specific points in time like 2006 (we know what followed that) and right now when real estate exceeds inflation adjusted prices. However,  over the long term it doesn't really appear that real estate appreciates much beyond inflation. Is real estate appreciation a myth?

https://www.supermoney.com/inf...

"We can debate whether this is a better investment than x but as to the initial question you posed, there is no doubt that growth in this market has clobbered the rate of inflation (as measured by CPI)."

And therein lies the rub. As detailed elsewhere in this thread, the CPI does not measure the rate of inflation. At least not by any sensible or classical definition of the term.

Rather, it captures the prices of a limited basket of consumer goods, which are likely to see naturally falling prices in real terms due to increases in productivity, improvements in technology, outsourcing of labor, increased capacity and so on.

If the price of a fixed basket of goods would have dropped 20% against a stable monetary baseline, but instead its price rose by 2%, it would be crazy to say "Well, inflation was only 2%!"

Yet that's what some people try to get you to do.

No, the inflationary price increase in that context was 22% relative to where it would otherwise be. At least.

And that's before we factor in substitutions, hedonic adjustments, and the fact that goods, services and assets that experience the greatest inflationary price increases aren't even included in the basket of goods. (Oil, rent, education, medical care, home prices, etc.)

This is why the classic definition of inflation is far more sensible. Inflation is when they create the currency. The price dynamics that occur after this are an entirely separate can of worms.

 The question of how to measure inflation is a key part of this question.  As Russell mentioned,, one issue is that real estate prices are included in the calculation of the CPI. Also, many think CPI (intentionally) underestimates inflation. Another problem is that the calculation of CPI has changed over the years. Using the 1980 CPI formula to calculate inflation yields a current inflation rate that is around 16%, rather than 8%.

http://www.shadowstats.com/alt...

Some of that is definitely right Eric! But it's even worse than that.

First, the commonly stated CPI statistics do not actually include real estate price increases. Rather, they use something called "Owner's Equivalent Rent". This is based on survey data about what homeowners THINK they would have to pay to rent their house if they had to rent it.

Many homeowners can be decades behind in their thinking about what their home might cost to rent, and this figure systemically and significantly understates actual upward changes in rents and home prices. But that's not all.

After that, you have to think about how home price or rent increases are weighted against other goods. Home prices and rents are a huge component of people's actual monthly expenses. Often, the largest part of their monthly expenses. And yet, the increases there are not really factored in as such into the indexes.

On top of this, there's the fact that the analysts make subjective "hedonic adjustments" to further downplay price increases that have actually occurred.

Yes, you are correct that if they used the methodology of the past, CPI increases would be at least twice of what it they are today. But even that understates the effect of inflation.

This still does not include asset price inflation, the amount of capital required to fund a retirement, and so many other factors. But most notably, it also doesn't factor in that most prices in the CPI would naturally fall—not rise—against a stable monetary baseline. So to do this properly, you'd need the counterfactual of how much prices would have fallen if there hadn't been any monetary inflation to begin with!

As written earlier:

"If the price of a fixed basket of goods would have dropped 20% against a stable monetary baseline, but instead its price rose by 2%, it would be crazy to say "Well, inflation was only 2%!"

"Yet that's exactly what some people try to get you to do.

"No, the inflationary price increase in that context was at least 22% relative to where it would otherwise be.

"And that's before we factor in substitutions, hedonic adjustments, and the fact that goods, services and assets that experience the greatest inflationary price increases aren't even properly included in the basket of goods. (Oil, rent, education, stocks, medical care, home prices, etc.)

In reality, all of the natural lowering of our cost of living we might would experienced without the monetary inflation would need to be factored into these baskets for them to begin to make any sense. And even then, they'd still have too many issues to count.

Bottom line is that by the more sensible classical definition, inflation is when the currency is created. The exact consumer price dynamics are far too complex to properly index in this way, even if the people who print the currency had an incentive to properly index them—rather than having incentives to understate them instead.

Quote from @Jonathan R McLaughlin:

@Justin Colletti actually the best way to value it—I submit—is what does the action of owning real estate allow you to do?

Live well or poorly according to your lights? Help others or be a burden?

The answers ultimately determine the value of your investment…cash return, appreciation, taz benefits are only chess (or checker) pieces used to reach that goal.

Are u better or worse off because you invested in real estate?

That's absolutely a good way to look at it Jonathan!

I'd only offer that if your quality of life, or your ability to have more impact is your goal, then the best objective metric we have to help you evaluate that is how much headache vs how much cash flow you get out of the property! (The headache may be hard to numerically measure, but the cashflow isn't. :-)

As far as "appreciation", well that's the question we are trying to answer in this thread. And if you measure real estate properly—by comparing it against either its cashflows, or against another asset of relatively stable value—you find that on a national average level, housing doesn't really "appreciate" at all.

Houses and buildings are indeed depreciating assets. (Even though the land that they are sitting upon may see more demand over time in certain areas. And even though the dollars you measure them in may be worth far less over time.)

That said, they tend to depreciate at a rate significantly slower than the dollar does, so if you use debt wisely and buy well, you're likely to come out ahead, even on that basis alone.

...But that's not the house appreciating necessarily. That's the dollars you are paying back depreciating more quickly than the house.

I think it's good to look at the structure underneath things, and that's what's going on here.

Hope that makes sense!

Quote from @Joe Villeneuve:

Quote from @Justin Colletti:

Quote from @Joe Villeneuve:

Quote from @Justin Colletti:

Quote from @Eric James:

One stated benefit of investing in real estate is price appreciation.  However, if you look at inflation adjusted real estate prices for the most part there isn't much appreciation.  There are specific points in time like 2006 (we know what followed that) and right now when real estate exceeds inflation adjusted prices. However,  over the long term it doesn't really appear that real estate appreciates much beyond inflation. Is real estate appreciation a myth?

https://www.supermoney.com/inf...

"We can debate whether this is a better investment than x but as to the initial question you posed, there is no doubt that growth in this market has clobbered the rate of inflation (as measured by CPI)."

And therein lies the rub. As detailed elsewhere in this thread, the CPI does not measure the rate of inflation. At least not by any sensible or classical definition of the term.

Rather, it captures the prices of a limited basket of consumer goods, which are likely to see naturally falling prices in real terms due to increases in productivity, improvements in technology, outsourcing of labor, increased capacity and so on.

If the price of a fixed basket of goods would have dropped 20% against a stable monetary baseline, but instead its price rose by 2%, it would be crazy to say "Well, inflation was only 2%!"

Yet that's what some people try to get you to do.

No, the inflationary price increase in that context was 22% relative to where it would otherwise be. At least.

And that's before we factor in substitutions, hedonic adjustments, and the fact that goods, services and assets that experience the greatest inflationary price increases aren't even included in the basket of goods. (Oil, rent, education, medical care, home prices, etc.)

This is why the classic definition of inflation is far more sensible. Inflation is when they create the currency. The price dynamics that occur after this are an entirely separate can of worms.

In the end, what does this all mean, in dollars?

 "in the end what does this all mean, in dollars?"

That dollars aren't the best thing to measure value with. Especially not over long periods. Better perhaps, to measure value with something that is more stable in value?

You can try to do this by measuring every asset against every other asset to see what their relative values are over long periods. That can be very instructive. If you do this, you will likely find that there is one asset that is more stable in value relative to all other assets over long periods.

Incidentally, it's exactly the asset keeps on getting selected as money—and therefore, as the primary unit of account—again and again throughout history. 

This makes sense... Because it keeps on behaving this way, whether or not people use it as money. That's precisely why it works so well as money, and why it is inevitably selected as the base money again and again throughout history, every time it becomes obvious that all the alternatives just don't work as well.

(Spoiler alert: It's gold. But don't take my word for it. Do this analysis for yourself. I've yet to find someone who has done so and come up with any other recommendation for the most stable possible unit of account over reasonably long periods. Even a "basket of commodities" doesn't work as well, because every other commodity in the basket would be less stable than just using gold. And yes, gold is substantially more stable than dollars, especially over long periods.)

Long story short:

The best way to objectively value a property is by the cash flow it will yield. (That's what we're all here to do, right?)

The next best way is to value it relative to the most stable asset you can find over long periods. (That's gold.)

The next best way is to value it relative to all other real assets.

The next best way is to value it relative to all other financial assets.

The last best way is to value it relative to dollars. (This usually doesn't work too bad for shorter term analysis. But it makes long term analysis much more difficult, as the length of the yardstick keeps changing over time.)

If you won't measure in dollars, why are you investing in ...anything?  Of course dollars are the best, and in the end the only way to measure REI.

I'm not sure I understand the question Joe. If I use a better yardstick to measure my returns, it doesn't change the amount of returns I get. I still have the same returns. I just have a better measurement of them.

The underlying returns are the same, regardless of what asset or method you use to measure them over long periods.

Similarly, if we measure the height of a building using a wooden ruler or a rubber band, the actual height of the building is still the same. Using a better or worse measurement doesn't change the height of the building.

Same goes with valuing properties with gold vs dollars.

Hope that makes sense!

Quote from @Joe Villeneuve:

Quote from @Justin Colletti:

Quote from @Eric James:

One stated benefit of investing in real estate is price appreciation.  However, if you look at inflation adjusted real estate prices for the most part there isn't much appreciation.  There are specific points in time like 2006 (we know what followed that) and right now when real estate exceeds inflation adjusted prices. However,  over the long term it doesn't really appear that real estate appreciates much beyond inflation. Is real estate appreciation a myth?

https://www.supermoney.com/inf...

"We can debate whether this is a better investment than x but as to the initial question you posed, there is no doubt that growth in this market has clobbered the rate of inflation (as measured by CPI)."

And therein lies the rub. As detailed elsewhere in this thread, the CPI does not measure the rate of inflation. At least not by any sensible or classical definition of the term.

Rather, it captures the prices of a limited basket of consumer goods, which are likely to see naturally falling prices in real terms due to increases in productivity, improvements in technology, outsourcing of labor, increased capacity and so on.

If the price of a fixed basket of goods would have dropped 20% against a stable monetary baseline, but instead its price rose by 2%, it would be crazy to say "Well, inflation was only 2%!"

Yet that's what some people try to get you to do.

No, the inflationary price increase in that context was 22% relative to where it would otherwise be. At least.

And that's before we factor in substitutions, hedonic adjustments, and the fact that goods, services and assets that experience the greatest inflationary price increases aren't even included in the basket of goods. (Oil, rent, education, medical care, home prices, etc.)

This is why the classic definition of inflation is far more sensible. Inflation is when they create the currency. The price dynamics that occur after this are an entirely separate can of worms.

In the end, what does this all mean, in dollars?

 "in the end what does this all mean, in dollars?"

That dollars aren't the best thing to measure value with. Especially not over long periods. Better perhaps, to measure value with something that is more stable in value?

You can try to do this by measuring every asset against every other asset to see what their relative values are over long periods. That can be very instructive. If you do this, you will likely find that there is one asset that is more stable in value relative to all other assets over long periods.

Incidentally, it's exactly the asset keeps on getting selected as money—and therefore, as the primary unit of account—again and again throughout history. 

This makes sense... Because it keeps on behaving this way, whether or not people use it as money. That's precisely why it works so well as money, and why it is inevitably selected as the base money again and again throughout history, every time it becomes obvious that all the alternatives just don't work as well.

(Spoiler alert: It's gold. But don't take my word for it. Do this analysis for yourself. I've yet to find someone who has done so and come up with any other recommendation for the most stable possible unit of account over reasonably long periods. Even a "basket of commodities" doesn't work as well, because every other commodity in the basket would be less stable than just using gold. And yes, gold is substantially more stable than dollars, especially over long periods.)

Long story short:

The best way to objectively value a property is by the cash flow it will yield. (That's what we're all here to do, right?)

The next best way is to value it relative to the most stable asset you can find over long periods. (That's gold.)

The next best way is to value it relative to all other real assets.

The next best way is to value it relative to all other financial assets.

The last best way is to value it relative to dollars. (This usually doesn't work too bad for shorter term analysis. But it makes long term analysis much more difficult, as the length of the yardstick keeps changing over time.)

Quote from @Eric James:

One stated benefit of investing in real estate is price appreciation.  However, if you look at inflation adjusted real estate prices for the most part there isn't much appreciation.  There are specific points in time like 2006 (we know what followed that) and right now when real estate exceeds inflation adjusted prices. However,  over the long term it doesn't really appear that real estate appreciates much beyond inflation. Is real estate appreciation a myth?

https://www.supermoney.com/inf...

"We can debate whether this is a better investment than x but as to the initial question you posed, there is no doubt that growth in this market has clobbered the rate of inflation (as measured by CPI)."

And therein lies the rub. As detailed elsewhere in this thread, the CPI does not measure the rate of inflation. At least not by any sensible or classical definition of the term.

Rather, it captures the prices of a limited basket of consumer goods, which are likely to see naturally falling prices in real terms due to increases in productivity, improvements in technology, outsourcing of labor, increased capacity and so on.

If the price of a fixed basket of goods would have dropped 20% against a stable monetary baseline, but instead its price rose by 2%, it would be crazy to say "Well, inflation was only 2%!"

Yet that's what some people try to get you to do.

No, the inflationary price increase in that context was 22% relative to where it would otherwise be. At least.

And that's before we factor in substitutions, hedonic adjustments, and the fact that goods, services and assets that experience the greatest inflationary price increases aren't even included in the basket of goods. (Oil, rent, education, medical care, home prices, etc.)

This is why the classic definition of inflation is far more sensible. Inflation is when they create the currency. The price dynamics that occur after this are an entirely separate can of worms.

Quote from @Account Closed:

Quote from @Justin Colletti:

Real estate often does outpace increases in the CPI yes, but that's not the same thing as "inflation", at least by the better, classical definitions of the term.

For an improved view of the picture, compare the cost of the median US home to other assets. For example, the price of gold, the price of stock indexes, the price of commodities and so on, and you will find that despite the recent nominal increases, US real estate is actually closer to its historic lows than its historic highs.

Here's a chart that is particularly telling in my view: The Case/Shiller housing index relative to gold. It tells a similar story to the chart shared earlier of the Shiller index relative to M2 and income, but even better in my opinion, as average wages can also fluctuate in real value:

Here's a closeup of the past 60 years or so:

A confounding factor here is that although home prices are actually down in real terms, rents and wages are also down in real terms compared to historic highs.

 Another way to look at things is that the dollar has lost so much value, compared to gold, that it appears prices have gone up. It's true that it takes more "dollars"  but is simply screaming that the dollar is now worth so much less. 

Real estate takes maintenance, replacements, property taxes, insurance and other costs. Physical gold does not.

When we bought our first house in Seattle in 1986 it cost the equivalent of 242 ounces of gold. Interest rate was 8% by the way. Today it is valued at 781 ounces of gold. That my friend, is actual appreciation . . .  or a gigantic bubble.

It doesn't take into account the total remodels, taxes, payments and improvements over that period and cost of sale if you liquidate. And, if Amazon & so on, had moved to Kokomo Indiana instead of Seattle, the property would be worth far less. That is something you can't control and can't plan for.

 Great reply @Account Closed! 

A couple things to note here: Yes, there are parts of the country where property values have increased substantially, even in terms of gold or other assets that do a better job of approximating true monetary inflation than the CPI does. But there are some big caveats here, one of which you have noted:

1. You mention how much work you put into the home to realize that appreciation in real terms. Great of you to point out! I don't know how much work you did, but it's possible you even improved the quality or size of the house from where it started. In any case, looking simply at the before an after value does not factor this in.

2. There are areas where property values do appreciate in real terms... But this isn't because of the house itself increasing in value. Rather, it's because the property on which that home sits is now experiencing higher demand! You still have a house that's a depreciating asset. But that is offset by increased demand for the physical property upon which it is sitting. Magically transport that house to somewhere else where demand hasn't risen and you will see it has indeed depreciated in value relative to when it was first built, all else being equal.

3. In those areas in the country where the underlying property may have appreciated in real terms, it certainly is possible there could be bubble dynamics at play. Places like NYC, San Francisco, Seattle etc., are among the most likely to experience that kind of thing. Some of their appreciation relative to other areas and relative to the national average may be relatively short lived. Many big cities have been through waves where they have been seriously overvalued and seriously undervalued over the years. NYC is a great example of this, but is not unique in this regard.

But to illustrate the larger point that the home itself is a depreciating asset—even if its price were to appreciate in real terms—we have to examine the possible "counterfactual" scenario.

Imagine a scenario where you had the same exact piece of property with the same type, size and layout of home, but in one example, the home was built in 1970, and in one example it was built in 2020. The newer home would be worth more than the old one. This would be true even if we could control for the quality and amenities of home at the point it was built! Even if the homes were identical at the outset, one has experienced wear and tear and the other hasn't.

This would still be the case if the home "appreciated" in real terms due to increased demand for real estate in that area. But it's fair to say that was appreciation of the underlying property due to increased demand. Not appreciation of the building itself, which is depreciating in the background, even as the market price for the property increases at a faster rate.

The only way you could keep this from being the case would be to invest a ton of money into that older depreciating home to keep it from depreciating further in real terms, or perhaps even increasing its size or quality from where it started. But again that's not really a fair comparison, because we're spending money to improve the property, so it's not really "appreciation". They are paid upgrades. Hopefully ones you made an investment return on, but also, maybe not.

Hope that makes sense!