Share this article!

A reader asks:

We own a cash-flowing rental property with a sub-3% mortgage with 28 years remaining. On the Aug 18th episode of Portfolio Rescue, Barry said “Real estate more or less returns zero net of inflation.” However, does this statement take into account the leverage provided by a mortgage? Return comparisons between stocks and real estate seem to favor stocks, but it’s not clear whether these comparisons ever take into account mortgage leverage. Also, how does one factor a mortgage rate that is below current inflation into the calculus? On a 20-year time horizon, would it really theoretically be better to sell the property and invest the proceeds into some combination of stocks/bonds? -Nick

Robert Shiller painstakingly created an index of U.S. home prices going back to 1890.

When he produced it, Shiller mentioned, “Oddly, it appears that no such long series of home prices for any country has ever been published. No real estate professor I talked to could refer me to one.”

No one really knew how the housing market performed over the long run until Shiller put together his Real Home Price Index.

Here are the number updated through the latest 2022 data:

It’s important to note that this series uses real, after-inflation, data for returns.

Let’s dig into the numbers.

From 1890-2022 the U.S. housing market is up a total of just 122%. That’s 0.6% per year over the rate of inflation.

And the majority of that return has come in the past 3 decades or so.

From 1890-1989, the U.S. housing market appreciated just 30% in total or less than 0.3% per year. It basically went nowhere for 100 years after inflation. Since 1989, it’s now up more than 70% which is more than 1.6% per year above inflation.

Some people may look at these numbers and think they’re terrible. The stock market’s long-term return over the rate of inflation is more like 6-7% per year.

How could housing be so much lower?

Personally, I think beating the rate of inflation while holding onto fixed-rate debt in the form of a mortgage and providing a roof over your head is a pretty good deal.

It’s also important to note that Shiller’s data here doesn’t take into account the actual experience of someone owning a home. This is just prices.