Recently, Jim at Bargaineering authored an article titled Your Home is Not an Investment. Looking at data gathered by Michael Bluejay, we find that the price of new homes increased by 5.4% annually from 1963 to 2008, on average. During that same period, inflation averaged 4.4%, so housing rose faster, no? Well, not so fast, the size of new houses also grew during that time, from 983 sq ft to 2349 sq ft, or 1.6%/yr on average. On a same size comparison, this means housing has lagged inflation by about .6%/yr.
When was the last time you heard of someone buying a house and leaving it unoccupied, hoping for a positive return? Me neither. What’s missing from Jim’s post is the rent saved by an owner occupied house, or the rent received by the landlord of a rental unit.
Where does that leave us? I’ll suggest that you not count on rising real estate values as part of your long term plans. On the other hand, as retirement approaches, a plan to either downsize or move to a less expensive area (or both, of course) can free up some needed money.