Happy Holidays from CMPS!

Many are wondering if the recent nationwide uptick in house prices is only temporary. After all, isn't the myth of house price appreciation dead?

Here's an interesting concept that may shed some light on the situation: we forecast the likely direction and "average rate of return" of the stock market in order to better manage our investments - right? Just because the stock market recently plummeted over 50% from its peak doesn't mean that we should naively assume that financial market rates of return are dead or that the market will lose an average of 50% every year for the next 20 years. The same is true when forecasting the likely direction and "average rate of appreciation" for house prices. It makes no sense to assume that house price appreciation is "dead" or that house prices will always decline.

Even as the long term trend and direction of the stock market is up, so is the long term trend and direction of house prices.

The US stock market tends to go up over time because the US economy tends to grow over time, causing US companies to make more profits. Likewise, the US housing market tends to go up over time because the US population tends to grow over time, causing more of a demand for housing. Make sense?

Let's look at the numbers. House price appreciation in the US has averaged over 5.5% per year over the past 40 years. Remember, this period includes the tumultuous 1980s with double digit interest rates, as well as the most recent downturn in house prices. Being that most people won't be living in their houses for 40 years, let's consider a shorter time horizon. The following chart illustrates existing-home median house prices in the US over the last 20 years as measured by the National Association of Realtors (NAR):

As you can see, the average rate of appreciation has been 3.31% throughout the last 20 years - including the most recent housing bubble and collapse. Not only that, but it also includes a period of double digit interest rates - mortgage rates were over 10% throughout the entire 1980s and even into 1990. If you exclude the bubble and collapse, the average rate of appreciation would have been closer to 5%.

This means that if there is another housing bubble and collapse, and if there is another period of double digit mortgage rates over the next 20 years, it may be likely that the average rate of appreciation over that timeframe would be just over 3% - just like the last 20 years. If there is no new housing bubble and collapse, the rate of appreciation could be around 5% or so as it has been historically. Remember, the fundamental issue that will drive house prices is demand for housing. As long as our population continues to grow, the trend for house prices will continue to be up.

In other words, if we want to forecast house price appreciation over the next 20 years, a very conservative number to use would probably be 3%.  This doesn't mean that house prices will always rise by 3%.  After all, they could stagnate, decline slightly, or even rise by maybe 1% or 2% over the next year or two until the economy improves significantly.  Then they could rise by 4% or 5% over the next few years.  Then they could stagnate or decline a little for another few years as the economy continues going through up and down cycles.  But on average, just like perhaps 6% annual returns may be a safe bet with the stock market over a 20 year time horizon, I would wager that 3% annual appreciation is likely to be a very safe bet with the housing market over a 20 year time horizon.

Remember, there is no "national housing market" as all real estate markets are local. Therefore, a state like Michigan that is losing population may have lower rates of appreciation moving forward; while a state that is gaining population, like Texas, may see higher rates of house price appreciation. In all cases, talk to your mortgage, financial, and real estate professionals for more details regarding your specific marketplace.

So the answer to the question we started out asking is a resounding, "No, house price appreciation is not dead!" In fact, housing will continue to remain a fantastic long-term investment as long as the US continues to be a desirable place for people to live.