Chart of the Day: Home Prices Since 1890
Are you one of those people who still thinks buying a home is a good investment? Perhaps some historical perspective will help. VisualizingEconomics provides a fascinating chart showing how nominal and real home prices have changed since 1890:
The thick blue line is actual nominal home prices. These make buying a home look like a pretty good investment. After all, a home bought in 1890 would be worth about 35 times as much in 2010 (if maintenance is done to keep it in good condition, presumably). That's an annual return of 3%.
But that doesn't take inflation into account. To do that, look at the thick black line. Once home prices fully fall from the bubble's pop, they will return back to the zero trend. In other words, home prices merely kept up with inflation over the past 120 years.
It's also worth noting on this chart just how ridiculous the housing bubble looks in a historical context. Check out the peak on the thick black line towards the right. There was nothing ever close to that sort of gain in real prices throughout history. And regulators didn't see the collapse coming?
What does history teach us? Buying a home isn't a particularly good investment, unless you just hope to keep up with inflation. But outside a bubble, its value should keep up with the prevailing price level fairly well. There is financial value in buying a home, of course. It can same you money from paying rent instead, as you accumulate equity and eventually pay it off. But don't expect its price to appreciate wildly. History shows pretty clearly that real prices won't increase much more than inflation in the long-term.