We’ve all seen the real estate prices jump substantially over the past year and a half. Every month locally and nationally prices are making new record highs. But realistically if you don’t take into account inflation, you wouldn’t know where the prices are historically. 10 cent coffee and 25 cent hamburgers don’t exist anymore. Neither does a $25,000 single family dwelling in the San Fernando Valley. Where does the $930,000 median priced home sit historically? Let’s dig into the numbers…
The following charts are utilizing the Case-Shiller Price Index. It’s the most accurate index that can be used to measure appreciation levels. It measures house price changes by looking at repeated sales of the same single-family houses. If a January 1990 price is given a value of 100, then 200 means the price has doubled. The only real negative is it’s slow at reflecting changes. The data runs two months behind and is a rolling 3-month average. The June 2021 numbers are the most current. For this longer-term historical evaluation, it serves our purpose.
For the inflation adjustment, we’ll use the Consumer Price Index less shelter (CPI-U) as the housing inflation is already incorporated in the Case-Shiller Index.
I’m starting the pricing/index analysis in 1990. That catches both the S&L (and aerospace leaving Los Angeles) recession that started in 1990 and the Great Real Estate Bubble that started forming around 1996.
Since the majority of buyers of real estate use the monthly payment as a primary criterion when purchasing rather than the price, we’ll be getting into that later in this blog.
Over the past 12 months, Los Angeles house prices appreciated at 15%. Fractionally higher than the nation as a whole, but not as high as many areas that have had substantial migration. Taking into account inflation we’re really looking at around 11% year over year appreciation. The reasons behind people leaving California and Los Angeles and migrating to other states/regions are covered in other blogs.
Let’s use January 1990 as the home price baseline at 100. Los Angeles dealt with a recession starting in 1990, and an earthquake in 1994, bringing on foreclosures and depreciation. Property values stabilized in 1997 and had major price appreciation till October 2006, where the Case-Shiller Index reflects an appreciation of 262 or over 2 1/2 times the 1990 pricing. Taking into account inflation, the “real” 2006 pricing is around 75% higher than in 1990.
The Great Recession that started around 2007 brought the inflation adjusted price to 91 or 10% below 1990 prices.
Now for the latest round of appreciation, Case-Shiller pricing is now at 350% 1990 pricing. But taking into account inflation the pricing is at 176, or technically where we were at the peak in October 2012.
The real mortgage payment adjusted for inflation, based on prevailing 30 year fixed rates, 5% down payment, incorporating property tax and insurance, is presently around 30% lower than June 2006. The loan qualifying back in 2006 was more lenient than the subsequent and present underwriting guidelines.
Real Income has gone up around 40% after inflation, making the monthly housing payment easier to afford.
Without taking all the variables into account, and understanding inflationary effects on assets, people can be deceived by the amount properties (assets) have actually appreciated.
Extracurricular Note: The Gov’t has been conveying the possibility of increasing Capital Gains taxes to normal income rates. Of course presently for an owner occupied property you have the $250K/$500K exemption (not investment properties), but without adjusting for inflation, the taxes can be based on an erroneously high basis. Long term real estate holdings and inheritances should have their capital gains basis adjusted for inflation.
If you are in the Los Angeles area, have any questions or real estate sales or financing needs, feel free in contacting me
Ron Henderson GRI, SRES, SFR, RECS, CIAS
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
Chairman – OutWest Marketing Meeting (Real Estate Education)
BRE #00905793 NMLS #310358
www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth
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