The myth of rising house prices
One the biggest myths about buying a home is that it is an investment. An investment is an asset which tends to go up in market value over time. But consider what would happen if this were actually true: if home values increased faster than inflation, pretty soon no one could afford a home! In fact, home values for the most part barely keep up with inflation.
The math is complicated by a number of factors: the size of homes keeps getting larger, so comparing the average home price now versus 30 years ago does not mean that any specific home will be worth more. We pay a greater portion of our income for homes than before because we pay for more home — this is a change in personal tastes, not home values.
According to the Case-Schiller Index, the price of existing homes increased by 3.4% annually from 1987 to 2009, on average. The general rate of inflation during this time was 2.9%. The increase in cost of housing slightly outpaces income growth – mostly because of government policies intended to increase home ownership!
Of course some markets are hotter than others — but if gambling is your thing, you would get lower overhead from the stock market, or even the horse races! The CAGR adjusted yearly return of the stock market for the same period is 6.27% – versus .5% for the average home.
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