Most interesting graphic, click on the image for an interactive version.
The upshot is that Average home prices have grown by an atypical degree in California, New York, Hawaii, and Mass. Since 1980 versus the rest of the US. Much of the growth was driven by three factors:
- Lowering interest Rates
- Larger and Fancier homes
- General Wage Inflation
With these “tail-winds” for home valuations not as likely to be as helpful, on aggregate, going forward, We should expect typical home prices to be near to flat for an extended period.
In turn, the days of buying a home as an investment/rental property and not having a care about the cash flow are likely in our rear view window. It worked to have a no, or even negative, cash flow property, if the invested assets (your down payment) was 15-25% due to the leverage. In those conditions you virtually couldn’t mess it up no matter how many mistakes you might have made.
Not so any more I believe.
In California, since 1980, we have seen average home prices increase by ~5% per year on average
- It got cheaper to pay more for a home: interest rates that averaged 13.74% in 1980 have averaged ~4% in 2017. This in turn allowed one to buy a home for ~2.4 times more and yet have the same payment. This attributes 2.4% if the annual price increase without the buyer having to increase their monthly payments by even $1.
- Homes got bigger and fancier: the average home in the US in 1980 was ~1,750 square feet in size, by 2017 this average had grown to ~2,700 square feet. This means that the average home was ~57% larger. This attributes 1.2% to the value of the home.
- General inflation (due to wage increases) can be credited with the balance of the price inflation, a mere 1.4% per year on average
Going forward we might think that interest rates will rise to about half of what they were in 1980, to ~6.875% perhaps and thus negatively impact the pricing of homes by actually making them more expensive to buy. This might reasonably be expected to have a negative attribution to future pricing of home by as much as -2.4% per year.
Homes may get bigger however that trend may be near to played out at this point. This may not be a pricing change facto going forward.
Inflation may now kick in to a greater degree. Perhaps pushing home prices up by ~3% per year.
The aggregate of this is that we might prudently assume that average home pricing may be near to flat overall, accepting pockets of exception in both positive and negative direction, over the next 10 years or so. The exception would likely be most present where homes are typically bought for cash and lending rates are of little consequence, and unique properties, which by their definition are not typical.
Add to this a likely tax break take-away for any home over ~$835,000 and you might expect even more price stagnation in the coming years.