Wow, housing has jumped 1,196% from 1970 or a simple average annual rate of 28.5% over 42 years. That's smoking good! Hard to argue with those numbers isn't it? Anyone owning a home in 1970 and selling it later reaped a windfall of good fortune for sure as did many others over the years. This chart suggests anyone buying now should feel good knowing "that homeownership in California is a solid long-term investment."
Well, is the historical reference to housing appreciation going to have any correlation to how housing might perform going forward? I have my doubts. So, before jumping into the foray of homeownership, think about the economic backdrop in which we live as it seems quite different then these four preceding decades.
First, the Federal government only started going into debt in the early 1980's and it has always seemed manageable as a % of GDP. We are now approaching clearly unmanageable levels at nearly $16.7 trillion or over 106% of GDP. Modest forecasts puts this well above $20 trillion in a few short years. Current economic theory states for developed countries this is still manageable but we all know it's a runaway government debt-train that can't possibly stop without crashing hard...and soon as GDP can also shrink (go figure!). A shrinking GDP and burgeoning national debt would surely make mince-meat of those low three-digit manageable percentages.
Second, the Federal Reserve has established an unprecedented monetary policy that has pushed interest rates down to historic lows and has resulted in the printing of trillions of "diluting" dollars to pump up the banking system and consumerism. This has never happened in any of those four preceding decades so the true consequences of these actions are still to be realized. Just know that the historic bond buying of the Fed can only last so long and at some point, the bond buying will stop. And...rates will rise - quite substantially considering the then size of our national debt and knowing the average maturity of this debt is just over four years; too short for my comfort. Wow! at $20 trillion that equates to finding nearly $5 trillion of U.S. debt buyers each year. So, it's not "if" but "when" rates rise that needs to be considered when looking at housing as a good long-term investment.
Third, the majority of housing price appreciation during this period is really inflation based and according to our government at present inflation is relatively non-existent with deflation posing a bigger risk. Want to see how quickly the government can make such a sizable return on this chart substantially disappear? Well, factoring in the loss of U.S. dollar purchasing power over this period of time yields a much more telling line on housing. One U.S. dollar in 1970 is worth 17 cents in 2012 or a decline of 83%. So, really that 2012 median home price of $319,340 is worth only $54,288 in 1970 dollars due to the effects of inflation. This makes the true annual market driven supply/demand price appreciation much more comprehensible at 2.86% over this period of time. This would be fairly consistent with population and real economic growth not government inflated "wealth" creation.
So what does that mean? Well, in California, we have just seen an 11.6% jump in the median home price from 2011 and in most markets there is further evidence that the supply part of the equation is well out of line with the demand side (thanks to the aforementioned historically low interest rates and many other factors which I'll blog about separately). For example, over 72% of currently listed properties are seeing multiple offers according to the California Association of Realtors. This unbalanced market shift is skewed and therefore driving prices higher when in reality prices should appreciate only at the previously determined historical rate of 2.86% since inflation is not a factor at present. This tells me the jump in 2012 is over four years of "true" price appreciation and quite possibly one more year like that in 2013 and we've had all were gonna get until 2020.
Fourth, the theory of large numbers compresses growth percentages as the base numbers in beginning years get larger and larger. From 1970 to 1980 median home price appreciation was nearly 304%. From 1980 to 1990 it was 94.6%. From 1990 to 2000 it was 24.5%. From 2000 to 2010 it was oddly higher at 26.4%. However, the 2010 median home price was surprisingly $31K higher than 2009 but strangely $21K lower the following year in 2011. Assuming 2010 was an aberration, then that decade the real median home price appreciation was approximately 18%. So, as one can see, California housing prices are of diminishing returns over decades. There's nothing to say those percentages can't turn negative too!
I wonder what happens to my industry when another housing bubble implodes through rising rates and our government's inability to finance its debt obligations. What will the housing market look like when it is being crushed by foreclosed properties, massive Fannie Mae and Freddie Mac bailouts, and countless bank failures not to mention high unemployment? But, didn't we just go through this! This next one could get very ugly is my guess and looking at that chart gives me no comfort in thinking the next ten years will be equally as rewarding to property owners. Like an alcoholic, sometimes you have to find the "true" bottom before things really start looking up. There is always something greater to expose the weaknesses in what man believes they can tame, control, manage or manipulate. To me, this is the American economy at this juncture in our country's history. We are on a path of massive wealth destruction and not generation.
