All Forum Posts by: Account Closed

The house pricing index is actually a tool utilized extensively by housing economist at the Federal Reserve. Just about every research publication by the federal reserve that has to do with home price movement, uses almost exclusively the home price index which is produced by a government agency. This isn't some sort of 'hit or miss' home value estimation algorithm by Zillow.

Based on the scope of area and transactions covered and considering that it only looks at repeat sales of the same group of houses and going back as far as 1975, it is one of the most reliable sources of home price movement there is. 

By the way, my response to the thread was not to defend investment in real estate or properties as some sort of inflation immune instrument but purely to clarify that the hypothesis (subject of the thread) wasn't/isn't scientifically verifiable with current data. I am also no stranger to economics or economist and there almost isn't any entity with more economist on the payroll than at the Federal reserve.

Regarding income growth, I thought you should have caught this earlier but some clarification is required. 

It is using the U.S household income but I had (for some reason) utilized series that had already been adjusted for inflation so a correction is required there.

So the unadjusted US household income growth rate (without accounting for inflation) seems to suggest that the median income grew from $20,712 in 1984 to about $51,915 in 2013 and that about 104.6% in 29 years or 3.61% per year.

Between 1984 and 2013:
Home price growth: 6.16% per year
Inflation growth: 4.37% per year
Household income growth: 3.61% per year

To recap, there isn't credible information going back 30 or 40 years that says 'home prices will never outpace inflation', it actually says that it has. Whether 30 or 40 years is adequate, if I can't find something concrete in the last 30 or 40 years that substantiates a hypothesis, I don't necessarily need to look 100 years.

Information regarding the housing prices index may be accessed here:

https://research.stlouisfed.org/fred2/data/USSTHPI.txt

Really? 40 years to any investor is a mighty long time. Trying to use data from the 1800s in today's environment which is remarkably different in so many ways may also not be sound.

If there seems to be a disparity between the growth rates of income, house prices and inflation, that is because there is. There also doesn't seem to be very much correlation (in terms of magnitude) between income growth rate and the growth rates of house prices or inflation.

Between 1984 and 2013 (based on readily available credible data), median income growth rate per year has only been 0.29% per year or a meager 9% in 29 years. Compared to average house price growth of 6.16% per year or 178.6% in 29 years. Average inflation however within this period increased 4.37% per year or 126.7% in 29 years. 

There appears to be more correlation (in terms of magnitude) between house price growth and inflation than with income growth and house prices or inflation. This is probably why the government would want to be involved in trying to address economic issues that appear to be depressing income growth significantly.

The fact that is verifiable is that income growth has not kept up with inflation or that something beyond dramatic would have to occur for income growth to outpace inflation.

Are you defining long term here as infinity? Seems like there would be some issues of practicality with that. For investment purposes 30 years would definitely be considered long term as shorter periods can and have been considered 'long term'. 

Regarding some of the questions, this is Freddie Mac's description of its methodology which does seem as a reliable means of having some idea of home price movement:

"The Freddie Mac House Price Index (FMHPISM) provides a measure of typical price inflation for houses within the U.S. ...Series are available at three levels of geographical aggregation: Metropolitan Statistical Area (MSA), state, and national. All series begin in January, 1975. The national index is defined as a weighted average of the 50 state indexes and Washington, DC. ..."

The house price index only goes back to 1975. Whether looking just at the last 30 years or as far back as 1975, house prices outpaced inflation regardless of which interval is being utilized.

This might help:

http://www.freddiemac.com/finance/house_price_index.html

It appears there is an issue with the statement: "House prices will never outpace inflation over time, its impossible"

Historical data for both the housing price index and inflation is publicly available information. Within the last 30 years for instance (between 1984 and 2014), the average yearly inflation was 2.84%. The average increase in home prices within the same period was 6.46%. 

What real fact is this assumption based on?

This sounds like a good problem to have. Is the property clear of any mortgage or liens? Current worth of property? Thought about flipping it or just drawn to renting it?

Greetings everyone. For foreign investors here in the U.S., how have some of your earnings in the U.S been taxed? This could be either earnings from rehab projects or rentals. Do you have a preference in terms of structure that may have a favorable impact on tax liability?

 It isn't a reliable route for getting discounted properties if flipping is the intent.

 It sounds like you are planning to loose some money.

The rule of 72 has been around for some time (since 1494) but is probably a tool that could still be utilized by many 'buy and hold' investors for estimation purposes. Using the example, 12 years for a rehabber is an eternity though to have to wait for funds to double.

Some issues... the rule of 72 doesn't necessarily account for inflation and the 'doubling' mentioned is in nominal terms. For real estate investments that utilize debt for financing, the 'doubling' in real terms could be longer.

Example, based on the housing price index data, within the last 30 years (between 1984 and 2014), the housing price index increased from 118.73 to 348.88 (193.84% in 30 years or 6.46% per year). So if you bought a house for $118,730 in 1984, the house was probably in the $348,880 range in 2014 with a ‘nominal’ profit of $230,150.

If you however factor in the total interest paid during the 30 years, using an 8.5% fixed rate, the net increase realized in 30 years is not $230,150 but $20,224. If you were to add inflation also to the equation, then after 30 years the very rationality of waiting that long then becomes a serious question.

If 8.5% seems high for a conventional mortgage, mortgage rates in 1984 were in the 13% range (18% in 1981 and still in double digits by 1986). So on a $118,730 property purchased in 1984 you actually spend a total of $328,656 ($209,926 just interest payments) if you were lucky to find an 8.5% fixed mortgage somewhere. Which practically did not exist.

It is however a tool that could be utilized for some types of estimation.

Zillow and the other websites may be useful at times for various reasons but the better question might be: 'how inaccurate are the estimates? Often this might be substantial. 

You want to have some sort of MLS based comps. If there isn't readily available MLS access (and realtors will claim to be busy), there is also the 'cost to replace' and 'income based' approach to determining value.

There are also at least 5 different sites out there similar to zillow that will also provide 'their version' of an estimate; you could use the average for further comparative analysis. The variance in values from each of these sites though on the same property may range from disturbing to frightening but they help in getting some sort of idea where the appraisal is likely to get in at.