I recently dispelled the myth that the stock market always goes up, and in fact showed that adjusted for inflation, it provides a return of between 1% to 2% per year. Some people think that real estate has been a good investment. This is not so; we still have a bit of ways to decline in prices before we get back to the real (inflation adjusted) median home prices.
Robert J. Shiller, a professor of Economics at Yale University has researched the median home prices over the past century. Based on his data in his book, Irrational Exuberence, here is the following inflation adjusted home prices of existing homes (not new construction). [Chart has been updated to included data through December 2008]
The blue line is the nominal median home price, and the red line is the inflation adjusted median home price. During the early 20th century with the advent of mass production techniques prices dropped. Then, prices peaked with post-war housing demand. During 1950-2000, home prices have remained steady when adjusted for for inflation. Coming out this enormous housing bubble, the median home prices still need to drop another 15% to get back within a range that has been consistent for the previous 100 years.
Simply put, a house is a place to live. It is shelter; it is NOT an investment vehicle. Why the large housing bubble recently? Could it be that people were losing money after the tech stock boom and decided to move their money out of the stock market and into real estate?
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