Hey Friends,
A quick lesson in the recent US history of appreciation and affordability, brought to you by one of my favorite analysts, Charlie Bilello. I hope you enjoy. Have a great weekend and let’s see who will win the NCAA basketball tournament!
Blessings,
Andrew
Fun Fact 1:
Your home is most likely the single largest component of your net worth.
Source: Charlie Bilello
Fun Fact 2:
Over long periods of time, there’s been a high correlation between changes in overall inflation (CPI) and changes in home prices, with the two variables generally moving in tandem.
Source: Charlie Bilello
Fun Fact 3:
Fueled by a desire to create a so-called “wealth effect,” the Federal Reserve attempted to boost the value of housing and other assets, holding interest rates at 0% for a record seven years (from December 2008 to December 2015) and purchased a record amount of bonds to artificially suppress interest rates. At the same time, the U.S. Government created a homebuyer tax credit (2008-10) and borrowed trillions of dollars, sending three rounds of stimulus checks (2020-21) to most Americans. As a result, we saw a second U.S. housing bubble take hold. Home prices more than doubled in the 10-year period from 2012 through 2021, and have recently surged to a new record of 118% above inflation.
Source: Charlie Bilello
Fun Fact 4:
When mortgage rates spiked higher in 2022, the median home for sale in the U.S. quickly became even less affordable than the previous bubble, and the demand for housing collapsed.
Source: Charlie Bilello
Fun Fact 5:
The median household income necessary to purchase the median home for sale in the US ($124k) is 57% higher than the current median household income ($79k). Needless to say, this is an untenable situation, but how and when this enormous gap will be closed remains to be seen.
Source: Charlie Bilello
Analysis I’m pondering:
“So what should homeowners expect going forward?
A much more modest pace of growth at roughly the local rate of inflation, with the understanding that it could very well be less if we see any reversion to the mean.
For when housing prices deviate too much from the rate of inflation, there’s a natural correcting mechanism in that supply eventually increases (more homes are built) and/or demand eventually decreases (fewer people buy homes as they become less affordable). This is intuitive, for homes should ultimately be priced based on the cost to build/maintain them and your ability to afford them (wages), which are both reflected as part of the inflation rate.
This report focused on home prices, but the price of a home doesn’t include the many other costs associated with home ownership (mortgage interest, taxes, insurance, closing expenses, repairs, maintenance, capital improvements, etc.). If you’re evaluating a home as “an investment,” a true rate of return would need to include these costs as well, making the analysis much more complicated.
Which is why buying a home to live in should be viewed very differently than passive investments like stocks and bonds. Your home is your castle and should provide benefits to you and your family beyond just the numbers. Price appreciation is only one small part of the equation.“ -Charlie Bilello
Thanks again for reading. Subscribe HERE to get this delivered to your inbox so you never miss a read.
Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, an offer to buy or sell any security, or to buy or sell real estate property. Read our full disclosures HERE.
