Many people are asking, “What do you think will happen if I buy now and hold for five years?”
You may be surprised to see that this “bubble” is not nearly as big as the 3 five year periods from 1973 to 1988. 1973 to 1978 is the highest appreciation period. The lowest appreciation period is the five years that followed those dramatic increases for 15 years, and still not showing a loss for any five year period going back from third quarter 2008.
Five Year Price Changes based on U.S. 3rd Quarter average prices of homes sold.
Sold in 2008 at $283,400; bought in 2003 for $248,100 – UP 14.2%
Sold in 2003 at $248,199; bought in 1998 for $184,300 – UP 34.6%
Sold in 1998 at $184,300; bought in 1993 for $148,000 – UP 24.5%
Sold in 1993 at $148,000; bought in 1988 for $141,500 – UP 4.6%
Sold in 1988 at $141,500; bought in 1983 for $ 92,500 – UP 52.9%
Sold in 1983 at $ 92,500; bought in 1978 for $ 63,500 – UP 45.6%
Sold in 1978 at $ 63,500; bought in 1973 for $ 35,900 – UP 76.8%
Sold in 1973 at $ 35,900; bought in 1968 for $ 26,600 – UP 34.9%
Sold in 1968 at $ 26,600; bought in 1963 for $ 19,200 – UP 38.5%
Note: U.S. Peak Price to date 1st Quarter of 2007
Sold 1Q 2007 at $322,100; bought 1Q 2002 for $227,600 – UP 41.5%
Data Source
It seems like the Seattle market has been one of the stronger markets there has been. Is this report local or national?
Anyway, the short term in the country is definitely rough, hopefully a five year period will balance out a little better.
Thanks
Wasn’t inflation in double digits 1973 to 83 periods, causing prices of everything and wages to go up in a similar manner? I’m not sure the component of appreciation that was just US inflation really counts.
Didn’t the interest rate drop dramatically in the early 80s, causing a spike in prices for that period?
Cautiousbuyer–since most real estate ownership is leveraged, inflation is actually good. If you owned a $150,000 home back then, and owed $140,000 on it, it was good when it went up 33%, even if inflation went up 40%. Not only did that create an additional $50,000 of equity (on an investment of $10,000), but in addition the $140,000 you had to pay back was also be paid back in dollars worth 40% less (so you were ahead even without selling).
Interest rates didn’t start dropping until the mid-80s. I obtained a loan in late 1978 at 10.25, which seemed like a horrible rate at the time. As I recall it was well past 1985 before it was worth refinancing.
Shawn,
Those are national numbers, the source is in a link at the end of the post.
Kary, whether inflation is “good” for homeowners or not is not really the point. The point cautiousbuyer seems to be making is that comparing the current national bubble to the one in the 1970s is a bit of an apples to pears type of comparison (not quite as bad as an apples to oranges comparison) – without taking things like inflation, median wages, etc. into account.
But Kary, you pay for the inflation in the form of much higher interest rates. The bank isn’t going to let you pay 1975 debts in 1980 dollars without charging 11% or whatever interest to make up the loss.
Cautious Buyer,
“Wasn’t inflation in double digits 1973 to 83 periods”
My recollection is that rates hit double digits in 79. My Mom was buying a house in 1980 and I was working at a bank. Rates locked automatically at time of application back then. The rate jumped from 10% to 16% during loan processing. We were locked (I was a co-signer) and they were trying to find any excuse not to approve the mortgage because of the huge change in rates before closing.
It was shortly after that they started charging for a lock, and rates were no longer automatically locked at time of application.
“Didn’t the interest rate drop dramatically in the early 80s, causing a spike in prices for that period?”
Double digit rates tempered the dramatic appreciation that you see from 1973 to 1978. Prices continued to increase, but not at the same pace until the late 90s.
One of the things that caused values not to drop as much as they would have during double digit rates was that we were moving into a nation of two income households. Women’s Lib was making it illegal to use gender as a basis for pay scale, and women were increasingly expected to continue working after having children.
In the early 70s it was not uncommon to be told that I couldn’t get much of a raise because the men had families to feed and I did not. I remember accepting that as reasonable 🙂
Loan applications had point scoring sheets where you needed a total of x points to get the loan. Points were deducted for female applicants. I remember those sheets becoming an issue around 1973. “an issue” meaning staff was told not to leave them out on the desks.
I was one of the first female officers in banking and I remember the issue of Title being discussed. When I was promoted to a Trust Officer, they were trying to find a new title “because they couldn’t call me the same thing as the men.”
In the late seventies when disparity between pay scales based on gender were heavily targeted, they had to raise my income by 33% to bring it up to the lowest male standard.
Lots of things were happening and by 1982 I was able to buy a house without a man on the application. In 1980 when my Mom bought after my Dad died and I was a co-signer, they sent letters to Mr. and Mrs. Ardell. I remember my Mom picking up the phone to tell them we weren’t husband and wife and I told her to put the phone down and tell them after the house closed 🙂
Gene said it better than me. If it was primarily just US inflation in the 70s and early 80s, that means it wasn’t a bubble, it was just US dollars being worth less. If the 2000s appreciation happened without significant inflation, that makes it more likely to be a bubble, and much different than the 70s. I’d like to see a similar analysis to Ardell’s but in real, inflation adjusted, dollars.
“The bank isn’t going to let you pay 1975 debts in 1980 dollars without charging 11% or whatever interest to make up the loss.”
Yes, they do, if you have a 30 year fixed rate mortgage and you don’t move. If I stayed in my first house, my mortgage payment would still be about $300 and my mortgage would be paid in full in 2012 when I turn 58.
So learn from that and don’t move a lot 🙂
RE #9 “Yes, they do, if you have a 30 year fixed rate mortgage and you don’t move.”
But don’t they base the 30 year fixed rates partially on what they expect inflation to do over the next 30 years? You could get lucky if the market underestimates inflation, but you can’t count on it.
Cautiousbuyer wrote: “But Kary, you pay for the inflation in the form of much higher interest rates. The bank isn’t going to let you pay 1975 debts in 1980 dollars without charging 11% or whatever interest to make up the loss.”
It will let you if you get a 30 year fixed today. As I mentioned I had a 10.25% rate, and that seemed outrageous at the time I got the loan. Within a year or two it was a fantastic rate–I think rates peaked at about 15% or maybe over that.
But yes, if you wait for inflation to start, then you will be paying higher rates.
I would question the idea that there hasn’t been significant inflation in the last few years. Just because our government hasn’t admitted to it via their bogus CPI numbers, doesn’t mean it hasn’t been happening. Any set of government numbers which purport to show how prices affect American consumers, which don’t show prices for fuel, housing and food, are immediately suspect when those are precisely the items that Americans cannot go without.
Keep in mind that this is the same government that is telling us there is no recession.
I have said before that this market reminds me of when I started in real estate in 1990. Only people who had to sell were selling. People who moved within 2-3 years of buying were bringing money to the table. Difference being they had money to bring to the table, and generally only people who bought FHA had to do that. In my experience during that time, people who were relocated for job purposes were being compensated for loss on home value by the employer. There were a lot of relo packages with home sale losses included in the hiring packages.
In 1995 and 1996 I was in Florida in an area where more people bought FHA and values were flat even into the mid 90s.
I remember peak home pricing being in late 89, at least where I was in Cherry Hill NJ and Bucks County PA at that time. I don’t see a similar trend in the Seattle Area in the late 80s.
As to number 10, I don’t think banks expect inflation to remain low for 30 years. That would be a crazy assumption. They have other ways of dealing with that, and it pertains to the investment side. People actually buy 30 year notes and such as investments.
As to seeing what happened nationally in both nominal and adjusted terms, look here:
http://mysite.verizon.net/vodkajim/housingbubble/
There is also a similar graph for Seattle. Compare it to some cities in California.
Gene wrote: “Kary, whether inflation is “good
Kary, like you said, you thought that rate was outrageous at the time, not knowing rates would go up to 15%. How do you know now that inflation is going to go haywire anytime soon? I’ve heard predictions everywhere from rampant inflation to rampant deflation. The market seems to have priced in about 6% rates. Do you really know any better?
If rates did go way up soon, it would have to drive down prices. It would seem then would be a good time to buy since you could get the low price and refinance out of the high rate if rates dropped 10 years later.
Sandy, good points, great picture.
SandyK, I’m pretty sure they have inflation figures still that include fuel and such, it’s just that they’re not widely used because they’re so volatile that they’re useless.
As to the recession comment, a recession is widely defined as being two quarters of negative growth. That means at any point in time you’ll be at least 6 months into a recession before it is officially a recession.
Connecting the two up, I suspect if a recession was measured in a manner similar to inflation (exclude energy, food, etc.) that such a substitute GDP (GNP?) number would show we were in a recession, because the cost of energy has probably bumped up GDP at least enough to revert a positive growth number ot a negative growth number.
Cautiousbuyer wrote: “How do you know now that inflation is going to go haywire anytime soon? I’ve heard predictions everywhere from rampant inflation to rampant deflation. The market seems to have priced in about 6% rates. Do you really know any better? . . . If rates did go way up soon, it would have to drive down prices. ”
If I knew what inflation was going to do going forward, I’d be rich enough that you wouldn’t have to worry about any of this because I’d give you a house! 😀
I’ve actually been more worried about deflation than inflation, but I think the government may be fighting that by spending billions and billions of dollars on bailouts. I’m more of a micro-economics guy than a macro guy, so I don’t know if you can avoid deflation by spending your way out, but seemingly that’s what they’re trying.
As to the last comment, prices don’t have to go down with rising interest rates. What I bought in 1978 was a condo. I started looking in 1977 and got priced out of houses in less than one year. Despite the rising interest rates, the price of houses continued up (even before factoring in the higher interest costs associated with buying). The condo market went all to hell, but houses kept going up or were flat, locally.
Also, in any case, I’d point out that even if houses don’t keep up with inflation month per month, eventually it does seem to catch up.
So connecting up, I don’t know where inflation is headed. I’m just trying to point out that if we are heading into inflation, that’s not necessarily a bad thing for people who own houses. In fact, a good bout of inflation might be just what is needed to cure the ills of the banks, even assuming houses only followed at half the rate of inflation.
Thanks for answering Kary. I agree that high inflation in the near future could have the effect of bailing out underwater homeowners and anyone else with significant fixed rate debt, preventing defaults for the banks.
Some investor somewhere would lose out from being paid back in worthless 2018 dollars. People with cash based savings and little debt would lose, but the stock market should go up with inflation.
And it’s all besides the point of whether 1973-88 appreciation can be compared to 2003-2008 given the more inflationary environment in the 70s and 80s (according to the gov’s numbers).
“If rates did go way up soon, it would have to drive down prices.”
Confused, why would double digit increases in rate drive up prices per your previous statement but drive them down now?
I remember raise freezes in the mid eighties and small banks being swallowed up by big banks. Specifically in 1984 – 1986.
FWIW (again I’m not much of a macro guy), I’ve always wondered whether “stagflation” was a creation of the Fed back during Carter/Ford. The inflation they were fighting might not have been real, but instead just the impact of OPEC on prices. By fighting the imaginary inflation they sent us into recession. To understand that you need to accept the premise that the price of one commodity (oil) going up, and working it’s way through to the price of other assets, is not inflation.
But that’s another way those years don’t compare. The Fed is behaving considerably different this time around.
If you click on the source link at the bottom of the post you can do a pdf of % increase YOY. I’ll post it.
RE #20
I was just thinking about that. Affordability would dictate lower prices for higher rates, but inflation is associated with higher rates and rising prices.
I guess the historical data in the post indicates rising prices and rates with inflation. Maybe rising wages with inflation balance out the affordability?
Re 23, probably, but with a lag factor of some sort. I don’t want to give the impression that inflation won’t hurt homeowners, because there will be at least some temporary pain as prices rise and income stays the same. It’s just that over the long run, homeowners (or just people in debt) would be somewhat better off as a result of some of the effects of inflation.
Also, I would add that many parts of the country did have falling prices when interest rates rose at the end of the 70s, early 80s. That just demonstrates how interest rates are only one factor that affect prices.
“Maybe rising wages with inflation balance out the affordability?”
Only if you use “household” income vs. individual worker income.
I posted the YOY price change chart and the big crash in home values was in the sixties followed by a period of equally dramatic increase.
Kary said, “I don’t know where inflation is headed. I’m just trying to point out that if we are heading into inflation, that’s not necessarily a bad thing for people who own houses.”
That’s true and all, the problem is what tends to come at the end of periods of inflation, and what some are arguing is happening right now, which is the opposite of inflation.
“This too shall pass” as they say.
Ardell brings up an interesting note which is the discrepancy between household vs. worker income. Individual worker incomes are flat compared to a generation ago, though household incomes have gone up. That is largely due to more households being two income households. It’s my understanding that the trend of two worker households is starting to reverse. Lots of women my age got their education, started careers, then Mommy-tracked and never came back into the workforce, unlike their baby boomer parents.
Sandy,
Here’s the trend on that in 2008 dollars from Pew”
http://pewsocialtrends.org/pubs/?chartid=531