Housing Usually has a Positive Nominal Return

Thomas Alexander Stephens and Jean-Robert Tyran write,

When viewed in nominal rather than real terms, the capital gains from US housing look more appealing. From 1946 to 2012, nominal house prices showed a 12-fold increase. On an annual basis, housing investments have mostly resulted in gaining money (in 58 out of 66 years), while at the same time producing real losses more often than not (in 36 v 30 years)

Thanks to Mark Thoma for the pointer.

4 thoughts on “Housing Usually has a Positive Nominal Return

  1. I’d like to see more discussion of housing returns as containing a capital gains component (the house value increase) and a dividend component (rent you pay yourself, minus homeownership expenditures). I suspect many people own a bigger home than they need, implicitly paying themselves (and spending) a big dividend. Then again, home characteristics are bundled. You may not be able to get a small house that also meets your other requirements (location, schools, etc.)

  2. Did they take into account:

    1) Costs of taxes, insurance, and maintenance

    2) Obsolescence — some housing goes away, and no one marks it down 100%.

    3) Increasing size and quality of housing

    4) Scarcity of land in desirable areas?

    Housing itself I doubt makes money, but land in desirable space-constrained areas might.

    Nice to have you back among us blogging, Arnold.

  3. I am not sure how much comfort should be derived from studies of the US in the post-WWII era. Here are some quotes from an article a few years ago about house prices over a much longer time frame:

    “This Very, Very Old House” By RUSSELL SHORTO March 5, 2006

    “Piet Eichholtz, a professor of real-estate finance at Maastricht University in the Netherlands, [studied] the Herengracht in the 1990’s. Eichholtz’s work — the so-called Herengracht index — … Yale economist Robert J. Shiller relied on it in the second edition of his best-selling book “Irrational Exuberance,” which was published in 2005.”

    “Between 1628 and 1973 (the period of Eichholtz’s original study), real property values on the Herengracht — adjusted for inflation — went up a mere 0.2 percent per year. …”

    “An analysis Shiller made of home prices in the U.S. going back to 1890 showed an average annual increase of a meager 0.4 percent.”

    “Also, notes Shiller, “Amsterdam — with tulip mania and the birth of the stock market — is the home of speculation. If you look at, say, Milwaukee, you don’t see the same degree of volatility. In a place like that, price is driven by land availability and construction costs, which is the tradition.”

    “But then, volatility is more prevalent in world history than stability, which, as far as Eichholtz is concerned, makes the Herengracht data more, rather than less, widely applicable. “The financial literature has been dominated by America,” he said. “And most models are created using post-1950 U.S. data, which give a biased picture of reality. There has been no other country like America, and there has been no other period like that in terms of stability. So I would say that in global terms, Milwaukee is the exception, not Amsterdam.”

    This url is not guaranteed to work:
    http://www.nytimes.com/2006/03/05/magazine/305tulips_shorto.1.html

  4. I am skeptical of any argument for housing as a positive investment, even nominally. What every housing study I have seen omits is the amount invested by the homeowners between purchase and sale in improvements. The public records do not capture that. So Idk how much of an analysis one can do with a major amount of data missing. If you make an estimate for those added sums, it becomes a much more negative story.
    Glad to see you back.

    As well, demographics and subsidies are responsible for much of the increase in price. To form a positive view on housing as an investment based on the 1946-2012 trends strikes me as overly simplistic.