Prices of real estate continue to decline, industry protestations to the contrary notwithstanding. Schwab discusses it here. I’ve dispensed with the investment portions, but present only the surprising point author, Rande Spiegelman, VP Financial Planning made about home as inflation hedge:
Q.Despite the past few years of declining prices, doesn’t home ownership provide a good inflation hedge over the long term?
“Despite wide fluctuations during shorter time periods, national residential real estate has indeed kept pace with inflation during extended periods. However, due to the mortgage crisis of the past few years, home price appreciation did not quite match inflation for the 10-year period ending December 31, 2010 (see table below).
“Overall, the average annual appreciation of residential real estate has underperformed stocks and fixed income during the past 20- and 30-year periods. In fact, during the past 30 years, residential real estate has underperformed the return on Treasury bills (see table below). And that doesn’t include mortgage-interest expenses, insurance, property taxes, repairs and maintenance!
“In short, while home equity is rightfully included as part of personal net worth, it’s best to think of a home as a place to live and not as an investment. Of course, some locations have done better than others. Also, keep in mind that commercial, or rental, real estate has performed better, about on a par with stocks (as long as occupancy remains steady and rents keep up with inflation). [he then recommends REITs, which as regular readers know, IFO eschews].
How Annualized Residential Real-Estate Returns Compare to Other Assets and Inflation
10 Years 20 Years 30 Years
1/2001-12/2010 1/1991-12/2010 1/1981-12/2010
Residential (price change only) 2.0% 2.7% 3.5%
S& P 500® index 1.4% 9.1% 10.7%
Barclays Bond Index 5.8% 6.9% 8.9%
T-bills 2.3% 3.6% 5.3%
Consumer Price Index 2.3% 2.5% 3.2%