6 ms·

The Case-Shiller Index [1] has increased ~3.4% annually since 1900. The general rate of inflation over that same period has been about 2.9%, leaving you with a

The Case-Shiller Index [1] has increased ~3.4% annually since 1900. The general rate of inflation over that same period has been about 2.9%, leaving you with a ~0.5% rate of return. Savings accounts tend to have significantly better returns. Even if you account for the effects of leverage. Note: this doesn't include maintenance costs, taxes, buy/selling fees, inspections, or anything else. So all-in, RE very likely under-performs inflation. [1] https://en.wikipedia.org/wiki/Case–Shiller_index#/media/File:Case–Shiller_Index.svg https://en.wikipedia.org/wiki/Case–Shiller_index#/media/File... ETA: I wonder why this is such a common belief? Is it because most HN (myself included) readers live in booming real-estate markets like NYC and SF? Those markets have done very well in the past 10 years. But remember: places like Detroit, Atlanta, Chicago, and Cleveland also exist.

SubuSS 7y ago
How come you count inflation for house and not for savings? :) As others point out, houses can be easily setup in and around the metros to give a steady 3% return not including appreciation. Considering dense living is the future and the house will materially remain through a market downturn, why wouldn't you diversify your portfolio with a few?
- the_gastropod 7y ago
  If you have enough money to buy a few metropolitan homes to add "diversification" to your portfolio (you know, well north of a $10 Million net worth), you're not at risk of feeling any sort of pain from major market downturns. FWIW, broad-market index funds hold REITS, which give you a market-weighted chunk of the RE market. No need to "diversify" into RE. Doing so only skews your portfolio to be overweight in RE.
javagram 7y ago
Savings accounts aren’t inflation protected. You can buy inflation protected assets - US series I savings bonds, and they offer between 0 and 0.5% fixed rate historically on top of inflation and are limited to $10,000 per person per year. An actual high yield savings account right now gives around 2% nominal interest which is less than inflation. The economist chart of house prices from the article certainly seems to show them outpacing inflation recently. Looking at an index since 1900 is a bit misleading since public policy changed dramatically in the 1950s-70s to constrict supply and juice demand.
- the_gastropod 7y ago
  > An actual high yield savings account right now gives around 2% nominal interest which is less than inflation. The inflation rate in 2019 was 1.76% [1] > The economist chart of house prices from the article certainly seems to show them outpacing inflation recently. Looking at an index since 1900 is a bit misleading since public policy changed dramatically in the 1950s-70s to constrict supply and juice demand. Ok, then look at it from 1970... The results are even worse [1] https://www.in2013dollars.com/inflation-rate-in-2019 https://www.in2013dollars.com/inflation-rate-in-2019
bcrosby95 7y ago
The SF bay area in general has done very well for the past 50 years, not just 10. The San Jose house my parents bought brand new for $34k in 1973 was sold for $95k in 1978. Similar houses in that neighborhood sell for a bit over 1 million dollars today.
- refurb 7y ago
  Depends on what time period you look at.[1] Housing in SF was pretty much flat from 1990-1998. It went down by ~30% in 2008 and took 10 years to match the peak in 2006. [1]https://fred.stlouisfed.org/series/SFXRSA https://fred.stlouisfed.org/series/SFXRSA
- rainyMammoth 7y ago
  This is also a fallacy. Why do you think houses are going for 2 m$ in the bay area? Because the expectation that it goes up is already priced in. Also a good reminder that the return of the past are not an indication of future returns. Buying in the bay area is de facto a speculative investment as rents are comparatively way cheaper. The only incentive for buying at those prices is the hope to sell it for even more to someone else later (see also, the greatest fool theory).
- thorwasdfasdf 7y ago
  Those returns can't continue. When people spend 30% of their income on housing and housing doubles in cost, it means they'll now have to spend 60% on housing. From there it simply can't double again, not without coping strategies exceeding anything reasonable (1 family per room, families living in garages, commutes that exceed 6 hours a day). Every coping strategy has it's limit. You can't commute more hours than there are in the day. YOu can't have more than 3 people living per room (at least not legally). Once you move in with your parents, you can't do it again. etc. I think we've reached that limit in the bayarea (at least the core bay area) so we can look forward to housing returns of roughly inflation. Even with the severe dystopian restriction on supply, it will just force more and more people out of the bay area. Maybe some of the outskirt areas still have room to go up, like Tracy, antioch, brentwood, etc. some of those places haven't yet been gentrified.
conanbatt 7y ago
Multiply that return by the leverage however.

SubuSS 7y ago

How come you count inflation for house and not for savings? :) As others point out, houses can be easily setup in and around the metros to give a steady 3% return not including appreciation. Considering dense living is the future and the house will materially remain through a market downturn, why wouldn't you diversify your portfolio with a few?

the_gastropod 7y ago
If you have enough money to buy a few metropolitan homes to add "diversification" to your portfolio (you know, well north of a $10 Million net worth), you're not at risk of feeling any sort of pain from major market downturns. FWIW, broad-market index funds hold REITS, which give you a market-weighted chunk of the RE market. No need to "diversify" into RE. Doing so only skews your portfolio to be overweight in RE.

javagram 7y ago

Savings accounts aren’t inflation protected. You can buy inflation protected assets - US series I savings bonds, and they offer between 0 and 0.5% fixed rate historically on top of inflation and are limited to $10,000 per person per year. An actual high yield savings account right now gives around 2% nominal interest which is less than inflation. The economist chart of house prices from the article certainly seems to show them outpacing inflation recently. Looking at an index since 1900 is a bit misleading since public policy changed dramatically in the 1950s-70s to constrict supply and juice demand.

the_gastropod 7y ago
> An actual high yield savings account right now gives around 2% nominal interest which is less than inflation. The inflation rate in 2019 was 1.76% [1] > The economist chart of house prices from the article certainly seems to show them outpacing inflation recently. Looking at an index since 1900 is a bit misleading since public policy changed dramatically in the 1950s-70s to constrict supply and juice demand. Ok, then look at it from 1970... The results are even worse [1] https://www.in2013dollars.com/inflation-rate-in-2019 https://www.in2013dollars.com/inflation-rate-in-2019

bcrosby95 7y ago

The SF bay area in general has done very well for the past 50 years, not just 10. The San Jose house my parents bought brand new for $34k in 1973 was sold for $95k in 1978. Similar houses in that neighborhood sell for a bit over 1 million dollars today.

refurb 7y ago
Depends on what time period you look at.[1] Housing in SF was pretty much flat from 1990-1998. It went down by ~30% in 2008 and took 10 years to match the peak in 2006. [1]https://fred.stlouisfed.org/series/SFXRSA https://fred.stlouisfed.org/series/SFXRSA
rainyMammoth 7y ago
This is also a fallacy. Why do you think houses are going for 2 m$ in the bay area? Because the expectation that it goes up is already priced in. Also a good reminder that the return of the past are not an indication of future returns. Buying in the bay area is de facto a speculative investment as rents are comparatively way cheaper. The only incentive for buying at those prices is the hope to sell it for even more to someone else later (see also, the greatest fool theory).
thorwasdfasdf 7y ago
Those returns can't continue. When people spend 30% of their income on housing and housing doubles in cost, it means they'll now have to spend 60% on housing. From there it simply can't double again, not without coping strategies exceeding anything reasonable (1 family per room, families living in garages, commutes that exceed 6 hours a day). Every coping strategy has it's limit. You can't commute more hours than there are in the day. YOu can't have more than 3 people living per room (at least not legally). Once you move in with your parents, you can't do it again. etc. I think we've reached that limit in the bayarea (at least the core bay area) so we can look forward to housing returns of roughly inflation. Even with the severe dystopian restriction on supply, it will just force more and more people out of the bay area. Maybe some of the outskirt areas still have room to go up, like Tracy, antioch, brentwood, etc. some of those places haven't yet been gentrified.

conanbatt 7y ago

Multiply that return by the leverage however.