I’m sure you’ve all heard stories about how a home purchased years ago for next to nothing is now worth hundreds of thousands of dollars or more. While those stories are true, the real truth is that investments in single-family homes haven’t been as spectacular as they sound after adjusting for inflation. So the numbers you hear are “nominal”, which means they do not account for the significant impact of inflation over the years and, therefore, overstate the value of real estate returns.
For example, a house bought in 1930 for around $6,000 is probably worth about $195,000 today, which works out to a compounded annual growth rate of about 4.2% per year over each of the past 85 years. But between 1930 and 2015, the United States saw inflation at an average rate of 3.12% per year. Factor that in, and you’ll see that since 1930, home values have increased by just about 1% each year, which is not a terrific return on investment.
The inflation-adjusted value of housing investments was brought to light by Nobel Prize winning economist Robert Shiller who analyzed historical data on real estate prices and compared them to inflation to illustrate long-term “real” returns on housing investments.
Two Distinct Spikes in Home Prices
Shiller also saw that home prices spiked higher over two distinct periods—after World War II and before the subprime housing bubble leading up to the 2008 recession.
Prices jumped after World War II because of the 1944 G.I Bill which subsidized home purchases for millions of soldiers, drove up housing demand, and caused the first major increase in home prices. By the late 1940s though, the postwar housing boom had stabilized and national median home prices plateaued at around $130,000, where they remained—roughly unchanged—for the rest of the century.
Then another housing boom took hold in the early 2000s when over-easy access to credit, low mortgage interest rates, and aggressive sales practices drove up enthusiasm for home ownership. And, as we saw, when many of these homeowners could not afford to pay their mortgages, foreclosures spiked and home prices plummeted.
Outside of these two periods, median national home prices remained fairly stable. Now there’s a lot of volatility in a number of major U.S. cities that experienced regional booms in the 1970s and 1980s.
And while experts understand some of the factors that impact housing demand and prices, economists are still not sure about what truly drives home price fluctuations over time.
Shifting Trends in Demographics and Home Sizes
Aside from prices, demographic shifts also impacted housing data. For example, 56% of Americans lived in urban environments in 1930, but 81% of our population lives in urban areas now. The sizes of homes increased, too, from about 1,500 square feet in 1973 to 2,488 sq. ft. by 2014, up 65% in size.
So here’s some historical data on median home prices. (I added the amount of disposable income people had at that time, so you can see the relationship between the two.) This info has been put together by the folks at 24/7 Wall St. based on data from Shiller’s book and the U.S. Census Bureau. So scroll down and see what a home cost the year you were born and what it’s worth now.
1930: Construction began on the Empire State Building.
The median price of a home was $6,106.
That’s equivalent to $85,929 today.
Disposable income per capita: $6,411.
1940: U.S. president Franklin Delano Roosevelt was elected to a third consecutive term in office.
The median price of a home was $5,800.
That’s equivalent to $101,062 today.
Disposable income per capita: $7,400
1950: Harry Truman orders U.S. forces into South Korea.
The median price of a home was $12,788.
That’s equivalent to $130,942 today.
Disposable income per capita: $10,033
1960: NASA launches Project Mercury, the first human spaceflight program in the United States.
The median price of a home was $16,714.
That’s equivalent to $136,440 today.
Disposable income per capita: $11,877
1970: After its oxygen tank exploded, Apollo 13’s mission to the moon is aborted.
The median price of a home was $21,546.
That’s equivalent to $131,947 today.
Disposable income per capita: $16,643
1980: John Lennon is murdered in New York City.
Est. unadjusted median home value: $49,573.
Est. adjusted median home value: $147,792.
Real disposable income per capita: $20,158
1990: The Hubble Telescope is launched.
Est. unadjusted median home value: $84,596.
Est. adjusted median home value: $159,780.
Real disposable income per capita: $25,555.
2000: The world celebrates the turn of the 21st century. Fears surrounding the Y2K computer bug prove unfounded.
Est. unadjusted median home value: $115,208.
Est. adjusted median home value: $156,846.
Real disposable income per capita: $31,524.
2010: The Deepwater Horizon oil rig in the Gulf of Mexico explodes, killing 11 people and becoming the worst oil spill in U.S. history.
Est. unadjusted median home value: $159,053.
Est. adjusted median home value: $179,686.
Real disposable income per capita: $35,684.
2015: The Supreme Court declares same-sex marriage legal in all states.
Est. unadjusted median home value: $189,593.
Est. adjusted median home value: $188,178.
Real disposable income per capita: $38,050.
So there you have it: The inflation-adjusted median home value has risen from about $86,000 in 1930 (that’s what $6,000 in 1930 is worth in today’s dollars after factoring in inflation) to about 188,000 in 2015 for a “real” gain that’s just short of 1% per year on a compounded basis.
Now compare that to a 6.3% inflation-adjusted rate of return for stocks from 1930 through 2015 with dividends reinvested.
You can see that stocks have historically far outperformed housing in real inflation-adjusted terms. Moreover, in his book Stocks for the Long Run, Wharton professor Jeremy Siegel says stocks returned an average of 6.5 percent to 7 percent per year, after inflation, over the last 200 years. So make sure that long-term stock investments—preferably with dividends reinvested—form a core part of your investment portfolio.
That’s not to say that there’s no value in owning investment properties. In fact, rent from investment properties often more than covers mortgage payments, so real estate investments have value as part of a well-diversified portfolio. But don’t put all your eggs in the housing market because housing’s inflation-adjusted returns, especially compounded over 20-30 years, come in well below what you’d get from the market.