Raymond James’ Jeff Saut made reference earlier this week to a WSJ article from February of this year; I adapted part of that in my market comments today.

Here’s the WSJ excerpt:

“If you have a house that you bought in 1970 for $100,000 and sold it for
$400,000 today, the gain was just inflation – you made nothing. In fact, you may
have lost money if you paid a 6% sales commission.” Also adding insult to the
inflation-injury has been the massive decline in the purchasing power of the
dollar since 1970."

-WSJ, Quoting Garrett Thornburg of Thornburg Investment Management

That number seemed a little light to me — so I went to the BLS Inflation Calculator. It turns out that if you bought a home for $100,000 in 1970, it is the equivalent of $514,948.50 in 2006 dollars. 

Still, that’s a pretty astonishing number, and it makes Thornburg’s point that you have to consider inflation in your expectations for performance. After all, its the real (not nominal) numbers that matter most.

Nada_zilch_nothing

>

Sources:
BLS Inflation Calculator
http://data.bls.gov/cgi-bin/cpicalc.pl

For Long-Term Investing Plan, Measure Real-World Return
E.S. BROWNING
WALL STREET JOURNAL, February 6, 2006; Page C1
http://online.wsj.com/article/SB113918337699965515.html

Category: Apprenticed Investor, Federal Reserve, Inflation, Investing, Markets, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “Measuring Real-World Inflation versus Investing Returns”

  1. Todd says:

    Barry,

    Wouldn’t you agree that the BLS calculator you link to vastly UNDERSTATES inflation – particularly the way gov data has been manipulated over the past 20 years?

    Would love your take on how much higher this should be. How about a BR Inflation calculator?

  2. Nona says:

    Don’t forget the carrying costs for a home: repairs, taxes, etc., etc., etc.

    Add those figures to the commission costs.

  3. Jonathan says:

    What happens if you factor in leverage? Buy a house for $100K in 1970 with $20K down. Sell it for $400K. Pay off the mortgage and you’ve made an 8% compound return, a nice gain over inflation. The only “bad” decision home owners made was not to leverage themselves. And if the home owners refinanced as rates fell, using cheap inflated dollars to service their mortgage, so much the better.

  4. royce says:

    This is the mutual fund industry’s secret marketing tool. They love showing you the nominal return over the percentages.

  5. chuck says:

    Some thing about these numbers that don’t tell the whole story, it implies that home
    ownership is only keeping up with inflation.
    A house I bought in Southern California for $25,000 in 1970 would now sell for $400,000,
    and for $100,000, [if I would have had it!], would have bought a house in an exclusive
    area that would now sell for well over a $1,000,000

  6. jkw says:

    Going from $1 to $46 in 70 years is pretty good. That’s an average annualized return of 5.46% (compared to the nominal return of 11.92%).

    It would be more interesting to see the return broken down year-by-year. How much variation is there in nominal stock index returns? How bad do secular bear markets get in real returns?

  7. Robert Cote says:

    Don’t forget the value of living someplace for 36 years for free or the fact that you are selling an item that is 36 years older at the time of resale for more than you paid for it.

  8. angela says:

    Why don’t we use real 1970 house prices? For most they weren’t anywhere near $100,000.

    http://therealreturns.blogspot.com/2005/08/us-median-house-price.html

    Note the median house price around the nation in 1970 was less than $24,000.

  9. semper fubar says:

    Makes you wonder if most people ever make any money. On anything.

    In the end, we’re all dead. In the meantime, I guess most of us are just barely keeping up.

  10. kevinmr says:

    I calculate a 2.59% real return using the median home value and annual CPI data.

  11. toddZ says:

    WOW! What a great article.

  12. trader75 says:

    Also consider that, while hedonic adjustments may be tools of satan in the short run, they have some intellectual value in the long run.

    When talking about real ‘stuff’ that consumers spend mucho dinero on–cars, houses, big screen TVs, outpatient surgery–there is a whopping difference in quality between 1970 and today.

    Over a long enough time horizon, technology really does change the game, or at least alter it significantly. They say land is the best investment because they aren’t making any more of it–but look far enough down the road and even that might not be true.

  13. kennycan says:

    Even land is subject to some inexorable forces. Think skyscrapers and utilization of available land. Now commercial enterprises can put tens of thousands of people to work on land that used to support only a few thousand. Like NYC at the turn of the century and its 10 story skyscrapers that now stand 50-100 stories and are more efficient internally as well.

    How about reclaimed arid dessert or harbor front. Hong Kong makes new land all the time. Just fills in their harbor somewhere!!

    Somehow I have a nagging suspicion that hedonic adjustment is double counting though. Aren’t the technological efficiencies already captured in lower prices somewhere already? Like transport costs are down for goods because trucks get better mileage. Also, I have doubts about how they quantify the quality adjustment. Could they be overestimating the quality when they put a number on it?

  14. Jonathan says:

    And don’t forget the tax advantage of housing. You need to multiply the return on the housing investment by 117% (= 1/(1 – cap gain tax rate)) to adjust for the fact that gains (of $500K) are tax free vs. a 15% tax on capital gains. To say nothing of the deductions on mortgage interest, the emotional benefit of owning vs. renting (ok…that is subject to debate), and the (typically) lower cost of owning vs. renting. A one-dimensional model is just that, one dimensional.

  15. Mary says:

    This is a specious comparison. A $100,000 house was 3-5 times the average cost in 1970, even in California.