Historical Real Estate Values

April 26th, 2022

money and housing

I often have conversations with potential homebuyers in speaking with them about their mortgage financing, where they ask me about whether I think Real Estate is due for a correction. Let’s face it, Real Estate has been going up in value at a striking pace in the last few years. It’s a realistic question to ask if some of that increase is due for a correction to some degree.

Of course, I don’t have the answers. But we can have a discussion to give homebuyers a frame of reference.

First, it’s interesting to consider that Real Estate values are normally very localized, and values going up or down is usually different market by market. However, over the last several years every single market in the country seems to be going up in amounts never before seen in those respective markets.

Second, Real Estate has been going up for so long, that cyclically you must wonder if it isn’t due for a correction, just because it’s time.

Third, there are things going on in the world right now that we haven’t seen in a long time that may upset real estate values. Geopolitically things seem uncertain.

Fourth, interest rates have been rising this year. That must put some amount of pressure on real estate values.

Last, there’s been general inflation across-the-board in the economy for various reasons, and it’s uncertain how that’s going to impact real estate values

Putting all that together it just seems to be a recipe for a change of real estate values. Whether that means values go up or down, it’s hard to say. Real estate values are also impacted by inventory, population shift, population growth, available financing, and many other things. As you can see, real estate values are made up of multiple ingredients that are hard to decipher in advance.

Nobody really knows which way real estate values are going to go, but one thing we can be certain is that things are changing at a rapid pace, and it’s understandable that a homebuyer would wonder if it’s time for Real Estate to correct to some degree.

There are many different sources to tell you that real estate values do not historically go up 10% or 20% or 40% a year.

This link is a good source to show you inflation adjusted prices from 1953 to 2021. You’ll see the inflation adjusted numbers didn’t move for many decades, and it took 70 years for inflation adjusted real estate values to go up 75%, which is about 1% a year in inflation adjusted numbers.

Another interesting source shows you the supply of housing inventory in our country from 1963 to 2021. There have been other times in our history with extremely low housing inventory, but it didn’t seem to correlate to spiking real estate values in those times.

This study by the Federal Reserve Bank of Dallas shows international housing data from 1870-2012!

It is 132 pages, so I’ll spare you the long read. In summary, it says that house prices in most industrial economies stayed constant in real terms from the 19th to the mid-20th century, but rose sharply late in the 20th century and into the 21st century. This blog has a chart that shows home prices from 1953-2021.

Further, it states that it has been land prices, not construction costs, that have influenced the trajectory of house prices in the long-run. Residential land prices have surged in the second half of the 20th century, but did not increase meaningfully before that. Increased regulations on land use further inhibited the utilization of additional land, while there has been increased demand for housing.

And in this Investopedia article it mentions that real estate prices don’t always go up, and that we need to remember that recessions and other disasters can negatively impact real estate values. It also mentions that you shouldn’t focus on national trends, as prices vary between states and even cities. We also need to remember that low mortgage rates have an indirect effect on home prices, as consumers are willing to take on more debt when credit is cheap. And we all know that mortgages rates have been on the very low end of the historical scale the last decade or more, that may be a sign that long term real estate values will moderate.

A few interesting charts by the St. Louis Federal Reserve show average real estate prices and median real estate prices from 1965 to 2020, and it shows how real estate has really taken off in the second half of the 20th century and into the early 21st century. But will it continue.

It seems to me that land restrictions and population growth have combined to cause real estate value to grow quite a bit over the last 6-7 decades. To me, real estate values are about jobs, job growth, wage growth and population growth. If I want to ensure as much as possible that I am buying a home that will retain and/or grow its value as much as possible, I look to buy in a market where people are moving, and jobs are strong.

That does not mean that I wouldn’t buy a home in a slow job growth market, or a market where population is leaving, but I would heavily consider my offer price, and adjust accordingly.

The bottom line is that when you need a home you need a home, and you need it when you need it. Treat a home purchase decision as your home first, and then as an investment and piggy bank second. But you certainly need to consider the investment aspects of your home purchase, to protect the money that you spend as much as possible.

Please schedule a call or email me with questions on real estate values, your local market, or your specific mortgage situation.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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