How are inflation and housing prices connected?

Question:

Hello, I'd like some insight into what people mean when they talk about property value appreciating. The question comes directly from my grandma's observation that her initial investment in the house she still lives in of $79,000 in 1967 compared to the sale of the house across the street for $220,000 in 2021 means she estimates her house appreciated in value by an amount of $141,000 over those 54 years. But after looking at some inflation calculators online, it seems like a conservative estimate for the value of the $79,000 in 1967 purports to be over $630,000 in 2021. Furthermore, converting backwards, the $220,000 her neighbor's house sold for in 2021 seems to equate to only about $27,000 in 1967. This all seems absurd because I can't imagine my grandparents being able to afford a house of that level of apparent value on the salaries they were making at the time. I know real wages were higher back then but the whole situation seems like I'm missing something because it also doesn't make sense that her home has lost two thirds of its real value when adjusted for inflation.

Answer:

People sometimes have different ideas in mind when considering home price appreciation.  Most conventional discussions do not adjust for inflation.  A more nuanced consideration could account for rises in the general price level, i.e., inflation, but that is less typical.

Buying a home is an investment, and people want to know whether their investment is a good or bad one.  Unfortunately, this cannot be easily assessed beforehand.  If markets are efficient or close to it, then expectations about the future will already be factored into current home prices.  However, unexpected changes in fundamentals can lead to very large unexpected changes in housing values.  Housing historically increases in nominal values over time, i.e., housing generally appreciates, but the power of compounding means that there can be a huge difference between say two percent and ten percent annual appreciation.  If the nominal appreciation rate is below the inflation rate, the home may lose value in real terms. 

Housing appreciation varies substantially across areas and over time.  There are some notable time periods where housing prices increased dramatically almost everywhere such as the past two years and other periods where housing values fell such as during the Great Recession and housing bust that started around 2007.  These periods and others also saw faster and slower appreciation across different parts of the country. 

Turning to your specific case, if the numbers are correct, you are right that the home in question did not appreciate very much compared to others and the rate of appreciation was well below the inflation rate over this period.  However, the U.S. median housing value in 1967 was about $23,000 according to FRED data: https://fred.stlouisfed.org/series/MSPUS

Thus, $79,000 in 1967 would be a very expensive home; most such houses would be worth a lot more than $220,000 today with reasonable maintenance and avoiding bad luck.  There are some exceptions in economically depressed areas that have lost their major employers and seen widespread population loss over the past few decades; these areas have not appreciated much if at all.  If the house is in a depressed area, you might be grateful that things are not even worse.  If the house is in a more typical area, it may be worth much more than 220K, they may have paid less than 79K in 1967, or there may be some other unknown factors that explain the difference.  You can use Zillow or other online tools to get a ballpark estimate of how much the house is worth; these are not always accurate, but they may provide some insight.

 

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Last updated on
August 31, 2022

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