Housing & Mortgage
Check Your Math: What’s Your House’s Value Today?
Many areas remain below 2005-’06 peak, adjusted for inflation
Many homeowners look at rising house prices in their neighborhood and think they’re getting rich quick.
They should take a second look.
After adjusting for inflation, many housing markets still are below the peaks seen in 2005 or 2006 — just before the housing bubble burst. Just as with other investments, it’s wise to think of home prices in inflation-adjusted numbers, not merely nominal figures, since the gain you realize on property produces dollars that have shrunk due to years of inflation.
Even in pricey markets such as San Francisco and Boston, home prices remain below former highs, according to an analysis by Real Estate Decoded. The analysis took the Case Shiller Home Price Indices, which are based on repeat sales of single-family homes in various markets, and adjusted them for inflation since 2000.
Notably, Midwest markets’ real (inflation-adjusted) housing prices are still below 2000 levels, according to Real Estate Decoded. In December 2019, Detroit and Cleveland home prices were at 84% and 83%, respectively, of their 2000 prices on a real basis. And Chicago home prices were only at 94%.
Depending on whether you’re a buyer or a seller, that makes the Midwest a bargain or a tough place to unload a house profitably. Of course, hot neighborhoods in any city tend to rise swiftly and show significant gains. But overall, these markets remain depressed. Population loss is part of it. A shrinking city has less overall demand for housing units.
“These towns didn’t have a bubble,” said John Wake, the founder of Real Estate Decoded. “But they still had a bust.”
It matters because homes are the biggest investment for a majority of Americans. Neighborhood differences aside, those who owned a home in those three Midwest cities, on average, have seen their investment lose value on a real basis over the past two decades.
That means many will walk away with less money when they decide to sell that home. They’ll be able to borrow less if they take out a home equity loan or reverse mortgage. And they will leave less money to their children than people in more robust markets.
To be sure, some markets have climbed above their pre-housing bust levels, in part because their prior peaks were restrained. Dallas has a rapidly growing economy but— unlike California or the Northeast— few constraints on housing supply. The result is that plenty of new housing is being built, which avoids price bubbles.
In 2006, at the peak of the national housing bubble, Dallas homes were only 4% higher on an inflation-adjusted basis than in 2000, according to Real Estate Decoded.
Real home prices slid after the crash but not as far as other areas. They have been on the march in recent years, and Dallas homes now sell 27% above their 2000 levels.
Of course, buying a home is a complex calculation, and home value appreciation is only part of it. The biggest value many homeowners get is imputed rent — the money they would otherwise have to pay to rent an equivalent dwelling. Homeowners get this benefit regardless of whether their house price goes up or down.
“You lock in your monthly housing payment” by buying a house, Wake said.
In addition, most homeowners buy their homes with a mortgage. This financial leverage increases the gain of any upward price movement — and the pain of any downward movement. And house prices have still risen in markets like Detroit and Cleveland; they just haven’t gone up as much as inflation. What’s more, because of falling interest costs, many homeowners were able to refinance their mortgages, slicing their monthly payments.
Finally, it makes a huge difference when a homeowner gets on the housing merry-go-around. If you bought a house in San Francisco in 2000, you’re up 75% on an inflation-adjusted basis. If you bought it in early 2009, after the housing bubble burst, you’re up even more.
That said, too many homeowners take a rosy view of their biggest investment. They forget the property taxes, the cost of maintaining their abodes, the money they’ll pay in brokerage fees when they sell them, and the fact their home value should be rising, merely to keep up with inflation.
Indeed, a growing number of well-paid people who would have been homebuyers in an earlier era are renting instead today. Some can’t afford homes in ultra-expensive areas like California’s Bay Area. But others, after witnessing the housing bust, don’t find home ownership a compelling proposition.