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Remember Inflation When Looking at Housing Prices
Posted By Jim On 04/25/2012 @ 7:15 am In Personal Finance | 2 Comments
The last few months, we’ve been looking at houses in our general area with the thought of one day moving to a home that was a little bigger. I like casually looking, rather than making a serious endeavor of it, and with sites like Redfin, it makes looking around that much easier. One weekends, when the weather is nicer, we’ll go to open houses with really no motive other than to look at nice homes, see features we might like, see features we might not, and just get a better feel for the single family homes in our area. It’s a fun little diversion on Sunday afternoons, checking out a house or two, usually within a few minutes drive, and usually on those days we don’t otherwise have plans.
One of the really cool things about Redfin is that they aggregate a lot of data on the listing page. A typical real estate listing provides a lot of detail, from the room sizes to photos, but you usually have to go elsewhere to find the really interesting information. Redfin includes comparables, property history (such as sales and listings), and even price per square foot in that zip code. The one that I really enjoy looking at is the Property History, which shows the pricing history and historical sales record.
What’s interesting is that you can really get caught up in the price increases (and decreases), especially if the home hasn’t been on the market in several years. Just the other day, I was looking at this house , with a list price of $719,000. It sold in 2002 for $560,000, about ten years ago. Doing some simple math, that’s an increase of $15,900 each year, which is a decent increase. Here’s the problem, it’s not as interesting when you account for inflation.
$560,000 in 2002 is worth as much as $708,678.60 in 2012 according to the BLS’s CPI Inflation Calculator . That means the house really only appreciated, in real terms, $10,000 over those ten years.
The takeaway from this is that you shouldn’t let the nominal price of something surprise you, the way it surprised me, because it might not be that much in real, inflation adjusted, terms.
(The flip side of this is the argument that you can buy a $560,000 with “only” $112,000, if you put 20% down, and your appreciation, as a percentage of your actual investment, is much greater.)
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 this house: http://www.redfin.com/MD/Columbia/11872-Bright-Psge-21044/home/9932948
 BLS’s CPI Inflation Calculator: http://126.96.36.199/cgi-bin/cpicalc.pl?cost1=560000&year1=2002&year2=2012
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