Friday, April 13, 2007

What Your Realtor Doesn't Want You to Know

There is an only saying on Wall Street: "When the doorman starts giving you stock tips, it's time to sell your portfolio."

I'm often reminded of that when I hear real estate agents' rational for why you can't lose buying real estate. A local advertisement from the realtor association gives many reasons why it is a great time to buy real estate (all of its reasons are incorrect - something deserving of a post all by itself). This mornings radio magazine had a mortgage salesman saying he couldn't understand the press stories about how bad the real estate market is. Over at Conchette's excellent blog an anonymous poster contributed:

"But over the long haul, more Americans have generated more wealth from home ownership than any of their pure investments."

As they say, "patriatism is the last refuge, to which a scoundral clings."

But lets look more closely at the facts.

I have included a now-famous chart of US home values from 1890 to last year (click on the chart to see a larger version). This chart is in real terms - meaning that inflation has been removed from the equation. Therefore, the chart is truly relecting the value of homes over the period studied.

According to the data, if you purchased a home in 1950, the value of that home had not increased until the turn of the century. Or maybe worse, if you bought at one of the peak periods in the 1950s, at the time a small housing boom, you were at a loss for the next 25 years. And there were plenty of other periods where housing was a bad investment - for example if you bought at the end of the 19th century. Then, you would have to wait 50 years before you could sell your house for an actual profit (again, in real terms). According to the chart, real estate values spend most of their time doing nothing - for decades at a time.

Maybe even more interesting is looking at each of the spikes that are on the chart - noting the huge price appreciations of short periods of time. Notice that the next move is down - nearly as sharply - then a long "sideways" period (often decades).

Also notice how large the housing boom of the past decade was. The gains are completely unprecedented. Therefore, I expect the fall will also be unprecedented in magnitude.

Don't believe you realtor into believing that real estate is a "can't lose" situation.


You most certainly can lose - and if this chart is any indication - the chances and effects will be signficant.
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1 comment:

Sally O'Boyle said...

Good post, lots of data. I like data!

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