Home Prices to Rise Average of 5 Percent Annually (If We're Lucky)


Home prices are likely to rise. Maybe not today, maybe not tomorrow, but soon and, on average, for the rest of our lives, according to one reading of a common sense report from the Citizens Housing Planning Council (CHPC).

Is this news? For a lot of people, the answer is yes.

The report reminds us of an old rule of thumb in real estate, one that seems to have been forgotten in the real estate boom -- and the bust that followed.

For several decades, between the end of World War II and the start of the most recent housing boom, home prices increased slightly faster than inflation, at an average rate of about 5 percent a year. So by historic standards, it's acceptable to call 5 percent a "normal" rate of home price appreciation, according to the economists at Freddie Mac.

Home prices grew much faster during the housing bubble and collapsed during the housing crash. But once the boom and crash are finally behind us, it's possible to imagine prices returning to their "normal" range.
"While any year or period has its own demographics, regulatory, or inflationary factors that would alter the "normal" line, the Freddie Mac study notes that 5 percent has been the historical post war average increase," writes Harold Shultz, senior fellow with CHPC. "Even in this bubble it's noteworthy that the prices seem to fall back to this basic 5 percent per year increase."

CHPC's chart shows that several major cities in the Case Shiller Index, along with the Case Shiller 10-City Index, have already begun to follow the steady red line that CPHC calls the "Projected 'Normal' Increase." The notable exception is the yellow line that marks foreclosure-plagued Las Vegas, which continues to dive far below "normal."

I believe Harold Shultz's "normal" increase is helpful, because it can help us get back to an understanding of the real value of real estate. Somewhere, beyond the hype and terror of the real estate bubble, homes have value as places to live. It makes sense that the value of a home would grow along with inflation and average incomes. Add a little extra -- about 1.5 percent -- because America's population continues to grow overall as it did through the post-World War II decades, and you get an average growth to home prices of about 5 percent a year.

Of course, I'm not advising anyone to run out and "invest" in the next housing boom. As an investment, a 5 percent annual yield is nothing. I mean "nothing" literally, since most homeowners have a big mortgage that covers much of the value of the home. If the homeowner just refinanced, that mortgage probably now has an interest rate of -- let's round up -- 5 percent.

But a home is supposed to be a place to live, not a scheme to get rich quick.

Harold Shultz's report harks back to an almost-forgotten era when the value of a home was predictable, even boring, rising just a little bit each year, barely beating inflation, like a big savings account with aluminum siding.

Note how I said a savings account -- not a checking account, or a credit card. Once homeowners get back to the business of savings for the long term, there's a reasonable chance home values will revert to their predictable but steady pattern of rising slightly but steadily over a period of decades. Just don't count on your house making you rich.
 

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