Since the New Deal, several generations of Americans have come to expect that home price would rise over time. We have also been able to point to long periods of time when the gains have exceeded the rate of inflation.
Some measures even compare rates of return on residential real estate with stock market or bond returns, although the purported gains don't take into account the annual costs of maintainance, paying taxes and other costs associated with home ownership.
The gains have not been automatic, of course. The expectation that we will be able to sell our houses at a profit hasn't actually been true for many people at many times, and those people have had to justify their outcome by being disappointed by the "timing" of their sale or "market conditions".
Let's take a look at what the myth of profit in residential real estate really means. We've been led to believe that we can suspend disbelief, not examine the facts (the math), and accept on faith -- the way we believe a beautiful fairy tale -- that we can live in a house for free* for our entire adult lives and then sell it at an inflation-adjusted profit.
By free*, I don't mean without costs, but the thinking goes: pay the mortgage, taxes and insurance, keep it up to a decent standard, and at the end, get it all back and a tidy sum for that retirement nest egg.
It ain't so. The maturation of the mortgage lending business created the ability for people to live in their homes long before they had actually paid for them, allowing for a massive increase in the rate of home "ownership" in this country and, once people could spread their payments over 30 years, a massive increase in the value of real estate. That's a great and incredible stroke of genius, and, make no mistake, it has had a real and lasting value on our quality of life and our standard of living in this country.
We rent our homes until the mortgages are paid. So mortgage principal, interest, taxes and insurance can rise to the level that a nation of renters can afford. Booms and busts assure that wage earners will spend every dollar of lifetime income on consumption, with the last marginal dollar going to pay for the biggest single expense: housing.
We rent our land from the king. The "real" in "real estate" isn't real. Real means royal. The royal estate is all the land. The king claims it all.
We improve our homes at our own expense. What percentage of a new kitchen can you expect to recoup upon the sale of your home? 60%? Pick a number.
Now take into account inflation and the time value of money.
We can certainly prefer to feel like we own the homes we live in, and we pay for things as if we did. Most people apparently do like to live under that impression.
We can certainly feel blessed to live in an age when most people in this country can reasonably expect to live better than kings and titans in previous ages. Think hot water. Think toilets, pavement, education and grocery stores.
Then again, that increase in wealth has a lot to do with advances in the speed and form of transportation, and the enormous positive impact of our ability to harness the power of oil. This is the age of oil. It's amazing.
The immediate challenge to creating new wealth is harnessing renewable energies. The option that will eventually feed, clothe, house and entertain the entire world is the sun. That advance will unleash enormous real wealth, and self-sufficiency to boot. It will happen with significant costs to the current, extremely successful, but unequally distributed system of costs, incentives and benefits paradigm that got us to this point. But be not afraid: the rich will be still richer and, not inconsequentially, the poor will be much better off. Nearly unlimited energy is about as close as we can get to a free lunch. In contrast, real estate is a limited resource.
Life is good. The myth that residential real estate will gain so much in value while we own it to pay for itself has served us well. We can hope for such outstanding results, and sometimes our dreams will come true. In real life, though, things wear out and there are real costs that will not be recouped in dollars. The truth is that you are living in your house, and what you get at the end of a good run are your memories of a full and joyous life and . . . the market value of your real estate.
Live well and prosper!
[Written for the "Let's Dish" AR contest]
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