Fed predicts 2% Inflation going forward, that means RE will only increase 2%?!

[andysandp]

Historically Real Estate appreciated with Inflation.  In the past it was about 3% each year, that's why people assume 3% appreciation each year.

The Fed said inflation should only be 2% going forward and for the long term.   Does that mean we should only expect 2% appreciation with Real Estate?

https://www.federalreserve.gov/faqs/economy_14400.htm

What are your thoughts?

[matchewed]

I'd say that RE increases with income. It is far more local than just general inflation for the US and general RE.

[marty998]

Agree with matchewed. Though over here there is a massive disconnect now between wages and house prices.

People will always pay the maximum they can afford. Keeping up with the Joneses and all that.

[YttriumNitrate]

Just my guess (and I know nothing), but I expect rising interest rates will decrease the amount people can borrow thus causing the average nationwide house price to stagnate below inflation for a while. Of course, real estate is local and I am just predicting the nationwide trend. I fully expect some areas to appreciate 10%+ per year for the next decade, while others are at -5%...I just have no clue which areas are going to see a ramp up in prices.

[Classical_Liberal]

+2 on the income theory. 

Frankly, the Fed has no idea what inflation will be in the future.  Their goal is 2% for now, but a good central bank has to react to economic reality and do whats needed to maintain economic health.  To believe inflation will run at around 2% going forward is foolhardy, no one can even predict 12 mos out with any accuracy.

[lostamonkey]

1. Real estate generally increases with income not inflation.
2. Real estate is generally leveraged so a 2% return could mean a 20% return on equity ($100K home, $10K down, appreciates 2K in one year which is a 20% return on the $10K).
3. Real estate also earns "rents." This could be rents from others or "imputed rent." Imputed rent is money saved from not having to pay rent to someone else and is tax free.

[andysandp]

Real Estate goes up only with Inflation, not with wages.  Nobel Prize Economist Real Estate Expert Shiller said Real Estate Prices on average hasn't appreciated if you include inflation. 

http://www.pragcap.com/robert-shiller-dont-invest-in-housing/

Yes you get leverage and rents, but in the past people were using 3% Appreciation for future Rents and RE estate price.  Not they should be using 2%.  This makes a big difference in forecasting your return in 10, 20, or 30 years.

The Feds are pushing for 2% inflation now and long term, so Investors should be using 2% appreciation instead of 3%.

From Shiller  "All else equal, the current Fed policy would have this effect: a home selling for $200,000 today will sell for around $250,000 in 2023, though the real price — corrected for inflation — would be unchanged. But because people often forget to correct for inflation, they may have the illusion that the market is improving."

What are you thoughts?

[Another Reader]

Clearly you don't live in San Francisco, New York, or any of the many other desirable places where prices have gone up at a compound rate of 6 percent or more for decades.  Nor do you live in Detroit, where folks would be delighted if their houses appreciated at all.  In high COL areas with constrained available land, the pressure on prices results from concentration of high tech and high finance professionals plus demand from overseas investors worried about keeping their money safe.  More demand than supply.  Very little correlation with the general rate of inflation except as a contributing factor.  Inflation can't help Detroit, where supply dwarfs demand.  So much supply that a lot of it is left to rot, like leftover unsold produce.

I have done very well investing in Bay Area real estate, far better than the rate of inflation.  Shiller is an overly coiffed academic with a product to sell.  Interesting theory, but not accurate.  All else is NOT equal.

[andysandp]

I live in Boston and own investment properties that have gone up more then 50% since 2012.  Did I have skill?  No the reason I bought them is because I live here, and I got lucky.

I understand Bay Area, NY and Boston went up more then inflation because of other desirable forces, but don't you think these prices are heading towards a crash?  If inflation is 2%, and Bay Area is 4-6%, the prices can't keep going like this forever because no one can afford it.

Regarding Detroit, maybe it will go back to the expected 2% if you wait another 10 years.

I wouldn't discount Shiller's research, who predicted the housing crash of 2008.

[MrDelane]

I'm no real estate guru, but the concept that a home would increase only with inflation seems entirely too simplistic to me.  There are market pressures of supply/demand, demographics of income, school districts, things like property taxes to consider, etc etc.

Our home has increased in price by roughly 85% since we bought it 11 years ago (and thats a conservative estimate).  If it had only appreciated with inflation then it should have increased only around 23% since the time we purchased it 11 years ago (according to the inflation calculators I just checked out).

[Classical_Liberal]

I understand Bay Area, NY and Boston went up more then inflation because of other desirable forces, but don't you think these prices are heading towards a crash?  If inflation is 2%, and Bay Area is 4-6%, the prices can keep going like this forever because no one can afford it.

You mean like, if interest rates weren't under 4% on a 30 year fixed?  I can't imagine what could be driving up real estate prices...

[kenaces]

since when has the fed gotten it's predictions right?

[andysandp]

Here is another article saying that appreciation more the inflation in the long term is BS.  If you did better than inflation, like I did in Boston, you are just lucky.

http://michaelbluejay.com/house/appreciation.html

So what will be inflation for the next 10 years or so?