Thursday, December 3, 2015

A 'Real' Money Lesson --- Homes are Not Investments --- They are Homes

The real value of money is not always what it appears to be. Too often we neglect to factor in the inflation piece.

For example, a McDonald's hamburger, fries and a Coke cost a grand total of 35 cents when I was a kid. And that 35 cents compared to what I earned for 1 hour of work pre-tax as a carhop while a 14 year old teenager. In other words, I traded an hour's work for what was not quite a McDonald's meal.

That's how free markets work, and I enjoyed the trade. So did both my wage paying employer and the hamburger providing McDonald's.

And so it is with the time and effort expended to get the money we exchange for purchases at McDonald's, Wal-Mart, college tuition, health care, cars, homes, retirement spending and everything else. There's the current dollar cost, not to be confused with value, and then there's the real cost. {NOTE: Not to be forgotten are the burdensome borrowing costs of credit cards, home loans, car loans, college loans and the like, but we'll set all that aside for today.}

Real Home Prices Could Take 17 Years to Return to Peak offers this sobering view of today's inflation adjusted home prices. By omission it makes the case for stocks as the optimal and least risky long term investment vehicle for individuals:

"Home prices have been growing at a rate that some see as alarming—about twice the rate of wages. But adjusting for inflation, the market still has a long way to go before returning to the frothy state of a decade ago.

Most measures of home prices—including the S&P/Case-Shiller Home Price Index, the CoreLogic Home Price Index and the National Association of Realtors existing home sales report—don’t take inflation into account and show prices nearing or surpassing the peak hit in 2006 or early 2007.

But a new analysis by real-estate information firm CoreLogic finds that when adjusted for inflation, home prices are years away from hitting the lofty heights of the housing boom. Indeed, economists there say that prices are unlikely to surpass 2006 levels until 2023 or beyond, some 17 years past the peak.
“It’s a slow recovery in housing,” said Sam Khater, deputy chief economist at CoreLogic. The rise and fall in prices without adjusting for inflation matter for existing homeowners because they determine whether or not they are underwater on their mortgages. The rapid run-up in prices in recent years has made it easier for people to sell their homes because they no longer owe more on their mortgage than the home is worth.

As of September 2015, CoreLogic’s Home Price index was 7% below its April 2006 peak, not adjusted for inflation. Prices fell 32% from that peak to the trough in March 2011. But adjusted for inflation, the bust looks far worse. In September 2015, CoreLogic’s Home Price Index was still 20% below the peak in March 2006. It dropped 41% from that peak to the trough in February 2012.

Although economists at CoreLogic said this helps demonstrate that rising home prices aren’t a bubble, they are still high relative to incomes in some areas. New construction has been far slower to recover than demand, which has helped drive up prices even though credit remains tight.

“The market is overvalued but it’s not a bubble,” Mr. Khater said. “Unlike the last boom, which was heavily demand-driven, this boom is home prices is driven by the chronic lack of supply.”"

Summing Up

Let's get real when it comes to knowledge about prices, costs, values, savings and investment returns.

Tomorrow won't be the same as today. And even at 2% annual inflation, the value of our money will drop in half over 36 years, representing most of a working lifetime.

Learn much, work hard, save regularly, invest wisely and take the time and make the effort to know 'what's what' about everything.

That's my take.

Thanks. Bob.

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