Toughest Times For Real Estate

During the last four years many of us have seen something we had never seen before, the prices of real estate falling. Many are now concerned about how safe it is to put your money into property, we tend to look at small windows of time and not the long term view of values. Our emotions rule over our logic. I thought we would take a look at a more historic look at home values to get a clue of what we might expect.

What does the curve for U.S Housing Price Index look like since 1900?

As you can see the price of homes was nearly a flat line from 1900 until after W.W.II when G.I.s came marching home. Then was once again rather stable until they doubled in just a four year time from from 1977 to 1980. That kicked off a ongoing growth curve with only a tiny blip during the recession of 1991 until 2008. History tells us we may be seeing a massive inflation curve coming toward us once again even more so than in the late 70s.

 What happened that caused the price increases back then? From 1977 for two years the Federal government went on a deficit spending binge where the Federal Reserve printed (monetized) 13% more money to cover it. That 13% influx of new money into the system (velocitized) caused inflation to jump 12%, then Fed Chairman Paul Volcker raised interest rates to 21% to pull money out of the market place. Even with the weak economy the inflation doubled the pricing of the average home from around 25,000.00 to over 50,000.00. I would suggest that we are positioned for another ride on the inflation train coming soon. From January of 2009 to January of 2010 the deficit spending required the Federal Reserve to print not 13% more money, but 120% more. I have no idea what that will mean, but would consider inflation a good bet, wouldn't you?

 Of course the past is no guarantee of the future, but it does provide a clue. Will putting your money into real estate be a gold mine? Who knows. But how does real estate stack up to gold? Let's look at the two from 1980 until 2011.

Gold up 95.5% since 1980 until 2011, it has gained another 30% as of today as insecurity in the market and nonstop advertising is driving more investors into gold.

The housing price index since 1980 through 2011 shows a 252% increase. However what happens when you adjust both gold and real estate for inflation?

Since 1980 gold actually lost value once adjusted for inflation and once again the oldest investment vehicle, real estate performed. Who knows what the future holds, but the past gives us a map to follow.