Long Term Housing Prices Did Not Beat Inflation: Is Your Home Investment Still a Good Deal?

07/14/2011 0 comments

Geoff Considine wrote on Portfolioist.com an interesting article on housing investment. Key points here

  • Based Robert Shiller, the renowned Yale professor and creator of the S&P Case-Shiller Housing Index, on an inflation adjusted basis, housing prices were essentially flat from 1890-1990, a hundred year history. The housing boom in early 1990's is essentially “massive popular delusion.”
  • Shiller further predicted that home prices might still go down another 10% to 25% in the next few years.

Considine pointed out, however, that owning a house now does have the following two advantages:

  • Taking Advantage of Low Interest Rates: if you have a mortgage on your house, it is actually a very good thing as you can take advantage of the extremely low interest rates for now.
  • Long Term Inflation Protection: once you buy a house, you lock in the price, regardless of the future inflation. This, again, bodes well if you take advantage of the low interest rates right now, especially the long term interest rate. With the looming inflation (due to government stimuli), this buys you an insurance to live in a place.

We might also add that Real Estate Investment Trusts (REITs) share similar advantages. iShares Dow Jones REITs (IYR) or Vanguard REITs (VNQ) are the two ETFs considered. However, one should definitely invest in them in a systematic portfolio asset allocation strategy. One should also be aware that home builders ETFs such as (XHB) or (ITB) are very different investments, compared with RETIs.

Symbols: IYR, VNQ, XHB, ITB, Housing



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